What a difference a day makes. Or does it?
Commodities are on the verge of their biggest one-week really in 33 years, according to Bloomberg. Gold was up US$25 overnight (2.7%). Oil rallied five bucks. The Reuters/Jeffries CRB Index tacked on 3.7% yesterday alone. If it can keep itself together Friday, the index will be looking at a one week gain of 6.7%.
So is this the second coming of the commodity bull market? Or is it just a blip of a rally? The answer matters. If the short-dollar trade is fully liquidated, then the decks are clear for commodities to resume their long-term ascent. But momentum comes and goes quickly these days.
Perhaps we should keep an eye on what started the whole resource rally in 2003, namely, a lack of investment in supply and brand new growth in demand. That’s how resource and China bull Jim Rogers sees it. “Until either a lot of supply comes on stream or the economy collapses, the bull market will continue,” Rogers told Bloomberg.
But don’t take the Investment Biker’s word for it (although you could, as his investment word has been pretty reliable for the last twenty years.) We have local proof that good old fashioned supply and demand will support prices for some key Aussie commodities, and earnings for some key Aussie companies.
The company providing the proof is Wesfarmers (ASX:WES). And really, is there a stranger mix of operating segments in one company in all of Australia? The company is like a holding company of all of Australia’s different businesses. You wonder if there’s any organic coherence at all to the operation (at least at the management level, with some focus on return on equity or return on capital).
As it stands now, Wesfarmers is like a plate of Mexican food in which the ingredients are present, but not properly mixed, and certainly not presented well. Everything’s there…the tortillas, the refried beans, the rice, the cheese, the tomatoes…but it’s all hopelessly disorganised.
Here are the operating segments for Wesfarmers: Home Improvement and Office Supplies (mostly Bunnings), Target, K-Mart, Resources, Insurance, Chemicals and Fertiliser, Energy, Industrial and Safety. That pretty much covers everything doesn’t it? Industry, agricultural, retail, food, liquor, financial, and housing…it’s like an entire economy in one stock.
The trouble is, the different parts of the Aussie economy are growing at different speeds. The Home Improvement and Office Supplies segment was the biggest contributor to pre-tax earnings, with $625 million for 2008, up 18.4% from last year’s figure. But the other retail segments (especially Coles) weren’t very impressive at all and showed no appreciable growth.
Coles contributed $474 to pre-tax earnings. Target threw in for $223 million. And K-Mart contributed $114 million. Combined, that’s $811 million. Not a shabby number. But so far, it looks like the addition of Coles to the Wesfarmer’s stable has increased revenues but not earnings.
Compare the Coles result to the Resources segment. There, mostly as a result of the company’s 6.8 million tonnes of metallurgical coal production from Curragh-revenues were up 15% to $1.3 billion. Thanks to high coking coal prices though, (similar to the BHP result earlier in the week) earnings were up 25% to $423 million.
Maybe Wesfarmers can turn Cole’s around. But if you can’t make more money selling food, liquor, and petrol…when food, liquor, and petrol prices are soaring, something isn’t right. For our investment dollars, we’d focus on the cash-generating coal assets. Or better yet, firms with exposure to thermal coal.
Markets and Money