The worst “buy” argument yet for iron ore

Here’s a nice way to go to Easter from the AFR:

“The tide is turning,” Pengana Capital strategist Ric Ronge said.

“We can’t ring the bell and tell you when commodities are going to rally but common sense suggests there’s more upside than downside.”

He estimated global resources were trading at more than a 20 per cent discount on the mid-cycle average while income assets were stretched.

…”Rio has been vilified by the industry for flooding the market with cheap iron ore,” he said. “The reason is they have a competitive advantage leveraging the existing capital that’s been sunk in the Pilbara.”

No offense, Mr Ronge, that is the worst “buy” argument for iron ore I’ve yet seen:

  • the assumption that because prices have fallen they must rise;
  • reliant on past cycles for guidance on this one, and
  • extrapolating past returns on investment forward.

All backward looking and reliant upon statistical analysis that by definition excludes tail risks. This is not a normal commodity cycle and RIO risk is asymmetric because it’s share price has assumed that it is and not fallen:

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Happy and safe Easter to you all.

Comments

  1. “but common sense suggests there’s more upside than downside.”

    WTF? Thats like looking at a stock thats currently $1, has been $2 before, and saying “look, it’s been $2 before its common sense that it should rise”.

    Meaningless.

    • moderate mouse

      BAU for most advisors….especially in this country!

      Happy Easter y’all! (Except if you’re an advisor….or RE agent for that matter…..or mortgage broker…or…)

  2. This share market is just plain incomprehensible. While it used to be muddy you could glean movement and make a call. Now it is totally opaque and it seems to levitate in random directions.

    Humans are just plain weird, and human systems even weirder. It gives cause to my bias that the more humans you involve in a project (that is, determining a stock price) the more perverse and nonsensical the outcome will be.

    Have a great Easter, remembering its true message! (Chocolates and a four day weekend).

  3. Statistical analysis does not ‘by definition’ exclude tail risks – tail risks are just frequently excluded because the analyst wants an easy life.

  4. Shanghai Rebar Oct futures down 2% at 5pm’
    Dalian Sep futures down 4%
    Implied TSI Index will be close to $47.00 tomorrow
    Implied MB Index will be close to $47.50 tomorrow
    12 month Swaps will be around $44 tomorrow

    • Cornflakes

      Makes about as much sense as those calling for a revert to mean on anything, because…. well…. It has to.

      Cheers

  5. at close
    Shanghai Rebar Oct futures down 2.66%
    Dalian Sep futures down 3.8%
    Implied TSI Index will be close to $46.50 tomorrow
    Implied MB Index will be close to $47tomorrow
    12 month Swaps will be around $42.50 tomorrow

  6. I am still confused by the heading to that chart. I’m assuming it shows the inverted premium of share price relative to spot commodity price. Or a measure of how far share prices have to move to mirror movements in spot. But you call it “relative performance of major iron equities versus spot”. To me, this suggests iron ore equities (with the exception of FMG) have underperformed spot iron ore by circa 40%, which would imply they are undervalued relative to spot. What am I missing?

    • It’s the “Idiocy Spread”. At some stage The Market, the real determinate of value, sobers up Sentiment – the hope that it will – and share prices fall!

      • Thanks Janet. I know what it means, I’m just trying to reconcile that with the chart heading (““relative performance of major iron equities versus spot”) which I think is misleading. Relative performance of equities versus spot is not -40%.

      • Fair enough, B. But my point was supposed to suggest that it is David’s “Idiocy Spread”; his Relativity. What you and I may understand as ‘relativity’ may not be what he does in this particular case? What he includes in his calculations produces that 40% over-valuation of stocks vs spot price….and given the fact that he has been calling this move, correctly, for some many months/years now, I wouldn’t be at all surprised to see IO stocks fall that 40% to normalise his calculations, regardless of how the graph may read to the rest of us!