What a Bargain!

  • Don’t be greedy
  • There’s still plenty to worry about
  • Earnings fall, expectations stay the same

From Bloomberg:

Sydney’s median house price has fallen below $1 million after recording a second consecutive quarterly drop for the first time in five years, new data shows.

Over the March quarter, the harbour city’s median house price dropped 1.5 per cent to $995,804, with apartments slipping 0.7 per cent to $656,166, according to Domain Group’s March House Price Report released on Thursday.

I don’t really have much to say on that.

Except to say that we wonder how anyone can claim Aussie house prices aren’t ridiculously high when the median price is almost $1 million.

We’ll leave it at that.

On to the markets…


Overnight, the Dow Jones Industrial Average gained 42 points, or 0.2%.

The S&P 500 index gained 1.6 points, or 0.1%.

In Europe, the Euro Stoxx 50 index climbed 1%. The FTSE 100 closed up 0.1%.

In Asian markets, the Nikkei 225 index is currently up 2.6%, while Hong Kong’s Hang Seng index is 1.8% higher.

In Australia, the S&P/ASX 200 index is currently up 46.8 points, or 0.9%.

On commodities markets, the oil price has taken off. West Texas Intermediate crude oil is trading for US$44.24 per barrel. Gold is trading at US$1,247 per ounce.

The Aussie dollar is worth 78.04 US cents.

Don’t be greedy

The US stock market is edging back towards its record high. But that doesn’t appear to be helping the hedge fund industry.

As the Financial Times reports:

Hedge funds have suffered their worst quarter in seven years after more than $15bn was pulled out by investors starting to fight back against the high fees being charged across the industry.

The total amount invested in hedge funds fell to $2.86tn in the first three months of the year, marking the first time since 2009 that the sector has faced two consecutive quarters of net outflows, according to data from Hedge Fund Research.

That’s not good news for the hedge fund industry.

Of course, high fees on their own aren’t a reason for investors to pull out. Hedge funds have always charged high fees. They typically use the ‘2 and 20’ model to calculate them.

That means charging 2% of the assets under management, and then 20% of the profits made. It’s a nice little earner. And it’s no wonder hedge funds are keen to use leverage as a way to boost their returns even further.

That works great…when the hedge funds make a profit. It doesn’t work quite so well when they don’t.

A quick scan of the hedge funds monitored by Bloomberg suggests that things aren’t looking good so far this year.

Of 1,897 hedge funds, only 787 have made a positive return so far this year. That’s compared to a year-to-date return of 3.9% for the Dow Jones Industrial Average, and 2.9% return for the S&P 500.

Over the past one year, things are even worse for the hedge fund industry. Only 674 funds have achieved a gain greater than zero.

Meanwhile, the Dow is up 0.8% and the S&P 500 is up 0.2%.

One of the biggest losers among hedge funds is Pershing Square, run by famed Wall Street investor, Bill Ackmann. Its main fund is down 20.2% so far this year, and down 40.5% over the past 12 months.

That’s not great, by anyone’s standards.

It didn’t help Pershing Square that one of its biggest fund holdings is Valeant Pharmaceuticals Inc [NYSE:VRX]. After soaring to US$263 per share last August, since then the stock price has…well…take a look:


Source: Bloomberg
Click to enlarge


It’s now trading for US$33.53 per share, down 87% from the peak.

Of course, not every hedge fund has performed this poorly — although some have done worse. The worst recorded return is a 90.6% fall in value of the Altavista Capital India Fund.

Not much we can say about that.

If you’re wondering about the relevance of this, it’s to make the point that it’s important for investors to understand the risks of investing, and to know their limits.

As I mentioned a couple of days ago, we sent a note to Microcap Trader subscribers, recommending that they lock in a 1,120% on a stock we tipped less than a year ago.

We didn’t issue the sell recommendation because we think it has suddenly become a bad company. We recommended selling because we didn’t want to be greedy.

A 1,120% gain is big by anyone’s standards. It’s the biggest return I’ve ever helped investors make in stocks, and I first got into the game in 1995. So I’ve been around a fair amount of time.

Check out the chart of Valeant Pharmaceuticals again. From late 2011 to late 2015, the stock was up 675%. I’m not sure when Ackmann’s Pershing Capital hedge fund bought into the stock, but we can assume it had made a big return leading up to the peak in 2015.

But now those gains would appear to be gone. The company’s US$11.4 billion market cap is now just a fraction of what it was.

We love making big gains in stocks. We love it even more when we can help our subscribers make big gains. What we don’t like doing is helping them make gains and then watching the gains slowly (or quickly) dissolve away into nothing.

Take note: Don’t be a greedy investor or speculator.

There’s still plenty to worry about

The great return that many of our Microcap Trader readers have made over the past year shows you that you don’t need a raging bull market in order to rack up big returns.

It helps to have a raging bull market, but it’s not always absolutely necessary.

But as much as we’re thrilled about helping folks make a big gain, don’t for a moment think that we’ve forgotten about the threats facing the world’s economies.

As Bloomberg reports:

Billionaire investor George Soros said China’s debt-fueled economy resembles the U.S. in 2007–08, before credit markets seized up and spurred a global recession.

China’s March credit-growth figures should be viewed as a warning sign, Soros said at an Asia society event in New York on Wednesday. The broadest measure of new credit in the world’s second-biggest economy was 2.34 trillion yuan ($362 billion) last month, far exceeding the median forecast of 1.4 trillion yuan in a Bloomberg survey and signalling the government is prioritising growth over reining in debt.

What’s happening in China “eerily resembles what happened during the financial crisis in the U.S. in 2007-08, which was similar fuelled by credit growth,” Soros said. “Most of [the] money that banks are supplying is needed to keep bad debts and loss-making enterprises alive.”

The warning signs are getting bigger and bigger. Yet, the market refuses to see them.

Earnings fall, expectations stay the same

More evidence of that is in a chart we’ve shown you regularly in recent months. The chart shows historical earnings for stocks in the US S&P 500 index, and forecast earnings for future years.

Here’s the chart:


Source: Bloomberg
Click to enlarge


The white line to the left of the green line are actual reported earnings. The white line to the right of the green line are earnings estimates for future years.

You’ll note something interesting about the actual reported earnings. Since late 2014, actual earnings have dropped, while forecast earnings remain the same.

In other words, even as corporate America reports lower profit numbers, the market and analysts continue to hold on to their belief that the US economy will boom again, and earnings will soar.

Maybe they’re right. We hope they are. But do you believe that will happen, based on this chart? We don’t.

Let’s see when the rest of the market will figure it out.

Exciting new project from Phil Anderson

Stay tuned for the launch of an exciting new project from Phil Anderson and his Cycles, Trends & Forecasts team.

You’re going to hear a lot about this over the coming days.

I can’t go into detail today. But tomorrow, you’ll find out more.




End of day market data

If you have any ideas about what you would like us to include in our end of day market data drop us a line at letters@portphillipinsider.com.au, and type ‘Market data’ in the subject line.

52-week highs: 48 stocks, including Audio Pixels Holdings Ltd [ASX:AKP], Corporate Travel Management Ltd [ASX:CTD], Fortescue Metals Group Ltd [ASX:FMG], OZ Minerals Ltd [ASX:OZL], Recall Holdings Ltd [ASX:REC], and Technology One Ltd [ASX:TNE].

52-week lows: 15 stocks, including Donaco International Ltd [ASX:DNA], ZipTel Ltd [ASX:ZIP], and Reece Ltd [ASX:RCE].

Note: The stocks listed above are stocks that hit an intra-day 52-week high or low during today’s trading. The stocks didn’t necessarily close at the 52-week high or low.