bhp vs rio, page-9

anyway things are not all that negative for BHP....below is what Charlie Aitken said in his morning update today....


Good morning, Lest We Forget..

There’s a great scene in HOWZAT; Kerry Packer’s War, when Packer is waiting for the crowd to turn up at VFL Park for the first ever World Series Cricket match. Not only does hardly anyone turn up (267 vs. estimates of 10,000), but the sightscreen falls over too! The look on Packer’s face is one of “am I the dumbest bloke in the world??”

I am obviously no Kerry Packer; he’s the best businessman Australia’s ever seen, but I am pretty certain I am having my own “am I the dumbest bloke in the world” moment this week in terms of iron ore.

But the good news is I have had these moments before and they are essential in contrarian investment strategy. They don’t kill you; they make you stronger.

The last time I can remember feeling this dumb was in Telstra @$2.60 when the Future Fund was relentlessly dumping them, brokers all had sell recommendations, and the financial press ran daily doomsday stories about what the NBN would do to TLS’s business model. It was relentless.

We can all make comfortable, ‘safe’ (see also expensive), investment recommendations and sleep well at night. However, in my experience the truly stomach churning ideas, which cause you sleepless nights, end up being the most rewarding. You have to be courageous and contrarian in a world of instant information, high frequency trading, and short investor measure periods. You have to feel like the dumbest bloke in the world. You almost have to be scared to turn on the screens and look at the share price, or in this case, the spot iron ore price.

Unfortunately this week I have been on the wrong side of the last ‘easy short’ in the world, iron ore. When you think about it the actions of central banks have blown up all the world’s other “easy shorts”. From the Euro itself, through to European banks and US housing stocks, Central Bank actions/words have forced short-covering in all those popular, previously crowded, shorts.

However, inside this consensus bearish view of Australia’s prospects there are clear contrarian investment opportunities. There was a capitulation “puke” in all things iron ore yesterday (and overnight), with even the “tallest dwarf”, BHP Billiton, being hit to $31.57 in ADRs. To me, the crescendo of downside moves like this is when the “tallest dwarf” or “least worst” stock starts being hit because it’s held up better than more exposed stocks.

But my view remains that after iron ore has fallen by 50% from $180t to $89t that iron ore stocks aren’t good shorting or good selling. The way to play this is SHORTING THE AUSTRALIAN DOLLAR AND BUYING IRON ORE EQUITIES. THAT IS THE TRADE. The chart below shows spot iron ore vs. the AUD. This is a totally unsustainable situation over the medium-term, remembering iron ore equities have been tracking the spot iron ore price 1:1. The AUD is the short, iron ore equities are the long. Yeah, that idea makes you feel sick in the stomach, but that is what it should do.