NEW YORK (Real Money) -- For years, "this market," as it is always referred to, has been about instant returns.
Investors, for reasons we can debate, have become conditioned to that. The downside for anybody who has a public view of more than a few minutes, or weeks, is public mockery or flat-out attempts discrediting the critics. More often than not, for a wide swath of investors, it's about what's happening now and how I can make money now. That is human nature, after all, only magnified many times over by day trading, high-frequency trading and all other kinds of trading, and the instant gratification associated with media, social and otherwise, as well as the general nature of this wired world. And between here and there, even after the warning signs are flashing yellow or red, it's pure gamesmanship.
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Trouble is, when there is a there (which more often than not in recent years is when the company itself has little choice but concede reality) those lulled into complacency by the easy money were the last to see it coming. The reason for this long wind-up is yesterday Bank of America Merrill Lynch sliced Rio Tinto (RIO) , the iron ore miner, to underperform from buy. This follows its removal from the conviction and focus lists at Goldman Sachs and Citi, respectively.
But nowhere to be seen in my newsfeeds was last week's reiteration of a sell recommendation on Rio Tinto by Gordon Johnson of Axiom Capital, which rarely makes the headlines. Johnson also lowered his price target to $28 from 33; the stock is currently in the mid-$40s after spending one-and-a-half weeks on the model "which anyone who has modeled RIO knows would take nearly 10 pages to document" that he wrote.
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That's not surprising, because Johnson's research tends to go deeper into the weeds than the average investor (pro or otherwise) cares about, or the average analyst has the time to do. As a result, he often turns over more stones and finds more treasures than most others do. As is often the case, however, many times they're just small details along the way that give his analysis depth by reinforcing his concerns.
Johnson initiated his sell on Rio in July 2012 when, ironically, the stock was about where it is today. Much of his focus was an iron ore bubble in the Chinese market that "was at risk of deflating." Since then, it's been higher (as people have speculated Rio would merge with another iron ore company or be acquired) and lower (as it hasn't.)
Speaking at an investors' meeting in London today, even Rio Tinto CEO Sam Walsh debunked the merger stories, and in a press release said that the near-term outlook "is more challenging."
To keep investors hooked in, the company said that it is committed to materially increasing cash returns to shareholders "in a sustainable way." Johnson said that they are "pulling out all stops." He went on to say that 83% of Rio Tinto's EBITDA comes from iron ore, which has been cut in half this year, yet Rio's stock is down 17%. "That makes no sense, period," he added.
In an email to me, Walsh wrote that paying shareholders more is an attempt to keep the stock higher and "doesn't change the supply-demand backdrop of their key business segment."
That brings me back to the "make money now" part of this story. If left to the fundamentals, the shares of companies like Rio Tinto would collapse. Gamesmanship and the pulling of levers only goes so far, and while investors may have ignored Johnson's warnings in the past, they may want to pay attention now. Even some of Johnson's competitors, after all, appear to be wising up.
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Published on Real Money at 11:30 am on Dec. 4, 2014