The Cure for Itchy Fingers…

Friday, 13th March, 2015

  • A comeback for resources?
  • David versus Goliath

What kind of win rate should an average trader have?

Some will say you should aim for around two winning trades for every losing trade.

Others will say it’s not the win rate that matters, but rather how much you make from your winners and how much you lose on your losers.

But what if you had both? That is, a two-to-one winning ratio (actually, closer to three-to-one), and your average gain across all those buys was an annualised 38.6% return?

Well, that’s how the returns are stacking up for Jason McIntosh and his Quant Trader system. If you haven’t checked out how to join in on these gains, you can do so here.

Is now the time to buy resource stocks?

The following is something I look forward to every year. It’s the US Global Investors’ Periodic Table of Commodity Returns:


Source: US Global Investors
Click to enlarge

Each column shows you the performance of a range of commodities during a given year. The best performing commodity is at the top. The worst performing commodity is at the bottom.

You can see that 2013 and 2014 were rotten years for commodities. This year, only four out of 14 commodities provided a positive return — palladium, nickel, zinc, and aluminium.

And of those four, palladium’s 11.35% gain is hardly anything to get excited about.

Contrast that to 2009 when four commodities produced triple-digit percentage gains and only three commodities ended the year in the red.

Last year was almost as bad as 2008, when only coal and gold finished in positive territory.

(Maybe 2015 will be a good year for coal. It’s a sector I’ve just written about to Tactical Wealth readers. It’s a genuine contrarian play, which I’m backing to pay off over the next 18 months.)

But then some folks (reader’s voice: you, Kris) thought that 2013 could be a turnaround year for commodities. But it wasn’t. It was bad. And it got worse the following year.

The iron ore price has continued to slump.

That has been especially bad news for Fortescue Metals [ASX:FMG].

Not to mention the crude oil price, which today is settling around US$47.17 per barrel.

And then there’s gold. After spiking higher last month, the price has hit the skids. It’s now trading at US$1,158, and some analysts say it could go lower.

Resources analyst Jason Stevenson has been calling for the gold price to go lower for most of the past 18 months.

He recently told his subscribers:

A couple of readers have written in asking whether I’m still bearish on gold. The answer is most definitely yes!

You must understand that it’s only worthwhile buying gold to hedge against governments defaulting on debt. As I’ve explained in the past, the gold price rose into 2011 and 2012 because mass European sovereign debt defaults were on the cards. At the time, the bond yields of Portugal, Italy, Greece and Spain went through the roof. Punters were scared to own bonds.

Gold rocketed until European Central Bank (ECB) President, “Super” Mario Draghi saved the day by saying, “I’ll do whatever it takes to save the euro.” Gold then crashed into 2013.

As a devout gold bull, it’s hard for me to face the reality that gold could fall further. Jason has his target price for the metal around US$931 per ounce. That’s more than US$200 below where it is today.

That’s enough to strike fear into any gold investor. Although it shouldn’t. If you’re a real gold investor, and you understand the reasons for holding it (insurance against government manipulation of money) then you’ll no doubt hold your gold forever, and will buy more if the price falls.

In fact, as much as it pains me to admit it, I actually agree with him that gold will fall further. As long as the gold price remains above US$1,000 many of the marginal buyers who bought gold near the peak in 2011 will stay in it.

But if it falls below that key level, and gives the appearance of falling much further, those marginal buyers will rush to the exit.

That could very well take the gold price to Jason’s US$931 target, or even lower.

As Bloomberg reports:

Gold headed for a second weekly decline after the longest slump in 17 years as investors weighed data for clues on when the Federal Reserve may raise interest rates and the dollar traded near a decade-high.

Bullion for immediate delivery was 0.4 percent higher at $1,157.89 an ounce at 8:36 a.m. in Singapore, according to Bloomberg generic pricing. Prices fell for a ninth day on Thursday to complete the longest losing run since 1998, and are headed for a 0.8 percent fall this week. The metal dropped to $1,147.72 on March 11, the lowest level since Dec. 1.

Gold erased its 2015 gains last week as better-than-expected U.S. jobs data spurred speculation the Fed will raise rates for the first time since 2006, boosting the dollar.

There’s no doubt that investors have the same attitude to gold that they have to other commodities — they hate it.

That’s understandable when the gold price fell 28% in 2013, 1.7% in 2014, and dragged a whole load of gold mining stocks down with it.

For example, OceanaGold Corp [ASX:OGC] is down 28%. Newcrest Mining Ltd [ASX:NCM] is down 70% since 2011. And St Barbara Ltd [ASX:SBM] is down a whopping 92%.

But, if you’re a contrarian investor, this is typically the type of market and opportunity you look for. That’s Sound Money. Sound Investments. editor Greg Canavan’s view.

Of course, Greg isn’t buying gold stocks just because they look cheap. Greg knows that other factors come into play, such as the outlook, and importantly, the technical trend on the chart.

Greg has found a number of gold stocks that meet his tough selection criteria. He has recently recommended two of them. You can check out the details here.

Whether this is the real bottom of the gold and commodities market is anyone’s guess. I’ve tried picking the rebound of commodities stocks before (wrong in 2013, right in 2009) and haven’t always got it right.

But one thing I do know, when commodities markets turn, they turn in a big way. 2008 was a terrible year for commodities stocks (like 2014), but 2009 turned out to be one of the best in living memory.

Don’t write off the chances of a commodities rebound yet.

The big infrastructure myth

I know it hasn’t been a popular view to back the idea of allowing first home buyers to use their super to buy a home. But after all, I’d rather folks got something out of super now, rather than risk leaving it there for the government to grab.

And I’d rather the government took one extra step — allow people of any age to withdraw their super for any reason.

Not surprisingly, the biggest opponents to giving you access to your super are the industry super funds. As the Herald Sun reports:

Treasurer Joe Hockey’s proposal to make superannuation more flexible by allowing super savings to be used as a home deposit could also destroy the property market, the group says.

And it could disrupt superannuation funds’ investments in assets important to long-term growth such as infrastructure, Industry Super Australia says.

The report goes on:

Mr Whiteley’s group lobbies for funds that hold about $190 billion in assets.

He claims allowing young people to withdraw their savings would disrupt the cash flow that the funds relied on to invest in infrastructure.

“If you disrupt that predictability of cash flows, the funds may decide to invest less in non-liquid assets such as infrastructure and that could mean lower returns to members.”

These investments were also drivers of economic growth — an important aspect of future-proofing the nation from the cost of an ageing population, he said.

It’s a common myth that infrastructure alone drives economic growth. Infrastructure only helps with economic growth. It isn’t the driver of it.

Take westward expansion in the US during the 19th century. The railroads helped drive expansion and growth, but that was only because there was a demand for railroads.

People had already begun moving west. The railroads helped them get there and back again faster. Or more specifically, the railroads helped transport agricultural commodities from the West to the East.

Western farmers could produce crops more economically than those on the East coast due to the wide expanses of land, and new technology. With the arrival of the railroads, they could send their produce East and drive down prices.

The same went for iron ore and steel producers in the US mid-west. Railroads allowed them to transport their finished product quickly and cost effectively to the major cities, most of which were still on the east coast.

But that only worked because there was the beginning of a thriving economy that demanded these goods.

So it’s time folks calmed down about the importance of infrastructure in driving the economy. If the Aussie economy can thrive after the end of the resources boom, then infrastructure will naturally follow.

You can see the folly of spending on infrastructure for the sake of it in two of the toll road companies listed on the ASX. I wrote about this in today’s Money Morning.

Shareholders of RiverCity Motorway [ASX:RCY] and Brisconnections [ASX:BCS] will know that infrastructure projects can easily turn bad. Both companies have gone bust and are in various stages of being wound up.

This is the peril of owning an unlisted infrastructure asset within a super fund. For a start, because it’s unlisted, can you necessarily trust the valuation?

And because an industry super fund may own an infrastructure project outright, how can you be sure the cashflows are real?

Many of the infrastructure funds in the early 2000s got into trouble because they kept borrowing money against rising asset values. That worked for as long as they could get someone to keep raising the value.

But when the financial meltdown hit in 2007 and 2008, those valuations couldn’t stick and infrastructure funds collapsed. Remember Babcock & Brown?

This is the real reason why the industry super fund lobbyists worry about cash flowing out of their funds. As long as reported cash flows remain within the funds, they can make sure any infrastructure project they own remains liquid. But as soon as cash flows start leaving the funds, that puts them in a spot of bother.

That’s especially so if they need to rely on valuations to borrow against infrastructure asset prices.

So when you hear the funds management industry bleating on about the need for infrastructure spending, and the need to keep your super money locked up for longer, think about why they’re really saying that.

It most certainly isn’t because they care about your retirement.

Cheers,
Kris


[Note: The following is an extract from Jason McIntosh’s 16th January weekly update to Quant Trader subscribers.]

Pitting David against Goliath
By Jason McIntosh, Quant Trader

This is the stuff of legends. The smaller player overcomes the odds to beat a larger rival.

It’s a story we all know well.

We often link David versus Goliath encounters to the sporting field. At other times the battle may pit an individual against a big corporation.

But is a match-up between seemingly unequal opponents relevant to stocks?

I think it is. The best performing stocks will often be outside the major companies.

I read an interesting article this week. It was by Tactical Wealth editor Kris Sayce.

Kris makes an excellent point. He says retail investors have an edge over investment firms.

Their edge is that they can buy meaningful stakes in smaller companies.

Big investment funds can find it difficult to trade in and out of smaller stocks. Many of the funds narrow their focus to the ASX 200. This naturally leaves a lot of opportunities behind.

So what’s this got to do with Quant Trader?

You’ll remember Quant Trader doesn’t signal the biggest ASX stocks — typically the top 40.

It’s not that trading the largest companies is unprofitable. Quant Trader just isn’t targeting these businesses.

Kris’ article was a prompt to do something.

Around this time of year, I like to look at the best performing stocks of the past 12 months. It’s always fascinating to see how big uptrends evolve.

Have a look at the list below. It shows the ASX 300’s top 10 performers during the last year:

  • Liquefied Natural Gas [ASX:LNG] +567%
  • Qantas [ASX:QAN] +123%
  • Northern Star Resources [ASX:NTS] +112%
  • Transfield Services [ASX:TSE] +106%
  • Corporate Travel [ASX:CTD] +104%
  • Sirtex Medical [ASX:SRX] +100%
  • Vocus Communication [ASX:VOC] +94%
  • Chorus [ASX:CNU] +92%
  • Capitol Health [ASX:CAJ] +91
  • Indophil Resources [ASX:IRN] +90%

(This list comes from www.morningstar.com.au on 15 Jan 2015.)

Most of these stocks aren’t household names. Not one of them makes the ASX 50. Qantas is the only company to come close.

They are mostly relatively small companies. I suspect few traders — or brokers for that matter — would have even heard of some a year ago.

These are the type of opportunities Quant Trader aims to identify — small to medium size businesses that get a lot bigger.

An emerging company will naturally have stronger growth potential than most big businesses. That’s why share price performance can be stronger than the majors.

Ask yourself this. Which stock is more likely to double in the next two years — a company in the ASX top 50 or a rapidly growing medium size business?

A member recently made a suggestion. He said Quant Trader should just track the ASX 200…why bother with stocks no one knows.

Quant Trader does bother. It looks well beyond the top 200, into the depths of what are effectively anonymous businesses. This is where many of the best opportunities exist.

You may find this interesting. The best performing long signal to date is AMP Capital China Growth Fund [ASX:AGF]. At yesterday’s close it was up 30%.

So how big is AGF?

Quant Trader uses a custom algorithm to rank stocks. It gives a similar result as if ranking by market capitalisation.

AGF’s rank was 311 at the time of the buy signal. Not high enough to make the ASX 300.

The second best performing long signal is Chorus Limited [ASX:CNU]. It was up 26.4% at close of business yesterday.

CNU is also outside the largest 300. It comes in at 383.

In third position is Air New Zealand [ASX:AIZ]. It’s currently up 25.5%.

And guess where AIZ ranks…538. This stock doesn’t even make the cut for the All Ordinaries.

I could go on. But let’s speed this up a bit. I’ll tell you the average rank for the top 20 companies in the portfolio. It’s 309. That’s the average rank at the time of the entry signal.

That’s not to say all small stocks will do well. They won’t.

But I think it’s interesting. You can do very well in stocks without buying a single blue chip.

2015 will produce a new list of top performers. I’ll be watching with interest to see how many Goliaths make the honour roll.

My bet is it will be similar to last year. The weight of numbers should easily favour the Davids.

Quant Trader will be scanning these ‘unknowns’ for movement!

Jason McIntosh,
Quant Trader

Publisher’s Note: We have just reopened the doors to new members for Jason’s Quant Trader service. But the doors close again at midnight Monday. If you haven’t yet experienced Jason’s Wall Street-style trading, you can check out full details here.