By MoneyMorning.com.au
In today’s letter we’ll ask whether the latest banking bailout is a sign of strength. Or whether it’s a sign of ongoing problems in the global banking and credit markets…
Problems that will have a direct impact on Australian investors.
Plus we’ll give you three stocks you should add to your watchlist. But not so you can buy them. These are three stocks for your short-selling watchlist.
Before we get to that, where better to look for evidence of trouble than China.
In the past few days we’ve followed the China bank bailout story. The Financial Times wrote earlier this week:
“‘They [China’s sovereign wealth fund] are trying to signal to the market that they feel confident,’ said Sanjay Jain, a Chinese bank analyst with Credit Suisse. ‘And of course valuations are depressed, so it’s not a bad idea to buy at these levels for a long-term strategic investor.’”
The deal is that Central Huijin (owned by the Chinese government) is buying shares in four Chinese banks: Agricultural Bank of China [HKG: 1288], Bank of China [HKG: 3988], China Construction Bank [HKG: 0939] and Industrial and Commercial Bank of China [HKG: 1398].
Over the last six months, shares in those bank stocks have fallen 52%, 51%, 41% and 47%. But since the announcement, the shares have rallied. So by revealing its hand, the Chinese government won’t get the depressed value a “long-term strategic investor” would hope for.
So, this is good news right? China is financially supporting its banks… just as the U.S., U.K., and Europe supported their banks.
Not so fast. Legendary investor, Jim Chanos has a different view…
Like your editor, Chanos has been bearish on China for some time. He told Bloomberg News:
“The fact that people are even talking about the government stepping in to shore up the banks, when two months ago people thought there was nothing wrong with the Chinese banks, should tell you just how seriously this situation is deteriorating.”
And you can be sure that when China hits the ropes, suppliers to China will cop it too. Remember, it’s not just Chinese stocks Chanos is short-selling. As Bloomberg also notes:
“[Chanos is] also betting against Brazil’s Vale SA (VALE), the world’s largest iron-ore producer, on expectations demand from China will slow.”
Chanos told the GAIN/GMA conference in New York that Vale is building “a fleet that is larger than the U.S. Navy” to ship iron ore to China!
If that doesn’t shout “commodity bubble” we don’t know what does. But that’s what happens in a price bubble. Businesses spend big on capital equipment. Why? They do it for one of two reasons…
One reason is they think the boom will continue for a long time. That to profit from the boom they need to increase production and that means adding to or replacing capital equipment.
The other reason is they think the boom won’t last forever, but unless they increase production, their competitors will… and that means they’ll miss out on the boom.
Maybe that explains the headline from the Australian yesterday, “BHP’s $1.2bn to start Olympic Dam”.
The story notes:
“BHP Billiton has approved $US1.2 billion ($1.19bn) in pre-commitment capital for the first phase of its Olympic Dam project, which has moved another step closer to board approval after the South Australian government signed off on the plans.”
It continues:
“The expansion project, which has the potential to boost copper production from about 180,000 tonnes a year to 750,000 tonnes a year for decades, would involve building an airport, a gas-fired power station, a 105km rail line and a coastal desalination plant.”
Woot-woot…
There goes our crash warning alarm.
China is bailing out domestic banks because of bad loans. Loans the banks would have made to unsustainable businesses and projects. At the same time BHP Billiton [ASX: BHP] forges ahead with plans to quadruple copper production… so it can ship more commodities to unsustainable businesses and projects.
Something doesn’t add up.
The way we see it, stock prices have only priced in some of the slowing growth from China. BHP Billiton is down 24.6% from its 12-month peak… Rio Tinto [ASX: RIO] is down 22.3% over the same time… and Fortescue Metals [ASX: FMG] is down 33%.
The important thing to remember is the market never gets things exactly right. That’s why share prices move up and down so much… as investors take into account new information.
Our bet is investors have underestimated the impact on earnings for Australia’s blue-chip resources stocks when the Chinese economy hits the wall. When China stops, prices of the big miners will be hit hard.
Bottom line: if you think BHP looks cheap today at $37.55, odds are that within the next 12 months it will be a whole lot cheaper… if as we expect, Chinese economic growth stops dead.
Chanos is short-selling Brazil’s Vale. You could try the same. Be we’d suggest something easier. And that is to look for good opportunities to short-sell the big three Aussie miners: BHP, Rio Tinto and Fortescue.
Cheers.
Kris.
PS. Slipstream Trader Murray Dawes has traded in and out of BHP, Rio and Fortescue several times in recent months. We can’t tell you what positions he has on at the moment – that’s for subscribers only. But if you’d like to hear Murray’s take on the broader market and what it could mean for all Aussie stocks, take a moment to view his latest free market update here…
Related Articles
Why Chinese Monetary Planning Means More Volatility for You
Australia: The World’s Investing Casino
Why China’s Hidden Debt is Bad News for Aussie Stocks
The Other Side of Short Selling
From the Archives…
What Debt Crisis?
2011-10-07 – Greg Canavan
Enjoy the Rally, It Won’t Last for Long
2011-10-06 – Greg Canavan
Why the Fed’s Actions Make Perfect Sense
2011-10-05 – Murray Dawes
Too Big to Bail
2011-10-04 – Murray Dawes
What Can We Expect Next From Commodities?
2011-10-03 – Dr. Alex Cowie
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