There’s no getting away from it.
Yesterday was a tough day for stocks. The scene in the US market overnight wasn’t much better.
Some of our favourite stocks took a beating.
It was across the board — bank stocks, resources stocks, tech stocks, biotech stocks…even our favourite convenience food stock fell.
For months we’ve told you to ignore all the talk about a crashing stock market. It was the right call, as markets didn’t crash.
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But now the Aussie S&P/ASX 200 index is down 5.2% in three weeks. Is this the beginning of something that’s about to get much worse?
Or is this when bargain hunters should start buying…?
We’ve had a consistent message for you this year — don’t fall for the fake crises that have plagued the market.
This year more than any other has seen one fake crisis after another.
Each time one of these crises appeared, the market fell. But then within days the crisis was over (it was never a real crisis to begin with) and stocks began to rise again.
It has been a familiar pattern. The question is whether this is a repeat of the past or whether this ‘crisis’ is something that should concern you.
Iron ore price continues to slide
The big story at the moment is China.
But then again, since when hasn’t China been the big story?
It’s the big story when the market booms. It’s the big story when the market stalls.
Right now most investors feel that the market has stalled. They see that in the price of iron ore, which has fallen below US$80.
At this price it means trouble for high-cost iron ore producers. The highest cost producers are China’s domestic producers. Some of them have costs well above US$100 per tonne.
It doesn’t take the mind of Dr Stephen Hawking to figure out that if something costs US$120 to produce, but they can only sell it for US$80, they won’t make a profit.
That’s putting a lot of Chinese producers out of business.
But it’s also having another impact. As the price falls, producers try to produce extra. That may seem counterintuitive. After all, wouldn’t it make sense to slow production to increase the price?
Yes. That’s what would happen in a cartel-controlled market. But in a market with many suppliers, their aim is to sell as much of their product before their competitors sell more product, which would drive the price down even further.
You can see the impact of this on the iron ore price in the chart below:
Not surprisingly, it’s hurting Aussie iron ore stocks.
This year BHP Billiton [ASX:BHP] shares have fallen 8.2%, Rio Tinto [ASX:RIO] is down 11.9%, and the company with the biggest exposure to the falling iron ore price, Fortescue Metals [ASX:FMG], has slumped 38.5%.
We don’t mind admitting that as a pure, big-cap speculation, Fortescue is one of our favourite plays. But it’s certainly not one of the market’s favourite plays right now.
But it’s not just iron ore taking a belting. Gold has taken a big hit too…
No one likes gold
It’s only three years since gold was above US$1,900 per ounce.
The US Federal Reserve’s money printing was in full flow. Some analysts predicted gold would hit US$5,000 per ounce.
It never happened. At the same time, the silver price was soaring too. It climbed to US$50 per ounce. Some thought a supply shortage could see the metal top US$100 or US$200 within five years.
But neither gold nor silver moved any higher.
Today, investors seem to have given up on both metals. Gold is just US$1,212 per ounce, and silver is just US$17.78.
Even the most hard-nosed of gold and silver investors would agree that in the short term things don’t look good for the monetary metals.
We openly admit that we’ve called for a recovery in resources stocks since early 2012. We couldn’t have got it more wrong. But that won’t stop us backing the sector, or the stocks within the sector.
That’s why we sent resources analyst Jason Stevenson along to the International Mining and Resources Conference here in Melbourne this week.
Big opportunities in emerging markets resources
Jason will be at the conference all week.
He’ll report back on anything of interest. He sent us his first dispatch last evening. He didn’t mention the mood, but if it’s anything like other resources conferences we’ve been to during a market downturn, it won’t be the happiest place on Earth.
Jason’s biggest takeaway? Emerging markets continue to be an exciting place to look for resources speculation, especially Central and South America. According to Jason:
‘US$229 billion was spent on mining CAPEX in Latin America during 2013, up 29% from 2012.
‘Australia received US$116 billion, so Latin America attracted more capital and investment than here.
‘Peru has been the most preferred investment destination for Chinese investment. China has invested over US$20 billion in Peru over the past 10 years.
‘In the next five years, there will be a total of US$50 billion invested in Peru alone (this is global investment in Peru).
‘Mexico is a nation with substantial mining wealth, but only six companies on the ASX have mining leases there. This compares to over 200 companies on the Toronto Stock Exchange. Mining has been essential to the economy for years. Investors will pour US$6–7 billion into Mexico this year.’
The upshot is that, yes, the market is risky right now, especially for resources stocks. But the market is always risky. That’s not new.
If China’s economy slows down more than most people expect, it could continue to have a major impact on stocks. But as Jason notes, there is plenty of opportunity.
As we’ve pointed out many times, since becoming the world’s biggest economy in 1890, the US has averaged a recession every six years.
China will grow. It will likely become the world’s biggest economy within the next 10–15 years. But there will be bumps along the way.
We’ve seen scenarios play out like this before over the past six years. The market takes a beating. Investors overdo it, and then the market rebounds. If that action repeats this time, it will create another great opportunity for investors to reap the rewards.
This is exactly why we’ve long advised you to take a relatively cautious approach with stocks. Buy stocks, but understand the risks, don’t invest more than you can afford to lose, and most of all…look for the opportunity to buy on the cheap.
Cheers,
Kris+
The post When the Stock Market is This Bad, it Must be Time to Buy… appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
