At this stage the mania is pretty much infiltrating speculative stocks across a number of sectors, and stocks now are tending to move on good news with a major increase in volume that is stretching well beyond twenty minutes of madness that we have endured for the past three years.
At this stage my volumes are still under 20% of the giddy heights reached during January, February and March 2000, which illustrates just how crazy it was back then and the scope for activity to escalate further before we see some real pain on the screens.
A VERY NASTY BUBBLE IS FORMING
In late 1999-early 2000 the so called "blue chip" stocks were under immense selling pressure and real estate was only starting to build up some momentum, although at the time some were of the opinion that it had already peaked. In early 2000 you could turn on your television and not be bombarded with DIY specials, best backyard contests, and having an already filthy rich family having a makeover squad put another 50 gorillas in their pocket at auction for a $7500 outlay. There was a very timely article in the Weekend Australian today in the Inquirer section titled "New Economic Order". It went on to discuss how the "Housing Bubble" could be pricked, and in brief looked at the impact of rising interest rates on household balance sheets. The last sentence summed the article up brilliantly, "And there may not be a lot central bankers or governments can do about it".
So here we have speculative stocks going crazy with the opportunity to lose $1,000 per minute on the punt, the housing market starting to get the wobbles with the interest rate bias pointing north, and families drowning in mortgages and credit card debt. There will come a time where juggling one card to pay the other will become impossible, and debt consolidation loans will become rather difficult to obtain as some credit card debts combined would rival the size of a mortgage in the early-mid 1990's.
Some may say that the "economic miracle" will pay for everything and see us through, however questions must be asked when the Police Service in WA is instigating work bans in order to secure a $16 per week increase in pay. We also have teachers planning strikes in search for more money. Whilst the increases would pay for three large pizzas on a Tuesday night, they are not going to save the average Australian worker from defaulting on their home loan. Only recently there was a story on "Today Tonight" where banks were taking possession of homes where the customer had failed to pay $200 of their mortgage and even one case where action was threatened despite the borrower being adamant that they were in fact in front on their loan.
The clues are everywhere and you only have to look at the Bond market in the US for some direction. Those still jumping on the property bandwagon must view the recent rout in the US as nothing more than an aberration. Maybe over a few drinks at a dinner party they can convince their friends that they are indeed counter-cyclical contrarian style investors that agree strongly with a study that suggests the boom will indeed make it to 2006 before easing off.
My investment strategy is centred on finding undervalued and well-managed junior mining companies with the potential to provide strong share appreciation over the medium-term without the requirement of a "speculative bubble" to provide the exit door. There have been numerous companies that have seen their share prices move from the 50c-60c to levels in excess of $2.00 through project development and not their associated PM or commodity enjoying a significant price hike. One of the negative aspects of a boom is that many investors will sell these stocks in favour of a hot tip and find they are trading stocks for a one-step price move, instead of concentrating on the goal of attaining a five-ten bagger. With funds chasing any explorer with a pulse, the upside in those with quality management and assets is subdued and initially good news is not fully reflected in the share price as on that day there were twenty-five or so announcements that sounded far more appealing. What appears to be a short-term negative has the potential to swing violently towards a major positive as profits from trading the rubbish can then be used to significantly increase holdings in companies that will still be around in five years time and more importantly one that has not strayed into every hot sector of the market. The "transformers" as I will call them are great trading plays, however when the music stops those reconstructions and cheap placements can be very painful for those holding at much higher prices.
There are always winners and losers in market booms, and unfortunately it is not likely to be retail investors putting through their own orders from the home office. The hook to keep people speculating is the spreadsheet that for many would be showing plenty of large percentage winners and already have them claiming guru status amongst their family and colleagues. Once they eventually convince five others to participate in stock market speculation we have a scheme on our hands that would put the pilot game to shame.
PM's AND EXPLORERS DOING WELL
In this environment there is no need to put up the gold producers and explorers table. The portfolio of junior explorers I put together in June has done extremely well (average return well on the way towards 50%), however it is now difficult to separate ability from luck in terms of each individual performance. At the time of listing them in a previous article I considered them to be very cheap relative to their projects/potential. Since some of them have moved strongly they are now no longer the bargains they were only 10 or so weeks ago. I do not want the potential for a conflict of interest in relation to the selling/switching of these stocks at some point by my family and/or clients. There comes a point where the market starts to get heated and some care has to be taken when mentioning stocks as some may inadvertently take it as a "tip" and take a major hit once the stock becomes riddled with daytraders as the trading ranges and volatility increases significantly.
The beauty of higher share prices is that the majority of speculators like to buy only after major increases then feel the need to tell their friends about it or promote it on the Internet with some wonderful share price targets that bring them in hook, line and sinker. When companies start to move on joint venture announcements and/or lacklustre drilling results that would normally be found somewhere in an annual report as we are starting to witness now even monkeys can become stock market gurus providing the dartboard is level.
The key is to be in the 3% that normally walk away from these events not only financially stronger but also armed with the knowledge to see them through the next market bubble. The fact that the last one was just over three years ago would suggest that some have already planned their exit strategies long before the uneducated money swamps the market in search of a fast buck. It is now a case of "Every speculator for himself/herself" with the majority destined to fail miserably once TSHTF.
Disclaimer: I have direct/indirect holdings in the stocks listed/mentioned above. Clients have considerable holdings in each of the stocks and may change these holdings without notice. The information on each stock has been derived from ASX reports, company discussions and a site visit to Long Victor in 2002. The company websites have been provided where applicable for further research. Each of the stocks listed is to be considered as speculative, and may not be appropriate for individual investors. No buy recommendations have been provided on the listed stocks, and the opinions on each are those of the author only.
About the Author
Tony Locantro is a Perth based Senior Private Client Advisor specialising in the junior resource market. He is the author of "The Green Room, A Guide To Speculating On The Australian Stock Market" and presents on resource stock investment. He is a contributor to a number of precious metals related forums.
Contact Details:
locantro@iinet.net.au for further information and/or contact details.
7 September 2003