I have been away from the writing scene for sometime now and this is due to being flat to the boards with existing clients and trying to maintain a decent level of service to entice them to stick it out with me. As you learn about financial markets and the psychology that guides them it you tend not to worry too much about short-term fluctuations or join the stampeding herds all throwing themselves off cliffs because everyone else is doing it. The basis of this article and my return to writing is to provide readers with my observations on what is happening in the world then to use their own judgement when it comes to investment decisions. Sure I would like everyone to go out and buy the stocks we are loaded up on, but due to our ridiculously low entry levels that would be unethical and hardly is a step towards longetivity in this industry.

The simple lyrics to a song can create a plethora of interpretations and I expect this article to be no different. Not everyone is going to agree with me and lets face it, if the majority did I would be mainstream and would be currently holding garage sales and trying to flog my CD collection on Ebay.

THE SITUATION DOWN UNDER

For those unaware I am from Australia, which is in the Southern Hemisphere and not far from New Zealand and Indonesia. When stars are well behaved or win Oscars we claim them as our own, when they brawl with photographers or throw things they are Kiwi's or are 5th generation anything else.

• The housing market in Perth is in the "fear of missing out" stage with a massive 29% gain in the last 12 months as housing prices in the Eastern States maintain their bias towards the downside. Potential buyers have been camping to ensure priority at new land sales, and houses in my area (4km from the CBD have a sold sign on them before you can say, "I would like a quick settlement please". There is a dire shortage of labour and materials and even construction companies that rely on word of mouth only are struggling under the weight of demand. There has been uproar that local companies are now forced to import workers from Asia that are being paid up to $70,000 pa to fill the gaps. (Can you really blame these people for making the huge sacrifice to come here?) I have been renting for three years, and although some would say I have missed the boat I have been fully invested in junior mining shares during this time and would never take for granted the liquidity and opportunities presented to me.
• Western Australians are a happy bunch of people in general. Often on a Friday after work I head to the mining industry watering holes and you get the impression that they are proud of their contributions to the Australian economy. We are still relatively clean and uncrowded (Europeans, South Africans and Kiwis are invading our Northern Suburbs) and I regret not moving here years ago. Regardless of the recent healthy correction the mood is still upbeat and deals are still being done,
• Personal debt levels are unsustainable and something has to give. Average wage earners with mortgages in excess of $300,000 have very little room for error and crunch time could come from not having private health insurance or simply maintaining their motor vehicle. The need to conform and live the "Great Australian Dream" is squeezing most out of any kind of lifestyle. I shudder to think what a 1-2% lift in rates could do to the average family budget. The scary aspect is that on an historical basis rates would still be cheap considering there was a time where you could get 18% from a term-deposit.
• Wages growth is stagnant, the tax cuts we are about to receive have already been decimated by inflation (What inflation some may ask?) and families are now "tip toeing through the tulips" to survive.
• The price of bananas has gone haywire from roughly $2.68kg to prices now fetching around $12.00kg after cyclone Larry has ensured short supply for many months to come. Instead of a bag I now grab two or three for the kids, yet we are still happy to pay $17kg for chocolate or $29kg for a decent cut of steak. Living so close to the CBD and often taking public transport I am somewhat immune to higher petrol prices, however I have decided to use the 4c per lire discount vouchers to put the premium product in that does make a difference. If the humble banana can have a market that may appear to reflect the true "supply and demand" I guess the oil, base and precious metals prices may not be an illusion after all.
• LCD televisions are coming right off in price and the influx of generic brands is overwhelming. Buying one of these televisions is like buying a car however with the need for a top of the range set top box, new cables that enhance the picture quality, extended warranties and a heap of other stuff they need to sell to make the real cheesecake. You now have more derivative names than the canned fish aisle in your supermarket. If DVD prices keep heading the way they are we will soon be competitive with the lower quality versions you can pick up in Asia.
• Reverse mortgages are booming and who could blame those who have retired from taking some play money off the table and not having to worry about it at all as it goes back to the lender upon their death. Not good for the children who will be relying on the good old fashioned inheritance to save them from financial oblivion.
• It is getting far easier now to get a parking spot at a major shopping centre. Even though the numbers may not be really showing it but I have no doubts that the consumer led bubble is in real trouble. Market darlings of the consumer discretionary sector are now finding the going tough and only a small number are able to adapt to the shifting market.
• Fads especially in children's clothes and products is still out of control, however prices have been in decline and it does not cost as much these days to turn your children into walking billboards. I could only shake my head this morning when I picked up my four year daughter who was dressed in a lovely pair of jeans, smart tweed style jacket, yet had a pair of white sneakers that flashed when she walked.
• Bird Flu has not disappeared and I have noticed that some around me are starting to get quite concerned and almost to the point of selling everything as you cannot eat mining shares or houses.
• Magazines are still full of advertisements for mobile ring tones or SMS dating services at heavily inflated prices in a font that does not exist on a computer. As someone with half a brain said a little while back, "Human stupidity is infinite". It does start to get rather sad when trickery and giving people false hope is the only way some cunning companies out there can make a dollar.
• Those returning from trips to China or even Dubai are still in awe at the progress of the countries and the level of activity with buildings and consumerism.
• Reality television is having a "dead cat bounce", current affairs programs are now trashy (with a few exceptions), and however the herd mentality is alive and well when it comes to novels. I purchased a razor on the advice of one those programs that apparently you don't get nicks from using yet can look like Homer Simpson at times after I have pin pointed where the blood was coming from.
• We are under continual pressure to be the most educated, have the best trading software and toothbrush that clean our tongues at the same time as saving us from tartar. I am on a roll with winning email lotteries and have lots of friends in strange countries that want to send me $18m because I am a good bloke. My watch list is now full with these overseas stocks that are supposed to fly, I have a collection of Rolex watches, and I will never struggle with the opposite sex again. Heck I can even use the Internet in the bathroom and the kitchen and to steal the phrase of LG, "Life's good".

SPECULATIVE MARKET OBSERVATIONS

• Uranium is still very popular with speculators and although some heat and momentum has been removed, there the scene is set for another burst of enthusiasm and another round of speeding tickets issued by the ASX.
• There are still companies with decent management, prospective tenements that are capped under $3m, which is barely shell value or the price of a decent block of land in a sought after area. These stocks are lagging due to the hot many chasing anything with a pulse with zero regard for value.
• Gold and silver stocks in particular had no time to react to the strong movement in prices. Even at $700Usoz for gold you could still buy quality gold juniors for a whopping 15c or 3c above where they were trading 5 years ago. Apart from a handful of market darlings and the big Victorians the gold sector has done didly squat and investors have yet to come to grips with the fact that some of these companies could have been locking in prices of around $1000AUD per ounce and will be profitable for many years to come.
• The rush for mines and resources has not yet begun in earnest. When cash and profits are king I would expect that those with the balance sheets and supporters to do it, will start picking up the micro caps, take them overseas and getting full value for their shots. There have been some takeovers and management shifts here but nothing to really capture the attention of speculators.
• I sat down with a client over a few coffees and started rattling off the last major discoveries. There has not really been anything of note during this last rally, and I would expect a 1m ounce+ find to trigger the regional booms we saw in the Gawler in 1996/1997 and the mini run when Minotaur discovered Prominent Hill in November 2001.
• Companies in base metals have very little to show for it on the scoreboard and this is more evident in the copper sector where the published prices for the last couple of years have obviously been a typo. It will only take one or two whales from overseas to realise the potential opportunities even from small mines and start to rip our already fragile mining sector to shreds. I am pleased that some of the zinc juniors and majors have responded and last night I spent sometime discussing the new mines coming on stream and now see the major threat coming from speculators and hedge funds as opposed to the companies actually searching for the stuff.
• Companies in countries where there the perception of sovereign risk is higher than average have been motoring along and if I purchased a basket of these stocks 5-6 years ago and stuck with it, I would be penning this article on a boat parked near Rottnest. It is amazing how well the DRC has gone, along with Laos, Thailand, Iran and surrounds and tiny African nations where you would not dare go for a holiday. It was most interesting to note that our local publication "Resource Stocks" recently Botswana as the best country on the planet to carry out mining business. Since the devastating events of boxing day 2004 and the bombings, the press tend to have a field day on any tremors anywhere near Indonesia.
• The saga at Beaconsfield has not really had a major impact with those investing in underground mines. I would like to think those miners who made it out might throw some funds at a few gold companies instead of an extreme makeover or a garage full of prestige vehicles.
• Daytraders are back and some figures are suggesting there could well be hundreds of thousands of them all out there to become the next "super trader". The old school still feel there is far too much information out there and another Poseidon or Bre-X may not eventuate, however since the last true mining boom was around 1980 (a few bubbles along the way) I doubt many would know one if they fell over it. My volumes even at the peak last month are still only 40% of what they were in the frenzy of late 1999/early 2000.
• You can still buy mining companies with low EV's and years of profitability ahead of them at throwaway prices. Even with the current metals prices the opportunities are not dissimilar to being first in line at a top-notch seafood buffet or buying beachside real estate that no one else was interested in during the advent of the "new economy".
• I have already started squirreling some profits into biotech stocks or industrials I feel offer some decent longer-term upside. Despite the noise, fear and greed companies still manage to provide multiple returns if you are prepared to realise when to buy the dips, switch off the computer and hang in there.
• Band Aid has started an advertising campaign where silver ions are used to heal wounds. This could well be minor in the context of the global silver market, however it will start to make people think that silver is not just something you buy for a loved one when you cannot afford gold.
• Speculators have still not learnt the lessons they were taught in 2000 and are still trying to trade the rubbish on borrowed funds or the dreaded T+3 where you know the price is bound to come in for a shellacking from those forced out. The volatility over the last two weeks in particular is one of the most brutal shakeouts I have seen in a bull market and for us it was a sobering reality check regardless of some near-term damage to the spreadsheet.
• The removal of broker numbers has been an interesting one. I was initially against the idea but in some cases now could not give a proverbial on who is doing what. It makes for more volatile and less stressful trading conditions if there is such a thing. The ASX is now toying with the idea of our own AIM style market here and this gained some press attention in today's paper. Regulatory changes might have some impact but the human side of the market will never change with no cures or pieces of paper that can alleviate "fear and greed"

PREPARING FOR THE NEXT BOOM SECTOR

With all this rapid fire Westernisation from Asian countries we tend to overlook the basics. People that are purchasing computers, mobiles, motor vehicles and signing up to SMS dating services still have to eat, go to the toilet, come down with some disease, grow old and die from tripping over their grandkids toys. Life for me was great growing up in the seventies and I still remember the thrill of my first BMX, game and watch or buying Boom Crash Opera on CD in my teens. We cherished whatever possessions we had, respected our elders, and most importantly our parents on average wages were able to afford a house and maintain a simplistic lifestyle (with the benefit of hindsight). It is quite sad where teachers, police and nurses cannot even afford to buy a house in the area where they work and if they round up the deposit money they are living on less than $200 per week once some of the debt is accounted for. There could well be opportunities in education, social welfare and assisting those facing financial ruin. The new credit cards with 0% interest balance transfers are only delaying the inevitable, and we need to see a return to good old fashioned to alleviate some of the pending pain. When you are seeking opportunities that may arise over the next few years you need to maintain a thirst for knowledge, analyse your surroundings, use watering holes to network and gain from others chit chat they may seem totally irrelevant but most importantly be prepared to buy when others are not interested and stick to your knitting.

Food science and agriculture are some areas I am starting to take a mild interest in, along with the development of children and the opportunities that will present themselves over the next decade. The fight against disease is ongoing and I cannot see how those that are prepared to throw considerable sums at mining stocks would not be glancing over some biotech's for diversification.

MY STRATEGY AS A SPECULATOR

• Portfolio rotation for clients where we take into consideration the risk/reward of trying to get some more mileage out of a stock that may already have 5-20 bagged. Regardless of the uptrend that appears "intact" overpriced stocks generally come in for some rough treatment during a correction and those lacking in fundamentals are often the ones that will reconstruct and come bag as a company selling feed to livestock.
• Maintain holdings in core gold companies with a path to production and growth aspirations. I accept the fact that everyone is different and the usual suspects are quite prepared to bail long before the party even starts.
• Silver is a very tough sector in Australia with limited opportunities, however those I have identified we have stuck with and are looking forward to the new floats that are hopefully in the incubation stage.
• In base metals we have stuck with companies with more advanced projects either nearing feasibility or construction. The discovery phase if you are onboard prior to the hit is where you should be taking profits bearing in mind the general rule when it comes to project development and how share prices react.
• Juniors with majors as joint venture partners often provide excellent investment opportunities when push comes to shove in the race for resources and cash. I am sure a dip in the price of copper from levels many thought possible or gold for that matter are not going to send the likes of Rio, BHP or Newmont into liquidation at this stage.
• In the energy sector the oil companies with cash flow or excellent reserves and exploration potential are worthy of consideration. I admit to not having a real feel for the oil sector and when it comes to the juniors you're dealing with casino style odds.
• Most of our uranium success as been off the side of the boot, however when dealing in this sector I pay some attention to politics but will often stick with management teams with the ability to make progress in that sector or more importantly to survive when the punting music fades out.
• I have encouraged clients to take a holiday, pay off some personal debt, place some money in the bank and not become seduced by the lure of a fast buck. Those passionate with the stock market could easily quote "Wall Street" word for word and will actually start to think that there were some pearls of real wisdom to come out of the movie.
• The breakdowns over the last two weeks have been across the board with very few companies spared. I have seen these events over the last eight years but there is always the desire to follow everyone else and the majority end up regretting not selling the farm earlier or taking the risk and buying up when stocks were being hammered. The only problem is that there were too many bargains and these events are often short, sharp and sweet and do not allow an in-depth analysis or the opportunity to liase with the family.
• The success of a market speculator is often dictated at birth so education can be in vein. It is a competitive arena and every type of player out there makes the market, so we all have our purpose.
• People fail to realise that booms are built on money flow and hype that extends well beyond fundamental reasoning. Even if metals prices head lower until the next "hot" sector comes around the influx of funds into mining and speculation will be the key driver and you are still going to see companies outperform. The mindset of market participants in Australia is ripe to see the next major "intersection" well and truly rewarded. Investment demand and not fabrication or increasing band aid consumption could send a commodity to the next level and bring back some of the glory days of a good old fashioned mining frenzy. It was surprising that the most on-line action I saw in the latter half of last week was my thirty minute struggle with a website to book and pay for my tickets to the upcoming Pearl Jam tour.

Gold, silver and base metals have enjoyed excellent rises over the last five years with equities still having considerable ground to make up if this is indeed the real thing. Valuations applied to some companies are far from "Bubblevision", however the majority are focussed on what could go wrong as opposed to what could well come off. At the Asia Mining Congress recently held in Singapore someone stood up and closed the conference with the following remark or similar.

"The speculative market is like someone busting to go the toilet where they are looking at how much paper is left on the roll. The smart ones would go and get another roll or two out of the cupboard, whilst those stranded yelling, "more toilet paper please" are nowhere near the smaller end of the market at this point".

28 May 2006

Personal Disclosure: I have personal holdings in speculative shares in gold, silver, base metals and industrial sectors and may at times liquidate or increase these holdings as I see fit. My clients have considerable investments in a number of companies and may rotate these holdings when required.

Disclaimer: The opinions contained in this article are my own and any prior to any investment decision you should contact a licensed financial adviser. Speculative shares are volatile, should be considered high risk and can result in significant financial losses. I earn fees from trading and raising funds for junior resource companies.

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" (available free to prospective clients via email request) and presents on resource stock investment. He has been a contributor to a number of precious metals and market related forums.

If you would like further information or are interested in becoming a client I can be contacted at tlocantro@aapt.net.au. Please note that due to an increasing workload I am unable to provide advice on individual stocks or answer emails in depth. I do not publish a newsletter but provide regular insights for clients. I am planning another book on market speculation and if you would like to be informed of developments please let me know.