Morning Report / Morning Report Monday 8 September 2014

By Market Matters 08 September 14

Morning Report Monday 8 September 2014

Morning Report Monday 8 September 2014

Western Desert Resources (WDR) goes into receivership, when/or if do we get brave and buy Iron Ore stocks?

The front page of the AFR is now leading with “Iron Ore slump hits economy” over a month after we predicted the inevitable fall in both the commodity and related stocks. Over the weekend, the commodity hit a fresh 5-year low of $US83.60 a tonne, leading prominent politicians to warn of an “inevitable” recession. The table below now shows a number of major producers are losing money at current levels.  A lower $A would help all concerned, but the RBA seems unable to get the stubborn currency close to its 85c level – currently at 93.65c. 

  • RIO Tinto (RIO) ~$42
  • BHP (BHP) ~$ 51
  • Mount Gibson (MGX) ~$ 75
  • Fortescue Metals (FMG) ~$84
  • Atlas Iron (AGO) ~$86
  • Grange Resources (GRR) ~$87

*Prices as at 30th June, 2014 assuming $A at 93c, source Sydney Morning Herald 27th August 2014.

John Paul Getty, the famous US Industrialist, who was the richest individual on the planet in 1966, has one simple quote that may apply to Iron Ore stocks in weeks to come:

“I buy when other people are selling”. -J. Paul Getty

So while I have been very negative the sector over recent weeks/months as the press finally get excited about the potential damage in the sector, I am turning my attention to buying areas. Personally, I am looking for “triggers” to buy Fortescue (FMG) with decent risk / reward. I am not looking at the potentially safer BHP and RIO, as I am only considering this as a trade, not a long term investment. – I still have no interest in investing in price takers whose profitability depends on the Chinese economy. An analyst at Shaw Stockbroking brought to my attention that “at every Iron Ore major turning point, the 24 month futures contract has been below the spot price (backwardation), but today the futures price is in contango = further to fall!

My conclusion:

  • Be patient on a risk / reward basis I want to buy Iron Ore stocks lower, my current FMG target is under $3.50 – see chart 2.

Chart 1 - Iron Ore Spot Price v forward pricing Daily

Chart 2 - Fortescue Metals (FMG) Weekly


Overnight Market Matters Wrap:

  • The US markets reversed early losses in the session on Friday, with the DOW closing 68 points higher and the S&P closing at its highest level at 2,007.
  • Domestically, most traders will continue to focus on the concerns of the weakening Iron Ore (see comments above). After trading at a 5-year low and down ~37% in for the year, when will the falling knife stop?
  • The SPI Futures are indicating the ASX200 will open around 5,595, marginally lower from the previous session.

Companies Trading ex-dividend Today

  • Ainsworth Game Tech (AGI) 5c
  • CSL Ltd (CSL) 64.85c
  • Insurance Australia Group (IAG) 26c
  • Orora Ltd (ORA) 3c
  • Ramsay Health Care (RHC) 51c
  • Veda Group (VED) 4c

Major Announcements Today

  • ANZ Australia Job Advertisement
  • China Trade Balance (Aug)
  • US Consumer Credit (Jul)

The Numbers that Matter

September Share Price Index -2 to 5,592
ASX200 (previous day) 5,599

AUD/USD 0.9368

Dow Jones +68 to 17,137
S&P 500 +10 to 2,008
NASDAQ 100 +24 to 4,090

London FTSE -23 to 6,855
Germany DAX +23 to 9,747

Gold Futures +$0.8 to US$1,267.3/oz
Nymex Crude -$1.16 to US$93.29/bbl
Iron Ore -$0.7 to US$83.6/t

BHP closing price in the US -$0.02 at $35.63

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 08/09/14. 8.30AM.
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