This Sector Is an AVOID!

Before relaying all the ongoing fun from the royal commission — assuming you’re not involved, of course — let’s take a quick detour into the world of oil.

From Reuters:

Top oil exporter Saudi Arabia would be happy to see crude rise to $80 or even $100 a barrel, three industry sources said, a sign Riyadh will seek no changes to an OPEC  supply-cutting deal even though the agreement’s original target is within sight.

The Organization of the Petroleum Exporting Countries, Russia and several other producers began to reduce supply in January 2017 in an attempt to erase a glut. They have extended the pact until December 2018 and meet in June to review policy.

Industry sources have linked this shift in Saudi Arabia’s stance to its desire to support the valuation of state oil company Aramco ahead of the kingdom’s planned sale of a minority stake in an initial public offering.

When oil was around US$44 a barrel in mid-2017, I said it was going much higher. I said it was in the Saudis interests for this to happen. I even published a report called the ‘Aramco Fix’, explaining why oil would go much higher in the next 12–18 months.

Aramco is the name of the Saudi’s state-owned oil company. The plan is to sell a 5% stake in what would be the biggest IPO ever. Of course, they want a high oil price to push up the value of that business.

That report wasn’t exactly my most popular. The response was underwhelming. As a result, I was even more confident in my prediction. Who was left to sell! Clearly, there was little interest in the oil market. Everyone was focused on batteries and renewable energy. Oil was dead.

But here we are, not even 12 months later, and Brent Crude is up nearly 70%. I think it’s got more to go before it peaks. But now the story is out, the easy gains are over.

Gold to make a move?

If you want to get in on the next major move in the commodity market, look to gold instead. My recent report on gold received a similar muted response to the one on oil. That is, people clearly think gold is boring, in the same way they thought oil was boring in mid-2017.

All I can say is ‘big mistake’. I don’t know when gold will make its move. I can’t even be absolutely sure it will make a move. But my analysis suggests it will. And when it breaks higher, it will move fast. Click here to read more.  

While I think you have a good chance of making money from gold in the next 12 months, I can’t say the same thing about many financial services stocks. As I mentioned at the start, the royal commission onslaught continues unabated.

Now you might think that from a contrarian perspective now is a good time to look at the sector. True, often the time to buy is when something is on the nose. But in this case, I believe that is a very low probability play.

There is a good chance that the long term impact of this royal commission will be a complete dismantling of bank business models. As I pointed out yesterday, banks are already starting to put their funds management businesses up for sale. Next, the rest of the wealth management arms (including the financial planning networks) will probably go too.

In worse news for the banks though, the share price performance of nearly all listed fund managers has been terrible over the past few months. Here’s a chart showing the major listed players over the past 12 months:

1 Day Relative Comparison 24-04-18

Source: Optuma

[Click to open new window]

I thought fund managers were meant to do well in a bull market?

The best performers over the past year are IOOF Holdings Limited [ASX:IFL] and Platinum Asset Management Limited [ASX:PTM], up just over 10%. Perpetual Limited [ASX:PPT] and BT Investment Management Ltd [ASX:BTT] are down around 20%, while Magellan Financial Group Ltd [ASX:MFG] is flat.

Steer clear of financial stocks

Falling share prices since the start of the year potentially reflect the pricing in of an end to the bull market. If this is the case, it’s bad news for the banks trying to sell their fund management arms.

The way most assets are sold to the market in IPO form, or via a trade sale, is to compare the valuation to current listed peers. Going by this measure, the comparison is not as favourable as it was just a few months ago.

That’s another headache for the banks.

But it’s not as big as the one they’re dealing with right now. The question is, how long will this news cycle go on for? A few more days? Weeks?

I don’t know, but the banks are scrambling. Yesterday, ANZ issued guidance for its half yearly result, due out next week. It disclosed that ‘legal and other costs’ relating to the royal commission would be in the vicinity of $50 million!

Go long law firms! I’d love to know what ‘other costs’ relate to. Lobbyists? If so, it hasn’t been money well spent.

Anyway, now that this is all out in the open, it might be time for a little rally in the banks to unfold. Don’t be fooled though, it will take some time to flush all the cockroaches out.

The sector is a long way from being a buy. AVOID!


Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Greg Canavan’s Investment Advisory.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

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

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

Official websites and financial e-letters Greg writes for:

Money Morning Australia