FYI | May 09 2007
A new day, a new record.
I am not talking about the newly launched uranium futures at the New York Mercantile Exchange (Nymex). FNArena subscribers can follow the developments at Nymex daily on our website and will have noticed the price has surged to US$144/lb in two days already.
I am talking about Australian shares.
Marketwatchers at GaveKal pointed out today the Dow Jones Industrial Average (DJIA) has now risen for 24 sessions out of the past 27, “a feat unmatched since 1927”.
The numbers look much less impressive for the local bourse, at least as far as that sort of statistics is concerned. Since the sell-off at the end of February this year, the balance between trading days that ended positively and those that generated a loss is close to 50:50.
What stands out, however, is the fact that on balance the gains recorded have been much larger than the relatively small losses over the period. This now takes the S&P/ASX200 index at today’s new peak of 6,341.0, narrowly beating the 6,335.7 top from two days ago, to more than 12% above its post-Shanghai sell-off point of 5,653.60, reached on the 5th of March.
As always, one can move into various directions with these statistics. An optimist would argue that compared to where the index was prior to the Shanghai induced global scare (index at 6,044.00 on the 26th of February) today’s record high still only implies a net gain of a little less than 5% since then.
Not really something to get overly worried about in a global bull market environment.
If we simply look back to the 2nd of January this year (official opening index at 5,672.70), Australia’s leading share index has now gained 11.7%. Not so long ago, this would be a figure Australian investors were staring at after a twelve month period, and be happy too!
Another way of looking at today’s market is through projected index valuations by the local stock broking experts. A short while ago the Australian Financial Review published a round up of the share market projections by some twenty leading local experts. The consensus seemed for an index at around 6300 by year end. The most bullish projections were for an index at 6600 by end December.
Ignoring anything below the highest index projections, this gives today’s index only 4% left to grow.
The irony behind this week’s surge is that it seemingly happened on the back of a favourable shift towards resources stocks. I use the term irony because I have been advocating for many weeks that resources stocks were likely to remain laggards throughout the year as bulls and bears among the experts kept on arguing whether surging spot prices for base materials were sustainable or not. The majority still seems to think the answer is “not”.
So it all came back to two questions, or so it seemed: when and how deep?
Another reason why the term irony seems well-chosen is because this week in particular saw the bears coming out of their caves, in droves, and declare the end was nigh, prices were about to collapse (or at least come down a lot)… but all that happened instead were further climbing spot prices and subsequently appreciating shares of resources companies.
News wires such as Bloomberg carried a few “bubble” stories this week as well. As usual, these stories contained references to what the majority of experts have forecast for the year and where spot prices currently are. Yes, that always looks kinda “bubbly”.
But haven’t we seen this before, over and over again, in the past four years?
One of the standout examples is nickel. Experts have been calling the end of the nickel run since May last year, and guess what has happened? The spot price has only continued appreciating since – at sheer unimaginable pace.
Here’s what one of the non-stockmarket related industry commentators had to say about yet another “the end is nigh”-warning yesterday: “The last round of the “sky is falling” talk came at the end of 2006. Since then, the price of nickel has soared nearly 50%. As we mentioned last week, if nickel prices ‘corrected’ (or crashed, or burst, or whatever else you want to call it) by 40%, we would only be back to pricing we were at this January. And since we made that statement… the price of nickel has jumped up by another 10%!! We think these analysts would be more honest if they just openly admitted they have no clue what is going to happen, and quit shooting in the dark. Their recent track record has been dismal… and that is being kind.)”
As regular readers of FNArena stories know by now, there is a growing number of experts who are advocating that most colleagues are underestimating the dynamics in the nickel market, a view shared by major producers such as CVRD and Norilsk Nickel.
If these experts are correct, nickel prices are to remain high, if not very high, for at least another two years.
More irony stems from the fact that it was not so much elevated prices for copper and nickel, but pure takeover speculation that pushed Rio Tinto (RIO) shares to near $100 today. The company even felt compelled to officially announce it was not aware of any approach, let alone one by fellow Anglo-Australian BHP Billiton (BHP).
Somehow the idea of a tie-in between the numbers three and one in the global resources sector gained traction this week. Was it because after many months of speculation and various scenarios involving anyone with a purse anywhere across the globe, alumina and aluminium producer Alcan finally launched an approach for fellow-producer of alumina and aluminium, Alcoa?
Or was it due to the fact that two leading stockbrokers in the local market had decided to do some calculations on some “what if” scenarios regarding both resources companies?
As such, the idea was far from new. It just happened that within a span of a few days only two different reports had been published, contemplating the idea, and both concluding that putting the two companies together would make for some highly attractive metrics and returns.
At some point today we were even receiving questions from our own subscribers whether we had any news about “the rumour”.
I felt obliged to respond each time in a similar manner: what do you mean have we heard of it? We published a detailed story about this… yesterday!
Rio Tinto at $100 (intra day) and BHP at $32. I think it’s time for a breather. After all, the saying goes “Sell in May”, not in June, or in July.
Till next week!
Your still long term optimistic editor,
Rudi Filapek-Vandyck
(As always supported by the Fab Three: Greg, Chris and Terry)