A no-show of force

  • Hater
  • No other explanation
  • ‘Tiny stocks’ series
  • No place like home

Your editor writes to you from London this week.

We’re here for a conference. The conference happens to coincide with this week’s UK general election.

Our trip here also coincided with the weekend terrorist attack south of the River Thames. We heard about it during our stopover in Dubai on the way here.

To be honest, we’ve found the reaction of the media and the authorities to be somewhat different to the reality ‘on the street’. Following the Manchester terrorist attack two weeks ago, the papers (in print and online) were full of images showing heavily armed police patrolling the streets.

From a distance, we expected to arrive into a London under martial law. And following the latest attack, we expected it to be even more so.

Yet, the reality is different. After arriving here on Sunday afternoon, less than 14 hours after the latest attack, we went for a long stroll around the West End. We were out for around four hours, taking in the Strand, Trafalgar Square, Leicester Square, Piccadilly Circus, Shaftesbury Avenue, Soho, Embankment, Fleet Street, and St Paul’s Cathedral. In all, we singularly failed to see one armed police officer.

On Monday morning, we strolled into the City of London. Again, past St Paul’s, Bank of England, Fenchurch Street, Lombard Street, Bishopsgate, Liverpool Street Station, Moorgate, London Wall, and back along Fleet Street to our hotel. Again, not a single armed constable.

And what’s more, on both days the packed streets were full of people just going about their business. Being tourists, or going to and from work. There wasn’t, it had to be said, a feeling of ‘terror’ or a ‘lockdown’ mentality.

Anyway, it’s just an observation. But in the era of ‘fake news’, it’s worth remembering that, while the mainstream press claim the moral high ground, they’re not immune to a bit of sensationalist spin when it suits their own interests.

And now, on with the show…


Overnight, the Dow Jones Industrial Average closed down 22.25 points, or 0.1%.

The S&P 500 fell 2.97 points, or 0.12%.

In Europe, the Euro Stoxx 50 index lost 12.27 points, or 0.34%. Meanwhile, the FTSE 100 fell 0.29%, and Germany’s DAX index added 1.25%.

In Asian markets, Japan’s Nikkei 225 index is down 106.58 points, or 0.53%. China’s CSI 300 is up 0.14%.

In Australia, the S&P/ASX 200 is down 81.4 points, or 1.4%.

On the commodities markets, West Texas Intermediate crude oil is US$47.16 per barrel. Brent crude is US$49.22 per barrel.

Gold is trading for US$1,285.07 (AU$1,716.86) per troy ounce. Silver is US$17.59 (AU$23.49) per troy ounce.

The Aussie dollar is worth 74.92 US cents.


Colleague, Sam Volkering, brought your editor’s attention to this story from Automotive News (Sam knows we’re a Tesla hater):

At least one national insurer, AAA-The Auto Club Group, is raising rates on Tesla vehicles based on data showing that the Model S and Model X had abnormally high claim frequencies and high costs of insurance claims compared with other cars in the same classes.

AAA said premiums for Tesla vehicles could go up 30 percent based on data from the Highway Loss Data Institute and other sources.

Of course, the insurance claims are only half the story. The biggest risk for Tesla Inc [NASDAQ:TSLA] is the lifetime guarantee it provides for its battery packs. That’s a lot of potential future liability that Tesla is piling up on its balance sheet.

But regardless. What does it matter? According to Tesla shareholders, it doesn’t matter one wit, because the share price keeps going up. The stock closed today up 2.2%.

No other explanation

We’ll admit to feeling on edge. No, it has nothing to do with terrorism.

It’s more to do with what we see as extreme bubbles in the financial markets.

For us, Tesla is one example. There are many more.

We see a bubble in the stock price of Amazon.com Inc [NASDAQ:AMZN].

We see a bubble in the stock price of Alphabet Inc [NASDAQ:GOOG], the parent company of Google.

We see a bubble in the price of Bitcoin. We see a bubble in the price of Australian housing. And we see a bubble in construction activity right here in London.

In short, we see bubbles everywhere.

And yet, while we see them, it doesn’t seem to matter. Stock prices keep rising, developers keep knocking down old buildings in order to build new buildings, and folks assure us that the world economy is structurally different to how it used to be. Hence, justifying high prices.

One of those folks pushing the structurally different case, is long-time value investor, and now former fellow worrier about high stock prices, Jeremy Grantham.

In his latest quarterly newsletter, Grantham makes the case for why stocks prices may not be unreasonably high. He notes, among other things, low interest rates, higher median PE ratios since 1997, and greater American corporate profitability.

He concludes:

What this argument probably does mean is that if you are expecting a quick or explosive market decline in the S&P 500 that will return us to pre-1997 ratios (perhaps because that is the kind of thing that happened in the past), then you should at least be prepared to be frustrated for some considerable further time: until you can feel the process of the real interest rate structure moving back up toward its old level.

Grantham argues that rather than a calamitous market crash, instead, the best the bears can hope for is ‘a 20-year limping regression that takes us two-thirds of the way back to the good old days pre-1997.

Oy vey!

20 years…really?

But hey, we don’t have a problem with anyone throwing in the towel when it comes to this devilish market. We’ve been there and done that ourselves.

From late 2010 to early 2012, we couldn’t believe markets remained at what were then, such stubbornly high levels.

But in 2012, we threw in the towel, when it finally dawned on us that interest rates weren’t going higher. And that in Australia they were, in fact, going lower.

We stayed on the bullish side until August 2014. That’s when we figured enough was enough. Stocks just had to fall. Our timing was prescient. For the next month or so, stocks plummeted. Only to rebound, fall again, and then rebound again.

For all the volatility, the blue-chip Aussie market is less than 2% higher than it was after our 2014 bearish switch.

The same isn’t true of the US market, which is around 20% higher since August 2014. And investors seem to be revelling in the soaring US market. As Bloomberg reports:

Shares of Google parent Alphabet Inc. passed $1,000 six days after Amazon.com Inc. crossed the same threshold, showing the sustained investor confidence that tech giants can outmatch older companies.

Amazon’s rise reflected a bullishness in e-commerce, coming despite bigger sales in brick-and-mortar retail. Likewise, Alphabet shareholders see that TV ad budgets will continue to gravitate online, where Google dominates.

These things may be true. And as impressive as it is that Amazon.com founder, Jeff Bezos, is close to becoming the world’s richest man — he’s just US$3 billion behind Bill Gates — we still can’t help think that a big chunk of the stock market’s fortunes are down to record low interest rates.

And we still can’t help but think that investors have forgotten that success and innovation rarely rise in a straight line. Almost always there are false starts…bumps in the road…and hiccups.

Yet investors seem to be approaching hot themes such as self-driving cars, electric cars, and cryptocurrencies as though it’s all plain-sailing from here.

Again, it may well be, and your editor may sooner rather than later be the recipient of a big dollop of egg applied straight to our face.

If so, we’ll cop it.

The point we’re making with all this is that it’s actually hard to see and appreciate a market or economic bubble in real time. Instead of seeing it as a bubble, most folks just tend to think of it as ‘prosperity’.

They see the innovation and increased wealth as the reward for sound business and investment decision-making.

Yet again, that may be true. Or it may be that an extended period of record low interest rates has created what Donald Trump famously called, ‘A big fat bubble’.

As the Financial Times editorialises at length today:

Money is tight for many people, but not for private equity funds. CVC, which has a strong record in Europe, has raised €16bn for its latest fund and expects to put between €3bn and €4bn of the proceeds to work each year. It is a European record, but only part of a wider rush into private equity.

The private equity industry grew in the US with buyouts of medium-sized companies but has expanded into every economic nook, from tiny to huge. Alexa Chung, the British model and television personality, is launching a new design label backed by Peter Dubens, co-founder of Oakley Capital. Saudi Arabia’s sovereign wealth fund is investing $20bn in an infrastructure fund run by Blackstone.

China Investment Corporation has meanwhile bought Logicor, the European logistics group, from Blackstone for $12.25bn. Profitable exits such as this have encouraged more cash to flow in. Private equity funds in Europe raised €75bn last year, according to Invest Europe, and investors increasingly regard the European economy as an attractive target for private investment on a level with the US.

The main factor behind the flood of money is that private equity has not only done well in recent years but it has performed better than many alternatives. Money placed in top private funds has produced stronger returns than stock markets, even after the industry’s sizeable fees. Meanwhile, hedge funds have struggled to make profits consistently.

There’s a lot of money floating around. Money which, if it weren’t for low interest rates, wouldn’t be there.

But the money is there. And because it’s there, it has to find somewhere to go. Or rather, those in possession of the money need to find somewhere to put it. They could just deposit it in a bank. But with pesky near-zero interest rates, what’s the point of that?

Instead, that’s where you see investors moving along the so-called risk curve. If investors want to make a return on their money, they need to accept greater risks. The greater the risk, the higher the return.

Although, it has to be said that returns today aren’t what they were.

That alone forces investors along the risk curve. An investor who wants a 5% yield, can’t get that from a bank deposit. So, instead of ‘safe’ bank savings accounts, they have to look for something riskier.

What about a corporate bond? Wishful thinking. Stocks? In many cases, especially for global investors, that’s wishful thinking too.

Next up, private equity and hedge funds. Or what about emerging markets stocks or high yielding corporate bond ETFs? Even there, you’ll be lucky to snag a 5% yield. The iShares iBoxx High Yield Corporate Bond ETF [NYSEARCA:HYG] yield’s 5.06%.

The iShares MSCI Emerging Markets ETF [NYSEARCA:EEM] currently yields 1.59%.

Worth the risk? Many seem to think so, which explains the high price and low yields for these investments. But for us, it all spells excessive risk-taking in the search for yield.

And that, as history has shown, results in a re-risking of investments when the returns from those investments are no longer sustainable.

This won’t be the last you’ll hear from us on this subject. More details soon, including a special event we’re organising for mid-July. Stay tuned.

‘Tiny stocks’ series

Have you caught up with our ‘tiny stocks’ series? We hope so. ‘Tiny stocks’ are just about the most exciting stocks you’ll find on any market, not just the Aussie market.

Take yesterday’s Aussie market as an example. The main, blue-chip S&P/ASX 200 index fell 0.6%.

And yet, on the same day, a bunch of stocks not only gained, they gained in a big way. Check this out:

chart image

Source: CMC Markets Stockbroking
Click to enlarge

Look at that. Three stocks gained 100% — that’s a stock ‘doubler’, by the way.

Another stock gained more than 53%. Another more than 41%. And five other stocks gained between 23% and 36%…all in a single day.

Now, don’t get me wrong, ‘tiny stocks’ don’t always go up. And when they do, not always by big jumps like this. The point is, because ‘tiny stocks’ can move by big amounts, it means you don’t have to put a big chunk of your portfolio into them.

In fact, you can get away with just putting in the ASX minimum amount of $500, and still end up walking away with a four figure (or more) profit…if the stock goes in the right direction.

And if it doesn’t, well, what have you lost? Maximum, $500. That shouldn’t break the bank. And if it would break the bank, then what the heck are you doing messing around with these stocks anyway?

Enough said. If you haven’t already, make sure you check out our ‘tiny stocks’ series. You should have seen the details in your inbox. If you missed it, then go here instead.

No place like home

Anyway, with all the ructions going on in the UK and Europe, we’re looking forward to flying home, back to Australia on Saturday. Back to safety…

chart image

Source: The Age
Click to enlarge

Oh, right. [Sigh]