Cycling Hard with Commodities…But to Where?

Financial markets, you’ve got to love them. Of all the sectors expected to bounce since the beginning of this financial year, we don’t think there were many who saw a bounce coming in iron ore stocks. But that’s what we’ve gotten. They haven’t quite had the same dash out of the blocks as Twitter, but several are up near 100% since June 30.

Mind you, reports on the move were mostly lost amongst the noise of the banks still cashing in. Commonwealth Bank of Australia hit an all-time high this week. It is now the tenth largest bank in the world by market cap. As Dan Denning told Scoops Lane readers on Thursday, you now have $27.8 billion in proof that Australia’s economy and financial system are rigged in favour of the banks. That $27 billion is the combined profit of the big four.

They have one notable competitor wanting to take some of that $27 billion: Macquarie Group. Its share price is just under a five year high as the company gets its hands on some of those juicy mortgages, and it has its eyes on even more. Take this from The Australian this week:

‘The Macquarie Group has revealed ambitions to almost double its share of the lucrative $1.3 trillion mortgage market as the resurging housing market and improved funding conditions lure lenders looking to deploy capital.’  

Macquarie’s mortgage book is chicken feed at $8 billion, but it also flags a ‘return to raising funds through residential mortgaged-back securities, as the market improved this year.

We’re sure if you’d asked Phil Anderson, he would have told you this was inevitable. Why? Phil, as you probably know by now, is bullish on Australian real estate. You can see why here. Phil’s study of history, as revealed in his book The Secret Life of Real Estate, says after every downturn banks find any way possible to get back to the lucrative business of prodigious credit creation (thanks to fractional reserve banking) against land value. It’s the best game in town until its inevitable collapse. That’s why he calls it the real estate cycle. But we’re at the beginning of a new cycle, he argues, not near the end.

Cycles got a good run this week, in fact. We finally had time to sit down and check out Rick Rule’s speech on the natural resource market.  Rick has forty years experience in commodities. And as far as he’s concerned, investors should be snapping up the right mining shares while they’re on sale. That is if you want to be ‘a contrarian, not a victim’.

Of course, you should only lay your money down if you can handle further price falls, he says. One of Rick’s anecdotes was buying uranium miner Paladin Energy at 10c around 1998. Pretty soon it was 1c.  He had a grin on his face when he said you’re either a buyer or seller when the stock you own is down that far. He bought more. Talk about buying straw hats in winter. He was able to grin at the memory because he eventually sold his Paladin stock at $10 during the uranium bubble in 2007.

Rick argues that nothing has really changed about the commodity bull market since 2000, except prices. Which is a rather obvious point. But he’s referring to the fundamental drivers of world population growth, rising per capita incomes in Asia, and general under-investment in productive capacity, not to mention the devaluation of paper money against hard assets, which are all still there. So why the bear market?

Because mining is cyclical and that’s what markets do. They move from undervalued to overvalued. Even in bull markets, there are declines. But his experience tells him resurgent commodity prices are a matter of when, not if. He can tell you all the reasons why they’ll come back. But, like the rest of us, he doesn’t know if it’ll be next year, two years from now or even longer.

Rick likes to view mining juniors through a research and development lens.  He wants to own businesses run by people who have been successful in the past. He wants to know the management team have the requisite skills. Human resources are important. But they need the wind at their back, too. That means a commodity with rising demand and not much competition in terms of supply.

There are a couple of commodities he likes in particular. Out of respect to paying Port Phillip subscribers, we won’t mention the ones he specified or why. But we can tell you he’s not the only one eyeing opportunities in the resource sector. Kris Sayce over at Australian Small-Cap Investigator is now on the hunt for some tasty juniors while prices are depressed. He’s already found one he says is a beauty. You can see what he means here.


Callum Newman+
for Markets and Money

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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