‘Technically’ stocks could fall MUCH further

  • Another zero
  • Don’t blame ‘Brexit’
  • Yes, ‘tiny stocks’ are risky…but that’s the point
  • In the mailbag

Today’s The Age headlines, ‘Technically, the ASX could fall to 5000’.

Sure. But, technically, it could fall to zero too.

  1. We get the point. The writer is referring to technical analysis, and support and resistance levels.

But when we look at the chart of the S&P/ASX 200, maybe it’s our current bearish outlook, but we see the potential for a much bigger fall — perhaps to 4,000 points…or lower.

chart image

Source: Bloomberg
Click to enlarge

We’ll concede it’s possible that we’re being overly bearish, but right now, if we had to bet either way, our money would be on following the direction of that red arrow.


Overnight, the Dow Jones Industrial Average fell 57.66 points, or 0.33%.

The S&P 500 fell 3.74 points, or 0.18%.

In Europe, the Euro Stoxx 50 index dropped 56.34 points, for a 1.97% fall. The FTSE 100 fell 2.01%, and Germany’s DAX index lost 1.43%.

In Asian markets, Japan’s Nikkei 225 index is up 74.16 points, or 0.47%. China’s CSI 300 is up 1.42%.

In Australia, the S&P/ASX 200 index is down 18.16 points, or 0.35%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$47.83 per barrel. Brent crude is US$49.16 per barrel.

Gold is trading at US$1,284 per ounce, while silver is US$17.40 per ounce.

The Aussie dollar is worth 73.71 US cents.

Another zero

Celebration time. The Wall Street Journal reports:

Yields on the 10-year government debt of Germany sank below zero Tuesday for the first time ever, a potent financial marker of Europe’s acute economic and political instability.

It’s true. Germany joins the rank of other ‘zero percenters’. The chart below proves it:

chart image

Source: Bloomberg
Click to enlarge

Germany’s 10-year bonds are currently yielding minus 0.005%.

The Deutschelanders are in illustrious and refined company. They join Switzerland, whose 10-year bonds currently yield minus 0.546%, and Japan, yielding minus 0.196%.

The blame of course, continues to fall squarely on the shoulders of the UK and next week’s vote to remain in or leave the European Union.

As the Wall Street Journal notes:

“The fact that Brexit is now perceived as a possibility is a total game-changer, and it’s very difficult to estimate the macroeconomic impact,” said Franck Dixmier, global head of fixed income at Allianz Global Investors.

The campaign over Britain’s June 23 referendum has hummed along in the background of most financial markets for months. It is now coming to the fore — and spreading across the continent. Price action in the European bond markets Tuesday echoed the patterns seen during the eurozone’s debt crisis in 2011 and 2012, when investors also contemplated rupture of the European Union.

The fickle market needn’t worry. Our view on Britain’s referendum remains the same. Even if Britons vote to leave the EU, the British government and the European Union won’t let them.

The response to an exit will likely be a major sell off in stocks worldwide. As the impact spreads around the world, the UK and Europe will have all the ammunition they need in order to overrule the vote.

And even if they don’t overrule the vote, politically, it would be a simple decision to demand a new vote. The ‘Remain’ lobby would have the upper hand. They would then say, ‘See what happened. This is your chance to put things right, vote to remain.’

The second vote would be as close to unanimous as it’s possible to get. No ‘Brexit’…a resulting rally in world stock prices…and postponement of the day of financial reckoning.

Don’t blame ‘Brexit’

Back to the Aussie market. At the top we referred to the potential for a big fall in stock prices.

At the close, the S&P/ASX 200 is down over 56 points for the day. That follows a 100-plus point drop yesterday.

Does that mean the bull market rally is over?

It’s always dangerous to predict such things day-to-day. Our honest view is that the rally shouldn’t have happened to begin with. As we look at the market, we see the same problems facing the world’s economy that existed last August, when we told investors a major crash was coming.

We were right about the crash. It came…but then went again, almost as quickly.

Saying that, the blue-chip Aussie stock index is still down nearly 10% from when we warned of the crash. And aside from a half dozen or so half-hearted rallies, the market hasn’t really appeared capable of regaining last August’s level.

Last August, the S&P/ASX 200 was around the 5,700 point level. Its most recent highs are around the 5,400 point level. Each time it has risen that high, the rally has fizzled.

And we expect it to continue to fizzle.

Why? Because the problems facing Australia’s economy remain the same. Australia is a commodity exporter. Its fortunes for the past 10-plus years have revolved around high commodity prices and big export volumes.

In recent years, the export volumes (in many cases) have increased. Trouble is, the prices and profit margins have fallen further than the volume increases.

It’s no wonder even the big mining giants like BHP Billiton Ltd [ASX:BHP] and Rio Tinto Ltd [ASX:RIO] have seen profits slump…not to mention their share prices.

It’s worth noting that, even after the recent rally, BHP’s share price is still down 52% from August 2014.

The danger for investors is that they fall for the idea that the Aussie stock market’s troubles are all to do with Brexit. Don’t fall for it. It’s not true.

The Aussie market’s performance and the economic problems are much deeper than that.

It’s been over 25 years since the last Aussie recession. Nothing lasts forever. Everyone knows the boom has ended. Now all that remains are for the official statistics to hammer the point home.

Yes, ‘tiny stocks’ are risky…but that’s the point

For the past few issues of Port Phillip Insider, I’ve written to you about ‘tiny stocks’.

‘Tiny stocks’ are exactly what the name suggests. They are the tiniest stocks on the market. The other term to describe these stocks is ‘microcap’ stocks.

You’re no doubt familiar with small-cap stocks. Again, the name is self-explanatory. They are small companies listed on a stock exchange.

Well, ‘tiny stocks’ (microcap stocks) are stocks that are even smaller than small-cap stocks. That means if small-cap stocks are risky, ‘tiny stocks’ are even riskier.

Over the past few days, I’ve shown you how ‘tiny stocks’ can shoot up by big amounts in a single day. Today is no different. As the table below shows you, even while the Aussie market is down, these ‘tiny stocks’ have made big one-day gains:

chart image

Source: Bloomberg
Click to enlarge

Who doesn’t want to bag a 100%, 41.18%, or 20.69% gain in one day?

However, even a novice investor knows that the stock market isn’t a one-way street. Because while ‘tiny stocks’ may go up in price by a lot, ‘tiny stocks’ can go down in price…by a lot.

The table below clearly shows this:

chart image

Source: Bloomberg
Click to enlarge

How do you fancy watching one of the stocks you own fall by 16.67%, 21.95%, or 50% in one day?

In truth, not many investors either enjoy or can cope with watching that happening at all.

But, if you want to speculate on ‘tiny stocks’, you have to be prepared for that to happen. You need to have the mindset that enables you to watch a stock rise 50% one day, lose 25% the next, gain 45% the day after, fall 30% the day after that…and so on, until hopefully (assuming you’ve bought the right stock at the right time) it goes on to record big multi-digit percentage gains.

Or, the stock could do nothing but go sideways over time. Or crumple into a heap.

That’s ‘tiny stock’ investing. Either you can handle it, or you can’t. The point is, a volatile market like this is what ‘tiny stock’ investing speculating is all about.

(Yes, I scratched out ‘investing’ there. Let’s not kid ourselves. We could argue that it’s ‘investing’, but really it’s pure speculation. Have no doubt about that.)

Anyway, if the idea of ‘tiny stock’ speculation appeals to you, look out for more details soon. We’re about to reopen the doors to one of our riskiest and potentially most lucrative trading services.

Spaces are strictly limited, but within the next few days, we’ll show you how to put your name down for priority access to one of those limited spaces. Stay tuned.

In the mailbag

More on the dairy industry, and its near cousin, the…erm…scrap metal industry. Subscriber, Phil, explains:

Kris really as I see it the difference with the dairy sector is they have a locked in asset base. Cow herds and good land are years of blood sweat and tears. Not easy to change, like an office or computer package.

What you say as to farmers putting away for a rainy day is correct in its measure. It depends on their financial cycle. But if you look at the good times and the bad times it does seem currently a lot of time is spent on the wrong side of the ledger.

I have been a farmer, but sold the farm. I am in the scrap steel business also and that too has a lot of pain.

In 2007 scrap steel reached the crazy price of $550 ton — unsustainable. It then crashed to $20 per ton for 18 months. The current price is $100 per now; hardly break even.

We now accept that prices are not reliable, so we have reduced costs and overheads. We have spread our business into second hand machinery and other areas.

I have come to it you can no longer depend on anything. It all needs to be short term and flexible. If you keep this in view at all times you won’t run into trouble.

Use contract employees and don’t owe money. Own your gear.

Kris that’s a few thoughts. I enjoy your paper.

And this from Tim C:

I have watched and read with interest your views on the plight of the dairy industry. For the record I must say I believe you are fundamentally incorrect and whilst some of your comments I concur with, they are largely ill-informed and uneducated comments, in my view.

It is something that I would enjoy debating with you another time. However prior to this, given light of your comments about the Dairy industry (your comment for edition 03/06/2016 “But, quite frankly, we like our milk one way. Not on cereal, not in tea or coffee…we like our milk cheap…as cheap as we can possibly get it.”)

I am interested in your views on steelmaker Arrium in particular (and other industries such as car manufacturing) which have received or are going to receive hundreds of millions of taxpayer-funded Government bailouts. Therefore should we hold the view “But, quite frankly, we like our steel, cars etc, not locally made, not in our buildings and projects…we like our steel, cars etc cheap…as cheap as we can possibly get it.” Or is the big end of town protected from your viewpoint?

Will still look forward to your articles, even if I don’t agree with you.

Point one, we never claim to have an educated view on anything. Arguably, an ‘educated’ view is the worst kind of view.

We’ll argue that the reason the world’s economy is in the condition it’s in right now is because of too many educated views — too many Harvard and Princeton academics trying to run the world’s affairs based on faulty textbook economics.

On Tim’s final point, we can only think that Tim is a recent subscriber to Port Phillip Publishing’s newsletters. Otherwise, Tim would know that we believe all subsidies, whether to the ‘big end of town’ or the ‘small end of town’, are misguided and a waste of taxpayer dollars.

Our view is that the Australian car industry should have been hung out to dry years ago. The car industry and the car dealership lobby groups have resulted in Aussies paying well over the odds for locally produced and imported cars.

The continued ban on ‘grey market’ cars (imports of used cars from overseas) is another form of subsidy to the local car market, at the cost of the consumer.

The same goes for the protectionism offered to the banking sector, through the government’s deposit guarantee. It’s a taxpayer-funded subsidy.

Get rid of it. If the banks get into trouble, tough. Let them hang.

And finally for today, a point of view from subscriber, David:

I have the utmost respect and admiration for primary producers, and I wouldn’t be one for all the tea in China. However I am a primary producer of sorts in that I work for 8 months of the year and hope that my crop comes through in the remaining four.

In my season I work like stink starting at 5:00am and sometimes finishing at 2:00am the next day. For me that is life, and while I make money, I bet it is not as much as dairy farmers in recession.

My main point is that I was once a retailer in a small business in a rural area, employing 5 people plus my wife and myself. After a few years we went through a rural downturn. Dairying wasn’t big where we were then.

Farmers, as if one, closed their chequebooks and we slowly went broke, losing all our assets and owing money. No government came and helped me out, and the bank wanted their pound of flesh plus interest. We survived and moved to other things, and my determination was that we would never again employ anyone. I tried all sorts of jobs, not being one to be fussy when it came to putting meat on the table. One day another opportunity came up and while many could not see it, I did, and we are now comfortable again. I have not needed, or was too proud, to put my hand out, so shifted as needed and came right. It took 15 years.

I take no pleasure in seeing anyone struggling. But in the case of farmers, I think that relying on multinational purchasers is an extremely silly move. We have seen the Argentinian giant JBS gut meatworks, Birdseye and McCain’s with vegetables, Monsanto with their obnoxious GMO and poison products, and many more.

Until farmers go back to supplying their market, either directly or by local co-op, they will never be free of the bloodsucking giants.

On that note. That is all for today. Back tomorrow.