BHP Billiton - a gentle behemoth?

Research on the share price fluctuations of BHP, featured in this column last December 31, and it has been extravagantly substantiated. It was followed with interesting results internationally, for BHP has been, and will probably continue to be for a very long time, a money machine. Malta's main quality newspaper is no longer confined to the narrow limits of this country.

Madrid economist readers of this BHP research have shown their appreciation for being helped to make their clients see the other side of the coin, by honouring me with the prestigious 'Actualidad' trophy in Athens.

Malta has climbed on the top of its past BHP experience and come to realise that the massive commodities conglomerate, which leads the Australian stock exchange, is indeed a behemoth. This, if approached with the right research, would lose its frightfulness. The very word "behemoth" derives from a common Semitic word, which we find in Maltese language - bhima. Everything is pleasurable once it is properly mastered.

A proper explanation

I was asked by a client how investment banks and multinational companies manage to make such big money from share trading. What makes possible the operations of a Buffet - the famous sage of Omaha? The proper answer to such a question is that decisions by these people are based not only on practical experience, but also on a knowledge of economic theory.

When an investment banker is able to combine these two elements of culture and wile, he becomes a formidable force indeed. 'Wile' is used in this context not in its trickery sense, but in its meaning of enjoying an activity, which is engrossing because of a repeated leisurely and pleasurable experience.

In more prosaic words, a moneyman is powerful when his work gives him the thrill of a game. We speak of financial players on Wall Street, but we do not call pathologists players when they look into their microscope, fighting disease for the good of mankind.

Pathologists are heroes since they are able to endure unspeakable hard work. Investment bankers are also heroes because, as the economic process is not completely understood, unexpected mistakes by politicians can create awful circumstances for them. These greatly increase the rate of mental breakdown or worse in their profession.

Life in the stockbroker profession is made bearable by the application of relevant economic theory.

The moneyman with a serious economic culture in this commodities boom makes use of a theory formulated by an economist who was indeed a martyr for the cause of his science. The economic theory, which is proving to be useful in forecasting the fantastic share price behaviour of BHP, is that of Nikolai Kondratiev, who was later shot by Stalin.

The Kondratiev trade cycle theory has always attracted the attention of economic theorists, but so far no one has stated that it is making a significant contribution to the making of money on the world's stock exchanges. As happens always, it is those moneymen who outdo their competitors, who make extraordinary gains for themselves and their clients.

The time comes, however, when keeping secret a little known cultural fact becomes impossible. The truth comes out with a bang in the headlines of the world's media. It has been so as regards the recent validation, but to a certain extent only, of the Kondratiev business cycle as a tool of making money from the present roaring commodities boom.

This boom was regarded as dead by most analysts last December, but certainly not by me. I wrote on December 31 in this newspaper: "Whatever happens to BHP Billiton's share price because of the fall in the price of copper, let not investors forget that it holds 20 per cent of the world's uranium, and that the world needs to go nuclear if it wants to avoid disaster due to global warming."

At the time these words were written the BHP share price was hovering round 850; now it is 1,200. That is a 41% gain. Good luck to those who take research published in this newspaper seriously when making investment decisions.

Since that time great things have happened. The truth that the world will have to depend on uranium for its energy needs continues to come forward with a vengeance as President George W. Bush continues to descend into his ethanol quagmire.

Uranium bull run

The stirrings in the uranium market pointed out last December, in a moment when the commodities market was undergoing a mood of the deepest pessimism, has turned into a bull run.

In this particular instance, I would like to highlight a paper published on May 8 by Garry White, stock market Reporter at UK-Analyst.com. His recommendations do not constitute advice. Readers are urged to study the risk warnings.

The most important incontrovertible statement in Mr White's paper is: "Nuclear power is going to be a cornerstone policy as the US government tackles its energy crisis. Part of this will be upgrading the national power grid, which has been substantially neglected. But the bill is set to promote nuclear power, reversing years of policy after the Three Mile Island incident sent serious doubts about the technology's safety.

"Two months ago Bush became the first incumbent resident of the Oval Office to visit a nuclear power station for 25 years. To rapturous applause, his speech at the Calvert Cliffs Nuclear Power Plant in Maryland went down a storm. It has been 30 years since the US last constructed a nuclear power plant, but that is set to change. Nuclear power currently provides 20% of US electricity needs - but the President wants this to rise."

Nuclear power makes sense; ethanol is rubbish. It costs more energy to make ethanol than the energy that is produced when ethanol is fed into internal combustion engines.

Prospective investors in the uran-ium boom can seek to research New York-listed Canadian mining operator Cameco (US: ECJ). Investors must look before they leap: one does not become an expert in commodities by spending 15 minutes in a consultancy, and walking out never to return to that office for a market update.

A company like Cameco requires monitoring, which can be expensive. Investors must not lie to themselves. The stock market gives results to those who treat it cautiously and gently. Proper guidance makes it lessen the terrors it holds for inexperienced investors who have suffered losses due to insufficient knowledge. Most inexperienced people who play the stock market lose money spectacularly.

The Kondratiev cycle

The reason the Kondratiev long-term cycle is being explained here is because the use of short-term cycles in stockbroking work can be gravely misleading.

On May 5, AMP's Mark Faber cited the 1920's Kondratiev theory in support of their support for commodity-stock optimism. Those who warmed to their advice were extravagantly rewarded on May 9. BHP and Rio Tinto rose by over five per cent and by nearly 11 per cent respectively on merger and acquisition speculation (M&A).

This was undoubtedly fuelled by the fact that the company that could result from such an operation would have to come to monopoly power over the world's uranium supplies. Australia has 40 per cent of the world's uranium.

The battle for uranium supplies is heating up. A recent development is that it is being traded on the New York Mercantile Exchange 24 hours a day, although in the US the next power station will open only in 2015.

Short termism as regards trade cycle movements is a very dangerous game when it comes to share trading. Short-term movements are very irregular, and hard to pin down.

Let us see what perhaps the greatest players in this game are saying:

"The man in financial markets is to look at very short-term cycles," said Oliver, who helps oversee $83 billion at AMP Capital investments in Sydney. "I think that's wrong - Kondratiev allows you to view these things in a broader context.

"BHP Billiton Ltd, the world's biggest mining company, and Rio Tinto Group, the third largest, are among AMP's top ten holdings."

A contrarian view

A contrarian view on the Kondratriev cycle is that of Angus Glurkie, who manages $830 million, which is indeed small fry compared to the $83 billion managed by AMP Capital.

Although the long-term Kondratiev cycle may have suddenly leaped into the limelight, it has by no means the standing in the science of economics of such a theory as the Keynesian consumption function. It would require a millennium of economic history to fully test the workings of the Kondratiev cycle, but able manipulators of the speculation of the Russian economist must be buying a new yacht for their Mediterranean cruise by now.

Cultural underpinnings

It does not require too much economic culture to understand what short-term or long-term economic cycles are. These are easily observable in the local economic scene.

Anybody can notice that short-term economic wobbles in Malta are rather disgusting as they originate more from the weakness of human nature than from long-term economic fundamentals of the Maltese economy. They are disgusting indeed, for Malta has an economy that is monitored and envied by all developing Mediterranean countries. These are by no means oblivious to the cruise liners in our harbour, or to the share price performance of De la Rue and STMicroelectronics. This was made clear to me during my Athens meetings of a few days ago.

Short-term wobbles in a trade cycle are more the doings of bouts of human pessimism and optimism. They are not the result of long-term changes in the globalisation underpinning the world economy. The economic emergence of China on the world stage, and its welcome by an all powerful US, is not a matter for wobbles in short-term trade cycle movements.

The irresistible economic emergence of China is what will colour the world economy in the next five to seven years. To understand it and forecast it, we need the poor Kondratiev who was succeeded in the elaboration of his famous theory by Schumpeter and his most famous student Balogh. The latter was in love with Malta, and came back to his Castille office to enjoy the company of his admirers in the last days before his death. He taught me about his Schumpeter experience but not about Kondratiev.

At that time, almost 30 years ago, he would not have had the chance to say much, because the 70 years' economic experience demanded by the Kondratiev cycle had by no means passed. The position is now completely different. We can recognise how utterly misleading the short-term cycle can be when we study it with reference to Malta.

Cycles compared

The short-term world trade cycle of the last months can be studied with reference to Malta in the Institutional Investors Credit Ratings published every six months.

The movements as regards Malta are insignificant. All we can make out is that our country has retained for some time the top 30 position among 134 countries.

The position on China and the US is quite different, but still the movements hardly indicate clearly the coming overwhelming economic power of China. In the last Institutional Investor magazine credit rating chart, the US has regressed from the eighth to the 13th position while China has advanced from the 36th to the 34th place.

The long-term Kondratiev cycle of about 70 years would say decisively that China's 10 per cent economic growth would continue at least for the next ten years.

It must be remembered that China's economy has grown ten-fold since the late 1970s. Its government would be wise to call a sort of correction, Kondratiev or no Kondratiev. China must pause to take some breath, as Goldman Sachs, the American investment bank which pushed the Industrial and Commercial Bank of China (ICBC) beyond the powerful HSBC, has pointed out this very week.

No excessive enthusiasm

The great uranium copper game is continuing with the probable merger of BHP and RIO Tinto, despite childish denials. No excessive enthusiasm please for any magical-sounding economic theories. These are not to be ignored, but nothing can take the place of daily vigilance, and the examination of hard economic facts like the details of future contracts.

These unmistakably reveal that BHP's decision last year to acquire its present position in the uranium trade, plus the possible expansion of that same position, is worthy of any serious investor's notice.

Last week there was a correction but the fundamental position of uranium's price prospects remains identical.

This is not investment advice but cultural background for the building of an investment decision. John Azzopardi Vella has promoted the Malta Development Fund and advised S&P. At present he is an executive manager with DBR Investments Limited licensed by the MFSA. johnazzopardivella@hotmail.com.