This Stock Will Warn of the Next Credit Crisis

This Stock Will Warn of the Next Credit Crisis

The Aussie market looks like having a breather today. The Dow and S&P 500 fell 0.25% and 0.3% respectively overnight, while oil prices fell almost 4%. Gold was up nearly US$10 an ounce, to $1,183, while US Treasuries gained.

In other words, it was ‘risk-off’ trading session as investors looked to lock in profits after a few months of very good gains.

Is this the start of a deeper correction?

It could be. But if it is, it shouldn’t surprise you. Check out the chart below, which shows the ASX 200 index. Since the ‘Trump Reversal’ in early November, the Aussie market has screamed nearly 800 points higher.

Click to enlarge

After such a strong rally, it would be out of the ordinary for a correction not to unfold. It’s simply how markets work. The question is, does it start now or will it keep pushing higher?

I have no idea. As a guess, it wouldn’t surprise me to see the market continue higher until it gets close to 6,000 points. That was the 2015 market peak, and represents a major area of chart resistance.

From a technical or charting perspective, it makes sense that a major correction would start from that area. But the market doesn’t make sense, and will do what it wants regardless of my opinion.

The best way to approach it is to expect a correction, and let it happen without too much concern. The fact is the market looks quite strong here. The trend is headed higher, and that’s bullish.

So keep this in mind when the correction does get underway. And ignore the bearish voices that will talk about the ‘Trump rally’ turning into a crash.

On that note, let me show you a chart of a stock that I call my ‘credit crisis barometer’. I’ve been tracking this for my subscribers at Crisis & Opportunity for the past few years…and I wrote about it in Markets and Money last year too.

The rationale is that if another credit crisis is REALLY brewing, you’ll see the evidence surface in certain companies’ share prices first. In other words, the market will throw off warning signs that something major is going down.

If you follow these signs, you won’t get out at the top (no one can do that) but you will get out before the proverbial hits the fan.

And if you want to be a decent investor, this is the attitude you need to take. That is, you can’t sit on the sidelines worrying about another credit crisis. You will simply miss too many opportunities.

And if you’re worried about missing too many opportunities and watching your life go by sitting in a miserly term deposit, the alternative is being in the market and stressing about the credit crisis that you expect (and know!) will hit at some point.

It’s stressful either way.

Stressed is not a good state to be in. It will probably kill you before the ‘next’ credit crisis blows your portfolio up.

But investing doesn’t have to be a stress fest. You just need to learn to let the market guide you. Which brings me to my ‘credit crisis barometer’ stock.

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The company is Macquarie Group [ASX:MQG]. Every facet of its business requires the free flow of credit around the world. If credit conditions are tightening, you’ll see it in MQG’s share price.

But as you can see below, MQG’s share price looks very healthy indeed. Yesterday, it broke out to its highest level since 2007!

This chart tells you that credit conditions are getting looser, not tighter. If you cast your mind back to the heady days 2007, MQG was involved in an attempted leveraged buyout of Qantas.

Click to enlarge

We’re nowhere near that point of financial recklessness at the moment, but MQG’s recent play at Tatts Group [ASX:TTS] suggests that things are heating up again.

At this point, you can curl up in a shell and think, ‘Here we go, financial stupidity is back, I’m outta here.’

But you can’t make moral judgements if you want to do well in the market. The fact is, the easiest way to make money in times of financial stupidity is to join in.

Just don’t drink the Kool Aid. Always keep an eye on the exits.

For the record, I don’t think we’re close to an exit point. Things feel like they’re just starting to heat up. That might make no sense to you, given the big rally global markets have enjoyed since the 2009 bottom.

But as I always remind you, markets only make sense in hindsight.

Governments and central banks are invested and involved in markets like never before. The intervention and manipulation has been extraordinary. Just last year, bond yields went negative across parts of the world, thanks to central bank buying.

And you expect the market to make sense?

To start getting bearish on the overall credit cycle, I’d want to see MQG’s share price start to reverse and head into a longer term downtrend. But given it’s just broken out to a near 10-year high, that’s a low probability outcome.

Playing the markets is akin to playing probabilities. Making big bets on low probability outcomes is high risk. In the same way, betting on another credit crisis right now comes with a very large opportunity cost.

I know it’s a pervasive fear. But there is simply no evidence of another credit crisis unfolding anytime soon.

We’ll get a correction, for sure. But a correction is not a crisis.


Greg Canavan

Greg Canavan

Greg is the Managing Editor for Money Morning. He helps investors preserve their wealth over the long term using a method known as value investing. Lucky for Money Morning readers, he imparts some of this knowledge on them three times a week with editorial spots.

Greg Canavan is a feature Editor at the Money Morning and is the foremost authority for retail investors on value investing in Australia.

He is also the Editor of Crisis & Opportunity. An investment publication designed to help investors profit from companies and stocks that are undervalued on the market. Greg is the former head of Australasian Research for an Australian asset-management group and has appeared on CNBC, Sky Business’s ‘The Perrett Report’ and Lateline Business. He has written articles for The Sydney Morning HeraldThe Australian and Greg’s aim is to help you create a portfolio of stocks based on sound, proven, investing principles. His system for identifying stocks trading beneath their ‘intrinsic’ value combines a big picture understanding of the financial markets with a thorough valuation analysis of individual securities.

Greg’s method of investing is not about taking huge risks and rushing into big positions. He investigates highly profitable companies trading at a reduced premium to their net asset value, or ‘equity’ value as he puts it – and passes that research on to his subscribers to incorporate into their financial plan as they see fit.

With Greg’s help, you can implement a long-term wealth building strategy into your financial planning, be better prepared for the tough financial challenges ahead and stop making the basic, costly mistakes that most private investors make every time they buy a stock.

To find out more Greg’s investing style and his financial worldview take out a free subscription to Money Morning here.

And to discover what a company’s profitability reveals about its true value…and more importantly how you can use that knowledge to become a better, smarter investor, take out a 30 day trial to his value investing service Crisis & Opportunity here.

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