In today’s Money Morning…liquidators chase Clive Palmer down…commodity investors chase copper prices up…a Goldman Sachs ‘buy’ signal?…and more
Three big stories emerged in the resources sector last week.
At first glance they might seem unrelated. But today I’m going to delve a bit deeper.
Because in a weird way, the combination of these three stories could be a signal for a resurgence in commodities stocks.
There’s certainly enough bad news out there to counter that conclusion. But as a wise man once told me, the time to invest is when there’s blood in the streets.
And at the moment it’s Clive Palmer’s blood.
Let me explain…
Now I don’t expect anyone to feel too sorry for jolly old Clive. Though, he’s probably not so jolly these days.
As ABC News reported last week.
‘Liquidators of Queensland Nickel have made a claim to freeze Mr Palmers assets in an effort to recoup $270 million owed to creditors. The company collapsed in 2016 with $300 million in debt, leaving 800 people out of work.’
So a bit sympathy isn’t amiss for all involved.
Here’s the thing though…
Companies going bust, directors liquidated and companies de-listing or turning into shells (listed stocks used by other companies to raise capital for a new business) occur most often at sector bottoms.
Since 2014, we have seen a spate of these backdoor listings as miners became technology firms or some other in-vogue business.
And as far as I can tell the resources pessimism hasn’t abated much yet.
Fellow nickel miner, Western Areas Resources [ASX:WSA] is one of the most shorted shares on the ASX right now.
20% of its entire share capital is currently short (people betting on the share price going down).
That’s a big number!
But the WSA share price is at a six month high. That’s interesting to me.
I’ll tell you why…
As the number of short bets has increased over time, the WSA share price has gone up. That means that the buying power is quite strong.
Strong enough to counter the pressure from the short sellers.
Now the shorts might be making an event-based bet. Or they may feel that the price rise is unjustified for some fundamental reason, so they are willing to increase their bet.
I can’t say.
But I do know this.
The shorts could be wrong.
And if they are, WSA’s share price could be set to pop as they all rush to cover (buy back the short position) at the same time.
It will be interesting viewing to see who wins the battle. Keep an eye on it!
Green shoots from Dr Copper
More broadly, there are general signs of hope for resource investors. Mainly from the copper price.
Last week it closed at a two year high.
That’s usually a big buy signal for all sorts of mining stocks. Where copper leads, other metals prices tend to follow.
Now, copper is referred to as ‘Doctor Copper’ by investors, as it is thought to have an ability to predict turning points in the market.
It’s basically a gauge for the health for the world economy.
Mainly because of the widespread application of copper in a variety of end uses.
It’s used in building products like piping, electronics, consumer goods, machinery…pretty much in everything.
Incidentally this is good news for BHP [ASX:BHP] who are set to almost double production at the world’s largest copper mine in Chile this year.
But I digress…
The last potentially connected story last week was about the outflow of money from US commodity funds. At first glance you might think this is a bad thing. Nervous investors selling out.
Even Goldman Sachs is closing their struggling commodities unit this year. You can see why in the table below.
Commodity Prices By Year:
Source: Stansberry Research
[Click to enlarge]
But you know what?
These two facts made me a little bit bullish!
Let me explain…
In 1998, another heavyweight investment firm, Merryl Lynch, closed down its commodities unit. There’s a story that when legendary investor, Jim Rogers, heard about it, ‘he couldn’t stop smiling.’
You see, his three decades of experience had taught him one important thing.
The best time to invest in a sector is when no one else wants to. The bottom is usually when negativity is high and everyone just gives up.
Big outflows can be a signal not of smart moves, but of general investor fatigue. They get sick of losses.
The final large volume capitulation often acts as a signal for the bottom.
Incidentally, 1998 was the start of the great commodities bull run till through to 2007. Jim Rogers was right to smile!
Mining boom ahead?
Time to go all in mining stocks then?
Easy there, I wouldn’t go that far yet!
But if the copper signal is still the accurate indicator it has proved to be in the past, it’s certainly time to start looking at this sector.
Maybe even time to dip a toe in?
The fact is, no one knows a boom is coming…until it does. Just like a bust.
Sometimes you’ve got to dissect the facts from the emotion, and start to play the probabilities rather than the stories.
The fact is copper is at a two year high. That’s something worth focussing on…
And if a boom does occur any time soon, the upside potential in Australia’s beaten down mining sector will be huge. At least for those brave enough to take a punt now.
Editor, Money Morning