ALS.TO - Altius Minerals

[GlennAS]

On the topic of China, here's this post today from zerohedge: How China's Rehypothecated "Ghost" Steel Just Vaporized, And What This Means For The World Economy http://www.zerohedge.com/news/how-chinas-rehypothecated-ghost-steel-just-vaporized-and-what-means-world-economy.

While annecdotal in its broader implications, it wouldn't surprise me at all that underneath it all, China is equal part the credit-based casino that is the western financial system/economy.

BTW, I really like Altius as a management team and investment. But view the macro scene very bearishly.

glenn

[Dazel]

thanks for the input on China.....we will all see how things play out there over a number of years...

dazel.

[ItsAValueTrap]

Well first of all Zerohedge is always bearish.  Secondly, I'm not sure it logically follows that you should be bearish on commodities.

If steel inventories are being falsified, then technically that is bullish for steel.

If hyperinflation occurs, technically that is bullish for real assets.

On a practical level, the ghost inventories of steel suggest a high level of fraud in China.  In practice, we've seen from the Chinese reverse mergers that frauds are rampant and that there is adverse selection going on.  (Little penalties for committing fraud, not surprisingly, leads to rampant fraud.)

[beerbaron]

Well first of all Zerohedge is always bearish.  Secondly, I'm not sure it logically follows that you should be bearish on commodities.

If steel inventories are being falsified, then technically that is bullish for steel.

If hyperinflation occurs, technically that is bullish for real assets.

On a practical level, the ghost inventories of steel suggest a high level of fraud in China.  In practice, we've seen from the Chinese reverse mergers that frauds are rampant and that there is adverse selection going on.  (Little penalties for committing fraud, not surprisingly, leads to rampant fraud.)

I was just thinking the same thing. I was mad to have wasted 5 minutes of my time reading ZeroHedge.

BeerBaron

[Studesy]

Basing a buy decision on such macro commentary is basically trying to predict the bottom as opposed to a purchase based on a sufficient discount to IV. If such macro events do occur, it would be a good time to add to the position. 

[GlennAS]

Wow, lot's of negativity re: zerohedge apparently. I really appreciate their macro analysis. Go figure. ...

I linked to the zerohedge post not as a comment on commodities per se, more a comment on the fraudulent nature - in China and globally - of credit and collateral. Plus, the reference to "rehypothecation" is priceless - an analogy to the MF Global rehypothecation crisis.

The bearish case for commodities is simple - and the one that Michael Pettis (and Hugh Hendry) makes. That is simply overcapacity built for a unsustainable credit boom - complete with consequent misallocation of capital. I personally don't believe we're looking at hyperinflation. Even the recent QE-to-Infinity risk on trade seems way overblown to me. The Fed and central banks can print money and use it to buy crappy assets from banks (which is essentially what the unsteralized QE is), but they're having a much harder time stimulating the real economy and aggregate demand because the consumer is deleveraging - at least throughout the developed world. To me, a Minsky moment appears more likely than hyperinflation.

Of course, the alternative thesis is that unrelented central bank money printing will  cause hyperinflation, will somehow also stimulate aggregated demand, and this will support the price of commodities. It's not a view I share - at least not in the short-to-medium term. But it seems to be the consensus view IMO, and if I see evidence that's it's working in the data points, I'll be more than happy to change my view.


Yeah, you could argue that ficticious inventories of steel is bullish for steel. But I would argue that the negative implications for the credit system in China outweigh the bullish implications for steel.

Fascinating times to be sure.

Regards,
glenn

[GlennAS]

Studesy. So I know this is a value investor forum, and the macro picture is often treated as background noise compared to "underlying value", margin of safety, and other core value investing metrics.

But in my experience, combining value investing with macro credit analysis has been very fruitful. Like value investing, it can require a lot of patience, because just like Mr. Market can bee irrational when pricing a stock, he can be extraordinary irrational when pricing assets in the midst of a credit bubble.

Of course, the big problem when credit bubbles burst is the impact the lack of liquidity can have on the prices of financial assets - even assets with good "underlying value". Furthermore, the impact credit busts have on commodity prices, the cost of credit, etc. can really change underlying fundamentals.

Anyway, I view macro credit analysis as another tool in my toolbox to buy great businesses at distressed prices. So not so different really.

Regards,
glenn

[Studesy]

Studesy. So I know this is a value investor forum, and the macro picture is often treated as background noise compared to "underlying value", margin of safety, and other core value investing metrics.

But in my experience, combining value investing with macro credit analysis has been very fruitful. Like value investing, it can require a lot of patience, because just like Mr. Market can bee irrational when pricing a stock, he can be extraordinary irrational when pricing assets in the midst of a credit bubble.

Of course, the big problem when credit bubbles burst is the impact the lack of liquidity can have on the prices of financial assets - even assets with good "underlying value". Furthermore, the impact credit busts have on commodity prices, the cost of credit, etc. can really change underlying fundamentals.

Anyway, I view macro credit analysis as another tool in my toolbox to buy great businesses at distressed prices. So not so different really.

Regards,
glenn

Glen.  My comment didn't clarify the fact that this is just my opinion.  I'm not stating that your method is wrong, but rather that I'm not smart enough to apply such detail to my own process.  If I could, I wouldn't have to sit on positions for many years to assume sufficient returns.  With the massive amounts of macro commentary out there, I would go crazy trying to merge it into my decision making pocess......I think it would pull me away from what I think is a disciplined approach.   I would rather buy with what I think is a sufficient MOS.......and wait.....not time.

[GlennAS]

((Glen.  ... I think it would pull me away from what I think is a disciplined approach.  I would rather buy with what I think is a sufficient MOS.......and wait.....not time.))

Completely understand your pov. Tis' true. Security analysis is difficult enough without decyphering the complicated and challenging macro domain.

Best wishes,
glenn

[ItsAValueTrap]

Wow, lot's of negativity re: zerohedge apparently. I really appreciate their macro analysis. Go figure. ...

Sorry I didn't mean to crap on Zerohedge like that.  They do post interesting stuff from time to time.  However, I take their articles with a grain of salt because they are always bearish.

2- As far as the macro picture goes, I personally believe that it's better to stick to the more obvious macro calls.  Otherwise you might be focusing too much on the noise?

The biggest risk that Altius faces is not a massive, terrible collapse in the Chinese economy (which is unlikely anyways... they are a creditor nation).  Their biggest macro risk is probably iron ore prices... supply has gone up dramatically in the past several years and more supply is coming online (everybody is expanding production).  Eventually there will be a wave of overbuilding and things could get ugly, like what happened in the drybulk sector.