Metals vs. Mortgages: Comparing US, Australian Economies
Your Melbourne-based editor deplaned near the Chesapeake Bay this afternoon to the news that Bear Stearns has gone from bad to worse. Bear's bad subprime bets went even worse than the market imagined. As a result, the two funds that Bear tried to bail out earlier in the month are worth - and here's the combined total - about nine cents on the dollar.
"Investors said the funds' investments in the subprime market had wiped out the value of their capital in its USUS$638m enhanced fund, and left only 9 cents in the dollar in its USUS$925m high-grade fund. This leaves only USUS$83m of the USUS$1.56bn originally invested in the funds," reports William Hutchings at FinancialNews.com
More gory news from the soft-underbelly of the American economy did not encourage Wall Street. The Dow fell by as much as 107 points during intra-day trading, before regaining some ground by the close. But the index couldn't hold the 14,000 level it briefly crested the day before.
There's nothing like being back in American to put its economy in sharp contrast with Australia. Granted, there are some eerie similarities. America's housing obsession is like Australia's, only bigger and with more debt and riskier mortgages. Whereas America's crush on housing as an asset class excludes attention on other assets, Australia, at least has metal.
The metals business is good and getting better, at least if you ask Oxiana's (ASX:OXR) Owen Hegarty. We don't mind telling you Oxiana is one of our core stocks in Outstanding Investments. It occupies a sweet spot as both a potential acquirer and a target of acquisition. It's in the position to add to its portfolio of assets, or become an addition to a much larger portfolio from a major.
Either way, Hegarty told shareholders yesterday that the company is on track to meet production and cost forecasts for the year. This despite some weather related hiccups during the rainy season. "We're in for a long period of economic expansion, metals are going to be the winners out of all of that," Hegarty said.
Metals vs. mortgages. Care to pick a winner? It's true the Aussie metals boom stems from the China production boom. And it's true the China production boom stems from the American consumption super-boom. But does that mean the Aussie metals boom ends when the American consumption boom goes bust?
That is a more complicated question to answer than we have time to reckon today. But the short answer is, "not really". Our thesis here in the Aussie offices of the Daily Reckoning is that the engine of global economic growth is warming up in the Far East. That's the big driver of metals demand in the future, if not now. America's displacement as the engine of global consumption will certainly disrupt the global economy. But as Aussie stocks are Asia's company store, their long-term profit prospects are better than say, the rock-star firms like Merrill Lynch and J.P. Morgan that reported epic profit growth this week.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). Dan draws on his network of global contacts from his base in Melbourne. He’s the managing editor of resource newsletter Diggers and Drillers and the editor of The Daily Reckoning Australia.
Comment by Bart Hall (Kansas, USA) on 19 July 2007:
Do you mean ... things are going from Bear to Ursa ? Oh, BAD dog, no cooky.
Comment by Jack Russell on 20 July 2007:
I keep seeing that US$1.5bn was originally invested. I take it this is the money from private investors.
What about the leveraged borrowings.
How much were the funds leveraged for?
Where was this money borrowed from?
How much of it is the lender/s getting back?
Am I right in thinking that the sum total of losses is being understated?
Comment by Bill Birnbaum on 10 November 2007:
The Chinese economic miracle is based on low cost manufacturing for the world's major economies... including and especially the United States. When Mr. and Mrs. America finally quit their over-extended spending spree, China will suffer. In turn, so will their suppliers of natural resources.