A Market Built on Shaky Foundations

Let’s see what’s been going on in the market…because it gets weirder by the day.

The Australian share  market got another shot of adrenaline yesterday with the news that Japan’s economy is in recession…still. Yep, in the Alice in Wonderland world, a recession in the economy of one of your major trading partners is good news.


Because it gives ammunition to the currency debasers to print more yen. Japan’s economic witch doctors reckon this will boost their economy. But all it does is shower profits on speculators. The Financial Times reports:

For an elite group of the world’s most successful and secretive hedge funds, only one bet has mattered for the past three months: the “Abe trade”.

Shorting yen and buying Japanese equities, inspired by the dovish monetary bent of Japan’s new prime minister, Shinzo Abe, has been one of the most successful hedge fund wagers in years.

And it’s not a bad deal for Aussie equities either. Australia’s large cap, liquid stocks are a prime beneficiary of the ‘short yen, long anything else’ trade.

But all it takes is for one hedge fund to shout ‘fire’ and the trade will reverse very quickly. We’re not there yet, though. With Japanese politicians mouthing off like drunken teenagers, the speculators see more easy money ahead.

Speaking of easy money, did you see Rio Tinto’s result, released yesterday evening Aussie time?

It might not look like easy money, with underlying profit down 40% year on year. But it’s certainty a case of turning red dirt into ‘money’ pretty easily.

Overall, the diversified miner generated underlying earnings for 2012 of US$9.3 billion.

At a divisional level, net earnings came in at US$10.2 billion. The iron ore division contributed $9.24 billion, or 90% of earnings. That gives you a pretty good idea that Rio is not diversified at all.

The copper division was the next largest earner, bringing in just under US$1.1 billion. The other divisions contributed negligible amounts, or losses.

Sam Walsh, the new CEO and former iron ore divisional boss, make a point in one of the presentation slides that, ‘China is Key.’ You’re not wrong Sam. China is the keystone for your entire organisation. Pull it out and the whole red dirt monetisation engine crumbles.

Lucky, then, that China is booming again…for now. But what happens when the keystone is on shaky foundations itself? We’ll find out soon enough.

Greg Canavan
for Markets and Money 

Join me on Google+

From the Archives…

Money in the Time of Financial Cholera
8-02-13 – Satyajit Das

Dishonest Leaders and Delusional Voters
7-02-13 ­ – Bill Bonner

Uranium: The Commodity Like Gold Ten Years Ago
6-02-13 – Byron King

How Australia-China Relations Are Caught in the Monetary Battle Space
5-02-13 – Dan Denning

The Great Rotation Into Stocks
4-02-13 – Dan Denning

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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