LEMMINGS AND LEVERAGE
Tony LocantroApart from repeats of Two and a Half Men, Australians have been saturated in negativity courtesy of the financial press. In moderation KFC is one of life's most enjoyable guilty pleasures, being bombarded with GFC for the last 18 months has not been one of them. It got to the point where it felt some form of bottom was in place, and only hindsight will tell us the shape.
15 April 2009
There have also been some interesting front page stories in our papers with one focussing on Mums and Dads out panning for gold, the other was one on how well school teachers perform in a global crisis and how safe and secure they feel. The issue is that the next batch of eager recruits will sign up for 4 year+ university courses to enjoy the serenity, yet may come to regret their decision when they could be earning $120,000 keeping the turbines shiny at a geothermal plant or selling electric car plans door to door.
I remember during my policing days going through the roster request book asking for as many afternoon/evening shifts as possible to scrape and extra $50 out per week, but am ever grateful for my training for this industry and the fact I have not been imprisoned by the alphabet after my name.
THE FOUR MOST EXPENSIVE WORDS
According to Sir John Templeton the four most expensive words in the English language are, "this time it's different". Sobering words and in my opinion oh so true. With the market in such a manic depressive state, one could be excused for thinking that stocks will never rise again, copper, zinc and oil were banished to the sin bin, no gold project would ever get funding because there is no money to lend, and even calls that the market will be forever stuck in a trading range and long-term investment as we know it is dead.
I took a long-dated history tour on speculation and noted that those in the game in the 1600's were very similar to the modern day entrepreneurial types. Despite an overdose of gloom and doom during every downturn the markets have recovered and in fact made new highs and eventually business starts to flow again and the majority will continue to be proved wrong in the end.
During periods such as these I can actually go out and not be bombarded with stock tips coming from every direction. Very few people want to talk shop because there isn't much to talk about and there is a shortage of experts.
I have noticed a significant increase in daytrading discussion and application on some internet financial chat sites. The recent market recovery has seen a number of stocks bounce violently off very low bases, and all of a sudden you have the birth of a charting guru. As their confidence and ego increases you start to see the upside targets pushed out and all of a sudden instead of sticking to their guns they are spending far too much time answering charting requests from those who haven't bothered to learn charting 101.
It then becomes like an internet dating site where you become addicted to getting emails and kisses and it is the admiration that keeps you going. You then notice that despite liasing with up to 20 women you're not going on any more dates, same deal if you ever try to pick up someone playing a poker machine (most cases you don't even start running to 1st base).
Prior to the "Tech Bubble" to pass the time we were trading Optus Warrants, then all of a sudden mining companies starting vending in Dotcom's and we had one heck of a bubble. Based on outrageous share price moves ordinary internet posters starting building their own websites and became charting gurus. Where are they today? Unlike the Brady Bunch I don't see any tell all autobiographies of any substance (pun intended).
This time around I don't see anything that looks or feels remotely different. During the tulip mania in the 1630's in order to be someone of affluence you had to possess a collection of tulips, these days insert your own luxury handbag, SUV or beach house. The short-term cure for affluenza turned out to be a high-strength dose of GFC! The advantage was then rammed home with the timely release of "Confessions of a Shopaholic" which I will avoid like a solar eclipse.
Writing is my escape, my punching bag so to speak and I admit fully that I was born in the wrong generation. In fact I would have been much happier chatting over a choc malt with George McFly.
The world is now so "derivative" with financial products, straddles, and strangles, CFD's, complex currency and interest rate swaps extending to food types. Fruit flavoured rice crackers were one of the best along with your favourite chocolates with a touch of alcohol. Perhaps for now the shearing shed for the rich and gullible is not doing a roaring trade but no doubt it will make a comeback.
During the next speculative bubble (and there will be many more to come) the aim for many will be to resist the urge to spend on items that buyers desert at the first sign of a downturn. I.e. luxury cars, boats and beach properties. Debt reduction doesn't sound like much fun, however once you are exhausted as a consumer it is the obvious place to squirrel funds away. Although many would have repeated their mistakes from the Tech Bubble again with the view that "This time it's different"
- Government stimulus didn't result in the increase in consumer spending they were hoping for. The sad part of the package was that the income test was based on the FY 2007/2008 where workers who have since lost their jobs would have earnt over the $100,000 ceiling. Suddenly the so-called Government employees who have paid the most tax over the years and kept the retail sector alive are deserted in their our of need. Fair enough I would not have spent my $950 at Harvey Norman but it would not have gone up my arm either.
- First home buyer frenzy now with the deadline approaching. Agents are reporting strong sales in the $300,000-$500,000. Going to get very interesting now that banks are tightening their lending requirements, and unfortunately interest rates are not going to stay at these levels forever. (It's not different this time).
- Is complacency creeping into the gold and alternate energy sectors? As soon as the gold price drops due to the afterglow of the G20 people want to ditch it. Without the oil price rocketing, I have also noticed less discussion on alternate energy, although talk on the development of the electric car still seems to be getting decent airplay.
- The Australian market has bounced 19.7% off a rolling year low of 3090.8. The consensus in the press is that it is nothing more than a "Bear market rally". Should this be a reason for people to stay out of the market?
- Notable increase in suspicious fires and thefts. Now that we are starting to see an "Insurance Fraud Bubble" perhaps someone out there could create a derivatives market for us?
GOLD AND OTHER JUNIORS
- Major increases in successful capital raisings. Some placements have even been oversubscribed. Capital is coming from resource funds and institutions, Mum and Dad take ups remain at depressed levels. (Some SPP's have struggled to raise even $200,000). Decent interest from Canadian funds starting to trickle in for some of our juniors/mid caps.
- Trigger happy sellers still dominating. I have noticed that when quantity is bid above the market price our orders are easily completed. Shame to see people thrown out of their stocks by the media or an unemployment figure but that is what makes the market.
- For major runs in some of the juniors you need the main players to be set. This has not yet occurred and I would expect the number of strategic capital raisings to increase.
- Stocks are still going to be ten baggers on a decent mineral discovery! One example in Australia was IVA where the shares moved from 15c to highs of $2.03 on the back of a molybdenum-rhenium discovery in Queensland. Some of the most explosive share price moves occur in quiet to down markets where a story gets more interest due to the fact there is little happening elsewhere.
- Finally some M&A activity in the gold sector with Avoca (AVO) announcing a takeover bid for Dioro (DIO). This is significant as we may start to see takeover premiums applied to gold juniors with handy resources. Why should this time be any different especially considering how well gold has done in Aussie dollars?
- There has been an increase in script based bids across the micro-caps. In some cases it is all about survival but we may start to see some strategy and the next group of stock promoters emerge.
- Low priced underwritten rights issues are proving to be very popular. Market remains tentative towards these with limited trading in the rights (the renounceable issues), and it will be interesting to note the shortfall percentages.
- Strong recovery in some copper juniors (200%+) and also some positive signs in the nickel juniors that were previously decimated. The higher cost lateritic producers copped it and then some.
- Market remains sceptical of earnings forecasts even in the gold sector that are clearly spelt out. This may be the result of the bitter aftertaste left when the financial engineering boom imploded.
- Risk is still on sale! We can still purchase juniors with high risk/high reward exploration projects that are well supported through management, cash in the bank, investments or a combination of all three. Whilst chart breakouts are being rewarded with further price hikes before reality strikes, all the hard work that leads up to major mineral discoveries is still being met with a yawn (nothing has changed here). I continue to beat the same drum but until you actually buy shares in a company that is out looking for a mine you will never be exposed to the windfalls on offer!
- Volume scanning programs are making their strongest comeback since the "Tech Bubble" Why research potential winners and develop good life long habits when a computer can simply pick the winners for you? This is a healthy sign and shows that some confidence is coming back. These programs will not pick up a low priced placement to friends or family or failure to roll over debt but boy aren't they addictive.
- Still lacking in POSITIVE FEEDBACK. Booms feed on this where people with normally little or no idea boast to their friends about how much money they are making, who then jump on the party circuit and start telling their friends all about it. Return of the Bakari rug and the overpriced abstract.
FINALLY SOME GOOD NEWS ITEMS!
- It has been reported that the victims of Opes Prime may start to see funds flow through this October. The junior end suffered from not only the sale of the stock but also from not having many of these speculators in the market. This could fuel a Christmas rally in a number of the junior stocks!
- The WA Government is now offering funding assistance for exploration. This has worked well in both South Australia and Queensland and about time.
BACK ON TRACK
Rather than sit here and accept getting beaten up on a regular basis, in order to maintain my sanity and direction I went on a financial book buying binge. I know this is also a variation of "retail therapy" but in times of need we can all do with some guidance. I must say I was very impressed with Devil Take The Hindmost, A History of Financial Speculation by Edward Chancellor. I also went in for another helping of One Up On Wall Street by Peter Lynch which I still regard as one of the best financial books ever written. Lynch oozes commonsense, keeps it very simple and is the type of person I would enjoy talking too over a liquid lunch. The stock market can be like a room full of poker machine players who all turn around when the winning tune starts playing wishing it was them who had won the mini jackpot. Sure we are starting to see some chartists claim to be making massive profits but that is all part of the cycle. The key for the longer-term research focussed players is to remain focussed on what they are good at and not become seduced by all the positive feedback doing the rounds.
I am often asked by clients with access to capital which stocks are likely to outperform over a number of weeks leading into three months. Normally these funds have been raised to pay a tax bill or for a deposit on a house.
Last time I checked I did not look like Australia's most gifted psychic or a top end real estate saleswoman (Why do the ladies with the 1900 numbers and links to the other side, look like the woman on the brochures of expensive houses?)
Whilst speaking to another one I was informed that there was little point putting money into a bank to earn 3% or thereabouts when he could simply buy a stock for 10c and sell it for 11c. Multiply this and you can see how easy it is for speculative bubbles to form and why they will continue well beyond our lifetimes. We have had super funds decimated and I wonder how these people can fight back earning a pittance on their savings. Leverage is a wonderful thing and will make a comeback.
Despite all the noise and belief that this time it really is different, reports relating to the death of the stock picker have been greatly exaggerated!
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 Disclaimer: The opinions contained in this article are purely 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: I am an advisor to hundreds of small to medium investors in the speculative sector of the market and have been since November 1998. In 2001 I wrote "The Green Room" A Guide to Speculating on the Australian Stock Market and have run a number of presentations. I am currently writing my second book and it should be ready for publication in early to mid 2009. I have a small number of books left and am happy to send these out to prospective clients free of charge.
If you would like further information or are interested in becoming a client I can be contacted at firstname.lastname@example.org
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