Three targets for BHP…or Tesla

Monday, 4 July 2022 — Albert Park

[6 min read]

Dear Reader,

Are you getting excited yet? You should be.

The big drawdown in Aussie stocks is making a whole lot of shares look crazy cheap. I have to hold back the temptation to load up all at once.

I saw a statistic that said the Aussie market, including dividends, was down 6% in the ‘22 financial year just gone.

Someone reading a history book 10 years from now will likely shrug that off as a blip.

The reality for many investors and traders is much, much worse.

The last six months have been some of the most difficult I’ve encountered.

Good news didn’t matter a damn, mostly. Many stocks are down 40–60%. Some more, some less.

You know the reasons: inflation, rising rates, war. Here’s the reality check. None of these things are unique in the history of shares.

We’ve seen them all before. None of them stopped the relentless march of shares higher over time.

I don’t see why the next five years will be any different. All I really see, from a distance, is cheaper entry points everywhere.

Could the market have one more leg down? Sure.

In fact, that’s what I expect, rightly or wrongly.

But you and I aren’t looking to hold a stock for the next three months, right? By buying now, we want to know what we might achieve in 2023 or 2024.

There’s a known tendency for investors to focus on what’s happened recently. Falling share prices make it emotional and acute. It really does seem like the world is going to the dogs.

That’s why bear markets usually end in capitulation. We just, as a group, can’t stand to take it anymore and sell out — usually at the worst time.

Hopefully you won’t follow the herd on this front. Better to think like a strategic investor. I saw an example from one enterprising company this morning.

ASX-listed firm HMC Capital announced it’s after cash to bankroll a new fund. Here’s the quote that I liked:

‘Economies and markets are moving into a new phase that is highly uncertain. While a natural instinct in this environment is to allocate to cash or do nothing, we believe that attractive opportunities are now emerging.’

I agree. You’re supposed to buy when valuations are depressed…as long as you take a medium- to long-term view.

Here’s an observation. The macro background is worse than the company reporting I’ve seen recently. That may change come August.

But it gives me confidence to back the market when I see volatility take shares down.

I saw one report comparing today’s market to the train wreck of 2008. I don’t believe the two periods are equivalent — yet.

2008 was a real estate collapse that imperilled the financial system. Aussie home values may be coming off the boil now, but we are not yet at the equivalent period of 2007.

If you go along with that line of thinking, it begs the question: which stocks to buy?

One idea might be to take your cure from Andrew Forrest — Australia’s richest man.

His fund was looking to acquire 15% of gold miner Regis Resources [ASX:RRL]. They couldn’t get the deal done, but it’s a line into his thinking.

The gold miners have been utterly smashed since August 2020.

It’s not unreasonable to think they can come back in a big way once the WA labour situation stabilises, and if we see a kick from the moribund gold price sometime soon.

It’s not as if the nature of the best deposits or the teams running them have changed.

And don’t forget lithium.

Pilbara Minerals [ASX:PLS] came out last week with a ripping update. Production was up last quarter, and they’re still shipping out at high prices.

That’s not all…

Lithium developer Liontown Resources [ASX:LTR] announced last week that it now has a secured contract with American auto giant Ford. You can see it for yourself here.

That’s stuck out like the proverbial for me. I just put together a presentation called Elon’s Chosen One.

The idea is that Tesla will buy up the available battery mineral supply in Australia. But the space is open for Tesla’s competitors to move in to — which Liontown just proved.

Analysts are thinking the same thing about BHP too.

The Australian Financial Review reported this morning:

‘Analysts reckon that if a recession were to hit and dampen demand for commodities and listed miners’ valuations — BHP’s the one that could use its huge firepower to pounce.

‘The company isn’t facing any existential threats, but there’s only so far that any dividends, buybacks or organic growth can go…

‘Analysts reckon BHP management is focused on copper and nickel, but it’s still thinking how to play lithium.

‘While BHP used to think lithium was a pond too small for big fish, the market has grown substantially.’

See what I mean? The big players, with cash to hand, don’t get spooked in the same way an Aussie punter might when the market goes down. They big guys can all go shopping instead.

Don’t forget, too, that the biggest criticism of Rio Tinto is that it has no ‘growth’ plays to complement its cash machine iron ore business. They must be analysing opportunities here too.

For my three best ideas on Tesla’s — or BHP’s — next ‘Chosen One’, go here now.

Regards,

Callum Newman,
Editor, The Daily Reckoning Australia

Dear Reader,

Of particular interest to us here at the Letter is the coming train wreck…when two especially numbskull federal programs. One is making things — especially energy — more expensive by reducing supplies. The other is making them more expensive by increasing demand (in the form of fake money). What happens when they collide?

The Fed created today’s inflation in the old-fashioned way — by ‘printing’ money. No need to go into the mechanics of it; they don’t matter. And we don’t want to take the time to understand them.

Here, economist Richard Duncan explains the first phase:

‘For decades, the US economy has been driven by rapid Credit Growth and Asset Price Inflation. Since the Crisis of 2008, in particular, aggressive fiscal stimulus, ultra-low interest rates, and round after round of Quantitative Easing have kept the US economy expanding and created astonishing amounts of Wealth.’

Of course, it was not real ‘wealth’ that was being created. It was fake wealth — brought to life by fake, ‘printing press’ money.

But between 1999 and 2022, the Fed added US$8 trillion (increases to its balance sheet). And its artificially low interest rates had engendered a US$50 trillion increase in the US’s total — public and private — debt.

(We’re dealing with round numbers here…if we’re off by a few trillion, one way or the other…don’t worry about it.)

Rising prices…

This ‘inflation’ of the money supply first led to an ‘inflation’ in asset prices. The Dow Industrials rose three times. The non-industrial…lighter-than-air…emptier-than-a-congressman’s-mind…assets went to the Moon. No one complained.

But then, the inflation leaked over to consumer prices. And suddenly, with the COVID lockdowns and the war in Ukraine, the leakage became a flood. Consumer prices rose worldwide — led by the most important ones — oil, food, and housing.

But the Fed wasn’t alone in causing consumer prices to go up. While the Fed was increasing the supply of money…the federal government was also restricting output. Lockdowns, for example, did far more damage than is generally recognised. The elites have little connection to or understanding of the real economy. They work in academia, Wall Street, the press, government, or the non-profit sector. It wasn’t surprising that they thought the economy was like a light bulb, something they could just turn off and on with the flick of a switch.

Alas, a real economy is a living thing. Drive a stake through its heart, and it dies forever. It cannot rise from the dead. Instead, a new economy must take its place. And that takes time, investment, training, and learning. New relationships must be built…distribution channels need to be worked out…costs and benefits need to be calculated…and investments to be made.

…falling supply

So, imagine that you are in the oil business. You saw after Donald Trump declared a state of emergency in March 2020 that the oil price could go below zero. Oil companies couldn’t sell their oil; they had to pay someone to store it for them.

And now, all over the world, the federales want to put you out of business. Here’s the LA Times: ‘Game over for the internal combustion engine’ as EU countries approve climate measures’:

‘The EU member nations came to an agreement on draft legislation aimed at slashing the bloc's greenhouse gasses by at least 55% in 2030 compared with 1990 levels, rather than by a previously agreed 40%.

‘“A long but good day for climate action: The council’s decisions on Fitfor55 are a big step towards delivering the EU Green Deal," Frans Timmermans, the European Commission vice president in charge of the Green Deal, said after the meeting of environment ministers in Luxembourg.’

The US’s ‘Climate Envoy’ is on your case too. John Kerry delivered an ultimatum:

‘We have to put the industry on notice: You’ve got six years, eight years, no more than 10 years or so, within which you’ve got to come up with a means by which you’re going to capture [emissions], and if you’re not capturing, then we have to deploy alternative sources of energy.’

So…what do you do? The feds want to put you out of business and make it almost impossible for you to plan for the future. Do you invest more money, drill more wells, and build more refineries? Chevron’s CEO Mike Wirth says there will never be another refinery built in the US.

Why?

‘Not Acceptable’

Who will invest millions of dollars…over many years…when the feds are gunning for him? And who’s going to wait years for a return on his investment when he has no idea whether oil will be selling for US$500 a barrel…or nothing?

And then, if you’re lucky enough to make a profit, they threaten to take it away. Joe Biden:

‘At a time of war — historically high refinery profit margins being passed directly onto American families are not acceptable.’

So, what happens when these policies — inflationary money printing and output-stifling regulations — crash together? How will people get to work? How will they power their cars and heat their houses? What will fuel their trucks and tractors? What will we eat?

What happens next? Well…we don’t know exactly. But our guess is that it will be a cold day in Hell when we find out.

Regards,

Bill Bonner,
For The Daily Reckoning Australia