Daily Murmur 12/05/11 | Gary Glover | Finance News Network

Daily Murmur 12/05/11

by Gary Glover

I'm not the fun police

Resource stocks have provided investors some great returns over the last couple of years and the general trading public has fallen in love with this sector.  Every time I suggest that resources are going lower or that commodities are in a bubble situation I seem to upset someone.  I feel like a parent at a kids party, telling my kids not to eat too many sweets and not too drink too much red lemonade because it will make you sick. 
Too many resources will be bad for your portfolios stomach at the moment, I'm just trying to be the good parent.
 
There are some good reasons to be vary wary of resources.
 
1.  It's the contrarian trade, when everyone loves a sector, this much for this long it is    definitely time to be somewhere else.

2.  Commodities are in a bubble situation and we know what happens to bubbles, 400-500% moves in two years are unsustainable moves.

3.  The Aussie dollar, is making us as a nation a bad place to shop as we are expensive to our trading partners.  When it gets too expensive one place we look somewhere else.

4.  Return on Equity for resource stocks is typically very low.  Most companies have high capex. (ie they eat capital)  They usually want more money from shareholders rather than giving back  to shareholders.  Even BHP with all it's growth is not going to increase it's ROE this year, it's putting it's funds back into other projects to fund more expansion and more debt.
How often do you see a capital raising getting done in the resource sector, it's almost every day at the moment.  Resource stocks are a capital consumer like a V8 motor vehicle is to fuel consumption.

5.  History always shows that most boom and bust scenarios are a result of supply and demand.  I may not agree wholehearted with this but there is an obvious change in the winds at the moment.  Indonesia, Philippines, Africa, Mongolia , the last couple of months this is where the new news on resources is coming from.  Our miners have started to look abroad, are drilling abroad and are finding resources abroad. Each day the biggest news in resource sector is coming out of other regions, outside of Australa.  The supply story is starting to unfold.

The following chart shows the CRB index (basket of 16 commodities) has broken down and is likely as a minimum to pullback towards the previous high, which is a further 15% lower.

Disclaimer

Gary Glover is an Authorised Representative (Rep No. 259215) of Novus Capital Limited ("Novus"). Novus is a holder of Australian Financial Services Licence No 238 168. Novus, its directors, officers, associates and employees each declare that they, from time to time, may hold interests in financial products and/or earn brokerage, commission, fees or other benefits from financial products mentioned in this e-mail or attached documents. Unless specifically stated within this page or an attached document, any information communicated by this e-mail constitutes unsolicited general financial product advice which has been compiled without regard to any investor's individual objectives, financial situation or needs. It is not specific advice for any particular investor. Before making any decision about the information provided, you need to consider the appropriateness of this information having regard to your individual objectives, financial situation and needs and consult your adviser. Any indicative information and assumptions used here are summarised and also may change without notice to you, particularly if based on past performance or relate to a future matter.