Handling National Risk in Small-Caps

For many small-cap investors, national risk is a fact of life. A speculative resource company might be forcibly nationalised by some tin pot dictator. Or unexpected restrictions could cut off access to entire markets overnight.

It’s the kind of risk that you accept, when speculating in those kinds of stocks. That added risk is often part of why the gains can be so incredible when you get it right.

But when you read the above, what kind of countries did you imagine? Unstable dictatorships? Illegitimate governments clinging to power through propaganda and violence?

How about the United States?

Investors in the fledgling legal marijuana industry took a hit this week. US Attorney General Jeff Sessions took aim at recreational and medicinal sales. And many weed stocks fell.

Roughly two thirds of US citizens believe marijuana should be legal. And states where it has been legalised have seen consistently good outcomes. Drops in violent crime, new jobs created in a legal industry, an influx of tax income. Perhaps best of all, police able to refocus limited resources away from a losing war on cannabis, onto more important issues.

Legal dispensaries have driven criminal dealers out of business. That’s making it harder for children and teenagers to get the drug. And allowed adult users to get it without paying criminals.

The US continues to lead the world on prison population. This presents a massive burden on public finances. Any move that sees fewer people locked up for non-violent must be a good thing.

What kind of politician would prefer to replace free, productive taxpayers with costly prisoners?

What kind of person would want to see more of his neighbours lose their livelihoods and freedom locked in a cell?

But there’s no convincing some people. That’s the nature of progress.

And in the realm of politics, many so-called leaders have spent so long campaigning on dead end issues that it would be career suicide to change.

I can’t speculate on what motivates Jeff Sessions. I can only look at what he’s said and done. And at the results for stock markets.

If you happen to have a few speculative dollars in some of the companies leading the way on legal marijuana, Session’s moves this week may be a concern. It’s a change from the previous US administration’s non-interference in the states on this issue. It also contradicts President Trump’s answer, that, ‘In terms of marijuana and legalisation, I think that should be a state issue, state-by-state.

For pot investors it may be President Trump to the rescue. Not because Trump has suddenly made a cast-iron promise to protect legal weed users and businesses from federal meddling.

No. It seems that Trump and Sessions are growing cold on one another for more personally-motivated reasons. This week, Trump sharply criticised Jeff Sessions for recusing himself from the investigation into links between the Russian government and the Trump election campaign.

With Sessions’ own secret meetings with the Russian Ambassador in 2016 having now come to light, it seems only right he shouldn’t be involved in the investigation. But Trump doesn’t see it that way.

The Trump camp has always been a loose alliance, at best.

The team that propelled him to power are motivated by wildly different issues. That can be a strength, bringing in many different ‘single issue’ voters. But it can also be a weakness when parts of the administration come into conflict.

And it means there’s a lack of unity when Trump throws one of his own people under the bus.

Sessions may be on a personal crusade to drag the US back into the bad old days of the war on marijuana. But with Trump now saying he would not have appointed Mr Sessions as Attorney-General if he had known he would recuse himself from the Russian investigation, I wonder. If Sessions falls on Trump’s sword so that Trump doesn’t have to, who will take up his crusade?

Investors can only hope their stocks will be left to do their business in peace. Just as in any nation with an unpredictable government, fractured by infighting, it’s difficult to know how it will shake out in the long term.

We’re used to risks like this when speculating on projects in certain developing nations. Investing in US stocks, it may come as a surprise. But if you want to capture some of the incredible gains that can happen as a brand-new industry is born, this kind of risk is a part of the package.

Small-cap editor Sam Volkering has already hunted down four leading ASX listed ‘pot stocks’ for his readers at Australian Small-Cap Investigator. And Sam brings the benefits of a full-time, experienced researcher to bear. If anyone can navigate past the risks and pitfalls of this fledgling industry, it’s Sam Volkering.

To find out more about Sam’s recommendations in this exciting, unpredictable new industry, click here.

This week in Money Morning

Greg looked at US markets on Monday, as industrial stocks made new highs and the tech sector lagged behind. Greg wrote a few weeks ago that tech stocks could be topping out, with a 10–15% correction ahead of them. Now quarterly earnings season in the US is kicking in. As Greg wrote Monday, if tech stocks can’t rise on good earning news, it likely means prices are too high and a deeper correction is beginning.

But while most investors have one eye on earnings data, there’s a more powerful force moving the US market. The Fed. The Fed’s guidance on rates is one of its key tools. Both for ensuring there are no sudden shocks to the market from its rate changes, and as a way to ‘talk’ markets into moving where they want. But as Greg explained, productivity growth in the US could force the Fed to deviate from its own guidance.

If uncertainty is on the rise in the US economy, is Australia in danger? Greg explained that we may be partially insulated from the US economy’s woes. Once again, thanks to China. To read why, you can find Monday’s Money Morning here.

Even as the Fed’s plan for interest rates in the US was being thrown into doubt, a similar story was taking place in Australia with the RBA.

Much of the market is convinced that the RBA will keep rates firmly on hold this year and much of the next. But Goldman Sachs Australia’s Chief Economist argues that Australia could weather a stronger currency, following a rate rise.

That would give the RBA more room to move in future, if they needed to cut again in response to future potential crises. But is it even possible? While house prices are strong, Australian consumers seem to be struggling. Private debt levels are at record highs, and consumption growth rates are still shrinking. Greg argued that high house prices are the cause of that consumer weakness. The RBA has created the trap it’s now caught in. Read the details here.

And on Wednesday, Greg looked at the flipside of the coin. The minutes from the RBA’s July board meeting, when it left rates on hold, seemed to indicate an increased chance of a rate rise this year. That flies in the face of what most of the market expected.

Similar to the Fed in the US, the RBA’s unpredictability is creating a confused response from markets. The Aussie dollar rose while stocks fell sharply. Greg sorts through the mess, and explains where it could go from here, in Wednesday’s Money Morning.

In Thursday’s Money Morning, Ryan Dinse looked at a few of the biggest losers in tech stocks for the last decade, and the one problem they all had in common. In retrospect it almost seems obvious. But at the time, few understood how much this one development would change so many industries. Even today, the effects haven’t finished playing out.

Trends this large could devastate your portfolio if you’re holding just a couple of stocks on the wrong side of them. Or they could remake it, with a small investment on the right side. For Ryan’s insights on knowing where you stand, with this tech and others like it, you can find Thursday’s article here.

Terence rounded out the week with an article on the psychology of investing. Understanding your own psychology is as important to trading as understanding the stocks you look at. You can’t make smart decisions about stocks if you don’t know your own biases, or let your fears get in the way. Terence argues that, if you’ve ever put on a rapid series of losing trades, you’re probably a victim of your own mind. Or maybe you’ve made a big gain, but then given it all back to the market. These mistakes are common. And they can be avoided, if you understand the psychology of your own trading. To find out how, read Friday’s Money Morning here.

That was all from us, this week. Tune in on Monday for more. Until then, enjoy your weekend!


Tyler Jefferson,
Editor, Money Weekend

Tyler Jefferson joined Fat Tail Investment Research in 2012. With a background in publishing, he started out as part of the team working behind the scenes with your Editors to bring you Money Morning each day.

When he joined, Tyler was Fat Tail Investment Research’s 12th employee. Today that number has grown to over 50, as more and more readers turn to Money Morning as their source for independent financial analysis and ideas.

Today as Managing Editor, Tyler still edits the articles you read each day. Along with that, he occasionally contributes to Money Morning with his own irreverent take on the most interesting news and opportunities for you.

Money Morning Australia