Resource Equities leading to a Happy Easter

by Barry Dawes

Key Points

  • China still growing steadily
  • US$ and bonds still weakening
  • Global equity markets, well, booming
  • Commodity markets strong
  • Oil prices ready to surge
  • A$ still strong

Despite the sombre mood and all the end-of the worlders, the world economy seems to just get better.  Not that is any surprise to you who still read Dawes Points and, as unfashionable are the views expressed here,  the reality is on our side.   The great Contrarians of the markets of yesteryear seemed to give a little too much of the same.  Year after year.  End of Western Civilisation is nigh in a great debt spiral that would have gold at US$10,000 the DOW at 1000 and everyone on the breadline.   The Also-rans Group have decided that Cash is King and yield is better and let’s just stick our head in the sand until it all goes away while we sit on A$1568bn in bank deposits, bank stocks and Telstra.  Yes, you win. Pity about your grandkids unable to  get a job.  Who is going to employ them?   Well, it isn’t going to be the government.

But hey, that is away from topic. And I was going to write about gold this week.  Well, maybe next week but the urgency for gold is still there.  Ignore it at your peril.

The China Syndrome threat hasn’t worked.  The collapsing of the Chinese economy that was going to drag us into a vortex of falling commodity prices, sinking of the A$, blowing up Australian Government finances, unemployment,  horrible this and horrible that and well, yes,  the Greater Depression just hasn’t happened.  Doug Casey and Harry Dent where are you now when we need you so much.  Or not.

So, something else is happening.  7.4%pa for China in March Qtr.  Where are the Bears?  Oh, The Government said it was going to be  7.5% so you might say the economy is slowing.  Only US$630bnpa  added to GDP, not US$640bnpa.  But they still tell you its is slowing.  Maybe next quarter they will get it right.  But the shadow banking system is collapsing.  Unoccupied phantom cities. Too much debt in the SOEs.  Power consumption slowing.  China is a basket case now!   Crude steel production collapsed to a new annualised high of 809.5mtpa in February.   Iron ore stocks at ridiculously high levels that show 40% less availability than two years ago.  But Australian iron ore producers can’t put enough on the ships to sell to China at these current low prices.  Record shipments for BHP and FMG.  And so it goes on.

Fine. Fine. But what are the markets saying?

Well, let’s start with the biggest markets first.  The currencies.  And the  US$ is the biggest . What are the markets saying about it.  I fear not much.  Same level as two years ago. And looking heavy.  I know you have seen it all before but we all need that boost to keep the faith.

Now you can say  that the ending of the Petrodollar Era will mean the US can no longer print money.  Maybe.  Or that the debt is coming home to roost.  Fair point.  Or you can say that the US has lost its true entrepreneurial spirit  and that it has lost its way.  Maybe.  Or just maybe that the US is OK but other places are better.   Well, this is my view.

Have a look at these.  The SWIFT Nowcasts are showing reasonable growth.

First for OECD.

Then for Europe

Golly gosh.  Economic expansion. Here.  And actually everywhere.

So no need for US$ safe haven.

I will put in a plug here for the strong A$ but I will come back to it later.

And  after the currencies come the bond markets.  About US$80tn worldwide.  Much bigger than the equity markets.

The US 10 year T-Bond seems to be a little less happy about being at such low levels than the 30 year  but neither gives the appearance of wanting to stay at these low yields.   Supporting on a downtrend after a breakout is a great technical indicator of change.  It has been a slow process but I think it is doing the right thing and yields will be heading higher.$TNX&p=W&yr=10&mn=0&dy=0&i=p14048960168&a=347095810&r=1397645925447$TYX&p=W&yr=10&mn=0&dy=0&i=p11287349502&a=347095864&r=1397645792451

So much for bonds.  I hope you are not too exposed here.  After all, it has been a 30 year bull market that has already peaked(July 2012).

Well then let’s look at the equity markets.

The US is the biggest.  And again let’s look at the small caps which have led the global markets.  And also the Wilshire 5000 that gives the market breadth.  Overbought on most measures but may be not over extended.  What are they telling us?  Surely not a global economic boom? Impossible!$RUT&p=M&st=1990-07-13&en=(today)&i=p67171178202&a=273606702&r=1397646631634$WLSH&p=M&st=1980-07-13&en=(today)&i=p77519187017&a=273606735&r=1397646800425

Well, now look at the big players.  S&P 500 and the DOW 30.  Everything overbought but not over extended.  Hmm.  Couldn’t be a synchronised global economic upturn. Nah.$SPX&p=M&st=1980-07-13&en=(today)&i=p25522426848&a=273606836&r=1397647127332$INDU&p=M&st=1980-07-13&en=(today)&i=p58019763741&a=276892999&r=1397647261041

Germany is already on its way to boom times and the UK in its own reticent way is catching up too.  Was that a surprise fall in unemployment I heard in the UK  today?$DAX&p=M&st=1980-07-13&en=(today)&i=p32505337962&a=276893002&r=1397647677939$FTSE&p=M&st=1980-07-13&en=(today)&i=p74581083786&a=276893000&r=1397647615363

And so much for the collapse in the Emerging Markets.  India surges to new highs and Korea is nearly there.  All the majors are looking OK.$BSE&p=M&st=1990-07-13&en=(today)&i=p63848639666&a=277530125&r=1397647468645$KOSPI&p=M&st=1995-01-02&en=(today)&i=p52817967426&a=303785916&r=1397647517818

Finally Shanghai.  Full of underperforming SOEs but the PER is<10x.$SSEC&p=D&yr=5&mn=0&dy=0&i=p52062669111&a=347099740&r=1397648795659

So equity markets are not calling the end of the world.  Are commodities?$CCI&p=M&b=5&g=0&i=p51164818296&a=308865341&r=1397648932962

Well, not here.

Brent is strong.  As is WTI.  Where is the recession?$BRENT&p=M&b=5&g=0&i=p10180392193&a=335711422&r=1397649061539$WTIC&p=M&st=1980-07-13&en=(today)&i=p74540382760&a=295571898&r=1397649126009

And finally BHP.  In US$ but looking good.

And finally, finally, the little Aussie battler.  After being in Hong Kong and China in the past month I sure am happy the A$ is over US$0.90 and not at US$.80.  Those who wish a lower A$ simply don’t understand wealth.   A higher A$ means EVERYONE  has to work better and more productively.  More technology.  More personal responsibility.

Isn’t this a ripper!  Supporting on the downtrend and kicking off!  Even if it has had a false start.  Supporting off a 100 year downtrend.  Now that is class.$XAD&p=W&yr=10&mn=0&dy=0&i=p32446109679&a=329137106&r=1397649608671

I was going to talk a little about gold too but I will leave that for another time.

So I am sure now you will want me to tell how to make some money in the stock market.

First of all, the broad resources market bottomed in the last week of June 2013, so we have been in an uptrend for almost 10 months.

And, if you had been watching the market closely recently you would have seen that dozens of small resources stocks have  jumped in 2014. Dozens.  But there is so much more to come.  We have shared in quite a few.

The majors are also building good bases and are looking good for the June Qtr upmove I have been expecting. A lot to like with BHP, WPL, STO, FMG, OSH, PNA.

I will continue to recommend the usual great plays where we have played a role in recent times

  • Lamboo LMB
  • Valence VXL
  • Blackham BLK

But also WSA, DLS,  BPT and WHC.

And a very special plug for Central Petroleum which has made a MAJOR gas discovery at the Mt Kitty +1TCF target that will have a significant impact on the Australian energy scene. And our very own Phoenix Oil and Gas (now soon to be listed as High Peak Royalties HPR.ASX)  holds a 1% royalty over all of this.  Watch out for a report next week showing why you should definitely not sell and should certainly buy on the 29 April listing!

So don’t be caught down the hole this Easter while St Nicholas is actually flying across the sky early this year delivering  some wonderful Christmas presents.

17 April 2014

Leave a Reply