Closing soon

  • It’s a sell!
  • Record high
  • Risky? You bet…

If you took part in our recent microcap investing summit, hosted by my colleague Sam Volkering and I, you should know that applications to join the Microcap Trader service have exceeded our expectations.

For that reason, we MUST close access to this service tonight. We don’t know when exactly, because it depends on when the spaces fill.

What I do know, is that there won’t be a chance to join tomorrow.

So, if you’ve been putting it off, for whatever reason, get to it. This is your final chance. Check your email inbox for the invitation to join the service, and act now.

Tomorrow will be too late.

Markets

Overnight, the Dow Jones Industrial Average gained 232.23 points, or 1.12%.

The S&P 500 added 14.46 points, or 0.61%.

In Europe, the Euro Stoxx 50 index gained 5.78 points, for a 0.16% gain. Meanwhile, the FTSE 100 gained 0.15%, and Germany’s DAX index added 0.1%.

In Asian markets, Japan’s Nikkei 225 index is up 210.1 points, or 1.1%. China’s CSI 300 is up 0.21%.

In Australia, the S&P/ASX 200 is up 40.22 points, or 0.68%.

On the commodities markets, West Texas Intermediate crude oil is US$49.45 per barrel. Brent crude is US$52.00 per barrel.

Gold is trading for US$1,264.57 (AU$1,683.43) per troy ounce. Silver is US$17.61 (AU$23.44) per troy ounce.

The Aussie dollar is worth 75.12 US cents.

It’s a sell!

This news from Bloomberg won’t warm the heart of many iron ore executives:

Iron ore’s surprise early-year rally that neared $100 a metric ton at its peak will probably represent the commodity’s high-water mark for at least the next half decade, according to BMI Research, which projects that prices will average lower each year through to 2021.

The commodity will drop to $70 a ton this year, $55 in 2018, and slump to $46 by 2021, according to the research arm of Fitch Group, which cited rising supplies from Australia and Brazil and expectations for a surplus. Major producers, backed by low costs, will boost output, BMI said in a report.

In short, the big iron ore players, such as BHP Billiton Ltd [ASX:BHP] and Rio Tinto Ltd [ASX:RIO], will have to produce more in order to earn less — if you get our drift.

The iron ore price slump has been remarkable.

In February this year, it nudged US$95 per tonne. Today, it’s barely above US$65 per tonne:



chart image

Source: Bloomberg
Click to enlarge


That’s a 30% drop, taking the price back to where it was in early November last year.

Of course, the iron ore price is a far cry from where it was in 2011, when the great commodities rebound took the price to over US$191 per tonne:



chart image

Source: Bloomberg
Click to enlarge


But high prices are rarely sustainable. Not in a free market anyway. In a manipulated market, such as healthcare and housing, prices can stay high…for a sustainable period. Even there, our bet is the high prices won’t last forever.

In fact, the price action in iron ore, and the current oversupply, is a great example of how ‘high prices are the cure for high prices’.

If prices are high, it draws more supply. Capitalists see the big profits on offer, and figure they’d like to grab some of the action.

Investors think the same way. They pour investment dollars into companies that are drilling for iron ore in new areas…or existing companies that plan to increase production.

It takes time, but eventually the increased investment and increased supply causes prices to reverse course.

That’s what you’ve seen since 2011. As prices rebounded higher, to a record high, it attracted investment. That increased supply.

But the more companies increased the supply of iron ore, the more the price began to fall.

So now, it means that iron ore production among the big miners, like BHP and Rio, is at the highest point ever. Unfortunately, they’re not necessarily making any more money from it.

BHP is a good example. Its revenue peaked in 2012, just after the peak in the iron ore price. It recorded revenue of US$72.2 billion that year.

Last year, with prices much lower, BHP’s revenue was just US$30.9 billion.

Yet, as ABC News reported in January this year:

BHP Billiton has reported a record amount of iron ore production across its mines in Western Australia for the second half of 2016 due to the ramp up of its Jimblebar mine in the Pilbara.

It’s not uncommon to see production levels surge when prices fall. We wouldn’t be surprised if 2017 was another record year for BHP.

The way it works is that as prices fall, producers rush to push even more supply into the market. They figure they’d rather sell as much as they can now, before prices fall further.

Trouble is, the increased supply pushes the lower prices even lower — at least for a time.

On the plus side, it simply means the cycle starts again. Prices always overshoot too high and then too low. Just as ‘high prices are the cure for high prices’, ‘low prices are the cure for low prices’.

Eventually, it won’t be economical for companies to produce at such cheap prices, and many will go out of business. The Bloomberg article hints at that.

That’s when supply drops, and the demand causes prices to move higher.

In the meantime, the market experiences wild swings, miners fall out of favour, and folks lose a lot of money.

That could even include the big companies that manage to battle their way through the downturn. An example? Say, what about BHP? From the Australian:

Goldman Sachs has turned increasingly negative on the mining sector, downgrading BHP Billiton to “sell” and slashing its target price for Rio Tinto in the face of falling iron ore prices and what it sees as China’s potential to restrict credit.

Not a good message to hear, especially as BHP is one of the most heavily invested stocks by ordinary retail investors.

Oh dear.

The ratings and target price downgrades were on the UK listed stock of both companies.

Goldman’s new price target for the London-listed Rio Tinto Plc [LON:RIO] is now £28. That’s down from the previous price target of £35.

As a point of reference, the current stock price is £30.99.

As for the London-listed BHP Billiton Plc [LON:BLT], Goldman’s has its price target at £11, with the shares currently trading at £12.06.

As recently as January, Goldman’s analysts had set a £15.50 price target for the stock…but only after the price had already hit that level. It has been downhill ever since.

Anyway, when Goldman’s says sell, it’s hard to ignore it. They don’t get everything right — you may remember their forecast for US$200 per barrel oil.

But they don’t get everything wrong either.

And despite the claims that the Aussie economy is diversifying away from resources into other sectors, it’s worth remembering that resources still account for the lion’s share of the Aussie economy, and most importantly, the lion’s share of its exports.

It would be wrong to ignore this as a warning sign of worse to come.

Record high

But what the heck, the Financial Times kindly informs us:

The Nasdaq Composite breached the 6,000 level for the first time on Tuesday as investors pile into technology and smaller companies with strong growth prospects amid concerns Donald Trump will be unable to spark inflation through tax cuts and big public spending plans.

We’re not quite sure what to make of that quote. It seems to suggest that stocks are going up, even though the outlook for the economy is bad.

To be honest, we’ve long given up trying to make sense of it all. Investors seem in the mood to buy stocks, so they’ll buy stocks…and the market goes up.

What more is there to know? What more is there for you to need to know? Just buy stocks, and carry on — that seems to be the message.

It’s not a message we’d follow without a great deal of trepidation.

Risky? You bet…

In which case, why take the risk on the kind of stock our colleague, Jason Stevenson, is banging on about right now in Resource Speculator?

He’s all over the growth in the battery and electric car industry. But he’s not recommending you buy Tesla Inc [NASDAQ:TSLA]. He has a different way to play it.

A way which, he says, could result in big quadruple-digit percentage gains — meaning you don’t have to risk a lot for the potential to make a lot.

High risk? Sure it is. But worth the risk? Could be. Find out for yourself. Go here.

Cheers,
Kris