The collapse of the iron-ore price - down to $87 a tonne from about $200 a year ago - is starting to cause something close to panic.
Last year, BHP Billiton's iron-ore division generated a return on assets (ROA) of 95 per cent. This year, it slumped to 75 per cent. But even if the iron-ore price keeps falling, the ROA should stay staggeringly high.
Rio and BHP's iron-ore businesses are low in costs and high in quality, something that can't be said of Fortescue, which could easily be brought undone by a tumbling iron-ore price.
The two industry giants have sound balance sheets and, with large projects being put on ice, cash flow may actually increase, even as commodity prices fall.
Intelligent Investor downgraded Rio to "sell" at $83.65 in November 2010 and has had a long-standing recommendation of hold on BHP.
With their respective share prices falling, they're finally getting closer to an upgrade.
Scared and scarred
This reporting season, BHP announced an excellent result in the face of falling commodity prices.
In the past 20 years, during which we've had the Asian crisis, the dotcom bubble and the GFC, BHP has never reported an operating loss.
With a highly successful petroleum division (shale-gas acquisitions aside), great copper deposits, and the best coking coal assets in the world, the iron-ore panic may well push the share price into bargain territory.
While profit growth is clearly slowing at BHP and Rio, the profits of some of the mining and engineering services companies are exploding.
Monadelphous released an astonishing result, with revenue and underlying profit up more than 30 per cent.
This tells us nothing about the shelving of massive capital projects, on which companies such as Monadelphous and WorleyParsons - currently trading on a lofty price-to-earnings ratio (PER) of 17 - depend.
When projects are curtailed, competition for project work intensifies, margins collapse, and so do share prices. None of these threats are in any way reflected in the share prices of these stocks.
Conservative investors should avoid mining services and engineering companies altogether and no one should have this sector accounting for more than 10 per cent of their portfolio at the current prices.
Many investors, scared and scarred by the end of the resources supercycle, have rushed into stocks that are not subject to cyclical pressures, especially those with a decent yield.
The price rises of four infrastructure stocks that Intelligent Investor recommended in July 2009 make the point. Including distributions, Spark Infrastructure has returned 67 per cent Sydney Airport (formerly MAp Group), 110 per cent Australian Infrastructure Fund, 159 per cent and Challenger Infrastructure, 6 per cent.
At a time when the ASX All Ordinaries Accumulation Index has returned 29 per cent over the same period, these stocks have returned an average of 86 per cent.
The pockets of value of two years ago have evaporated in this flight to safety. Even relatively expensive businesses with growth prospects are getting much attention.
Having upgraded CSL to a long-term buy in March last year at a price of $33.97, I expected the company to grow profit this year. Profit increased 12 per cent (in US dollar terms), but the share price has soared and CSL now boasts a PER of 24.
Healthcare stocks such as CSL, Sirtex, Sonic Healthcare and Cochlear all delivered results that suggested they can grow earnings in a weak economy.
While infrastructure and healthcare stocks have seen their prices and PERs increase, cyclical businesses are being punished.
Having steered well clear of companies such as BlueScope, building materials stocks and most retailers, it's perhaps time to start thinking a little less defensively. The better businesses in these sectors will survive and eventually prosper.
That cannot be said of discretionary retailers such as JB Hi-Fi and Harvey Norman. Here, the recent results were as harrowing as expected.
There may be an upturn in consumer spending but in the long term, the structural changes in the sector will continue to cause havoc.
Future share-price rises are best viewed as an opportunity to get out before things get worse.
The banks, despite showing signs of slowing profit growth, have no such problems. Don't expect high capital gains, but fully franked dividend yields offer acceptable returns, on the proviso that there are no significant economic shocks.
That's not something I'd want to discount. Australia remains vulnerable, which is why I suggest keeping financials, including banks, fund managers and insurance stocks, to no more than 25 per cent of your portfolio, including bank-issued hybrid income securities.