Resources Boom - is it really a boom??

[rederob]

wavepicker
Your reply is greatly appreciated.
I agree with contrarian investing.
The difficulty, however, is picking the turnaround.
I have done in the past what you are now doing with TLS etc: I did it first with Pacific Dunlop and got lucky and did the same with Seaworld, and then with Orica. There were a few I was not so lucky with later on, though.
The problem can be having a lot of money tied up in stocks that just don't go anywhere..... for a long time. One I have been holding for some years is OEC, but with only $5k on it I am not too worried.
In relation to this commodity run, I think we probably have 15-20 years to run, minimum, guaranteed.
Along the way we might get a mini boom and bust cycle, but the run will continue afterwards at a greater pace each time.
Why so long, rather than the few years "everyone else says" it will last for?
China wants to do what Japan did, and China has over 10 times the population.
And India wants to do what China is doing, and India's population is slightly less than China's.
Right now if you tallied up every known copper resource and then tallied up the number of homes in China and India that need to be wired to the electricity grid, and have fridges, TVs and airconditioners etc, the overwhelming quick conclusion you arrive at is that there just is not enough copper to do the job, nor enough nickel to make the steel etc, etc.
Of course if they all want cars as well, then the resource equation is so out of whack it's almost funny.
Yes, we will find more copper, and nickel and all the other metals (but not enough oil), and when we do it will take many years to bring the refined metals to consumer goods manufacturers, and then into the marketplace.
We could be saved if the US melts down in the interim, but until then get used to high commodity prices, looming $100+ oil, and a steadily rising rate of inflation.

 

[IGO4IT]

I suppose with your logic whereby you say there will always be a demand for goods and so supply will never meet demand then I assume you also think that house prices should always continue to rise and never fall because people will always need a roof over their head and somewhere to live - but even house prices move up and down in cycles because even in housing booms sellers begin to lock in profits when prices rise above realistic valuations and buyers stop bidding up prices for the same reason - and imo a roof over one's head is much more of a necessity than the necessities you listed for the vast majority of people.
bullmarket

the need to buy a house (NOT to rent) is more of an advanced financial state that you reach after fulfilling many other basic needs like having a tv, fridge, oven, shower & a car to drive to work, etc....

Yes, I believe humans can survive without BUYING a house because they can still rent or live with their parents or share accomodation but none of which I know now can live without a mobile phone & most can't work without a car or a watch.

house prices increased in latest boom mainly because of the low intrest rates that made it obvious for those renting that with extra 30% to thier rent payment they can pay for their own home & same prices gone down when renting again became more affordable when interest rates gone up again. I understand that it was a boom as it was based on a temporary reasoned increase of demand (because of the low intrest rates).

I still think that minerals are the basic fact of everything around us & its appreciation is coming from the ever expanding immediate need for it by all manufacturers & that will never change because we'll always need more not less.

 

[Smurf1976]

I think we're thinking about two different things here. It's quite possible and rational to be both bullish and bearish on the same sector. It all depends on the timeframe being considered.

1. Long term commodities boom. Most seem to agree that over the long term there's a lot of upside left in commodities.

2. Short term situation. Some including myself believe it's all gone a bit too far, too fast and is due for a rest. Others disagree.

I could be wrong but I think we're getting a bit confused with each others posts depending on the timeframe under consideration. Some are thinking long term (decade plus), others are thinking in terms of the next year or two. Just my perception of course.

 

[bullmarket]

I think you summed it up pretty well smurf1976

Medium to long term, say 3-5+ years then the overall picture still looks encouraging but if some resource stocks keep going up at the rate they have, given that China have stated they are now looking at ways to slow down their economic growth, then when the smart money sees that share prices have gone past at least short term optimistic valuations the smart money will dump their holdings to lock in profits and hence trigger at least a short term correction.

If global fundamentals then still justify a perception of global growth the resources sector will then most probably restart an upward trend.

cheers

bullmarket

 

[IGO4IT]

Smurf,

very true that we're talking about 2 time frames.

On the short term, do you think in resources sector we tend to pay more than fund value is worth to the extent that one day we may realise that shares we're holding are worth say half of what bought them for?? this is when the resources market boom busts!!

on the short term, I think we've been very cautious when it comes to valuation of stocks we buy, even that most don't agree but I think majority of whom are trading know their shares value & are educated enough (share market wise) to not put their "investment" into an over valued share, any newbie has basics & if not they get burnt few times & decides to learn to not lose money.

Traders are the exception here because they could be day trading or short term trading & not necesserily that they'll wait for a good entry point but will catch whatever wave (volume or event) to get any return out of a trade but long term investors who like to wait for many years are usually not very bad in valuating their stocks & paying right price for it.

imo, a short term fast over growing market is even based on fast resources growth (economy has more resources & it became richer in captial) or fast financial growth (economy can produce more goods, it became richer thru increased operational profit). We are the first, how can it bust again? we'll we have less resources on short term? will resources prices fall? will our cost increase? will we have competition to provide more resources than we can (which doesn't make us any poorer!)?

No one still can tell me a reason of why it will bust on short term being overvalued is a general statement & not enough reason for a whole sector to fall because even if it is, it's still in the benefit of all share holders of that sector to keep it overvalued.

 

[bullmarket]

Hi igo4it

.............No one still can tell me a reason of why it will bust on short term being overvalued is a general statement & not enough reason for a whole sector to fall because even if it is, it's still in the benefit of all share holders of that sector to keep it overvalued.

Maybe I'm splitting hairs, but technically I don't believe your above comment is correct.

Reading back through the posts in this thread I can see plenty of reasons in various peoples' posts of why there could be a correction if share prices run further than what even the smart money feels is an optimistic valuation.

To me the posts are in plain English and make sense.

If you disagree then that's fine. After all, people having different views is what helps makes prices move up and down

cheers

bullmarket

 

[rederob]

Bullmarket
Corrections are a given in every market, but the degree/extent always can be debated.
While the speculative end of the resource spectrum can crash and burn as there is little cash to prop it up, the producer end has a different composition.
Some producers have significant proportions of their metals pre-sold at set prices - hedged - into the future, so their profitability is easy to determine. Typically if the market sold down, they would prosper by comparison.
Other producers have long term contracts at set, or variable prices (often with "floors" and "ceilings"), and these companies are also not likely to be severely impacted by rapid market changes.
Unhedged producers would be at the peril of the market, and these companies are known right now to follow the markets up and down each day.
However, with tight markets the unhedged producers cannot meet consumer demand, so consumers are presently highly dependent on unhedged producers.
And we have funds taking the place of the commercials who used to "run" these commodities markets, and the funds don't care about anything but making profit.
So, if the funds know that consumers need unhedged producers to stay in business, they can afford to bid up prices until near breaking point, and stay in the market to reap the rewards: That's what they are doing now.
However, as some sectors get so overbought (like silver last week) that it makes no sense to stay on board, positions will be quit and the markets will correct downwards.
My view is that funds can and are manipulating a tight market for principal commodities because they can get away with it, and because consumers have no option but to pay up to stay in business.
As soon as the balance changes, for any commodity type, watch out below.

So the daily charts will show up some big movement from time to time, but the weekly and monthly charts, for years to come, will maintain a rhythmically robust resounding uptrend.

 

[bullmarket]

Hi rederob

Bullmarket
Corrections are a given in every market, but the degree/extent always can be debated..................................

I see we are essentially in agreement as that is the point I have been making in this and other threads where I talked about average market PER's....but I get the impression a few in these forums believe there is no possibility of a correction in the resources sector - which obviously they are entitled to believe if they choose but I and some others don't agree with them.

I don't follow resources as closely as you do, especially at the smaller end of the sector - I stick to the majors - but the rest of your post seems logical and makes sense to me.

cheers

bullmarket

 

[michael_selway]

Boomtime
Sunday, April 23, 2006
"If you look at the industrialisation of China, if it follows the same course as Japan and Korea, then this process lasts a number of decades."

The share market is surging to record highs and there doesn't seem to be any stopping it. But everyone knows it must come to an end sometime. Even Federal Treasurer Peter Costello this week warned the good times couldn't last. He cautioned investors against putting all their "eggs" into resource companies. So what does the future hold? What do you do right now ”” buy, sell, stay put, bail out? Business Sunday has put together a panel of experts to explain what's going on with the markets and work out the best course for investors. Ali Moore hosts this discussion.

ALI MOORE: Gentlemen thank you very much for joining me. I think we've got three bulls and a bear which is probably pretty reflective of market sentiment at the moment. Let's start with a politician, and the Federal Treasurer no less, Peter Costello says he put all your eggs in the resource basket and in a few years time he'll be as badly off as those who bet on the tech boom. Let's start with you Shane, is he right?

SHANE OLIVER, AMP Capital: I think it's always wrong to put all your eggs in the one basket, you need diversification and there's always going to be volatility in individual shares and the overall share market but I think the situation we have today is very different to the tech boom. Back in March 2000, Nasdaq, that was the index dominated by the tech stocks, was trading on a PE of nearly a hundred times the dot coms, trading on PE's near infinity, very little profit growth, whereas this time around, the resources stocks are generating very, very strong profit growth, 50 percent, often more.

MOORE: So has this boom got more than a few years to run?

OLIVER: My feeling is that it's got many years to run.

MOORE: Justin, are you as optimistic as Shane, a long, long time, if indeed you are, can you put a time-frame on it, is five, ten, fifteen years?

JUSTIN BRAITLING, Wilson Asset Management : Sure. If you look at the industrialisation of China, if it follows the same course as Japan and Korea, then this process lasts, you know, a number of decades and we're very early in that process.

MOORE: Greg, what are the charts telling you, I mean, is this sort of demand, this level of demand sustainable over that period of time?

GREG TOLPIGIN, GH Financial : A lot of these commodity prices haven't done anything for 20 years, I mean, we're talking about silver prices, gold prices, copper prices, these sorts of things are awakening from 20 years or, 25 years in some cases, of poor performances. So, when you're leaving behind that sort of activity, you tend to see some very, very big, large and longer term price movements that tend to underpin what we are seeing in the equity market.

MOORE: Gerard, in the face of all of this, you're the bear, how can you possibly be bearish?

GERARD MINACK, Morgan Stanley: Well, two points. First is there's a lot of other areas in the market I'm more worried about than the resources, but if you just focus on the resource sector I always like to distinguish between on the one hand the economics, and on the second the investment case. Now, there's lots of other areas in the market where this same sort of volume arguments are true as well, so on a one or two year view, I'd be happy to buy these things but I think extrapolating out for ten and twenty years is way too optimistic.

OLIVER: I think that's a bit too negative, I mean if you look at the resources sector, it is a big chunk of our export income, and each year every time we see commodity prices rise that leads to higher profits for companies like BHP and Rio and some of that flows through into the Government budget surplus.

MINACK: We are truly the lucky country. I mean just as we had the consumer adjustment start, we had land in our lap, this once in a generation commodity price windfall. I think it's too early to say however the consumer's escaped its problems. We're still leveraging up at an enormous rate, we're still seeing home owners borrow six-billion dollars a month for (unintelligable) led investments, I mean this is good money going into a bad investment. More-over we can focus on the upside of China and the exports there but let me tell you, there's only one thing that's grown faster than exports to China, and that's our imports from China.

MOORE: But how much does that demand in China trickle through to all those other sectors of our economy that people want to invest in. I mean, how many companies are really going to reap the benefit of China's boom in the next two, three, four years?

OLIVER: It's broad-based, you see what happens is that obviously the key sector benefiting is the mining sector but as income levels rise there people get paid more, they spend that money in the rest of the economy and you get a flow-on to the rest of the economy.

MOORE: Can you see some value?

MINACK: Very stock specific. But in aggregate we have a market where the profit share of GDP's at all time highs… and that's the case.

MINACK: US, Europe, Japan.

MINACK: You're absolutely right. Why, this is, Australia is as I describe it, a part of a global bubble, we are worlds best practice in my view, in terms of the bubble but this is not just an Australian problem and what I'd argue is, we are being swept along now in part, on the back of a global wave of euphoria and I don't think...

MOORE: But what pricks that? What pricks that?

MINACK: What pricks that is you can have these things prick without a trigger that that's obvious and I'd ask all the panellists ”” here we are, six years after the Nasdaq top, can anybody say what was the trigger then?

TOLPIGIN: The trigger was, in January, US bond yields peaked in January and they were falling for two months signalling that the strength of that US economy had ended and I think, as Gerard's probably point is that there are going to be some aspects that are of concern out there, there are some head winds for the markets in the next few years and I think...

MOORE: But headwinds are a lot different to substantially changing the…

MINACK: I think we're now at the stage where people have pushed up these things, risk appetites are so aggressive at the moment that it doesn't take much bad news to get a large reaction.

OLIVER: Nasdaq ”” there were a few things that ultimate led to the peak, Nasdaq was trading on an exceptional PE, a hundred times. BHP is trading on about 14 times…

OLIVER: Very, very different. Very hard to say that BHP and Rio are in a bubble.

MINACK: I don't think they are as big a bubble... but it's more the issue of the trigger. I mean, to say the Nasdaq was expensive in March 2000 ”” absolutely, but it was expensive a month before, a year before, two years before, given how far it ultimately fell, it was expensive five years...

OLIVER: I'm saying it was expensive five years before.

MINACK: That's right.

BRAITLING: If you want to look at the specific events which led to the unravelling of the tech bubble, first of all it was an additional call of a 100-billion dollars of capital to fund the third generation mobile licences. I think the fundamentals are much stronger in this mining boom and it's all to do with the industrialisation of China and the issues we talked about.

MOORE: As Gerard, you say, everyone is riding this particular wave, I mean, so what? I mean everyone can be right can't they?

MINACK: Not, not but not everybody's riding the, the mining wave. I think the wave I'm talking about is the leverage investment in markets. I mean, everything's gone up over the last three years. We're not just talking about mining stocks we're talking about financial stocks, we're talking about credits, everything where risk is involved has performed well.

MOORE: So are you seeing signs of a rational exuberance? Are you seeing the??

MINACK: I think in some parts of the global markets absolutely.

OLIVER: It's fair to look around ”” you can certainly say there's risks there. As households we've taken on a lot of debts compared to the past but you've got to see something that goes wrong to trigger that, either a big rise in unemployment or interest rates and right now I can't see either of those occurring on a big enough basis to cause big problems for Australian consumers, or therefore, the banks.

MOORE: So, is that fair to say, there's three of you all in that camp, no really big issues on the immediate horizon?

TOLPIGIN: I think there are some big issues on the horizon, but it's just a matter of whether the market can overlook those in the short term, obviously any of these concerns, for example the oil price, geo-political concerns in what's happening in Iran, and if the US Federal Reserve continues to raise rates where it pricks the housing bubble there are probably your three main global concern.

OLIVER: I would sort of see the oil price and there's a few other problems around the world like the rise in bond yields, and interest rates, there's a possibility that China might announce a monetary tightening sometime in the next couple of weeks to slow their economy down just a touch, all of those things have the potential to cause a correction in our market. Last year we saw two corrections, around April and October, both of the order of eight per cent, or so, both of them were associated with higher bond yields and oil price concerns, but, of course, with both of those corrections the market then came back down and then moved back up...

 

[michael_selway]

MOORE: So you'd say a healthy pause is what we're likely to be in for but not a fundamental change.

OLIVER: Yes, we have seen an eleven per cent in the market - our market so far this year, other markets are up by similar, if not greater amounts, so we are due for a bit of a pause at some point.

MOORE: Let me ask all of you, given the scenario that we've painted about the current situation and what's ahead, do you hold, do you sell, or do you buy, Greg?

TOLPIGIN: I think you buy.

MOORE: You buy.

TOLPIGIN: You buy.

MOORE: Alright we'll get to where you buy in a minute. Shane

OLIVER: Right now I'd be holding and I would use any correction as an opportunity to buy into the market.

MOORE: I guess you'll just…

MINACK: Short term, short term, I'm with Shane, I don't think we're at the top yet. I think markets may have a one or two months celebration if the Federal Reserve brings to an end its rate increases but I'd be selling into that rally.

BRAITLING: I think there's a strong corporate profit momentum in place and consequently I think the earnings expectations will be met and the stock market can move ahead.

MOORE: So is now a good time to buy, or sit for and wait for a little correction?

BRAITLING: I would hold.

MOORE: You'd hold. Ok the question then is, when it does come time to buy, what do you buy. I mean if you look at resources, you've got massive share price increases just in the last couple of months alone coming off a very high base. Let's perhaps start with you this time, give us your topics?

BRAITLING: Well if you look at the earnings forecast, a large portion in earnings growth that the market's looking for is coming from the international growth companies, NewsCorp, Aristocrat, ResMed, these types of companies.

MOORE: How about you?

MINACK: If you had to invest I'd go for off-shore companies as well. I'd go for QBE a world-class insurer, I'd go for Brambles, which is in turnaround mode, and I'd also go for Westfield.

MOORE: Shane…

OLIVER: I'd be focussing on two main areas. One is the resources sector, I think that's still worth looking at...

MOORE: Even though BHP's off something like 30 percent just since January.

OLIVER: Certainly had a great gain but the PEs are still quite reasonable and my feeling is that earnings growth will remain quite strong for that.. that sector driving further gains in the resources stocks, so I certainly think that's one area to look at. On top of that, another one worth looking at is the health care stocks. Health care is being driven by very rapid growth on the back of innovative products and good off-shore expansion, stocks like CSL and Cochlear and ResMed and those sorts of companies.

MOORE: Greg, what are the charts telling you?

TOLPIGIN: If you're looking in the resources area, I mean I continually like stocks like Beach Petroleum, for example, stocks that potentially when there is consolidation in the industry, and oil companies start to merge and acquire each other, you want to be owning one of those stocks that's being acquired and get a premium for your investment. Outside the resources sector my favourite out there is IBA Health...

MOORE: So you're sort of next tier down really aren't you?

TOLPIGIN: Yeah, I think so, I think, look, that's where I think the best opportunities are going to lie with stocks specific, opportunities in sectors where there is a lot of growth.

MOORE: I do want to just ask you, was anyone keeping more cash? Any one putting a little bit away in case there's a rainy day? You are?

MINACK: Well I unfortunately still have an investment that gives me a guaranteed, after tax, return of seven percent, which I just don't think the stockmarket can do, apart from a mortgage.

MOORE: Despite a 22 percent return last year.

MINACK: Despite that, I mean, I wish I'd have put it in the stock market a year ago but if I had a dollar today I'd pay down my mortgage.

MOORE: Well it's a brave man who calls an end early isn't it? Gentlemen, thank you very, very much for joining us.

http://businesssunday.ninemsn.com.au/article.aspx?id=96757

 

[nizar]

thanks for that MS

a good read

I follow some of Shane Oliver's other reports, he puts asx200 fair value at 5600

 

[Wysiwyg]

I think you summed it up pretty well smurf1976

Medium to long term, say 3-5+ years then the overall picture still looks encouraging but if some resource stocks keep going up at the rate they have, given that China have stated they are now looking at ways to slow down their economic growth, then when the smart money sees that share prices have gone past at least short term optimistic valuations the smart money will dump their holdings to lock in profits and hence trigger at least a short term correction.

If global fundamentals then still justify a perception of global growth the resources sector will then most probably restart an upward trend.

cheers

bullmarket

I agree with this comment and it appears will happen again.We`ll see. :drink:

 

[Holy Roly]

Re: Resources Boom - is it still a boom??

What do people / investors think?

POG is still quite strong, and Uranium, though price has dropped still is subject to mergers and takeovers. Perhaps, we could even see some recovery of base metal prices that have taken a nose dive.

However, it seems to me a lot of money has left the stock market, and even good news does not hold up a price for long, and market seems only to be interested to buy low and sell at a reasonable gain.

Please, revive this thread, and hope that the resources sector is also revived.

Note: still trying to get to 10 posts.

 

[Lucky_Country]

Resource boom is over but not the super cycle !

1 or 2 years of bad prices does not end a the cycle just prolongs it as investments are delayed.

Once this GFC is over we shall see the supply constraints re appear and all will be welcoming an increase in prices and investments.

 

[Wysiwyg]

Resource boom is over but not the super cycle !

1 or 2 years of bad prices does not end a the cycle just prolongs it as investments are delayed.

Once this GFC is over we shall see the supply constraints re appear and all will be welcoming an increase in prices and investments.

Is this a good thing for Australia in the long run? Any thought on the following excerpt? Could be a 'no idea' story but what for I know not.

The resource curse is usually found in developing countries, but as former US Federal Reserve Board chairman Alan Greenspan explained in his recent book, The Age of Turbulence, the phenomenon was first identified in Holland, when revenue from North Sea oil flooded into the country.

"How is it possible that a super-abundance of natural resources — oil, gas, copper, iron ore — would not significantly add to a nation's production and wealth? Paradoxically, most analysts conclude that, particularly in developing countries, natural resource bonanzas tend to reduce rather than enhance living standards," he writes. "[It] takes the form of an economic affliction nicknamed the 'Dutch disease'. Dutch disease strikes when foreign demand for an export drives up the exchange value of the exporting country's currency."