These stocks love a skittish market

Monday, 15 October 2018
Melbourne, Australia
By Bernd Struben

  • When markets truly crash…
  • Oil to US$60 per barrel…or US$200?
  • Mailbag

Opinions, as one of the politer versions of the saying goes, are like noses. Everyone has one, but there are usually a couple of holes in it.

There is certainly no shortage of opinions as to causes of last week’s stock market rout. A rout which continues on the ASX today.

Despite a strong rebound from Wall Street in Friday’s trading, Asian markets are deep in the red. At time of writing, the ASX 200 is down 0.99%.

If futures traders have placed their bets correctly, US and European markets look set for more pain overnight (Aussie time), as well.

So what gives?

Is it growing concern over a full-blown trade war between the world’s two biggest economies?

Is it rising interest rates in the US, where yields on US 10 Year bonds are currently at 3.14%?

Were stocks becoming overvalued, and this is the correction we had to have?

All of these factors likely have some roll to play. But the best account I’ve heard for the pullback pins the bulk of the blame on the blackout period in the US. Which for our South Australian readers, has nothing to do with rolling power outages.

From The Wall Street Journal:

Because major indexes have been unusually calm lately, sudden outsized market moves during the blackout period could sour investor sentiment toward stocks, some analysts say. That occurred when the market tumbled in February.

Earnings season in the US begins in earnest this week. And US regulations prevent most corporations from buying back their own stock for the month prior to releasing their profit results. This is known as a blackout period.

As you likely know, when companies buy back their own shares it reduces the number of shares outstanding. This generally inflates the share price.

And it’s big business.

Goldman Sachs estimates that in 2018 S&P buybacks will exceed US$1 trillion (AU$1.41 trillion).

The idea of a blackout on stock buybacks prior to releasing results is to inhibit insider trading. But with investors already on edge, this sudden lack of buyers looks to have driven many to the exits.

If this is the predominant force behind the selloff in stocks, you can breathe a bit easier. Once the blackout period is lifted, the market should bounce back. Just as we saw in February.

In the meantime, it’s important to remember that the stock market is just that. A market of stocks. The ASX 200 fell 4.7% last week. But some stocks bucked the trend.

Gold stocks, in particular, were a standout.

More after a look at the markets…

(You can join resource expert Jason Stevenson on his hunt for the next explosive gold stocks right here.)


Over the weekend the Dow Jones Industrial Average closed up 287.16 points, or 1.15%.

The S&P 500 gained 38.76 points, or 1.42%, while the NASDAQ leapt 2.29% higher.

In Europe the Euro Stoxx 50 index finished down 14.78 points, or 0.46%. Meanwhile, the FTSE 100 lost 0.16%, and Germany’s DAX closed down 15.54 points, or 0.13%.

In Asian markets, Japan’s Nikkei 225 is down 326.27 points, or 1.44%. China’s CSI 300 is down 0.82%.

In Australia, the S&P/ASX 200 is down 58.37 points, or 0.99%.

On the commodities markets, West Texas Intermediate crude oil is US$72.18 per barrel. Brent crude is US$81.63 per barrel.

(More on oil below.)

Turning to gold, the yellow metal is trading for US$1,220.26 (AU$1,716.98) per troy ounce. Silver is US$14.64 (AU$20.60) per troy ounce.

One bitcoin is worth US$6,200.85. That puts bitcoin down about US$400 since this time last Thursday.

Where to next for bitcoin? Find out here.

The Aussie dollar is worth 71.07 US cents.

When markets truly crash…

When markets truly crash, think 2008, you’ll find almost every asset class in retreat.

Gold is no different. When investors see their portfolios cut in half and the value of their mortgaged homes plummet, they tend to sell everything, including the kitchen sink.

Hence we saw gold drop from US$972 in February 2008 to US$732 by October, that same year.

But when stock markets are simply volatile, correcting by 4­­–6% as we saw last week, investors lean towards jittery…rather than panicked.

That’s when gold’s classic safe haven status often sees a strong uptick in its price.

Have a look at the one month gold price chart below:

chart image

Source: Bloomberg
Click to enlarge

As you can see, gold enjoyed a nice 2.7% lift since last Monday.

And when gold goes up 2.7%, you can expect the better placed gold miners and producers to see a much larger share price rise. That’s because the miners are heavily leveraged to the gold price.

Indeed, this is what played out last week.

St Barbara Ltd [ASX:SBM] gained 8.9% during the week.

Evolution Mining Ltd [ASX:EVN] performed even better, up 10.7% last week. That’s almost four times the rise in the gold price.

Now both of those stocks are giving back some of those gains today. EVN, for example, is down 2.0% at time of writing.

But the point I hope you take away from this is that when investors are nervous — and not full out panicked — gold stocks have the potential to see you making money while most others are losing it.

And if you’re looking to put some money into small, speculative — and risky — stocks that can actually see their share prices rocket even during a full-fledged market crash, then it’s hard to beat Australia’s small gold explorers.

These tiny stocks often operate on a shoestring budget. And many will see investors walk away nursing hefty losses.

But every so often these largely unknown explorers do hit the mother lode. And when that happens, their share prices tend to go through the roof.

These are some of the stocks resource analyst Jason Stevenson spends his days hunting down over at Gold & Commodities Stock Trader.

Now this service won’t be for everyone. You’ve got to have the appetite for some significant risk…and the hunger for the potential outsized returns than come along with it.

You can find out more here.

Moving from the yellow kind to black gold…

Oil to US$60 per barrel…or US$200?

While crude prices nudged up overnight, WTI and Brent are down around 50 US cents per barrel since I wrote to you last Thursday.

I still expect an emerging glut in global oil supplies to drive the price down 15% or more. But as with all such forecasts, there are a lot of pieces to the puzzle.

A key piece is Saudi Arabia. I expected the Saudis to play a vital role in helping replace Iranian supplies when US sanctions target the Iranian oil industry next month. And they still might…

But the disappearance of journalist Jamal Khashoggi inside the Saudi embassy in Turkey could throw a spanner in that assumption.

Khashoggi is a well-known critic of the Saudi royals. Or perhaps I should say he was a well-known critic.

According to Turkish authorities, Khashoggi was murdered and dismembered in the Saudi embassy. They claim to have recordings — from his smartwatch — to prove it.

The Saudis say he walked out of their embassy in one piece. Though they have yet to offer any evidence to support that.

EU nations are already threatening sanctions against the Kingdom. Even Trump looks like he may find himself on a collision course with his good buddy, Saudi Crown Prince Mohammed bin Salman.

As Bloomberg reports:

Trump has vowed “severe punishment” should Saudi Arabia be linked to the disappearance of Jamal Khashoggi… In an excerpt from an interview with CBS’s “60 Minutes” to be broadcast on Sunday night, Trump said: “It’s being looked at very, very strongly. We would be very upset and angry if that was the case.”

It looks like the Saudis may have really put their foot in this one.

But the fallout from attempting to ‘severely punish’ the oil rich Kingdom would likely spread well beyond the Crown Prince and his cohorts.

Also from Bloomberg:

“The kingdom emphasizes that it will respond to any measure against it with an even stronger measure,” the Foreign Ministry said in a statement. “The kingdom’s economy has an influential and vital role in the global economy.” …

“If there are U.S. sanctions against Saudi Arabia, we would be facing an economic disaster that would rattle the world,” Turki Al Dakhil, who heads the Saudi state-owned Arabiya news network, wrote in an article on its website…

“If President Trump was angered by $80 oil, nobody should rule out the price jumping to $100 and $200 a barrel or maybe double that figure,” he wrote.

Oil to US$60 per barrel…or US$200?

Look, anything could happen in the short term. But the Saudi royals are unlikely to survive for long if their own nation devolves into an economic disaster. Especially lacking US military support.

I expect the Saudi rulers will trot out some mid-level scapegoats in due course. And their literal or figurative beheadings will put an end to this latest flashpoint. Until then, uncertainty could see crude prices head higher.


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Now before you sign off, here’s the latest on the Trump ‘witch hunt’ from The Australian Tribune:

‘Was Alexander Downer “a Stooge for Clinton”?’

The long-running, dubious FBI probe into Russia’s role in US President Donald Trump’s victory over Hillary Clinton would make great fodder for a Hollywood soap opera. And it’s about to get a lot more interesting, and possibly highly embarrassing, for the Australian government.

Donald Trump’s former campaign adviser George Papadopoulos is heading to US Congress to deliver testimony expected to target…’

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