How to Navigate 2020’s Roaring Start

Tuesday, 21 January 2020
Adelaide, Australia
By Bernd Struben

  • On a bearish note…
  • No end in sight for oil glut

I should go on vacation more often.

Not just to reconnect with family and friends or wash the dust off my surfboard.

And not just to give you the opportunity to hear directly from some of our top editors, who you may not subscribe to. Though I hope you’ve learned something from their unique investment insights.

But while I was away, doing little more than peeking at the financial headlines, 2020 got off to a roaring start.

The major US markets are all at or near record highs. Most European and Asian markets are also well into the green.

And though it’s slipping in intraday trading today, the ASX 200 notched its fifth record high close yesterday.

You can see the year-to-date performance in the chart below:



chart image
Source: Google Finance
Click to enlarge

In less than three weeks of trading, Australia’s biggest 200 stocks by market cap are up 5.8%.

While that’s good news, it’s also clearly unsustainable. Unless you think the ASX 200 could more than double by this time next year. Which, barring a surge in earnings, would lift the price to earnings (PE) ratio from the current record high of 18 times up to 36 times.

Despite that, Port Phillip Publishing’s head of research, Greg Canavan, remains cautiously optimistic.

Though he reminds us the market ‘is probably a lot closer to a top than a bottom’. And not to lose sight of the fact that, ‘the rapid rise in prices could be taking the market to a major peak’.

And it’s not just stocks that are on a tear.

Bitcoin, the world’s leading crypto, is up 21% since we kicked off the new year. And according to our crypto pros, Ryan Dinse and Sam Volkering, this could be the beginning of a big surge higher as we approach the next ‘halving’ in May. (More on that tomorrow.)

Gold’s gained as well, up 2.9% so far this year.

As you’d expect, that’s helped lift the share price of many gold stocks. Like Aussie gold giant Newcrest Mining Limited [ASX:NCM]. Newcrest stock is up 8.4% since 2 January (as at yesterday’s market close).

Or Saracen Mineral Holdings Limited [ASX:SAR], already up 13.9% in 2020.

Does that mean the train has left the station for potentially big, rapid gains in the gold sector?

Not according to Aussie gold expert, Shae Russell.

Shae is the editor of Rock Stock Insider, published by our friends over at Fat Tail Media. In 2019 she travelled the globe speaking to the top players in the gold markets. And she walked away more convinced than ever that the price of gold is headed sharply higher.

With that in mind she put together a short list of Aussie gold stocks she believes will deliver some of the best gains if gold shoots well past US$1,600 per ounce as she expects.

You can get the full story here.

Now a look at the markets.

Markets

Overnight, the Dow Jones Industrial Average closed up 50.46 points, or 0.17%.

The S&P 500 closed up 12.81 points, or 0.39%.

In Europe the Euro Stoxx 50 index closed down 9.23 points, or 0.24%. Meanwhile, the FTSE 100 lost 0.30%, and Germany’s DAX closed up 22.81 points, or 0.17%.

In Asian markets Japan’s Nikkei 225 is down 205.28 points, or 0.85%. China’s CSI 300 is down 1.31%.

The S&P/ASX 200 is down 25.01 points, or 0.35%.

West Texas Intermediate crude oil is US$58.71 per barrel. Brent crude is US$65.20 per barrel. (More on oil below…)

Turning to gold, the yellow metal is trading for US$1,561.82 (AU$2,271.08) per troy ounce. Silver is US$18.09 (AU$26.31) per troy ounce.

One bitcoin is worth US$8,676.02.

The Aussie dollar is worth 68.77 US cents.

On a bearish note…

Not everyone is convinced that record low interest rates and…erm…market friendly central banks will keep stocks humming along this year.

Like our wealth preservation expert, Vern Gowdie.

Vern reminds us that what goes up must come down. And that recessions are inevitable. ‘Between recessions the market expands. And during the recession, the market contracts. That’s the complete cycle.

The last global recession is now 11 years past. Long enough for many investors to forget the pain of seeing 30–40% or more of their wealth disappear in a matter of months.

But Vern warns that you can’t wait around for the government to announce we’re in a recession to take precautions.

The official definition of recession is two quarters (six months) of negative growth. Therefore, the official recognition of a recession cannot be made for at least six months.

The market (invariably) changes trend before a recession. Those waiting for a recession to be the precursor for a market downturn are blind to history.

When the cycle rotates from up to down, then a recession will commence…but it won’t be recognised for at least six months after the event. By then it’s too late.’

Fair warning.

No end in sight for oil glut

Not all markets and commodities have gone up in price this year.

Crude oil, for one, has been slipping. West Texas Intermediate crude (WTI) is down 4.0% since New Year’s Day. And it’s down 6.7% since a recent 6 January peak.

That’s despite a remarkable number of geopolitical factors you’d expect to send oil rocketing.

Venezuela’s oil exports, for example, remain largely barred from global markets due to US sanctions. Sanctions that will likely remain in place so long as Nicolas Madura clings to the presidency.

Then there’s the growing civil unrest in Libya. Much of the nation’s oil production remains shuttered by a local branch of the armed forces, mired in civil war. You can add Iraq to the list too, where protests also impacted on oil output over the weekend.

Even the US killing of top Iranian general Qasem Soleimani — and Iran’s retaliatory missile strikes against Iraqi bases housing US forces — wasn’t enough to push crude to new highs.

Which all spells bad news for OPEC’s efforts to crimp the gushing global supply lines.

Not that OPEC’s leaders are ready admit as much yet.

In December OPEC+ (which includes Russia) agreed to slash another half million barrels per day (bpd) from their combined output. If that target’s met, the Saudis upped the ante by saying they’d slash another 400,000 bpd. That agreement runs through the end of March, and it could be extended to the end of the year.

OPEC’s talking heads believe their efforts should support crude prices at or above today’s prices. But the world’s top energy agencies — and your editor — disagree.

As Bloomberg notes:

OPEC’s own research team sees that pact continuing to drain global stockpiles throughout 2020. By contrast, the IEA [the International Energy Agency in Paris] and EIA [the US Energy Information Administration] see inventory levels rising — even if the deal gets implemented in full. And even if were to be extended for the entirety of 2020.

Much of the global supply glut continues to be driven by record levels of US production.

And with most US shale producers profitable at prices above US$50 per barrel, crude looks to be 15–20% overpriced in today’s markets, by my metrics.

That’s all for today. Be sure to check back in with us tomorrow.

Cheers,
Bernd