Investment hostages?

  • Are you up for the ‘2-Minute Challenge’?
  • Three steps…
  • Adults only!
  • In the mailbag

We’ll admit it.

Some days, we just don’t get the markets.

Take this, from the Financial Times:

Tesla turned to Wall Street for another $1bn cash injection on Wednesday as it sought a bigger financial cushion for the planned launch of its mass-market Model 3 this summer.

Elon Musk, chief executive of the US electric carmaker, signalled last month that the company’s ambitious plans would push its finances “close to the edge”, and indicated he was thinking of raising more money.

We don’t know about you, but, if a company we’re invested in says that its finances are ‘close to the edge’, we’d get the heck out of there.

Yet Tesla Inc. [NASDAQ:TSLA] appears to be lapping it up. In after-hours trading, the stock was up more than 2%.

It seems to us that we may have the financial-market equivalent of the ‘Stockholm Syndrome’. Perhaps investors in Tesla have become hostages, and now feel sympathy with the company — in the face of what seem to be severe financial problems.

Or maybe it’s an extension of the saying: ‘When you can’t pay a $1 million debt, you have a problem. When you can’t pay a $100 million debt, the bank has a problem.’

Maybe investors are willing to tip in more cash, not because they’re bullish on the stock, but because they fear the whole enterprise could go ‘bottom over elbow’ if they don’t.

But, whatever the reason, and despite the rising share price, it still strikes us that, with over 6,000 stocks on the US market, there must be (there has to be) better investment propositions for your hard-earned money than Tesla.

As we’ve noted before, Tesla is a one-man PR machine, and little else. We think we’ll start calling it ‘DeLorean Mk II’.

Markets

Overnight, the Dow Jones Industrial Average gained 112.73 points, or 0.54%.

The S&P 500 added 19.81 points, or 0.84%.

In Europe, the Euro Stoxx 50 index added 9.89 points, for a 0.29% gain. Meanwhile, the FTSE 100 climbed 0.15%, and Germany’s DAX index closed up by 0.18%.

In Asian markets, Japan’s Nikkei 225 index is down 18.93 points, or 0.1%. China’s CSI 300 is up 0.55%.

In Australia, the S&P/ASX 200 is down 3.1 points, or 0.05%.

On the commodities markets, West Texas Intermediate crude oil is US$49.15 per barrel. Brent crude is US$52.18 per barrel.

Gold is trading for US$1,225.32 (AU$1,594.41) per troy ounce. Silver is US$17.44 (AU$22.70) per troy ounce.

The Aussie dollar is worth 76.84 US cents.

Are you up for the ‘2-Minute Challenge’?

Two minutes.

That’s all.

Is it possible to scrape hundreds of dollars in cash (I’m talking $125, $240, $320…and more) from Aussie stocks…in less than two minutes?

Without buying a share? And without selling a share, either?

I’m certain it’s possible. I know it’s possible.

I’ve seen it with my own eyes. I’ve watched it happen in the markets.

Heck, I’ve seen it and done it with my own brokerage account.

The trick is convincing (by showing) ordinary Aussies that it is possible.

So that’s exactly what we’re going to do, one week from now. And we’re going to do it in a way that we believe has never been tried in Australia before.

How? Go here. I’ll explain everything.

And, as the saying goes, ‘seeing is believing’. Quick. Check it out. Go here.

Three steps…

In what was a complete surprise to no one, the US Federal Reserve raised interest rates this morning.

It’s the third rise since 2009. It’s also the third rise since December 2015.

That means the upper range for the US Fed Funds Rate is now 1%.

That’s some achievement. It has taken the Fed eight years to get to that level, after squatting on 0.25% from 2008 until 2015. Since then, it’s been a painfully slow ratchet higher to the current level.

The question now is what impact — if any — will it have on stocks and major indices?

And does the old Wall Street saying, ‘three steps and a stumble,’ have any relevance to today’s markets?

David Stockman, the former director of the Office of Management and Budget under former US president Ronald Reagan, swears that the old saying holds true.

But, back in 2004, at the start of the last bull market run, CNN wasn’t too sure. Here’s what they said:

The old adage “three steps and a stumble” still has fans on Wall Street, but some analysts think it’s ready for the glue factory.

Dreamed up by the late technical analyst and guru Edson Gould, the catch phrase refers to the market’s tendency to fall after the Federal Reserve has raised interest rates three times.

When that story appeared on the CNN website, the Fed had just raised interest rates for the third time.

The impact on the market? Stocks climbed 45% before topping out. Not a good indicator then, right?

Not so quick.

Check out the chart below. Three times since 1985 when the Fed has raised rates, the market has suffered significant falls soon after:



chart image

Source: Bloomberg
Click to enlarge


After the Fed’s third rate rise in 1987, the US stock market soon collapsed by more than half.

After the third rate rise in 1994, US stocks fell more than 9% — just short of the common definition of a ‘correction’.

And when the Fed raised interest rates three times from 1999 to early 2000, it didn’t take much longer before the market topped out and stocks began a long and painful 50%-plus collapse.

As we’ve noted, the market didn’t collapse or fall to a large degree in 2004. But, then again, no predictive system is 100% perfect.

Yet we would also point out that, in 2004, interest rates were so low to begin with, and the stock market was still well below the record high, that euphoria hadn’t yet entered the market.

Now look at where the market is today.

The S&P 500 index is 312% above the 2009 low. That alone is significant. More than that, it’s more than 58% above the pre-crash 2007 high.

To our mind, that represents an extraordinary period of growth.

So, if anything, our way of looking at history is that, given the high index level, and this being the starting point for interest rate rises, the chart pattern looks much more similar to the 1987–2000 period than it does to the 2004–2008 period.

Admittedly, we don’t know much about charts. So take that with whatever sized grain of salt you like.

But, as we’ve pointed out countless times, while we may not know much about charts, we do know something about common sense.

We know that interest rates have been at a record low in the US for eight years.

We know that household, government and corporate debts are at record highs. And we know that wages growth is almost non-existent.

And circling back to our favourite whipping-boy of the stock market, Tesla, we question how a company that raises so much money, and which has access to funds at low interest rates, still can’t manage to make a profit.

Something ain’t right. And that ‘something’ is this market.

Adults only!

We’ve received several angry letters from subscribers about two recent promotions for popular investment newsletters Australian Small-Cap Investigator and Resource Speculator.

An example of one letter comes from subscriber SB:

So, I followed the links to the special report on Marijuana stocks that you linked to TODAY — purchased and read through the report only to discover the advice is completely out of date.

The buy-up-to-price on both stocks recommended is well and truly exceeded now. Both stocks are trading at much higher prices — you even include a note about it (pg11).

It is completely misleading to promote this report as a valuable reference guide when the advice is no longer valid.

Annoyed subscriber — please explain. Not good enough.

Colleague Sam Volkering has been all over the cannabis (marijuana) story for months. That includes his recommendations for three ‘marijuana mania’ stocks, listed right here on the Australian Securities Exchange.

These truly are ‘hot stocks’. The mainstream press is all over the story. Politicians are all over it. And investment analysts (including Sam) are all over it too.

It therefore isn’t surprising to see that, when we published a research report for a selection of these stocks, a surge of buying caused the prices of these stocks to rise.

But it wasn’t just our subscribers buying the stocks. As I said, this story is all over the press.

I congratulate SB for following Sam’s instructions by not falling into the temptation of paying above the buy-up-to price. So many ignore that advice — to their cost.

What’s more, sometimes, it only takes a small increase in volume on a small stock for it to show up on the radar of other investors. They see the action, assume that something is going on, and so they buy in.

That can often push the price up too. In short, we have no control, and neither do we seek to have control over stock prices.

We simply encourage our analysts to write about interesting, and potentially profitable, ideas.

Do all those ideas pay off? No. Does every one of our newsletter subscribers get to buy at the optimal price? No. Sometimes, they don’t get to buy at all. That’s frustrating.

But the way I see it is that the stocks and advice we provide in each investment advisory are much more than the stocks profiled in a sales letter.

In fact, after early success with his two initial ‘pot stocks’, Sam managed to unearth a third. If he finds another worth backing, I’m sure he’ll tip that too.

There’s so much more to Sam’s research than just one ‘hot sector’. Sam looks at a bunch of stuff. Robotics, biotech, consumer goods, small-cap dividend payers, electronics, and more.

But, because these stocks are so small, it sometimes means some of our subscribers miss out. We can’t do anything about that. We aren’t a broker that gets to buy up stock in a company quietly, and then flick it off to clients. We publish research.

We publish research to adults. We know they’re adults, because we only accept payment for our subscriptions by credit card. In order to qualify for a credit card, you must be an adult.

And so, we treat our subscribers like adults. By that, I mean we publish the research. We give the advice. We provide a guide on what we think could happen to the share price. And we provide details and warnings of the risks.

The rest (and I’m trying not to be rude here, but forgive me) is up to our adult subscribers to take the best course of action that they think is suitable for their circumstances.

If any subscriber feels that they can’t do that, they should stop trying to be an independent and self-directed investor. That’s just the way it is. And, by the way, being an independent investor isn’t for everyone.

There is absolutely no shame in that. I happen to believe that making your own decisions, perhaps based on research provided by us or our competitors, is the best approach.

But it’s not for everyone. That’s why we always provide a 100% money-back guarantee. Check out the service. See if it’s for you. If it is, great. If it’s not, no drama.

Just remember one thing: The only person that does (or should) have control over your money, your investments, and your investment decisions is you.

We liken investing and investment advice to the argument over gun control in the US. Gun advocates point out that a gun doesn’t fire itself. It needs someone to pull the trigger.

A gun is safe in the right hands. The same goes for investment advice. But, in the wrong hands, and handled the wrong way, it can be dangerous.

In short, before you make any investment decisions, know that you have a safe pair of hands.

In the mailbag

Subscriber EM writes:

Really, if you don’t know something of a subject (electricity in this case) it is better [sic] not to venture there…

This statement of yours is simply scientifically wrong: “…adding 100 to 300 megawatts to the capacity (we assume he’s talking about storage capacity)”. Yes, indeed it is energy storage capacity (as opposed to power capacity) that he meant and in that case you measure electrical energy storage capacity in megawatt-hours (MWh), not megawatt (MW) or heaven forbid megawatt per hour, so your statement should have said ‘‘…adding 100 to 300 megawatt-hours to the storage capacity”.

And this is even worse: ‘Australia consumes an average of 22,000 megawatts per hour’!!! No, there is not, cannot ever be anything like watt per time unit. The watt (named after James Watt) is already a timed unit as is: One watt is simply one Joule of energy per second.

What you probably meant to say is “Australia consumes an average of 22,000 megawatt-hours per hour”. Yes, that is correct: MWh/h equates to one million units of electricity per hour whereas MW/h will have Mr Watt turn in his grave.

On the first point, we disagree. We believe that knowledge on a subject and the ability and interest to pontificate on the subject are inversely related.

Hence, the less we know, the more we’ll comment.

Our point still stands: The so-called Tesla solution is nothing more than a PR stunt and, even if something comes of it, it will be a drop in the ocean.

More on the subject from subscriber Doug:

You are correct in assuming the addition of around 200 MWhr battery capacity is insignificant. Note the unit you correctly used is MWHr, meaning that if for example the total battery capacity is spread over a typical 3 hour evening peak, it would contribute only 67 MW to the states 3124 MW peak demand. All this trouble for a 2% boost?

The Greenies have the answer. They are advocating for more solar instead. An equally ill-advised way of overcoming the evening peak.

We think solar is a great solution. But only at the micro level — not at the baseload-generating level.

Cheers,
Kris