Kim Jong-un won’t crash the markets, but this will
Friday, 11 August 2017
By Kris Sayce
- Bad investors
- What is Crash Market Investor?
- It’s always about the profits
- A new regular guest
- If only I knew this when I was 23…
Stocks are down.
Why? Because US president Donald Trump, and North Korean leader, Kim Jong-un, have gotten into a bit of a verbal spat.
Dangerous, right? Maybe.
But don’t for a minute think that will be the reason behind the big market crash when it comes. It won’t.
Stocks always fall because of one reason — earnings. Unfortunately, if you’re looking for a silver lining there, you’re out of luck.
We’ll explain why following this short intermission…
Overnight, the Dow Jones Industrial Average fell 204.69 points, or 0.93%.
The S&P 500 fell 35.81 points, or 1.45%.
In Europe, the Euro Stoxx 50 index closed down 34.91 points, for a 1.01% fall. Meanwhile, the FTSE 100 dropped 1.44%, and Germany’s DAX index lost 1.15%.
In Asian markets, Japan’s markets are closed in observance of Mountain Day. China’s CSI 300 is down 1.58%. Hong Kong’s Hang Seng index is down 1.91%.
In Australia, the S&P/ASX 200 is down 81.13 points, or 1.41%.
On the commodities markets, West Texas Intermediate crude oil is US$48.17 per barrel. Brent crude is US$51.44 per barrel.
Gold is trading for US$1,286.14 (AU$1,638.02) per troy ounce. Silver is US$17.09 (AU$21.77) per troy ounce.
The Aussie dollar is worth 75.51 US cents.
We know it’s not the ‘done thing’ to criticise the customer.
After all, the customer is always right.
That is, of course, except when the customer is wrong. Or the customer is ignorant.
We risk a backlash. We risk an increase in un-subscriptions to our investment advisories.
We risk a lot of things. However, we fear that the majority of our subscribers are risking a lot more than we are risking by stating a few home truths.
The biggest of those home truths is that most investors are terrible at investing.
We hope you don’t take that as an insult. Rather, we hope that, if you are one of those terrible investors, you’ll take it in the spirit with which we intend it to be taken.
So where do we get this notion that most Aussies are terrible investors?
In several ways. But mostly because many admit to it themselves. Although, we don’t think they necessarily intend to admit it.
The most common example is when we’re told about how much money a previous financial planner or advisor had lost them.
In the ‘old days’, we would immediately sympathise, and join in the castigation of the aforesaid planner or advisor. In more recent times, we’ve begun to wonder if the planner or advisor isn’t a scapegoat for the investor’s own investing crimes and misdemeanours.
Other examples are when an investor writes to us, congratulating us on an excellent stock pick…or railing against us for a terrible stock pick.
On each occasion, the investor informs us that they’ve doubled the size of their portfolio with one trade, or halved it with one trade.
In both instances, we can only hold our head in our hands. In both instances, whether the investor has made or lost a large amount of money from one trade, it’s usually because they have taken an irresponsible amount of risk.
We love it when our subscribers make money from our tips. But it’s hard to get excited when we hear how they’ve turned a $100,000 portfolio into a $200,000 portfolio, simply from buying a tiny small-cap stock that has doubled.
There’s another reason we know most people are terrible investors.
We recently launched what I believe is our most important investment advisory, Crash Market Investor. The response was…well…OK.
But, it was nowhere near the response we would have gotten if we had launched, say, a brand new small-cap trading service.
And I mean, nowhere near.
The fact that relatively few investors have joined the Crash Market Investor service, tells us how powerfully alluring a bull market can be.
No one wants to think about stocks falling when the market is going up. They’d rather think that bigger and better gains lie ahead.
That may happen. Or it may not, if we’re right about a major market crash coming within the next two years.
What is Crash Market Investor?
The premise of the Crash Market Investor service is that I believe the world’s stock markets are heading for an almighty crash. I strongly believe the crash will happen in the next two years.
When exactly? We concede that our crystal ball fails us in that respect.
But we wouldn’t be surprised if it fell off its perch this year, if we’re being completely honest.
We look at companies like Tesla Inc [NASDAQ:TSLA], Amazon.com Inc [NASDAQ:AMZN], and Netflix Inc [NASDAQ:NFLX].
These are companies with no profits, or tiny profits relative to their huge market capitalisations.
Those three companies combined have a market capitalisation of US$593 billion. Over the past 12 months, they had a combined profit of US$1.5 billion.
Combined, they trade on a trailing price to earnings (PE) ratio of 395-times.
These are three of the US market’s hottest stocks. The market loves them. We’re told that these three companies are major disruptors, which will destroy their stale old competitors.
Really? What will they use to destroy them?
Certainly not profits.
And not cash, either. Of which, they collectively hold a seemingly impressive US$30.9 billion. Unfortunately, this is offset by short-term and long-term debt of US$30.4 billion.
But hey, it’s a bull market. We know those things don’t matter in a bull market. All that matters is the opportunity…the potential…the disruptive nature of these ‘new’ industries.
The thing is, they aren’t really new at all. The Amazon.com, Netflix, and Tesla businesses are on the verge of becoming just as stale as the businesses they are supposed to replace.
For companies at this stage of their life-cycle, if they really were radical and disruptive businesses, now should be their most profitable time.
But it’s not. And there is a simple reason for that. While each business may appear to be disruptive, as time passes, it becomes apparent that they aren’t disruptive at all.
At the base level, Amazon.com is a retail stock. Netflix is an entertainment stock. Tesla is a car stock.
Sooner or later, the market and investors will realise that. And when they do, the combined PE ratio won’t be 395-times trailing earnings, it will be the PE ratio of retail, entertainment, and car stocks.
If you’ll allow us to give you an example. The Walt Disney Company [NYSE:DIS] trades on a PE of 17.7-times earnings. Wal-Mart Stores Inc [NYSE:WMT] trades on a PE of 18.5-times earnings. Ford Motor Company [NYSE:F] trades on PE of 7.3-times earnings.
Once the disruptors have finished disrupting, what else is there for them to disrupt? Nothing. Only then, they need to watch their backs. For the disruptors will soon find new disruptors challenging their market dominance.
It’s always about the profits
We openly and unashamedly talk our own book.
Of the three ‘hot’ stocks mentioned above, the Crash Market Investor service has a short-selling recommendation on two of them.
To good effect, so far.
And we see more opportunities to short-sell the market. Through fundamental analysis, and our ‘magic number’ trading system.
At our recent live event, we told investors that once the Dow Jones Transportation Average hit a certain level, it was almost certain that the index would continue to fall.
The following chart shows how it has performed since hitting that level:
Click to enlarge
The index is down 4.67%.
It’s a similar performance for the trade we issue last week. It’s down around 4% since then. We expect further falls.
Look, there is trouble in the market. There’s geopolitical trouble too. But just be aware of one thing. Even though the spat between Donald Trump and Kim Jong-un is getting all the headlines at the moment, that won’t be the reason why stocks ultimately fall.
The reason stocks fall, and crash, is always due to one thing: profits.
It just so happens that three of the hottest and best-performing stocks on the US market, are stocks that offer very little in the way of profits.
One day, the market will figure that out. And then the crash will begin.
We’ve launched the Crash Market Investor service to help investors prepare for that eventuality. Details here.
A new regular guest
Before we finish, each Friday, you’ll now find a new guest essayist, Jason McIntosh.
Jason is a former quantitative (‘quant’) trading whizz, who now runs our Quant Trader service.
Jason has a unique take on the markets, how they work, and why they behave in a certain way. It’s all based on the years he spent working for a top Wall Street trading firm.
But for the past nearly three years, Jason has been working with us, helping his subscribers trade the markets. So, please welcome Jason to Port Phillip Insider. I hope you’ll enjoy his latest essay, below.
If Only I Knew This When I Was 23
Jason McIntosh, Quant Trader
Time to kick back without a care in the world. You switch off from the daily grind. The hustle and bustle of the office feels like an eternity away.
Well, maybe in an ideal world…
If you’re like me, you never completely wind down…you’re still thinking, still planning. My wife jokes that I relax by reading a book about trading. Hmm; I could be a tad obsessive.
It just so happens that I’m on holiday now. We’re in Fiji, and I’m enjoying a slower pace.
The wonders of technology mean I can still access the markets. I’ve been downloading the daily data each evening from our bure. I then run the Quant Trader system and send members the signals.
Today’s article will be a bit different to usual. I’m going to share a message I wrote to a young man — Jonathan. He’s 23 years old and facing a problem.
You see, Jonathan is a casual investor who works full time. His goal is to build a large trading portfolio. But a lack of capital is holding him back.
Jonathan also tells me that he fears picking the wrong stocks. He worries about buying the losers and watching the winners race off.
Reading Jonathan’s email got me thinking. Starting out is a unique time — and it doesn’t matter how old you are. You can start something new at any age. I’ve done this many times.
Two words describe my emotions at the start of a new venture: enthusiastic uncertainty.
I suspect Jonathan can relate to these emotions. In fact, I’m sure enthusiastic uncertainty is familiar to you as well.
You might not be 23. But you may be facing similar challenges.
This is what I wrote to him:
‘You’re already a few steps ahead of most 23 year olds. You have a starting stake…that’s a plus. Even better, you’re actively thinking about strategies to grow that base.
‘The first thing I’ll say is be patient. It takes time to make money. Forget all that “get rich quick” nonsense. It almost never works.
‘Overnight success stories are great. There’s only one problem. I’ll bet you’ll find just about all of them were a decade or so in the making.
‘I think you’re on the right track. Knowledge is everything — and I suspect you’re learning a lot. Experience will come in time.
‘You need to think about what sort of trading style fits your personality. This isn’t something you can answer over a weekend. It may take a few years to truly understand what’s right for you.
‘Let me tell you about myself…
‘I’m patient. I’ve also developed strong emotional control. These traits are ideal for a trend following strategy.
‘I also like consistency. This makes system trading the perfect fit.
‘It all sounds so simple. But it wasn’t. These connections didn’t happen overnight.
‘I guess the basic mental wiring was always in place. But it took years of practice to hone my mindset. I still work on it all the time.
‘No one is born successful. It’s something I believe we learn.
‘I’ve been trading for years. And do you know what? I’m still learning. Still evolving.
‘There’s a book I suggest you read. It’s called Market Wizards by Jack Schwager.
‘The book is a series of interviews with top traders. They all have different styles and approaches. The one binding characteristic is they are all hugely successful.
‘I read Market Wizards when I was your age. I was working on the foreign exchange desk at Bankers Trust.
‘Market Wizards was a revelation…a pivotal point in my career. I began to think differently about trading strategies.
‘Learning through the experience of others is a great shortcut. It can save you years of trial and error.
‘I found that I could really relate to a couple of traders. These were the chapters I read and re-read many times. Their methods became mine.
‘You mention fear. This is a trader’s worst enemy. It stops you from pulling the trigger on trades. And if you can’t pull the trigger…you can’t be a trader.
‘Sure, you’ll probably miss a few good trades due to lack of capital. But you’ll likely also avoid some that don’t work out — think positively.
‘The important thing is that you manage your risk. Make sure you stay in the game. If you do this, then I’m confident you’ll get on some great moves over time.
‘Remember, the race is long. Start with baby steps and build-up. This will help you manage your fears. It will also mean your early mistakes shouldn’t be too costly.
‘I wish you all the best, Jonathan. You’re doing better than you think!’
Starting out is something we all do. I’m sure you’ve got your own vivid memories.
I’ve had some great mentors over the years. Learning from them made a huge difference to my career. I hope my experiences can be just as helpful to you.
Until next week,
Editor’s note: Tackling the markets on your own can be hard. The ASX has over 2,000 listings. It’s little wonder everyday traders like Jonathan worry they’ll pick the duds, while the best stocks race higher.
Don’t worry if Jonathan’s story is like yours. There are things you can do. I suggest checking out Jason McIntosh’s Quant Trader service. Not only will it help you identify winning trades, it also aims to give you the skills to do it yourself.