Q: How can you spot a vegan at a dinner party?
A: Don’t worry, they’ll tell you…
Markets like this require a dose of humour to get through! Because stocks, bonds, currencies, commodities…the current rout is taking no prisoners.
As central bankers make moves to remove the stabilisers from the market, the mood is turning sour as quickly as asset prices are falling.
The consensus mood is almost universally bearish. The question is: will consensus be proven wrong?
With many asset prices at multi-year lows, will this be looked back on as a massive contrarian buying opportunity…or is buying this market today an investing death wish?
The well-worn contrarian quote from that 18th century financier Baron Rothschild goes, ‘The time to buy is when there’s blood in the streets.‘
In his case it was quite literal: he bulked up the substantial Rothschild family fortune by betting big after the carnage and confusion of the Battle of Waterloo.
However, the full quote was in fact, ‘Buy when there’s blood in the streets, even if the blood is your own.‘
Well, there are plenty of investors out there that could relate to that today.
Is it Time to Get Bullish Again?
It’s tough to imagine. Junior resource companies have been falling for two and a half years now, and have lost over 70% on average.
Small Resources Index – a World of Pain
Source: Bell Potter
The worry now is that in the last month the small resources index has crashed through the level set in the GFC. This means it’s now at nine year lows.
Right now it’s hard to think we have seen the worst of it. Until recently, I’ve been pretty bullish. The thing is even just talk of the Federal Reserve dialling back on the current $85 billion buying program caused the market to crash – even while the Fed is merrily still buying $85 billion each month.
If global markets are falling simply in anticipation of tapering, what will happen when tapering actually happens?
In yesterday’s Money Morning I explained how the Bank of International Settlements (BIS) is pressuring all central banks to step off the gas and tighten up monetary policy.
They may be getting their way. It’s not just the Federal Reserve talking about it, but China seems to be actually tightening already. This could have a major effect on commodities and resources in particular. Marc Faber reckons commodities look ‘horrible‘.
A mining exec I was in touch with recently said, ‘It will be interesting to see how the next 12 months plays out. I think there will be a lot of blood on the floor.‘
This strain is showing up in more than just stock prices. Brokers are leaving the industry each month in large numbers. The Australian financial services sector has now shrunk by around 10% from its recent peak.
Everyone is having a tough time. As a measure of retail investor activity, the web-traffic for the stock forums has more than halved in the last six months.
You can understand why. Even last year’s hot trotters are turning into this year’s dog food. Sirius (SIR), the rags-to-riches nickel explorer with the dream project, has fallen 70% in a few months from $5.00 to as low as $1.56 yesterday. Another recent market darling, Linc Energy (LNC), has crashed from $3.00 to $0.78 as of yesterday. There are many more with similar charts.
Sirius and Linc – Sharp Falls in Last Three Months
In recent days I’ve taken profit on some of the winners in the Diggers and Drillers tips, and cut some losers in anticipation of prices falling further. In all, I’ve halved the number of stocks in the portfolio.
But just as this all unfolds, some people in the market are getting very bullish, with talk of this being an outstanding opportunity. We’ve heard that the whole way down of course, but ultimately they may be right. Patience will be the key, as things may well get worse before they get better.
Just as some high profile resource funds are being forced to sell to meet investors’ redemptions, there are other funds out there that are starting to see value and buy ‘quality’ on the cheap. They admit that they will have to be patient.
Others, like mining legend Owen Hegarty, made the case for the current squeeze in mining to make the next bull market ‘stronger for longer‘.
History to Repeat?
Your regular editor, Kris Sayce, is certainly getting more excited by the day. The market reminds him of the collapse in 2008. Back then, when everyone was running for the hills, he tipped a raft of beaten up stocks which went on to put in big triple-digit returns, including gains of 242%, 338% and 458%.
The trigger that Kris saw back in 2008 (along with the torrent of central bank money printing) is happening today – the collapse of the yen.
The yen slumped from late 2012 through to the early part of this year, before rallying in recent weeks. But that rally looks to be over. If Kris is right, he believes that could be the catalyst for another Aussie stock rally.
It’s a risky strategy, but I don’t think I’ve ever seen him so confident.
Dr Alex Cowie
Editor, Diggers & Drillers
From the Port Phillip Publishing Library
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Markets and Money: Think and Invest Like a Venture Capitalist
Money Morning: How Central Bank Zombies Control the Stock Market