Don’t be a Victim

Thursday, December 3rd, 2015
Albert Park, Victoria, Australia
By Kris Sayce

  • Markets in a holding pattern
  • Worse to come for BHP
  • In the mailbag

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Yet again, the markets have moved into a proverbial holding pattern.

The Dow Jones Industrial Average closed down 0.9% overnight, while the S&P 500 index fell 1.1%.

That’s a reasonable drop. But in reality, everyone is waiting for the US Federal Reserve to raise interest rates on 16 December.

According to the latest numbers from Bloomberg, the markets have now factored in a 74% chance of the Fed raising rates this month.

And if they don’t, it’s a 76.6% chance for the January meeting.

And an 88.3% chance of a rate rise at the following meeting in March. (The Fed won’t meet in February 2016.)

Meanwhile, after rebounding, the Aussie S&P/ASX 200 looks like it will have a down day today. At the time of writing, the index is down 0.4%.

Everyone waits for the Fed, but the currency wars wait for no one…

Worse to come for BHP

I’ve said it once, and I’ll keep saying it until I’m blue in the face.

It’s easy to think that the Fed’s actions are just an innocent game of playing around with interest rates.

But they aren’t. It’s bigger than that. Every action or inaction by one of the world’s central banks is another part of the currency wars game.

And it’s not just affecting interest rates and currencies. It affects another big market too — commodities.

The oil price is currently trading at US$40.41 per barrel.

The gold price is US$1,051 per ounce.

And copper is now trading for just US$2.03 per pound.

Check out the copper price chart below. It’s now trading at the lowest level since the 2008/09 crash:

Source: Bloomberg

Yesterday I mentioned that BHP Billiton Ltd [ASX:BHP] was trading at the lowest price since 2005. I brought this fact up in today’s Money Morning Facebook video update.

Go here to watch it. Our web team should have uploaded it by now. It’s only short. We keep it that way for the short attention span millennials!

The point I (briefly) make is that the BHP chart is final confirmation that the resources boom has ended. That’s it. It’s over.

The Rio Tinto Ltd [ASX:RIO] price chart is heading in the same direction too. Although, unlike BHP, it’s not yet at a longer term low.

Its recent low was in December 2008, when it traded around $25. The previous low was in 2003.

But that’s not the point. The point is that the once in a multi-generation boom has ended. The boom that some folks thought could last 50 years, is no more.

And sadly for the miners, things are set to get worse. As Bloomberg reports:

Iron ore may be on the cusp of dropping into the $30s a metric ton as the biggest producers expand supply and the onset of winter in China dulls demand that’s been hurt by the slowdown in growth in the world’s top user. Miners’ shares retreated in Sydney.

“The outlook remains grim for iron ore fines because end-demand from construction and manufacturing is uncertain,” said Jessica Fung, an analyst at BMO Capital Markets in Toronto. “Steel inventories have been building.”

Spot ore with 62 percent content delivered to Qingdao fell 2.6 percent to $41.13 a dry ton on Wednesday, a record low in daily prices compiled by Metal Bulletin Ltd. Dating back to 2009. It’s dropped each day this week, losing 7.6 percent. The raw material traded as low as $10.51 in 1988, when annual benchmark contracts were negotiated between the largest miners and steel producers, according to data from the International Monetary Fund.

Remember, it wasn’t that long ago that BHP and Rio Tinto pushed steel producers to switch away from annual contracts, to instead trade based on quarterly contracts.

It’s no surprise that change happened in 2010, just as the mining boom was reaching the peak for the second time.

You can see how the iron ore price has changed in the data at the end of each day’s Port Phillip Insider.

Today the iron ore price is just above US$41 per tonne. One month ago, it was around US$49 per tonne. One year ago, it was around US$69 per tonne.

That’s a big fall, and it’s all part of the global currency wars.

The big issue for Aussie investors is the impact it will have here. As I’ve written elsewhere, BHP’s profits have fallen from above US$23 billion at the peak in 2011, to just US$1.9 billion this year.

Considering that BHP pays a big chunk of these profits out as dividends, there’s no doubt that it will have a big flow on effect to the rest of the Aussie economy.

As odd as it may seem, some investors did indeed buy BHP stock for the dividend. And why not? It’s the Big Australian. It’s a company that’s as safe as the big four banks, Qantas Airways [ASX:QAN], and any other Aussie icon you can mention.

OK, it’s a stretch to say that Qantas or any other airline is safe.

But the lower the iron ore price goes, the lower the BHP price goes. At the close today it was $18.19. The last two dividends it paid were 62 cents each.

That puts it on a grossed up dividend yield of 9.7%.

That’s not sustainable for a company that will likely see lower revenues and lower profits.

Do you see what I’m getting at? BHP is a victim of the currency wars. Just as much as savers and investors are a victim of the currency wars.

As Rick Rule, a good friend of Port Phillip Publishing’s always says, ‘You can either be a contrarian or a victim. Don’t be a victim.

It’s time for investors to acknowledge that the currency wars are happening, and do all they can to profit from them. Go here for details.

In the mailbag

It’s been a while, so let’s pay a visit.

Peter D writes, following up on yesterday’s Port Phillip Insider and the ‘collapse of animal spirits’ as claimed by former Greek finance minister, Yanis Varoufakis.

Peter says, ‘Try googling “animal spirits”: John Maynard Keynes may make an appearance.

I’ll admit to getting about a third of the way through Keynes’ General Theory before I just couldn’t wait to put it down. That was about seven years ago. It’s still on the bookshelf at home, but I haven’t touched it since.

I think my main interest in reading Keynes’ General Theory was to laugh at his suggestion for boosting an economy.

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

To be fair to Keynes, he wasn’t necessarily saying that burying jars filled with money and then digging them back up was a great idea. But he was suggesting that doing so is analogous to digging for gold.

Nice try, but it doesn’t quite work.

It’s not the process of finding and recovering gold that makes it valuable. What makes gold valuable is its relative rarity, its divisibility, and its general acceptance as money for thousands of years.

By contrast, paper money, whether buried in jars or not, historically has an incredibly short lifespan.

There is no currency (except for gold) in existence today that was in existence in the same form 100 years ago.

In fact, you could probably shorten that timeframe to 60 or 80 years. But whatever, the point is, paper money is the opposite of everything that makes gold valuable as money.

Paper money isn’t rare.

Paper money and legal tender coins aren’t divisible.

And while paper money may be generally accepted, no one can claim that a particular type of paper money has been generally accepted by anyone for thousands of years.



End of day market data

If you have any ideas about what you would like us to include in our end of day market data drop us a line at, and type ‘Market data’ in the subject line.

52-week highs: 38 stocks, including Admedus Ltd [ASX:AHZ], Baby Bunting Group Ltd [ASX:BBN], CSG Ltd [ASX:CSV], QMS Media Ltd [ASX:QMS], and Ridley Corp Ltd [ASX:RIC].

52-week lows: 35 stocks, including Capitol Health Ltd [ASX:CAJ], Godfreys Group Ltd [ASX:GFY], Medusa Mining Ltd [ASX:MML], K&S Corp Ltd [ASX:KSC], and Yellow Brick Road Holdings Ltd [ASX:YBR].