Oil Was Down and the Banks Were Up

In a complete reversal of recent primary trends in the market, oil was down and the banks were up. Crude actually fell under $130 for the first time in six weeks. Investment broker J.P. Morgan reported better than expected earnings in New York and sent the Dow to its biggest two-day gain since 2002.

We wouldn’t read too much into this little sortie by the financial bulls. But it’s a free country. You can do what you’d like, for now.

Still, keep in mind that what you’re seeing is a giant de-leveraging in the financial system. Assets are being sold and marked down as debts are called in. Things that went up with cheap money are going down as easy credit vanishes from the system.

One key issue for Aussie investors to watch is whether the draining of liquidity from the global financial system takes down resource shares. Mineweb reports that BHP has lost US$75 billion in market capitalisation in the last two months.

In the last year, the top twenty mining companies (by market cap) have lost US$542 billion in value. Throw in the top twenty oil companies (especially Exxon Mobile and Petro China) and you get combined losses in market value of US$1.4 trillion in the last year.

“In the natural resource markets,” says our friend Rick Rule, “you are either a victim or a contrarian.” Rick is speaking at the Agora Wealth Symposium next week in Vancouver. Your editor is speaking too, and will be filing reports from the show. There are a lot of people we’re eager to hear from, including Jim Rogers, James Kuntsler, Byron King, and others.

But the big question, from the Australian perspective, is whether you’d be a victim or a contrarian to continue betting on resource stocks after such a brutal twelve month period. Resource markets are cyclical. And the action in the last year suggests that at least some investors think the cycle is near the top.

For reasons we’ll go into at the show, we believe the cycle is not at the top yet. In fact, this particular period is a lot like May of 2006. Remember, from May of 2003 to May of 2006, BHP stock went up 270%, from $8.56 to $31.72. This was the first great “re-valuing” of a mining stock as a growth stock.

Then, in May of 2006, the commodity boom entered its first phase of consolidation. BHP didn’t make a new high for an entire year. It took until May of 2007 for the stock to close above $31.72. But over the next twelve months, it gained 51%, topping out at just under $50 on May 19th.

Could we be two months into another consolidation period? It would make sense, given the scare that credit markets have put into equities. But is the case for higher resource prices, greater production volumes, and a historically stronger resource cycle still strong? Yes. More on this next week.

We’ll have to cut the market coverage short today.

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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