Rational investing in an irrational world

Thursday, 21 March 2019
Adelaide, Australia
By Bernd Struben

  • A fly in the Saudi’s ointment
  • 50,000 kilos of Aussie weed
  • ‘More Green Tape! APRA Tells Banks to Mitigate Climate Risk’

As investors, we like to think of ourselves as rational beings.

And for good reason.

My pocket dictionary tells me that the definition of rational is ‘based on or in accordance with reason or logic’.

Whether you’re considering new stocks, a new car or even a new property, you likely hope your investment decisions are based on reason and logic.

But the truth is almost all investors — your editor included — are highly influenced by sentiment.

My same trusty dictionary tells me that the definition for sentiment is, ‘people’s opinions or feelings about a situation’.

Now investing 101 stipulates that you should never buy or sell an investment based on opinions and feelings. Even when you’re choosing which restaurant to spend your hard earned savings at you would hope to reach a decision with reason.

But that’s just not how we simple humans are wired. Which is why correctly gauging market sentiment can make the difference between riding a trend higher to big gains rather than lower for big losses.

You’ve probably heard the term ‘market sentiment’ often enough. It refers to people’s feelings about the future direction of a specific financial asset, an entire sector or the wider the economy.

To grasp how huge a role market sentiment can play, just think back to 2017 and bitcoin.

It started the year at US$996. By 17 December it was trading for US$19,500.

Why?

Positive sentiment.

Of course you know what happened to the price of bitcoin next. It fell off a cliff, hitting US$3,339 on 8 December 2018.

Why?

Negative sentiment.

With that in mind, the results from the latest Westpac Melbourne Institute survey bring more ill tidings for Australia’s struggling housing market.

As the Australian Financial Review reports:

The index for the overall economic outlook for the next 12 months fell 6.9 per cent, while the index on housing sentiment sank to its lowest on record and the percentage of people who thought the best place for savings was in real estate slipped to just 9 per cent – the worst level since 1974.

Like it or not, sentiment drives investor decisions. And with sentiment on housing down in the subbasement somewhere, the outlook for property prices remains sharply lower.

Until, of course, something happens to change people’s opinions and beliefs on Aussie real estate.

In the meantime, you may want to check out Global Investor editor Selva Freigedo’s survival kit. Just click here.

Now to the markets…

Markets

Overnight, the Dow Jones Industrial Average closed down 141.71 points, or 0.55%.

The S&P 500 lost 8.34 points, or 0.29%.

In Europe, the Euro Stoxx 50 index finished down 36.62 points, or 1.07%. Meanwhile, the FTSE 100 lost 0.45%, and Germany’s DAX closed down 184.52 points, or 1.57%.

In Asian markets, Japan’s Nikkei 225 is up 42.07 points, or 0208%. China’s CSI 300 is up 0.23%.

In Australia, the S&P/ASX 200 is down 26.25 points, or 0.43%.

On the commodities markets, West Texas Intermediate crude oil is US$59.83 per barrel. Brent crude is US$68.50 per barrel. (More on oil below…)

Turning to gold, the yellow metal is trading for US$1,315.37 (AU$1,844.58) per troy ounce. Silver is US$15.52 (AU$21.76) per troy ounce.

One bitcoin is worth US$4,035.11.

(Is bitcoin getting ready for its next big run higher? You can get all the latest crypto investment advice here.)

The Aussie dollar is worth 71.31 US cents.

A fly in the Saudi’s ointment

Getting back to oil…

West Texas Intermediate crude (WTI) is now within a whisker of US$60 per barrel, the upper range I forecast for 2019.

Oil bulls’ sentiment was buoyed (there’s sentiment at work again) on two fronts.

First, the US. The Energy Information Administration revealed a 9.59 million barrel drop in US oil stockpiles. The fall exceeded analysts’ expectations.

Second, US Federal Reserve chair Jerome Powell and company not only kept rates on hold this month but indicated no further rate hikes are in the cards for the rest of the year.

Rising US interest rates had hampered global growth and with it the demand for oil. Investors are betting the Fed’s new dovish stance will see that demand increase.

That may be so.

But as I’ve written before, the big picture these days isn’t about the demand for oil, it’s about the supply. And there is a global glut in supply.

Hence the Saudi’s determination to extend production cuts of the OPEC+ cartel through the rest of the year.

But there’s a fly in the Saudi’s ointment.

Namely Russia.

The world’s number three oil producer was late to initiate its agreed upon cuts. Now Russian Energy Minister Alexander Novak is dragging his heels on signing up to any extension.

From Bloomberg:

The partnership at the heart of the OPEC+ alliance showed further signs of strain after Russia pressured the Saudi-led group to delay a decision on the future of their production cuts…

Saudi Arabia needs its oil to sell for $95 a barrel to cover government spending this year in an economy that relies almost entirely on petroleum. Russia is more resilient, with a more diversified industrial base and a less bloated state that means it based its 2019 budget on $40 crude…

Russia will take a wait-and-see approach on whether to extend the OPEC+ deal because the market has achieved a fragile balance, Novak said in an interview with Bloomberg Television on Sunday.

With Brent currently trading at US$68.50, the Russians are more than meeting the US$40 crude they’ve budgeted for in 2019. Add to this picture that Vladimir Putin is eager to cosy up to Donald Trump, and you can see why I expect Russia to open the taps back up in the second half of 2019.

It looks like we may not get a decision from Russia until shortly before the OPEC+ meeting in Vienna on 25­–26 June.

If WTI is trading above US$60 per barrel in early June, that could be a great time to consider shorting crude. Stay tuned…

50,000 kilos of Aussie weed

What do you think of when you read ‘50,000 kilos of Aussie weed’?

I can’t help thinking that the Australian Border Force is celebrating their discovery of a massive illicit shipment. Enough to fill the beds of more than 50 full-sized utes.

But as Bob Dylan, no stranger to cannabis himself, famously sang, ‘The times, they are a changin’.

Indeed.

The 50,000 kilograms in question is the amount of dry cannabis that Cann Group Ltd [ASX:CAN] expect to produce each year from its planned new facility in Mildura, Victoria.

The medicinal cannabis company intends to build a 3.4 hectare $130 million greenhouse at the site. If that sounds big for a marijuana grow facility, that’s because it is. In fact, it will be Australia’s largest purpose-built medicinal cannabis facility.

Cann already operates two medicinal cannabis facilities in Melbourne. The company’s cannabis is processed for use by Australian patients and for export.

As you can see in the chart below, investors were bullish on the latest expansion news:



chart image

Source: Google Finance
Click to enlarge

At time of writing, the stock is trading for $2.17. The share price has pulled back a bit from its market open on Wednesday. But it’s still up 38.2% over the past five days.

Is it back on track to reach…and exceed…its peak of $4.01 on 5 January 2018?

Pot stock guru Sam Volkering thinks so. And he’s bullish on a few other Australian cannabis companies as well.

You can find Sam’s latest favourite Aussie listed pot stock here.

Finally, don’t forget to check out the latest in politics from The Australian Tribune:

‘More Green Tape! APRA Tells Banks to Mitigate Climate Risk’

First it was the Reserve Bank of Australia making unqualified noises about climate change. Perhaps to distract from the fallout of its lower for longer interest rate policies.

Now the boffins at the Australian Prudential Regulation Authority (APRA) have felt the need to show their green colours.

Financial institutions, after all, are surely the experts when…’

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