-- Posted Sunday, 19 October 2008 | Digg This Article
| Source: GoldSeek.com
Stock markets around the globe (apart from Iraq of all places) have been beaten into absolute submission. In the flight to liquidity or as I put it, “Selling for the sake of selling” rarely anything is spared and this is where value investors start to feel like mugs. You can feel the fear starting to tighten round your neck, you start to fear for everything you have created, your family, and your home and then all of a sudden you wake up.
I must admit during the current carnage I have not felt fear at all. Fear for me is being asked to assist getting a baby stroller out of the boot, trying to wrestle a shopping trolley free, or fumbling trying to keep up with a Slash blues driven solo. In my world a genius to me is someone who can take the plastic lid off a butter chicken without any spillage. My list of things I fear has been greatly reduced since we purchased a vehicle with reverse sensors and a camera. Now I can simply stride into car spaces I could never have dreamed and my no claim bonus can breathe a sigh of relief.
This is the market period where every stock I have recommended this year has fallen in value. I am seeing clients finally start to give up and move their accounts elsewhere, I am now like a rag doll soon to become a pin cushion. The good days are easily forgotten and some of the antagonism directed at me is from clients that have made up to $1m on individual stocks and in some cases from investments as meagre as $20,000. Yes a $1m portfolio is probably sitting around the $650,000 mark, but it’s time to look at where we have come from and the profit taking opportunities that have since evaporated. I am sure that they have sold out of the new GPS devices the HINDSIGHT 101 that told everyone what they should have done. Yes we should have all sold out in November 2007 when the market was good and 2008 was going to be fantastic year. Truth of the matter is that Australian gold bugs have seen very favourable conditions yet their stocks have been poleaxed in the flight to sell everything.
This is where fundamentals do not matter, cash flow becomes irrelevant and with margin calls snowballing I would say that psychologically Australian investor sentiment is plumbing new depths of despair.
Emails sent to clients telling them to buy are like throwing pebbles at a tank as stocks continue to drop and since everything has fallen there is no way possible that their adviser could be right about anything. I have been broking now for 10 years and have seen conditions similar to this before. We came out of the Nasdaq bubble into one of quietest periods I have ever seen, 2001-2002. This is where my pre-tax income was just over $30,000 and I would have been more successful flipping beef patties at McDonalds.
People are quick to forget that most of the time the stock market is a normal, peaceful place where you can actually make money through investing in companies with sound fundamentals at the right price.
RECENT TRIP TO LOS ANGELES
One of the first things I noticed upon arrival at LAX was that the place hasn’t changed since I last in the US, 14 years ago. I now note that money is being spent on the airport to facilitate that arrival of the A380 and B787 (when it eventually sees the light of day). To me LA has suffered in parts due to lack of infrastructure expenditure and I marveled at the real estate section as to the astronomical prices still being asked on some properties. It will be interesting to see how Hollywood survives the crisis but my guess is that stars pay packets and egos will have to deflate somewhat. The reality TV bubble has long burst and when you see Sophie Monk taking on the likes of Paris Hilton you have to wonder. Nevertheless I overheard numerous conversations of new shows being developed, castings and those bagging the stock market as a viable source of investment. Rather than gangland violence I am now more afraid of drivers who ignore red lights than anything else in the US. Just like here the newspapers are dripping with fear and you suffer from information overload.
By pure accident my guitar hero Slash was appearing at a music store just before I left. I took a long term view and regardless of the financial consequences at customs I managed to get a pair of guitars home in one piece. Even though I could probably offer them up for sale on Ebay at a handy profit I am taking a long-term view that Les Pauls and anything to do with a modern day guitar hero is going to increase in value. Bring back near parity I say, next time our dollar gets near the USD it will be time to jump on a plane and lock in some bargains as I fortunate to cop an exchange rate of around 70 just before our dollar went into another freefall.
I left LA still very much grateful for our lifestyle in Australia and Perth in particular. Sure it is quiet and the streets aren’t alive with the sounds of clicking cameras but it is a mighty fine life we lead. Whenever I feel the need to escape reality and expose my family to a Disneyland of many varieties I know where I am heading again!
THE SITUATION HERE IN AUSTRALIA
Ø -Our market has been slammed along with our currency which was previously seen as a safe haven insulated by Chindia. Obviously not the case as everyone flocks to the almighty US dollar.
Ø -The Australian Government has now stated that all deposits in banks, building societies and credit unions are safe. Good move but would you expect any less?
Ø -We now have commercial TV stations cashing in on the fear by producing shows designed to educate the masses and allay the fear. About as cutting edge as a blunt instrument but nevertheless they are required.
Ø -Economic stimulus giving $1400 to pensioners, $2100 to pensioner couples, and for low to middle income earners $1000 for each child in their care. To me what a waste of $10b! I could write a whole new paper on this so best not to get me started. By all means we need to provide a lift to those on welfare who are probably not feeling the impact of the credit crunch. This is like giving a 5yr old child a machine gun. Many in Australia have labeled it the pokie and plasma package and I do not disagree with them.
Ø -In business don’t you reward those who contribute and perform? It would be the middle to higher income earners in society who are under pressure and could become the new waves of bankrupts. These are the people that for years have paid excessive amounts of tax and have the capacity to continue to do so. Where is their handout to help them over Christmas? The major winners of this stimulus package could be
· -Harvey Norman (ultimately GE money that takeover the billing once the interest free period is over)
· -JB HiFi. One of my favourite stores also and one where I go for my retail therapy.
· -Your local RSL club or establishment with poker machines.
· -Anyone holding a garage sale just after the funds is deposited into the accounts. Perfect timing for anyone looking to offload into a market flooded with liquidity.
· -Local liquor stores (ditto for those in more remote locations)
· -Crisco or Castle Hampers where you can buy Xmas 2009 in advance.
· -Red Dot, Thingz and the list goes on.
Ø - The best thing the Government could do for Australian investors is scrap capital gains tax (CGT) now or at least for 2-3 years. I cannot blame many Australians or Americans for seeking out tax havens around the world and if it wasn’t for family and education (this may not be an excuse forever) the idea is not that farfetched. Once my income is taxed at 45% I will then go and invest it and hey why not pay up to a another 45% on whatever is left. Ludicrous isn’t it?
Ø -Big incentives for first home buyers. $14,000 grants for existing and $21,000 for those who purchase new properties. Housing market appears to be struggling and in a transition phase where sellers are yet to really lower prices to meet buyers. Now taking up to 80 days to sell houses in Perth and this is a leading indicator that there is further downward pressure to come. I still remember the “Fear of missing out” stage in the Perth market and it was something to behold. Houses were being snapped in frenzy as these times just like in every boom things are different.
Ø -The broking industry is suffering. I lunched at a local CBD establishment and it was crawling with script shufflers. My partner commented to me how it had that “Last Supper” feel about it. Most firms have seen significant cost cutting and I have already noted a number of brokers just starting out have returned to wage paying jobs outside the industry.
We are now in a period of job envy. It is where you look at a school teacher or police officer and think right now that you wish you were in their shoes. The fact that in a decent year you could earn 10-20x what they do is totally irrelevant. All you wish for is a basic $55,000pa wage with job security and where some of the most brilliant minds and those with the ability to succeed will crawl back into their holes.
THE AUSTRALIAN SPECULATIVE MARKET
Ø -All sectors brutally sold off. Major falls in particular in the iron ore juniors which were caused by talk of 20% declines and Chinese customers requesting delays before taking on new supplies. The iron ore bubble was one sector of the market that simply kept on running and just like every other bubble history it was heading for one heck of a burst.
Ø -Now that trust in financials and debt riddled instruments will take time to reappear this could be the lead up for a rush towards gold, silver and the companies that mine or explore for them. I often hear, “Why haven’t gold stocks run yet?” Those without enough patience or self belief will be the ones who sell out around one week before the real rally begins. With all this liquidation where is the money heading? In my opinion a fair slice of it is waiting to jump on the next sector that moves in a positive direction. THIS WILL HAPPEN and those prepared to place some bets on where it will occur are likely to be very well rewarded.
Ø -Gold juniors decimated in the flight to sell everything regardless of fundamentals. The AUD gold price is still over $1000oz. The bulk of the selling pressure has come from resource funds both here and overseas who have been bombarded with redemptions. The battle ground in one gold junior at the moment looks like 4-5 institutions versus Joe the Plumber. It is not pretty, however everyone should be mindful of the fact that fundamentals will always win out in the end.
Ø -Those sectors looking the most likely prior to it really hitting the fan included, gold, geothermal, and lithium juniors. In particular the geothermal sector was looking most resilient and has only recently thrown in the towel.
Ø -Cash crisis. We are now nearing the end of the world so companies struggling to find cash are going to curl up and die. This is not always the case, especially considering that the juniors routed during the Asian crisis of 1997 were the ones that became the shells to explode during the Nasdaq bubble.
Ø -Many juniors will have to cut field stuff, office expenses, downgrade to 2 ply toilet paper and generic coffee but on the whole those with fantastic assets that will be dug up should maintain minimum expenditure unless they are drilling into a potential orebody that will be reflected on the scoreboard. Some juniors should look at merging with others, however the biggest barrier to this style of M&A is the EGO. I know of some that are surviving off the bank interest and these will be the companies who will thrive once speculators want to make money again (and they will).
Ø -There is still some daytrading occurring, however volumes are well below average. Some positive announcements are being met with moderate re-ratings however these are of the intra-day variety.
Ø -A number of companies are trading at or below cash backing and this is perfectly normal in the current environment.
The market is failing to discriminate between quality and absolute rubbish. All stocks have been sold off and we could now call this a “reverse top”. These periods are unique in history, and it should be noted that bottoms are far less dangerous than tops when it comes to wealth destruction. Those who invest in the quality juniors are likely to suffer further mental damage when some promoters stocks are the first ones out the blocks. Now is not the time to change tactics or try to trade out of the abyss. Once you’re addicted to buying rubbish stocks it is a harder habit to kick than smoking.
HOW TO THRIVE IN THE NEXT UPLEG
Ø -Selectively buy juniors now with good assets and or management. Most of the market depths are ghost towns but there are many out there now trading at 4c-5c that in my opinion are the next batch of 20c-30c stocks over the next 5 years.
Ø -Look at some mid-cap mining companies that will attract institutional money. These are the ones with strong balance sheets (plenty of cash) and appear to be the easy 50%-100% trades over a relatively short period. There have been cases where some of these companies have actually traded below cash backing which is obscene.
Ø -Gold Mining is a very tough industry and you must pick your targets well. Look at who has the highest grading open pit resources and has a chance of getting off the ground. There are also a small number of producers mining up to 20 g/t dirt that have seen their share prices trashed also.
Ø -Look beyond yesterdays heroes. My guess is that the junior end of the market will reward new sectors before holding a peace gathering for the iron ore, phosphate, uranium and coal stocks that have destroyed many players out there. My money is on geothermal and lithium, some commentators believe in manganese. Buying management before a trend occurs is your downside buffer and buying quality will rarely let you down if you invest appropriately.
Ø -TAKE PROFITS! This might seem ridiculous but investing $10,000 and having it increase 4x on three occasions becomes $640,000. I have just issued a 4 bagger challenge to clients and hope that some take it up. I could talk for days on how many do not take profits, I have genuine examples where clients have made up to 50x on their investment but become so complacent they are paralysed to take profits. I think this could come down to trust and the fear of having to pay brokerage on a $1m sell ticket even though it was the brokers idea and the client only stumped up $20,000. Tax is another killer of windfall profits. Clients become overly focused on holding a stock for 12 months to halve their taxable component yet see their capital halve in the process. Again another good reason why CGT on share trading should be abolished.
Ø -Adjust to a lower price environment. I feel that if you can adjust and lower price expectations you will be mentally prepared for when stocks start to rally. The problem with bubbles is that once you are in them the mindset adjusts quickly to higher prices with greed and ultimately complacency setting in.
Ø -Move on and accept that stocks were not sold off at the top. The sooner people can let go of the past the better.
Ø -Do not become too defensive. People tend to lose money when they diversify away from core areas or try to protect their money through buying stocks with high yields. There is only a small catch here that in most cases the yield support cannot be maintained. One of my most overused phrases as an adviser is “There has been no greater destruction of wealth than in the search for yield”. I had one client who wanted to go into property trusts after some extreme success on junior mining stocks. Had he done this I am sure that 80% of his capital would be now swirling around in a massive black hole.
Ø -Learn to trust your adviser if they have been good to you over the years. Remembering that they are also feeling the pinch and you much prefer them to stick around to help you through the next speculative bubble which is going to be an absolute doozey if this negativity goes on for much longer.
Ø -Beware of the sharks. Even though things are quiet I am sure they are breeding at a rapid rate. I know the big financial toilet has just been flushed but there are no doubts some marks left on the bowel. These people will fleece you at the very sight of greed making a return. On our current affairs shows they have just run stories on companies set up to benefit from sports betting arbitrage opportunities. Perhaps a dodgy art bubble isn’t too far away, or things become really grim let’s start trading tazo cards and Coca Cola yo-yo’s.
KEEP YOUR WITS AND A SENSE OF HUMOUR!
Before I go here is a YouTube link of a well respected gold analyst in Perth who made a bet with me in 2005 that gold would not get to $1000US an ounce prior to 2050. (Yep you heard right, 2000 and 50!). Just like this event wasn’t supposed to occur nor the financial bloodbath we are now enduring just think now what could possibly happen to the upside once a sector or two starts to motor? Never say never and I know the next rally might seem like a distant event but best prepare for it now as it will do far more damage than the current crisis sweeping the globe. Enjoy and best of luck to all my readers out there!
http://www.youtube.com/watch?v=RTJIuaevVbM
Tony Locantro
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 tldk2@bigpond.com
-- Posted Sunday, 19 October 2008 | Digg This Article | Source: GoldSeek.com
