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It’s all getting exciting on stock markets again.
Companies with cash, rather than indebted private equity giants, are looking to buy. Microsoft’s (NASDAQ:MSFT) bid for Yahoo (NASDAQ:YHOO)was one big weekend headline grabber. But of more interest, is China’s move on Rio Tinto (LON:RIO).
It’s not surprising that China wants to break-up the Rio / BHP party. After all, these two together would control 35% of the iron ore market. That would be very bad news for a country that needs plenty of iron ore for its infrastructure needs.
So what’s next?
On Friday morning, Chinese state-owned miner Chinalco teamed up with US miner Alcoa to buy 12% of Rio Tinto’s UK-listed shares (that’s 9% of its overall value as it’s listed in Australia as well). Meanwhile, Brazilian miner Vale is looking at buying Xstrata (LON:XTA).
The rush of M&A in the mining sector is unsurprising. The companies in question have plenty of money (unlike their counterparts in the financial sector) and because of rising mining costs, in many ways it looks cheaper to buy rivals than to invest in developing new mines.
Time to take some profits on mining stocks
It’s all been very good news for shareholders too. But as we’ve already mentioned in MoneyWeek a few times, we think that now might not be a bad time to take some mining profits off the table. We still believe in the commodities supercycle – the idea that commodities of all types will remain at high prices for much longer than anyone expects – but as we’ve also often stated before, no bull market rises in a straight line. There will always be setbacks, and with the global economy under more pressure than it has been for many years, the chances are that metals prices – and probably oil prices too – will have a rougher ride in 2008 as demand falls.
If miners aren’t careful, they’ll end up shelling out hefty sums for each other, just in time for metal prices to ease off, while costs will remain high (the main costs tend to be booked in years in advance).
That doesn’t mean we’ve turned bearish on mining. Growth in Asia, and China and India in particular still has a long long way to go and even if the rest of the world goes into slowdown, they’ve still got plenty of money to spend on their infrastructure.
But given the size of the gains made by anyone who’s invested in mining, even over the past year, locking some profit in now seems wise. You can read more about which stocks and regions we think look good value for this year in our editor Merryn Somerset Webb’s recent cover story: Don’t panic, here’s what to buy now. If you’re not already a subscriber, click here to get your first three issues free: Free trial
Governments have control of our oil reserves – get set for $150 a barrel
There’s another good reason to be bullish on oil in the long term. Back in the 1970s (1978 to be precise), big oil companies like Shell and ExxonMobil controlled about 70% of the world’s oil reserves.
Now that figure has fallen to around 10%. The rest is controlled mainly by government-run national oil companies in countries like Saudi Arabia, Russia and Iran, says The Times, quoting Wajid Rasheed, author of The Hydrocarbon Highway.
So why is this fact bullish for oil? Well, it’s pretty straightforward. Companies like Shell need to find and sell more oil in order to keep making ‘obscene’ profits, as the unions like to tell it (funny how losses are never ‘obscene’, even when they’re the result of wanton greed and mismanagement, like the banking sector’s recent sub-prime writedowns).
Governments, on the other hand, don’t worry as much about profits so much as control. And despite various valid criticisms of shareholder capitalism focusing on the short-term, governments are even worse. The big oil companies realise there’s a problem, and that they have to invest more and dig deeper for oil. Governments – especially pseudo-dictatorships – generally care more about clinging to power and would rather pretend that their oil reserves are limitless and never-ending, rather than acknowledge any problems that might put a dent in their popularity.
And as we’ve all seen from experience, public companies generally aren’t run terribly efficiently – and that’s assuming (generously) that the politicians are keeping their noses out of the trough.
The point is this. More than ever right now, the world needs efficient, profit-hungry oil explorers thinking of ingenious new ways to exploit and uncover our most crucial natural resource besides water. What we have in reality, is a group of corpulent, inefficient, politically unstable oil producers controlling the vast majority of the world’s resources.
That doesn’t sound like the way to find a solution to the world’s energy shortages to me. That sounds like a recipe for $150 oil – eventually.
Turning to the wider markets…
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European markets:
European markets:
US markets: Dow Jones Industrial Average – 12,743.19 (+92.83); S&P 500 – 1,395.42 (+16.87); Nasdaq – 2,413.36 (+23.5).
US markets: Dow Jones Industrial Average – 12,743.19 (+92.83); S&P 500 – 1,395.42 (+16.87); Nasdaq – 2,413.36 (+23.5).
Asia
markets: Japanese Nikkei – 13,497.16 (-95,31); Hang Seng – 24,123.58 (+667.84).
Crude oil: $88.77. Brent spot: $89.77.
Crude oil: $88.77. Brent spot: $89.77.
Gold $901.60. Silver: $16.62.
Gold $901.60. Silver: $16.62.
Currencies: pound/dollar: 1.9767; pound/euro: 1.3339; dollar/euro: 0.6748; dollar/yen: 106.9200.
Currencies: pound/dollar: 1.9767; pound/euro: 1.3339; dollar/euro: 0.6748; dollar/yen: 106.9200.
Our recommended articles for today…
Is SocGen heading for a takeover?
– Rumours of a takeover have bolstered stricken Société Généralé’s share price. But France’s reluctance to let its assets fall into foreign hands presents a problem. Scott Moeller looks at why shareholders should simply be thankful for the boost the speculation has given the bank’s shares: Is SocGen heading for a takeover?
Cotton: the commodity to watch in 2008
– From the Deep South to the Chinese futures market, events are conspiring to make cotton the likely commodity success story of 2008. With this in mind, Kevin Kerr considers why cotton’s looking oversold, here: Cotton: the commodity to watch in 2008