Over the last two days RIO has rallied over 9%.

Still our preferred miner but for now we step aside as global IP continues to struggle and the commodity complex stays under pressure going into 2016.

We take this opportunity to close RIO FOR -10.24%.

At the same time we take this opportunity to close Glencore vs. SXXP for -9.52%.

Merry Christmas!



Wednesday • 22 April 2015 • 16:17

Interesting article from Pritchard in the telegraph.

Bearing in mind he is the ultimate bear/end of the world man China shakes off deep slump as credit soars again.

Forward-looking gauges of consumer confidence are rising at the fastest rate since 2007 in China as output picks up on almost every front.

China’s housing market is roaring back to life in the biggest cities while local governments are issuing bonds at a blistering pace, the latest signs that the world’s second largest economy is finally pulling out of a deep downturn.

Output is picking up on almost every front as the effects of credit easing begin to feed through, with the ‘expectations’ component of consumer confidence soaring to the highest level since the glory days of 2007.

Rail freight, electricity use, and even sales of diggers and earthmovers are all recovering at last from recessionary levels.

The apparent inflexion point has major implications for the world’s commodity markets and for struggling resource economies in Latin America and central Asia that depend on feeding the dragon.

Think you buy miners today, on their knees and commods still fine. We Still have ahalf a short position in BLT which we will close on the open.

The BLT trade has currently returned +9.28% and we are also long RIO:-3.6% since inception.

We feel now is the time to enter or add to this position



Wednesday • 22 April 2015 • 16:17

The bear story in Rio is well known. The super cycle in iron ore is over and is now structurally oversupplied. This will remain so given the low marginal cost of production of the tier 1 suppliers.

As a result everyone is downgrading their commodity estimations making Rio’s marked to market P/E over 20x and seemingly very expensive. However the analysts are late to the party as the commodity downgrades are already in the price.

If the Iron Ore forecasts prevail, the dividend is no longer covered by cash, and the div will either be cut or the balance sheet will be used to protect it. The result is that RIO is now -6% YTD and part of one of the most underweight sectors in the market.

Has iron ore reached a short term bottom? The oversupply is being subtly addressed by BLT who are delaying a 25MT expansion, by VALE who’s output was down to 74.5m tons from 83m tons last quarter, and by RIO who missed production yesterday.

The effect? A 6% move higher in IRON ORE overnight.

The other contributing factor to commodity weakness in general has been the DXY strength. I am not a currency trader but this has lost momentum in the last 2 months which may provide a small underlying bid.

Add to this a 5% yield (for now), a lingering bid rumour from GLEN and a market that is in full unwind mode. Mean reversion or unwind of the extreme underweight market positioning are powerful forces as we have already seen in oil names.

These factors make RIO a compelling TRADING BUY.