Too early for bargains?
Author Rob Schultheis wrote: “…there’s a silent voice in the wilderness that we hear only when no one else is around. When you go far, far beyond, out across the netherlands of the Known, the din of human static slowly fades away, over and out.”
For over a year we have felt like the voice Schultheis wrote about, but knowing always that it is when the din of human static catches on that we will start to see some very dramatic adjustments.
Our views about mining and mining services are now coming to pass and as CSLA’s Damien Kestel (see below), and others, comment about the depth of the crisis that now befalls the mining contracting space, we have moved on to think about the broader implications for the companies that will be affected by our ‘no-speed’ economy, lower dollar and much lower iron ore prices.
Here at the insights blog we will keep you abreast of the sorts of views that we believe you can discuss with your adviser when plotting the course of your investment journey.
Before we quote Damien Kestel, you might recall one of the reasons we moved to over 40% cash in The Montgomery [Private] Fund was the ‘anecdotal’ evidence we have received from friends and companies based in Perth, about how poor conditions and confidence is, and the extent to which the Eastern Seaboard is oblivious…
We do not currently believe that attempting to find the best mining services company, for example, is wise. Doing so would be like a minnow swimming in a bath whose plug has just been pulled. It’s too early.
In our view it is best to wait until the tide has gone out. That’s when we will see who was swimming naked. For those wondering, the tide won’t have completely receded until the mainstream press is talking of recession threats for Australia. This may or may not eventuate but it’s when it does, when the din of human static grows to a roar, that real bargains may be available.
Here’s some commentary from CLSA Analyst Damien Kestel:
“As noted in recent weeks it has been happy days for investors enjoying the highs on the S&P 500 and associated rallies across Germany, the UK, Japan and elsewhere. But that joy is a world away from the pain that has been inflicted on the majority of resource related equities and their investors. The AS39 Index on Bloomberg includes 87 mid and (now) small cap Australian resource companies. It has been smashed – just like many of its constituents. From early 2011 it has fallen >65% to now sit at GFC levels while there are plenty of examples of stocks that not so long ago had mkt caps of $800m that are now $50m. The evidence of pain in the resources space is everywhere but probably none more so than in Western Australia, the ‘engine room of Australia’.”
“…conversations over the past week with friends and associates in the Perth mining game and it brought back memories of the Asian Crisis, Tech bust and of course the GFC.”
“We’re seeing a much sharper contraction in the Australian economy than we’d anticipated four or five months ago”. Coffey MD, John Douglas. The engineering group has seen its shares, which traded above $4 in 2007, hit 10c last week.
“We’ve still got a lot of construction under way or committed and there’s a lot of activity that will go on for the next three years or so. I think where the question mark comes in my mind is, well, what will follow those projects?”. Western Australia’s Premier, Colin Barnett
“Perth has the highest population per capita of self made millionaires in the world”. Extract from a list of fun facts on Western Australia. I dare say there are a few less after the recent carnage in mining stocks.
“The current feeling on St George’s Terrace (Perth’s main business street) amongst brokers and miners is that today is worse than the GFC ever was. It’s 100% pain out there” Perth mining investor
“I was at the Mines and Money conference in Hong Kong recently. They should really call it Mines and No-Money because no one has any and no one wants to give it to them” Mining CEO
“By 10am, the Fitness First gym in the city is packed full of brokers who’ve had a gutful of sitting at their desk doing nothing – salary cuts are starting and next it will be jobs” Perth broker
“Oh mate, the funding market is dead. You are now seeing a few deeply discounted rights issues for those that are reaching desperate levels ….. liquidity has completely disappeared” Perth broker
“Private equity firms are gearing up for a multi-billion-dollar push into the mining sector, with a wave of proposed asset sales by the big miners, a shortage of competing buyers and the funding headaches faced by smaller companies paving the way for a rise in deals”. The Australian
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Steve Baron
:
You were certainly right about getting out of mining services Roger even though I wasn’t in agreement at the time but I’m glad I got out when I did. That was mostly because I felt more confident with whst skaffold global was showing as value in other countries and my expectations that the dollar would drop.
I feel that Australia will get far worse than it is now and when the Liberals get elected we will soon get reports that the books were far worse than they expected. I would suggest that this will be more likely to be the time to start looking for bargains.
Until then I am selling out, even though it is hard for me to do with some of the excellent stocks I hold because as you suggested once before, people exit everything in moments of panic. Even good stocks.
I just hope the dollar bounces like a dead cat long enough for me to get my money off shore or I will be sitting on cash for quite some time if I am right.