Your answers to the question I never thought I’d ask

Monday, 7 January 2019
Melbourne, Australia
By Bernd Struben

  • High time…or a dangerous Overton window?
  • ‘Liberals Under Pressure to Establish Ill-Advised Quotas’

In last Wednesday’s Port Phillip Insider, I posed a question to readers that I never expected to ask in an investment newsletter.

The response was tremendous.

I’ll do my best to publish all of them this week. We’ll get to that below, but first…

What a rally!

By market close on Friday, every major European and US index was well into the black.

The beaten down tech sector was among the best performing.

In the US, the NASDAQ gained a stellar 4.26%.

Even the beleaguered Apple Inc. [NASDAQ:AAPL] stock managed to rally, gaining 4.27%. Though the share price is still down 6.12% in 2019’s trading. And it’s still down a whopping 36.11% from its high on 3 October last year.

Ouch.

Those are the kinds of losses you might expect from a high risk small-cap play. Not a venerable blue chip like Apple. Its share price has, in part, fallen prey to declining demand in China and increased international competition from cheaper phones made by the likes of Huawei.

But we won’t delve into those details today.

The big question now is whether Friday marked an end to Apple’s precipitous decline, along with the broader market.

And the answer is…maybe.

But with history as a guide, you should proceed with caution before rushing to ‘buy the dip’.

As Bloomberg notes:

‘[S]ince 1950, the S&P 500 has endured 11 retreats of 12 percent or more that happened in prolonged bull markets such as the current one, according to Bank of America. While the average decline of 19.9 percent matches the latest sell-off that started in October, the corrections have typically lingered for much longer — eight months, on average.’

As you can see in the graph below, if markets do shrug off the bear and run higher before mid-year, it will be the fourth shortest rout since 1950:



chart image

Source: Bloomberg
Click to enlarge


Now as a contrarian investor, I don’t advise that you let these kinds of statistics paralyse you either. There’s nothing that says this rout can’t be among the shortest in 70 years.

While there are hundreds of pieces to this puzzle, there were two major factors that really pulled stocks lower over the last three months.

The first is fears of an expanded and prolonged trade war between the world’s two largest economies.

The second is continued interest rate rises from the US Federal Reserve in 2019.

That second fear looks to be coming off the boil. While anything can happen, Fed Chair Jerome Powell cheered investors on Friday with a decidedly dovish turn, saying:

As always, there is no pre-set path for policy, and particularly with muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves.’

As for the first fear — a prolonged full out trade war between the US and China — I still see that ending with a ‘great new deal’ inside the next few months. One where China offers enough real concessions for US President Donald Trump to claim victory at home.

At time of writing, US trade negotiators are meeting with their Chinese counterparts. This marks their first formal meeting since Trump and China’s President Xi Jinping’s dinner in Buenos Aires in December.

That meeting saw Trump agree to delay any additional tariffs on Chinese imports by 90 days.

Further negotiations are expected on the sidelines of the World Economic Forum in Davos, Switzerland on 22–25 January. Trump himself may meet with China’s Vice President, Wang Qishan.

In the meantime, I’d brace for further volatility in the markets, with some big runs up and some big moves down over the coming weeks.

And if you’re looking to take a position in an Aussie listed small-cap tech stock with strong links to the Chinese market ahead of the rebound, you’ll want to check this out.

According to small-cap and emerging market analyst Harje Ronngard, this pioneering company is ‘primed to shoot from virtual obscurity…into a household name this year.’

(Details here.)

Now a look at those markets…

Markets

Over the weekend, the Dow Jones Industrial Average closed up 746.94 points, or 3.29%.

The S&P 500 gained 84.05 points, or 3.43%.

In Europe the Euro Stoxx 50 index finished up 87.19 points, or 2.95%. Meanwhile, the FTSE 100 gained 2.16%, and Germany’s DAX closed up 351.03 points, or 3.37%.

In Asian markets, Japan’s Nikkei 225 is up 547.56 points, or 2.80%. China’s CSI 300 is up 0.36%.

In Australia, the S&P/ASX 200 is up 61.54 points, or 1.10%.

On the commodities markets, West Texas Intermediate crude oil is US$47.96 per barrel. Brent crude is US$57.06 per barrel.

Turning to gold, the yellow metal is trading for US$1,286.05 (AU$1,806.00) per troy ounce. Silver is US$15.70 (AU$22.05) per troy ounce.

One bitcoin is worth US$4,020.83.

The Aussie dollar is worth 71.21 US cents.

High time…or a dangerous Overton window?

Now here’s the question I asked you last Wednesday: Do you believe Australia should follow Canada’s lead and fully legalise, regulate and tax marijuana?

As mentioned above, the response from readers was tremendous. More than 40 replies in, so far, with the majority (some 80%) in favour of full legalisation.

That’s far too many to publish, though. And some, frankly, offer great opinions but the writing is too mangled for me to print here.

However, I will try to share a fair representation of the responses over the course of the week. (Some have been edited for length and clarity.)

Now onto the first letter. This one comes from reader Richard:

I do agree with legalisation of cannabis for medicinal and recreational use, but non-smokers need to be properly protected from smoke fumes.

We went to Vancouver and Seattle recently and my wife felt sick because there was so much of a pervasive smoky cloud of weed.

A “raucherzone” that is open like on German railway stations simply won’t cut it.

Perhaps as more companies turn to producing and selling beverages and edibles infused with THC (the ingredient in Cannabis that gets people ‘high’), fewer people will need to light up in ‘pervasive smoky clouds of weed’.

Reader Steve also gives legalisation the thumbs-up:

I vote a YES for this.

Decriminalise it and grow under proper legal conditions….

Take the synthetic version to the tip, though. Not as efficacious for medicinal purposes and I don’t want Big Pharma profiting from crap…. again.’

If there’s one issue that highlights the counter productiveness of the war against cannabis, it’s the black-market development and sale of ‘synthetic weed’. This stuff, or so the newspapers tell me, can and does kill users. Unlike the natural version…

And this, from reader James:

It’s been a long drum roll of the greater population versus the small number of politicians that create and control the laws of the nation.

Marijuana use won’t be stopped by laws.

Legalise it.

It never ceases to amaze me how a small number of politicians backed by powerful vested interests can manipulate the greater population for so long. Perhaps the drum roll is reaching a crescendo on this one?

Reader Andrei, the fourth to reply, wrote against legalising cannabis.

No, because you are opening Overton windows for other drugs even by discussing that topic.’

An Overton window, if you’re not familiar, illustrates a range of relatable ideas that people are willing to discuss and possibly accept.

Indeed, if cannabis were fully legalised in Australia, it’s no stretch to think that the next push might be to legalise and regulate other currently illicit drugs.

Then there’s reader Jeff, who wrote to warn us to be careful what we may wish for:

I have several friends who live in Colorado, a US state that legalised marijuana four years ago. I recently asked them about it.

They responded with some colourful stories, some humorous and some concerning, with a theme that no one anticipated the far-reaching effects of the legislation.

In our conversation they referred to sociologist Robert K. Merton’s “law of unintended consequences” …

In short, they were highly supportive of it at the time, and are now wishing the legislation had not passed.

I imagine reversing course and returning to marijuana prohibition will be almost as difficult as ending its prohibition was in the first place. There’s a lot of legal money now backing the industry. As I wrote last week, Zion Market Research estimates the global market could be worth US$62.9 billion by 2024.

The last (edited) letter today comes from reader John. He’s against legalising cannabis, but for reasons you might not expect:

[T]he sin tax on weed will be massive. Don’t let the government spin you stories on the kids’ suffering eased etc. Their goal is to rob us of the last free market we got that is pot, so they can waste the tax on dumb s*** like 900 hundred dollar give away packages…

If you support legal weed get a job in Canberra because I’d like to remind you we’re about free markets and less tax. Or am I with the wrong people?

I’m guessing I’m going to see muppets writing in saying yes legalise it. All the BS they told themselves about revenues etc… I blame these dumb people too for mess of the left world, because they never worked out the government’s not here to help, it’s here with its hand out for wealth…get with the program!!!

Thanks John.

Indeed, after railing against the excessive sin taxes on tobacco and alcohol in Port Phillip Insider last week, you’re correct to assume the sin tax on cannabis will be massive.

It sounds like you might vote for decriminalisation. That would see the government simply turn a blind eye to the cannabis trade, letting people make their own choices and go about their business without involving bureaucratic oversight.

Knowing what we know about government though, that’s highly unlikely.

If it’s illegal, the government can use that to demand more funding for police, courts, jails and all the other cogs in the wheel that make the justice system turn.

On the other hand, if it’s legal, the government will certainly demand an oversized share of the pie in the form of taxes and a new small army of regulators.

But if you look at what’s been happening to some of the top listed pot stocks, both in Australia and internationally, you’ll see it’s not just the government that benefits from legalisation. Free market entrepreneurs are already making hay as well.

As small-cap and pot stock investing expert, Sam Volkering points out, ‘The prohibition of cannabis around the world is coming to an end — and pioneering cannabis companies are minting new millionaires every day.

You can get all those details — along with Sam’s favourite Aussie pot stock play — in his new digital release, The Black Book of Cannabis.

Just click here.

Finally, here’s the latest on the gender wars from The Australian Tribune:

‘Liberals Under Pressure to Establish Ill-Advised Quotas’

The talk you hear about the Liberal Party being “anti-woman” almost always reflects the relatively small percentage of women elected within the party. Not the number of women voting for Liberal candidates. And certainly not the Liberals’ policies towards women.

Quotas, while often well intended, do not serve the best interests of business or government. The people deserve the best candidate in the job to serve them. Whether that person is…’

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another then The Australian Tribune is for you.

And it’s absolutely free.

Sign up here to get The Australian Tribune delivered free to your inbox five days per week.

You can visit our website at https://www.theaustraliantribune.com.au/ to read the complete article above now.

Cheers,
Bernd