Citi ringing a bell for the bottomCiti ringing a bell for the bottom of commodities market
He's rung the bell for the bottom.
The attachment contained his latest commodity strategy bulletin with the simple headline "Overdone", pointing out that the sell-off in commodity markets over the past nine months had been without a precedent in terms of its extent and speed and looks to have gone too far.
The key Reuters/Jeffries-CRB index of commodities went from 473 in July 2008 to 200 in early March.
The London Metal Exchange index dropped by more than 60 per cent in the year to early March. Over that period, falls in metals ranged from 43 per cent for tin to 70 per cent for nickel and lead.
Thurtell believes the data he is seeing shows spending on consumer durables by Americans has fallen, but that production of these items has declined even more quickly. Inventories are now very low as manufacturers adjust to slower demand.
"World durables output (and thus metals demand) could thus snap back once this production adjustment is over," he concludes. Interest rate cuts and money printing could hasten this recovery. Thurtell says the recent bounce in both the Chinese and US purchasing managers' indices suggests that growth in industrial production should rise from here.
Warwick Grigor at BGF Equities is also encouraged by the strong performance by local mining stocks last week, the enthusiasm even trickling down to many smaller stocks.
People are no longer in sell mode -- they're getting set for the rally, he believes. And those sitting on the sidelines hoping to pick the bottom are now fearful they may miss out.
But Grigor also points out that our dollar has risen faster than many commodities, so producer profitability has not improved. Moreover, any move by juniors to sniff the wind and unveil placements would soon put a limit on the strength of their stocks.
Engineering a recovery
ANOTHER sign of growing confidence in the resources sector is the strong rise of some of the engineering and contractor stocks. Ausenco (AAX) has received a speeding ticket from the ASX. The company made a very optimistic presentation last week, touting all its resources work, including holding an 85 per cent world market share in slurry pipeline construction.
Another company that relies heavily on mining work, Monadelphous Group (MND), has seen its stock go from a January low of $5.90 to $8.82 on Friday.
There have been some really impressive recent gains in share prices for miners. Take Jabiru Metals (JML): the copper producer has restructured its hedge book and last week paid back the last chunk of its bank debt. Its forward sales cover 7000 tonnes at $US4000 a tonne. The company's share price has more than doubled over the past month.
There's clearly a feeling out there that some stocks have been oversold. It's just a matter of figuring out which ones.
gold took a beating over recent days, which is not surprising given the sharp fall in the fear factor. The people at Foster Stockbroking are keeping the faith, though, figuring that the market rally has no basis in economic reality.
Their advice: sell stock into rallies but don't sell gold. "Don't be underweight gold in these uncertain times," their client note urges.