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Fragile shares and a cactus Pilbara

World sharemarkets continue to dance to Europe’s tune.

Overnight, the S&P 500 index rose 0.5 per cent, after earlier falling as much as 1 per cent.

According to Bloomberg, shares rebounded as two people familiar with the matter said Europe may combine the temporary and permanent rescue funds to unleash as much as 940 billion euros to fight the crisis.

To be honest, we’re lost with all these large numbers. A few billion here, a trillion there…can anyone truly fathom what all this means to Europe and the global economy?

No joke
Quote of the day goes to Brian Barish on Bloomberg

“This whole situation makes doing my job, as a guy who’s trying to buy stocks based on a long-term view, almost laughably difficult.”

And therein lies the problem for institutional investors, including hedge funds. They are judged on their quarterly returns, every quarter. If their funds aren’t growing, investors withdraw their money. End of story, end of massive pay cheques.

It’s tough to make money when the whole market is falling. The biggest Wall Street firms have just posted their worst quarter in both trading and investment banking since the depths of the GFC.

Our huge advantage
But it is precisely this focus on the short-term that gives investors like us — those who can afford to take a longer-term perspective — a huge advantage.

Mr Barish wants to invest for the long-term, but his investors judge him on his short-term performance. We think you can see the disconnect.

On the other hand, Foolish investors like us invest for the long-term, and judge our wealth generation skills in 10, 20, 30 and more years.

Simple.

Buying cheaply
We don’t enjoy pessimism. But pessimism brings cheaper share prices and the opportunity to buy great companies at good prices.

Year to date, the Australian S&P/ASX 200 index is down over 12%. By contrast, the U.S. S&P 500 index is down only 3%. And here were thinking it was the U.S. economy that was in a mess…

Of course, it is. But share prices don’t move with the local economy, in the short-term at least. Sentiment moves them, and as that goes, the big Aussie shares are having a tough time of it.

Fearful Aussies
Fearful of GFC II, of our big four banks, only National Australia Bank (ASX: NAB) is up year to date. Trailing the pack is Australia and New Zealand Banking Group (ASX: ANZ), down almost 9 per cent.

Worse, far worse in fact, is the performance of our two big miners. Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) must be wondering who they’ve upset so badly, their shares off 26 per cent and 21 per cent to date in 2011.

The performance of the big miners is inextricably linked to China. And China is being linked to the European and U.S. economies, both of which are struggling.

Fragile
According to the Australian Financial Review, World Bank chief Robert Zoellick described what was happening in Europe as a “fragile situation” but added the “big concerns” right now were the enormous U.S. debt levels.

“What I’m most worried about are problems in the developed world that will drag down the developing world.”

As if to back up the fragility, Bloomberg reports iron ore had its biggest decline in 15 months, saying it “may worsen as the economy slows in China, the largest importer, the European debt crisis persists and BHP Billiton Ltd. and Rio Tinto Group increase production.”

Iron gone
No wonder then fellow iron ore producers Fortescue Metals Group Limited (ASX: FMG) and Altas Iron Limited (ASX: AGO) are doing it tough, off 27 per cent and 17 per cent respectively over just the last month.

Fortescue is unperturbed, spending $8.4 billion to triple production to 155 million tons by 2013. They are profitable even if iron ore prices plunge to $70 a ton from the average of $169 Fortescue obtained last year.

David Flanagan, CEO of Atlas Iron, was quoted on Bloomberg as saying…

“There are so many amazing deposits out there that the opportunities are limitless. If China suddenly catches the flu, the whole planet’s cactus anyway.”

The whole planet?

For Mr Flanagan, his planet may revolve around the Pilbara. Iron ore sold for $28 a ton in November 2002. Who’d be cactus then?

The Motley Fool has recently released its latest free report, The Motley Fool’s Top Stock For 2011-12Click here now to request it whilst it’s still free and available.

More reading
Rich Aussies have nothing to complain about

The death of the bear market?

Bruce Jackson has an interest in BHP, ANZ and NAB. The Motley Fool has a disclosure policy.

 

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