Think back to four years ago. In April of 2011 gold was crossing $1,600 an ounce, on its way to $1900. Copper had just traded over $4.50 per pound. The CRB US Spot Raw Industrials Index had just ticked at 640. Investors were convinced China would grow at 10% forever. Their optimism on China was only eclipsed by their pessimism regarding Bernanke’s repeated quantitative easing programs. In this environment, there was only one thing to do – buy commodities with wild abandon! It was a sure fire win. Between the never ending demand from China and the inevitable inflation from Bernanke’s overly aggressive programs, commodities were destined to continue their rise into the stratosphere.
I remember the stunning level of surety from the investing community. Anyone who dared suggest China might not grow at that rate forever was looked on with pity. They simply “didn’t get it.” The bulls took to insulting the bears as unable to comprehend why this time was different because they had not actually visited China. Famed short seller Jim Chanos responded that he hadn’t worked at Enron either, but he was still able to identify the unsustainability of Enron’s financial situation.
It is easy to forget how bulled up everyone was on commodities and China in the first half of 2011. You won’t get them to admit it, but all these mopes that are now proclaiming the demise of China and all things commodity related were often the very ones falling all over themselves in bullish fervour four years ago.
Don’t forget that one of the biggest IPOs of 2011 was none other than commodity giant Glencore. Investors were lining up like 13 year old girls at a Taylor Swift concert for the chance to buy into the “great” commodity powerhouse.
In what will surely go down as one of the greatest timed trades in the history of finance, Glencore Chief Executive Ivan Glasenberg floated his company within one day of the all time high in the CRB US Spot Raw Industrials Index.
As my old boss loved to say, “he stuffed ’em like a butter tart.” Glencore was floated at 530 pence, and immediately traded down. It is only obvious now in hindsight, but Glencore’s IPO marked the top of the commodity cycle.
But the point that I want to stress is at the time – there were precious few who were preaching caution. In fact, it was just the opposite. Bears were routinely vilified.
Now contrast that to today. If you dare suggest China is not going to implode, or that commodities might represent an interesting investment opportunity, you are derided as an idiot who collects “pet rocks.”
And into this massively pessimistic environment Glencore has been forced to massively de-leverage their business. Over the week-end Glencore announced a series of asset sales, a new rights offering and the suspension of their dividend. But if you thought this abrupt change of heart was driven by Ivan Glasenberg’s worries about the state of the commodity market, you would be mistaken. According to Bloomberg:
Glencore Investors Force Glasenberg to Prepare for Doomsday
After a breakfast meeting with a small group of hedge funds in New York last week, Glencore PLC Chief Executive Officer Ivan Glasenberg concluded that investors could no longer stomach his famously bullish outlook.
The meting capped two weeks of discussions with shareholders from North America to Europe after the Swiss miner and trader reported a 56 percent decline in profit. His plan to trim Glencore’s $30 billion debt by 10 percent by the end of next year wasn’t enough to halt a plunge in the company’s market value, which has more than halved to about 17 billion pounds ($26 billion) this year. On Monday, the company announced a strategy to reduce debt much more quickly.
…“This is definitely the first time you get the impression that shareholders are the most important voice in the room versus management,” Ben Davis, a mining analyst at Liberum Capital Ltd., said by phone from London. “Until now, a lot of the market has seen Ivan as the smartest guy in the room.”
The fresh approach was triggered by the almost-universal bearishness on commodity prices that investors expressed in talks, surprising Glencore’s management, a person familiar with the matter said, asking not to be identified because the meetings were private.
Let’s see… We have the same investors who were over the moon bullish in 2011 when they were clamouring for Glencore’s IPO now forcing management to puke out a ton of exposure because they have now decided commodities might be headed lower.
My guess is that Ivan thought they were idiots when they were willing to pay 530 four years ago, and he thinks they are equally stupid now when they are diluting themselves with a rights offering at 135. It would not surprise me at all to see Ivan and the other wealthy managers take down a massive piece of this new rights offering.
The commodity top was when Glencore plugged the uber bullish hedge funds with their overpriced IPO. Could the bottom be when these same hedge funds hit their pain point and force management to de-lever? I will be watching intently how much of the new rights offering Glencore management takes down. I think I would rather put my money on them instead of the trend chasing hedge fund mopes.
Thanks for reading,