It took one week. One week for the Aussie market’s entire choir of analysts to swap their tune. Not seven days ago they were belting out ‘Ain’t No Mountain High Enough’. Now it’s a dreary rendition of ‘Nobody Knows the Trouble I’ve Seen’.
“The action over the last week is basically telling us that the rally that we’ve had since mid-March is now over and that we’re now going back into a period of turbulence,” hums the market’s lead tenor, Shane Oliver of AMP Capital. He sees the All Ordinaries going as low as 5,350. Last week, our own Gabriel Andre pointed to 5,700 as a possible support level.
“THE Australian share market is entering another period of turbulence,” wails The Australian.
“Market expected to open weaker,” chants ABC Online.
Yep…the experts all agree on one point. The market is going lower. Here, we’d like to add our own two cents. You’ve seen these two cents before, too.
The reason the market came back from its low was not because all was well. It wasn’t because the global recession vanished. It was because individual stocks had a good period. Mainly individual stocks dealing in resources and energy.
Coal went up in price. BHP (ASX:BHP), Coal and Allied Industries (ASX:CNA) and Rio Tinto (ASX:RIO) boomed.
Iron continued to go up price. BHP, Rio and Fortescue all added more gains.
Oil continued continuing to go up in price. Woodside (ASX:WPL), Santos (ASX:STO) and BHP got a lift.
The market still hasn’t figured out exactly what US$130 oil means. To America, it means inflation and disaster. To Australia? Well…it means higher earnings for some headline companies, and higher costs for others.
We suggest the former as investments.
Take Woodside (ASX:WPL), a headliner of headliners. It produced around 70 million barrels of oil equivalent last year. From 70 million barrels, it made total revenues of AU$4 billion. That means it got a price of around AU$56 per barrel. The current market price is at US$130. Woodside’s revenue potential has more than doubled.
It’s just what Kris Sayce said in the last edition of Money Weekend…this isn’t a tough market. It’s just not particularly forgiving if you invest like a robot. The strategies that have worked over the last decade are not working any more. But the opportunities remain for you, if you’re willing to do some thinking and research.
Resources and Mining Take the Wheel from Financials
Asset-based investments are beginning to dominate the ASX in market value. The mining sector is now worth $406 billion in market cap. Financials have fallen to $403 billion. The king is dead. Long live the king.
Of course, financial companies have assets. But they’re not tangible things. You can throw a rock at your neighbour’s window, and it’ll shatter. If you throw a mortgage-backed asset at your neighbour’s window, he’ll probably run shrieking out his own front door all the same. But the window won’t break.
Real tangible assets are in a bull market at the moment. A non-imaginary one. The values of commodities can be identified in real markets. There are real people buying these things, and transporting them to real countries in real ships. They crush them and cook them with real machinery, then sell the refined product to a real end-use.
We may very well see a bubble develop in the commodities boom soon. Anywhere where there’s a good opportunity, greed and opportunism follow. But the real nature of this boom is what sets it apart from booms in technological speculation or financial earnings.
Now here’s the important part…what happens now that the mining sector is the undisputed leader of the market?
Could this be a symptom of the much-maligned “decoupling” theory?
Commentators slaughtered the idea last year. The Aussie market fell just as fast as the US. Indeed, global equity markets fell in unison. But that was when the Aussie market had finance as its lifeblood.
Since then, trade with other countries has increased. Our five top exports are all resource offerings. Iron…two types of coal…oil…and wheat. There are no securitised assets or government debt on that list. Just useful things.
A true decoupling can’t happen yet. That would, among other items, require a major overhaul of the international currency system. But a-mini decoupling of sorts is already happening in the Aussie economy. Every time we export more iron to China, we have a little less to do with the US economy.
Chinese Wheat Production Hit by Disease
China’s National Bureau of Statistics says the country’s largest wheat-producing province won’t be breaking any records this year. Henan Province is facing disease, not to mention rising costs from oil and fertiliser booms.
Woe, woe, woe…
It’s a disconcerting fact that agricultural production today is an oil-based business. We turn natural resources into food. Petrol fuels the massive machinery that mass-production farming requires. Phosphate, potassium and nitrogen make up the chemical fertiliser that stimulates extra returns on crops.
Rising prices wouldn’t so much of a problem if Chinese farmers could make up the difference with a good year. But pests are making the situation harder. ‘Sharp eyeshot disease’ is expected to take its toll on Chinese wheat fields this year.
As we said earlier, wheat is one of Australia’s top exports. If China can’t get enough wheat, it’ll look to us. Now that AWB (ASX:AWB) has lost its grip on the exporting trade, a few second-tier wheat players may be worth a look…
Gold in a Good Place for Buying
If money’s moving out of stocks, where will it go?
It might be time to take another look at the ultimate alternative, gold. It hasn’t made a major move since it came back from US$1000. Gold costs US$920 this morning. Our hunch is that that’ll change in the next month or so.
Good investing,
Al Robinson