Investors dropped everything and stampeded out of the resource sector yesterday, reader. We mean everything. There are kitchen sinks lying all over the place. According to the Australian Financial Review, Lynas (ASX:LYC) was the best-performed miner in the top 200 yesterday. It only lost 0.4%.
So today’s issue is an idea-fest. Among the wreckage there are good stocks. Really, unless you believe there isn’t a good miner in the country, that has to be true. They all went down.
But before we get to ideas…why did the miners cop such a drilling yesterday?
Falling commodity prices. Oil’s trading at US$116 this morning. It’s leading a lot of other hard assets down. If you’re a fan of the charts, stay tuned for tomorrow’s MM. Gabriel can tell you what this plunge means for technical traders and the market’s sentiment.
Today, we have two things to say about the commodity correction.
It’s only a correction. And it’s not an all-in, broad bear market like the one you’re seeing in financials shares.
On the first point…look at what commodities have done since 2004.
No market can keep that up forever. When you hear that metals are down, or that wheat is losing ground…it’s mainly because in the last 4 years their prices took enough ground to fill the Grand Canyon.
And it’s not a bear market. Why? Because in a bear market, everything falls. That simply isn’t the case with commodities. Take a look at a break-down of that chart above.
Those are the key sectors for Australia’s trade. They don’t move in tandem, contrary to what a lot of people believe. The financial drama ended in tragedy. That’s because no-one needed a reason to buy financial stocks anymore. They just did it.
But every commodity is different, with different sources of supply and demand. We guess if you wanted an analogy for the financial market…they only trade mainly in one commodity: interest rates. That’s why we keep track of the Bank Pain Index over on the sidebar.
Resource stocks aren’t all the same. So we don’t expect them all to drop at once. And when they do…like yesterday…it means some are probably more valuable than they look.
Some are even trading below their book value. You can see for yourself below. There’s even a recent Diggers and Drillers tip in this list. We’re not letting on which one, mind you.
Companies in the Materials Sector Trading Below Book Value
Companies in the Energy Sector Trading Below Book Value
Flat Rates…Falling Oil…Wall Street Gains 3%
But the deflation of some commodities is bringing some buyers back to the market. Add in the fact that the Federal Reserve declined to cut rates again. What do you have?
In a ridiculous circle of un-logic, we’re now left with a huge opening in the All Ordinaries today. The ASX200 Materials and SAX200 Mining indices are flying with a 2% gain already.
Falling commodities yesterday meant a falling ASX. The fall in oil also meant the Dow rose. And if the Dow goes up, the ASX follows it like a lost puppy. Make up your mind, ASX.
Gindalbie’s Prediction for the Iron Price
Over to the latest from the iron sector. BHP and Rio’s iron contract prices only reset about a month ago. Yet iron junior Gindalbie (ASX:GBG) is already calling for 20% gains in the next year.
Are you any good at picking market bottoms? When the whole-sale slaughter on the ASX is over, iron juniors might prove to be the sector to hold. Yet again.
AXA Surprises the Market
Anything can happen now, we suppose. AXA leapt 7% on a joyous earnings report yesterday. Boss Andrew Penn delivered it to the market with this encouraging line:
“Frankly, it is impossible to predict how and when this (volatility) will play out, or what the next round of bad news will be. In the meantime, it will continue to be a difficult time for our industry.”
Investors are scrambling to buy anything even remotely positive. A financial announces a modest 11% increase in operating profit and traders go ga-ga. Never mind the bearish outlook from the CEO. Or the fact that the company’s overall profit fell by 75%.
