Down we go again.
After a short bounce, the Dow Jones and ASX 200 are down again.
Were investors premature? Did bargain buyers jump the gun?
Maybe. But the bulk of recent buying might have just been short covering. Here’s how the ever-knowledgeable Greg Canavan explained it in Wednesday’s Money Morning:
‘When traders “short” the market, it means they are betting on declines. In order to short stocks, you first borrow them from someone (for a fee), promise to return them at a later date, and them sell them in the market.
‘You then hope that the share price falls. Assuming prices do decline, you buy the stocks back at a lower price, return them to the owner, and pocket the difference.
‘Overnight, it looks like lots of short sellers bought back stocks (covered their shorts) which lit a fire under prices.’
So does that mean the worst is yet to come? Were these initial declines all just a spook, a precursor for what will happen next?
This exploding market could be your pot of gold
Trump is not a low interest rate kind of guy. I’m sure you’ve heard he’s not all that happy about the current trend of rates.
‘I’m not happy with what he’s doing,’ Trump said in reference to head of the Fed, Jerome Powell. ‘I mean, I don’t know what their [the Fed] problem is but they’re raising interest rates and it’s ridiculous…The Fed is going loco and there’s no reason for them to do it and I’m not happy about it,’ Trump added.
It’s a typical response from a real estate mogul. To Trump, inflation is king. It’s what lifts property prices, sometimes a whole lot in a short space of time. Inflation and debt is what made Trump a billionaire.
And now, Powell is taking away what Trump thinks is a ticket to wealth for the American people. In reality, inflation is terrible for most people. It’s detrimental to households and their ability to afford goods and services.
In an ideal world, there would be no inflation. Money creation would go towards developing new goods and services, rather than biding up prices of what already exists in an economy.
It’s why the Fed is running for the window of opportunity they see now. The US economy is getting strong. It no longer needs the helping hand of low interest rates.
As a result, assets of all kinds will likely fall. Like the tide, interest rates lift all boats. When the tide finally goes out…you get the metaphor.
Yet among a sea of red, there is one market exploding. It’s still green to most investors. But for those who learn about the industry fast, it might be a path to their own pot of gold.
How to win big on cannabis
From Bloomberg Businessweek:
‘Amid the stock market rout on Oct. 10, shares of Aphria Inc., a cannabis producer, jumped as much as 17 percent after a report that tobacco giant Altria Group Inc. was interested in buying a stake in the company. Other pot stocks jumped on the news, and Altria’s shares rose too.
‘Investors have been cannabis crazy, bidding up stocks in pot-related companies…Investor enthusiasm hasn’t been hampered by the fact that most weed stocks lack earnings.’
And it’s not all that hard to see why investors are rushing to the industry. Investors are always looking for quick gains.
They want to buy something and for it to immediately rise. They don’t want to sit for months holding paper losses. Investors also generally like to assume whatever is happening right now will persist into the future.
So if tiny cannabis stocks are rising now, most believe they will continue to rise, at least for as long as it takes them to buy in and sell out for a hefty profit.
Sounds a lot like bitcoin doesn’t it? The crypto climbed ever higher until there just weren’t enough buyers. A couple of events spooked the market and herd mentality took over.
Of course, it’s very easy to say all of this with hindsight. When bitcoin topped US$19,000 I had no idea it would fall. And I’ll bet millions of others didn’t know either.
But back to pot. Fortunes could be made in this market. And if you want to be one of those few you’ve got to start learning as much as possible.
You’re not going to win it big on cannabis if you’re just looking for a quick fix. You’ve got to start understanding this emerging market. Learn how these businesses operate, then sort the goodies from the baddies.
I remember watching Warren Buffett in an interview talk about tech stocks. He had just missed the great tech boom of the late 1990s.
Everyone thought the old man’s style of investing was dead. The turn of the 2000s would usher in a new economy and a new way to invest.
To Buffett this new way of investing (buying anything associated with the internet) didn’t make sense. So he let what seemed like amazing opportunities pass him by.
Buffett likened it to someone making a fortune from cocoa beans. He doesn’t know the first thing about cocoa beans. Nor should he. He’s spent no time studying the stuff.
If he were to jump into the market with little to no knowledge he’d probably lose a whole lot of money. And that’s exactly why he’s happy to sit on the side lines.
He’s honest enough to admit he doesn’t know enough. And because he had no edge, he sees no reason why he should be playing in that market.
The same goes for the rocketing cannabis stocks. Don’t just jump in hoping you’ll make money. First read, learn and study the market and its constituents.
Then, make an intelligent bet.
Editor, Money Morning
PS: Cannabis stocks are the new exciting thing, but before you get caught up in all the highs that come with this so called ‘marijuana stock frenzy’, you should hear what our top stock-picking expert has to say and make up your own mind. Download same Volkering’s free guide ‘Three Golden Rules to for Investing in Pot Stocks’.