The Valor Blog.
Investment News and Views, Direct from Our Team.

Ignoring Fundamentals

I usually dont worry too much about short term moves in the markets as they can be quite irrational but current trends are puzzling me.

Iron ore has fallen significantly lately but yet the big miners BHP and RIO are going up? (See http://www.macrobusiness.com.au/2012/08/ore-swaps-bust-the-ton/)

Who is crazy enough to buy these companies when the fundamentals are heading in the opposite direction to where you would want them to go?

Are they betting on a bigger than 4 Trillion Yuan stimulus in China? I am not confident that the Chinese will introduce a stimulus equal to or larger than the previous 2009 injection. Without a large stimulus, I would suspect that there is a continual decline in commodities over the next few years heading toward longer term averages.

I suspect that China will stimulate, but at a level that they believe will stop the rot rather than ignite another boom. They have shown they are keen to keep the pressure on property prices in the larger cities and I expect this to continue in an attempt to stop a reflation of the bubble.

The fragility of the Chinese banking system, the potential for numerous de-listings of Chinese companies in the US and a capital outflow are just some of the risks to the Chinese economy in the near to medium term. I would suggest that it may be difficult for the Chinese to get past this coming speed hump without meaningful slowdown. You need to contend with these issues when buying the mining stocks at present.

Caveat emptor!

Belief in China’s command economy to solve all problems when it is the command economy that caused the problem is a dangerous paradigm.