Bear Market


Peak Dow for Stocks?

January 31, 2013 by · Leave a Comment 

The Daily Reckoning

Well, the stock market’s having a well-deserved break after motoring ahead recklessly for the past few months. The bulls will take comfort in this. They’ll say a pull-back should not surprise after such a strong run…that it’s ‘healthy’.

Indeed it is. And if you look at a short term chart like the one below of the Dow Jones Industrials index, you couldn’t help but agree. Since bottoming in mid-November 2012 at around 12,500, the Dow has added nearly 1,400 points. That’s an 11% gain in a little over two months. Momentum indicators such as the RSI (top of the chart) and MACD (bottom of the chart) are in ‘overbought’ territory and the index is well above the 200-day moving average (red line).

So time for a pullback, right?

Source: StockCharts

Yep. A good ole pull-back before we’re off to the races again…

But hang on a minute. Let’s change the context with the same chart in a different timeframe. (Don’t you love charts, you can slice them up any way you want to get your point across!) So in that spirit here’s a chart of the Dow Jones Industrial Index over 10 years. Same index, different time frame.

And to make it interesting, it’s a weekly, rather than a daily chart. That is, the data points are weekly rather than daily…which helps to reduce some of the ‘noise’ that comes with long term daily charts.

And here’s what you get…

Source: StockCharts

As you can see, the Dow Jones is bumping up against the highs of 2007. Does this mean anything? Well, it’s a psychological barrier, that’s for sure. Buying stocks at Dow 14,000 in 2007 didn’t turn out so well.

And while we’re not sure that many traders actually remember back to 2007, there must be a few out there who can recall events further back than a few months.

At the very least you can expect some back and forth around this important psychological level. We’re not making any predictions as to which way it will eventually break. But you can be pretty sure that if and when it does punch through that level, it should surge higher again from purely a momentum perspective.

But if it can’t manage to do so…the formation of a ‘double-top’ portends some pretty nasty action ahead.

We’d prefer to sit on the sidelines to watch the outcome. We want no part in the craziness. Economic stagnation and a rising stock market make for strange bedfellows. This weirdness makes us recall a statement made by the world’s pre-eminent physicist of the 18th century, Isaac Newton, after he lost his shirt in the South Sea Bubble:

‘I can calculate the motions of the heavenly bodies, but not the madness of people’

We concur. But what makes this market even more treacherous is that there is no discernible bubble in stock prices based on traditional methods like price-to-earnings ratios. The bubble is in the system itself…in the creation of credit…

It is this vast creation of credit which bubbles to the surface, finding an outlet in various asset markets…junk bonds and other forms of corporate debt, government bonds, blue chip stocks. But little of it finds its way into productive investment. Easy money tends to find an easy use. Genuine investment and productive endeavour are hard.

Greg Canavan
for The Daily Reckoning Australia

Join me on Google Plus

From the Archives…

Shale the Conquering Hero!
25-01-13 – Dan Denning

The Nobel Prize for Quack Economists Like Stiglitz
24-01-13 – Bill Bonner

The Real Story Behind Germany’s Gold Recall
23-01-13 – Byron King

At the Mercy of Financial Repressionists
22-01-13 – Dan Denning

Walter Russell Hall: From Rebellion to Bullion
21-01-13 – Kris Sayce

Similar Posts:

More articles from The Daily Reckoning….

The RBA’s Interest Rate Bait Isn’t Attracting Many Bites

January 31, 2013 by · Leave a Comment 

The Daily Reckoning

The ABC reports that, despite the recent interest rate cuts by the RBA, it’s having little effect on borrowing:

‘Official figures show Australians are taking out home loans at the slowest annual pace recorded, indicating the property downturn may be far from over.

‘Figures from the Reserve Bank show total lending to the private sector grew 0.4 per cent in December, with the amount Australians borrowed rising by only 3.6 per cent last year.

‘The data shows housing credit remains the most consistently robust category of borrowing, with a 4.5 per cent rise over the past year.

‘However, that annual growth rate is the slowest in the Reserve Bank figures which go back to 1977.

‘Home lending growth of 0.3 per cent in December is also one of slowest monthly increases recorded.’

Is this really surprising though? As much as the RBA wants to generate another housing boom to replace the quickly expiring mining boom, people aren’t quite that gullible. Not everyone, anyway.

When interest rates start scraping the bottom of the barrel, the creation of credit happens not through central bank determination, but rather through the credit worthiness of borrowers. Judging from the latest borrowing statistics, most credit-worthy borrowers have already passed through the banks’ gilded doors during Australia’s long residential property boom.

Those few who haven’t can smell the RBA’s bait and don’t want a bar of it. And you can hardly blame them… 30 years of debt servitude to own what is essentially a depreciating asset. Only the land appreciates in value and it’s appreciation in recent decades is all out of line with economic fundamentals.

A credit boom in Australia started the run, and a credit boom in China (which pushes up our national income, which increases our borrowing capacity) is prolonging it.

Not for much longer, we say…again.

Which should make the upcoming Federal Election an interesting one. It’s still more than 8 months away, but that’s plenty of time for China’s latest credit surge to turn ugly. If that’s the case, it will be a very difficult election for Labor to win.

They’ll have a mining tax that’s not generating any tax (but they’ve spent the proceeds anyway) and a carbon tax that’s hurting ‘working families’ and not making a bit of difference to the overall carbon emissions, not on a global scale anyway.

Abbott’s pitch/bribe of abandoning these taxes will be very compelling.

Just why Labor decided to go for such a long term campaign we have no idea. We’ve read nothing about it, mind you. We think political watching is one of life’s great time-wasting activities.

But we do think it just heaps another layer of uncertainty on Aussie investors. Especially as the pollies will be coming out of the woodwork with plans, ideas, bribes and fixes to win an electorate over by September.

We’re one month down so far this year…and it’s been a very good one for punters. A positive January usually portends a positive year. But genuine investing is all about risk and reward. And to get a reward in this type of market, you have to take an inordinate amount of risk.

Greg Canavan
for The Daily Reckoning Australia

Join me on Google Plus

From the Archives…

Shale the Conquering Hero!
25-01-13 – Dan Denning

The Nobel Prize for Quack Economists Like Stiglitz
24-01-13 – Bill Bonner

The Real Story Behind Germany’s Gold Recall
23-01-13 – Byron King

At the Mercy of Financial Repressionists
22-01-13 – Dan Denning

Walter Russell Hall: From Rebellion to Bullion
21-01-13 – Kris Sayce

Similar Posts:

More articles from The Daily Reckoning….

The Great Opportunities in Small-Cap Stocks

January 31, 2013 by · Leave a Comment 

The Daily Reckoning

For the past year we’ve had our eye on one index.

And for most of the time it hasn’t been a pleasurable experience.

In fact, if you accused us of being masochistic by frequently looking at the chart…well, we couldn’t argue with you.

But that started to change from Christmas Eve.

That’s when the index that was causing so much pain, finally turned. We’re talking about the S&P/ASX Emerging Companies Index [ASX: XEC]:

Source: Google Finance

Here’s why watching this index was so frustrating…

Most times at the beginning of a stock rally it’s the small-cap stocks that take off first. Why? Because that’s the time when buying stocks seems crazy. The market may have fallen or tracked sideways for a time.

When stocks behave that way, the last people you expect to jump into the market are the investors who are looking for safe and low-risk stocks.

The investors usually attracted by falling or sideways markets are those looking to buy some of the riskiest and most beaten-down stocks on the market, namely small-cap stocks.

But you know what they say, ‘past performance isn’t a guarantee of future results’. That was certainly true in 2012.

Sure, stocks took off early in the year. But it didn’t last. Because when blue-chip stocks kept running, small-cap stocks didn’t. Figuratively speaking, small-caps fell off the perch on to the floor…and then fell off the floor into a hole!

But things started to look up again over the Christmas holiday and through January. The question for small-cap investors (heck, any investor) is whether the rally can continue.

We’re betting it can, and here’s why…

It’s important to look back and figure out why high-risk/high-return small-cap stocks didn’t do as well as the relatively safe and lumbering blue chip stocks.

The answer is dividends. That’s right, it sounds counter-intuitive. Dividend stocks are supposed to be low-growth stocks. They’re supposed to be the stocks that have finished growing and so they choose to pay excess cash as a dividend rather than growing the business.

Because of that, typically (but not always) dividend-paying stocks lag growth stocks. But that’s not how things have shaped up over the past year.

Since last February big dividend payers Commonwealth Bank [ASX: CBA] and ANZ Bank [ASX: ANZ] are up more than 22%, while growth stocks BHP Billiton [ASX: BHP] and Rio Tinto [ASX: RIO] are barely breakeven.

That’s all due to falling Aussie interest rates. Investors, especially retirees living off investment income, saw their income drop as the Reserve Bank of Australia (RBA) started cutting interest rates. In order to protect their income they’ve had to take more risks.

That means shifting out of safe bank savings accounts and buying dividend-paying shares. Make no mistake, that’s a big shift, and it shows that investors are desperate to move from almost risk-free savings account to much higher risk share investments…just so they can maintain their income.

But as we say, that trend may have changed. Having lagged blue-chips, small-cap stocks started to regain some of the lost ground during the first month of the year. Our bet is that this will continue.

Yes, analysts predict the RBA will cut rates further this year (the RBA’s first meeting of 2013 is next Tuesday), but having pushed blue-chip dividend stocks up so far already, many of those stocks are far from being the type of safe and stable income stocks most savers are looking for.

They are what we call, ‘priced for perfection‘. That means the share price has already built in every possible bit of good news. If the company disappoints the market by not growing profits or by not increasing the dividend fast enough, the share price could fall hard.

So if buying dries up for the big stocks, investors and fund managers will have to look elsewhere. That means looking for growth and value plays. That is, stocks that have the potential to grow quickly, and those trading at a big discount to fair value.

Looking at the chart above, and based on what we’ve seen in the market, there are plenty of great opportunities in small-cap growth and value stocks at the moment.

As always, investing in small-caps isn’t risk free, but we’ve said for some time now that small-caps are trading at the best valuations since 2009. And if 2009 taught us anything it’s that when a rally starts you’ve got to be quick, because before you know it other punters will have snapped up these stocks and it may be a while before the next great opportunity appears.

There’s no question in our mind that fortune is favouring small-caps at the moment, and that looks set to continue over the coming months.

Regards,
Kris Sayce
for The Daily Reckoning Australia

Join me on Google Plus

Special Article
Australian Small-Cap Investigator:
How to Make Money From Small-Cap Stocks

From the Archives…

Shale the Conquering Hero!
25-01-13 – Dan Denning

The Nobel Prize for Quack Economists Like Stiglitz
24-01-13 – Bill Bonner

The Real Story Behind Germany’s Gold Recall
23-01-13 – Byron King

At the Mercy of Financial Repressionists
22-01-13 – Dan Denning

Walter Russell Hall: From Rebellion to Bullion
21-01-13 – Kris Sayce

Similar Posts:

More articles from The Daily Reckoning….

The Pipe Dream (Reposted)

January 31, 2013 by · Leave a Comment 

Here is a little something reprinted from March 9, 2009 that might help span the gap for my writers block right now. I should have something new by Sunday.

The government is going to stimulate the economy and create jobs with this multi Trillion dollar plan. It’s a little like the Marshall Plan in reverse. We are going to get the money before the disaster, not after it. The reasoning is, we get the free martini and the deck chair to sit in. Logic states that if you’re lounging in a deck chair enjoying the band, you can’t be standing in line to board the lifeboats.

Giving hundreds of billions to AIG is not going to increase jobs or stimulate the economy. This company is on life support, and we don’t even know why. This has to be a bill for previous consumption (financial insurance bets). We didn’t eat the meal, but we get to pay the bill. Add insult to injury, we have massive layoffs.

Interestingly there are two different types of layoffs. In the private sector, the layoffs are the result of a lack of consumption, car sales are in the dumps and real estate has gotten too real. In the government sector, the layoffs are a result of decreasing tax revenues, teachers and police. Notice if you’re in the latter group your workload increases and your wages don’t. It might be a good thing, less education makes for dumber criminals.

We couldn’t afford to spend the money when times were good and now we can??? It doesn’t take a pencil and paper to figure out that we have been shorted a couple of cases of whiskey, on this order!

The government isn’t creating new long term jobs. These jobs have to disappear when funding stops. Of course when you think about it, four years is a long term job in the government sector.

We need to invest in the private sector and focus on building items that people want to consume. Give that a thought or two. Look at all the business expenses the owner has to outlay for pension, health care, unemployment and taxes before he even hires one person. The government already has its hand in your till.

A lot of new entrepreneurs in California are starting pot farms; there are no government startup costs, fees or taxes. Plus the state offers a free vacation plan if you get caught.

A world war seems to have pulled us out of the depression in the 1930’s. The government was buying from the private sector, tanks ships planes and armaments. The private sector needed employees to fill the government order. So if we carry this forward to today, a government contract to purchase four million General Motors vehicles could be a hell of a stimulus to the economy. Give the cars to the people that didn’t act financially irresponsible. It’s their savings that the government is spending anyway.

Of course, it’s probably not in the cards and that’s what a pipe dream is all about; there is no realty, just a lot of smoke and government mirrors.

Read more….

Gurjarat NRE Coking Coal rejects Jindal Steel takeover bid

January 31, 2013 by · Leave a Comment 

Gurjarat NRE Coaking Coal, the Australian subsidiary of Indian metallurgical coal miner Gujarat NRE Coke, has rejected a takeover bid made by Jindal Steel and Power (JSPL).

Read more….

Deals this week: Sandstorm Gold, TMAC Resources, Brigadier Gold and more

January 31, 2013 by · Leave a Comment 

Canada-based Sandstorm Gold has concluded an agreement with Premier Gold Mines to acquire common shares and warrants, representing a 43.2% stake in Premier Royalty.

Read more….

January’s top stories: Rio Tinto writedown and space miner targets asteroids

January 31, 2013 by · Leave a Comment 

January saw Rio Tinto report $14bn in writedowns related to its aluminium assets in Mozambique, while Deep Space Industries presented its plans to mine asteroids. Mining-technology.com wraps up the key headlines from January 2013.

Read more….

Phase 2 of Esperance Port iron ore plant approved

January 31, 2013 by · Leave a Comment 

The Esperance Port Authority in Western Australia has secured state government approval for the next phase of a multi-user iron ore facility (MUIOF) within the premises of the port.

Read more….

Brent futures to trade high on Israel’s Syria hit MCX too

January 31, 2013 by · Leave a Comment 

Chinese PMI fared 50.4 in January according to the National Bureau of Statistics and China Federation of Logistics and Purchasing, an official agency.The reading is below the mark of 51 for January and 50.6 in December as estimated by Bloomberg.

Read more….

MCX Natural Gas: Next bull run expected only on close above 180

January 31, 2013 by · Leave a Comment 

Intra-day traders are advised to sell natural gas below178 with stop loss of 180 and wait for the target near 176 and 174 for the day.

Read more….

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