-- Posted Thursday, 15 March 2012 | | Disqus
One of the first books I recommend to those looking to broaden their market knowledge is “Devil Take The Hindmost, A History Of Financial Speculation” by Edward Chancellor. If you take nothing else away from this article except that title then I have achieved my goal. Do not let the overlong footnotes stifle your attempt to get through the material as once complete you should be able to draw the following conclusions:
“Fear is temporary and greed is perpetual”
“Human stupidity is infinite”
I wrote an article and exam for the financial industry titled, “Great Speculative Bubbles in History” and for those after something a little more modern and Australian it can be found here:
http://locantro.com/news/article/great-speculative-bubbles-in-history
Since March 2011 the markets have not been conducive to speculative bubbles and in fact the lull in Australia reminds me of 2001/2002 when activity and interest in the juniors dried up considerably. Following the madness that was Dotcom we have seen speculative bubbles in:
Retractable syringes
Childcare
Uranium
Potash/Phosphate
Coal
Iron Ore
Rare Earths
Molybdenum
Lithium
Micro-breweries
Nickel
Geothermal (short-lived and confined to a small number of stocks)
Regional mini bubbles in Cloncurry and at Doolgunna (Sandfire and surrounding companies)
West African gold stocks
Mongolia
For those with pay TV and in fact any TV, you may have noticed the ridiculous number of ads for funeral plans, income and life insurance, and products for seniors, pets and even women. The sports betting craze continues on now and companies are offering money back promos on protests, paying out on fourth placed horses and a refund if your football team is leading with ten minutes to go and gets beaten.
I follow and analyse a number of sports, however, apart from my once a year splurge on the Melbourne Cup I am going nowhere near this as it’s all about human nature and addictions. Black Caviar has been great for racing and bringing the crowds in but placing a large bet at teeny weeny odds on favourites is a strategy likely to bring even the most seasoned gambler unstuck.
Outside of insurance and gambling we have also seen a cider bubble that has spread from apple to pears and more exotic fruit combos. I don’t know how Strongbow sales have been, however, I have occasionally splurged on one over many years but on this occasion it is all about the more arty, retro and hip brands.
Online shopping is here to stay but the stories of women taking us inside their walk-in robes has finally slowed up. The hype surrounding group buying also appears to be abating and this was exacerbated after a failed Havaianas thong campaign by one company after they couldn’t meet the rampant demand for the product. There must also be limitations on spa treatments and facials and I admit the spam was becoming overwhelming.
I think My Kitchen Rules (MKR) makes for great television and I am mildly addicted but I think that other formats have been overdone and this goes for weight loss, home renovations and garden shows. I am also over the Kardashians, Snooki, singing and talent shows and anyone seeking 15 minutes through going viral on Youtube.
As we lose interest in what is happening on TV and realise we do not need to be shopping online on a daily basis it’s time to take a look at what is happening on the market and try and identify some sectors that could take off.
Please note, I am pretty good at stereotyping and general observations but have no psychic ability whatsoever. The odds are that something will go ballistic that isn’t on the list (citrus shirts and marble wash anyone?).
Graphite
· Stocks have been performing very strongly in Canada and to a lesser extent in Australia. (Syrah Resources SYR the notable exception)
· Similarities with the lithium bubble in how it formed in Canada. I have also noted an increase in blogs and calls for graphite to become another “fad” investment.
· Based on activity and hype the bubble is already underway, however, it could well be a case of how powerful it gets and when it will deflate.
· Results from Archer Exploration (AXE) on 13 March 2012 saw the stock rise 52% at its peak from their Campoona Graphite Project which indicates increasing investor interest.
· If markets can remain stable to even slightly negative over the next 6-12 months it may even help the cause as frustration increases with non-performing sectors/stocks and higher returns are sought.
Potential sales pitch: Did you know that it in a lithium-ion battery there is more graphite than lithium itself?
One of the best articles I have read on graphite can be found here:
http://www.munknee.com/2012/02/here-it-is-the-latest-resource-investment-fad/
Zinc
Who would have thought that iron ore, coal and Susan Boyle would have become sexy? Whilst we don’t hear of analysts referring to zinc in the same manner they love their airlines it has been a sector that hasn’t aroused much in the way of speculative fervour. Zinc has been an underperformer in 2011 and with plentiful supply the remainder of 2012 isn’t looking much better. I have read a number of forecasts but will use Barclays Capital Research who provided the following:
“The key swing factor for the zinc market outlook over the next few years is supply. While currently plentifully supplied, a medium-term concentrate crunch may be looming, although the timing and extent of this will be partly defined by prices (high prices will encourage marginal production).
The three likely causes for this shortfall are: mine closures (such asBrunswick 215Ktpy, Perseverance 135Ktpy); steep declines in ore head grades (the reason for the almost halving in Century’s production in 2014 to 290Ktpy); and an expected decline in tightening in metal supply and a period of much higher prices starting 2013.”
The issue I have here is that the zinc situation has been so well documented and reminds me a little of the uranium bubble that was due in 1998. The uranium bubble was an almighty event but turned up seven years later no doubt testing the patience of those expecting it much earlier.
Potential sales pitch: Yeah I know zinc stinks but why don’t we get a few stocks just in case these analysts are right.
Regional Exploration Bubble
The Gawler Craton boom of late 1996/1997 was my first association with near-ology and I admit to being addicted ever since. I regard this as being one of the most exciting and potentially rewarding aspects of speculation. I am able to build positions on weakness and have gradually built my contact list in the industry of those I can trust when it comes to providing some guidance on early stage exploration results. Although I like what I am seeing in Cloncurry and have positions in the Lachlan/Thomson Fold Belts and Broken Hill it is the activity in South Australia that I am hoping will lead to something.
An Adelaide Advertiser article on 27 January 2012 concerning speculation of BHP’s success at Wirrda Well along with reports of FMG’s pegging of IOCGU tenements in the South Australian copper belt is worth noting. It will only take a decent drill intersection and/or further corporate activity to drive the sector and even if one of my companies isn’t responsible for the discovery I would look to benefit from near-ology as speculators chase cheaper options.
Gold Stocks
Apart from a few growth stories including RRL, SLR, RMS and NST it has been tough going for the Australian gold sector. The African stories PRU, GRY, AMX, and AZM have fared better along with AZH in Guyana but a number of juniors in Australia and North America/Canada are yet to escape some very low valuations. Outside of looking for the next growth stocks the sector needs a major discovery and/or M&A activity to see it fire up. Gold equities suffered through much of 2011 in line with markets and it could be argued that they will require a more stable environment to thrive and this may involve lower spot prices.
In an interview between Chris Martenson and gold bullion/coin dealer Robert Mish, the following is worth noting:
Chris Martenson: So again just to be very clear about this, where do you think we are in that story of the public moving into precious metals?
Robert Mish: On a ten point scale, two.
Chris Martenson: We are at a two, and when we get to nine you will let me know, hey my store is jammed.
Robert Mish: I will not be able to because my phones will be all on hold.
I have suggested a number of sub 5c gold stocks to subscribers and I must admit that it only takes a run to 7c to provide some excitement. When you look back at the great gold stock bubbles of 1985 to 1987 and 1978 to 1980 even thinking of taking profits at 7c looks ridiculous.
If gold stocks suddenly become sought after I would expect silver juniors to outperform due to a limited number of ASX listed companies. In the short to medium-term I cannot see silver stocks going it alone although I would love to be proved terribly wrong.
Potential sales pitch: The gold stocks are finally moving we better get set before the herd moves in.
Some Other Sectors in Brief
Uranium
Was the scene of the wildest bubble since Dotcom with a blow off phase in 2007 that followed a gradual build up from early-mid 2004. Following the bursting of the bubble the sector was in a post GFC recovery phase but suffered due to the Japanese earthquake and fears over Fukishima. There has been some M&A in the mid-caps and majors, however a return to the madness of early 2007 seems very remote at this stage. There have been some strong performers including AGS and AGE and there will continue to be opportunities for stock pickers.
Alternate Energy
I will never forget the quote, “The alternate energy bubble will be like the Nasdaq on steroids”. There have been a number of brief spurts in geothermal, solar, wind and fuel cells but nothing like we saw with uranium. The sector has shown some promising signs, however, in the case of geothermal there have been considerable funds thrown at exploration/drilling for not much return on the scoreboard. With carbon pricing initiatives to commence from July 2012 two new institutions (Clean Energy Finance Corporation (CEFC) and the Australian Renewable Energy Agency (ARENA) have been created to oversight over $13 billion in financing and funding initiatives. This could see renewed interest in the sector, however, it may take further oil price shocks to again see alternate energy attract more attention.
Still a market for the stock pickers and I often suggest investing with funds you don’t need tomorrow. If a bubble forms I would expect that the fear of missing out and the fact that you cannot watch prices trade 24/7 could see it eventually go much further than anyone expects.
Shale Gas
Beach Energy’s (BPT) takeover of Adelaide Energy (ADE) threw my shale gas strategy into complete disarray. Shale gas is now more widely discussed on finance programs (YMYC in particular) and is becoming more mainstream, however, saturation in the US has seen some interest revert back to more traditional oil exploration. Certainly a sector to follow and to see what becomes of the Cooper Basin assets that BPT now control.
Other Threats
Although the outlook for platinum has been reported by some as being “dim” it is one sector that shouldn’t be written off. I have also noted an increase in discussion in diamonds based on rising demand from Asia, however, many would be more likely to declare their love for airlines and load up. This hatred could in fact be of benefit to the diamond sector but you would think it is going to take the mother of all discoveries to fire the sector up in Australia anyway.
Potash/Phosphate were the scene of a number of very strong rallies and despite positive arguments could need more time before they really go again. Watching the movie Contagion again got me interested in the biotech sector and if the next flu season is a bad one I can see another rush for the vaccine stocks.
The rare earths sector suffered in September 2011 on the back of a JP Morgan downgrade of Molycorp, whilst Lynas (LYC) has been the subject of protests in Malaysia with an appeal being lodged on the approval of their temporary operating licence. Regardless of these issues The Australian ran a story from the Wall Street Journal on 12 March 2012 titled, “Rare-earths companies loom as the next market dealings”.
From a purely selfish and biased viewpoint I am hoping that scandium comes in for some attention in the future. Biochar is another interesting proposition I have come across during wider reading and I will probably do some further research just in case.
There is always the possibility that the next speculative bubble could involve something not mentioned or widely known. The key will be to recognise the early signs and look at ways to profit from it.
The broader market in Australia has underperformed the US, however, conditions at present I still regard as being conducive to seeing a sector finally rise to prominence. There is so much to research against a backdrop of negativity that could well lead into something powerful and ultimately destructive.
To finish off here is a great quote from George Soros who has a handy back catalogue:
“Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception. “
Tony J Locantro
Email: tony@locantro.com
Website: http://locantro.com/news/article/free-to-flee
About the Author: Tony Locantro is the Managing Director of Locantro Capital Pty Ltd, Locantro Asset Management Pty Ltd and Gold Australia Pty Ltd. He entered the stockbroking industry in 1998 and was an Associate Director at Patersons Securities Limited until 2010. In 2001 he authored The Green Room: A Guide to Speculating on the Australian Stock Market and is the current author of the newsletter, Locantro’s Life. He has been quoted extensively in the financial press and Dow Jones Newswires, has written articles for Kitco and other websites and also appears on Sky Business News. He is known as a passionate and respected supporter of the junior resource industry.
Disclosure of Interest: Tony Locantro, his companies, employees and associates may have personal interests in the majority of the companies or sectors covered in this article.
Disclaimer: This article is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular reader have not been taken into consideration. Individuals should therefore discuss, with their financial planner or adviser, the merits of each recommendation for their own specific circumstances and realise that not all investments will be appropriate for readers.
-- Posted Thursday, 15 March 2012 | Digg This Article
| Source: GoldSeek.com
