$1 Billion versus $6.5 Million…What Would You Prefer?

Monday, 7 September 2020
Melbourne, Australia
By Greg Canavan

Ahhh…2020 just keeps on delivering…

Overnight, Novak Djokovic hit a ball in anger in his fourth round match at the US open. It accidentally hit a lineswoman in the neck. As a result, the favourite to win the tournament was disqualified!

As bizarre as that might be, it pales in comparison to the bizarro world of Dan Andrews, who has gone from flattening the curve to outright elimination. The only thing he will eliminate is the life and vitality of the Victorian economy.

Last week’s economic growth data showed economic growth in Victoria contracted by 8.5% in the three months to June. The state will have been in hard lockdown for much of the September quarter, so you can expect to see another very bad quarter for Vic when the figures are released.

Victoria is in a depression, and much of that is due to the ineptitude of the Andrews government.

The ongoing lockdown, announced yesterday, only ensures things will get worse. Andrews has set an impossibly high bar for Melbournians to regain their freedom, all based on subjective ‘modelling’.

Here are some of the hurdles, courtesy of The Australian:

From Sunday, some restrictions will be slightly eased, with the curfew starting one hour later, at 9pm. Public gatherings will be allowed for two people outdoors for two hours, and those who live alone can nominate one person who can visit their home.

If the state records fewer than five new cases on a daily average across a fortnight, restrictions will ease more considerably on October 26. That would reopen hospitality for outdoor seated service, with non-essential retail also allowed to begin trading.

Shopping, currently restricted to one person per household, will also be allowed from this time, as will weddings and intrastate travel.

The state will allow all retailers to open, and restaurants to have up to 50 patrons, after November 23 only if there have been no new cases in the previous fortnight.

The stock market didn’t like it. The ASX 200 fell at the open, but then rebounded on hopes of a vaccine arriving sooner than expected.  

Still, it won’t do anything to stop what’s happening in Victoria now. The State of Disaster accounts for around 25% of the Australian economy. The ongoing lockdown will have an impact on banks, retailers and property trusts, just to name a few sectors.

Let’s bring up a chart of the ASX 200. It’s not looking great…

Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

As you can see, the market made a recovery peak in June. This was when it looked like the economy would open back up and things would slowly get back to normal. The market tried to break through this high on several occasions, but couldn’t manage it.

In doing so, it formed a rising wedge pattern. Stocks broke down out of this pattern last week, then tried to rally back up. But Friday’s sharp fall saw the index fall back to the lows of late July/early August.

Any more selling from these levels suggests we’ll finally get a meaningful correction following the big rally from the March lows. If you’ve been patiently waiting for it, now’s your time to look for some potential long-term bargains.

But maybe not in the tech sector. The bigger question here is whether the good times are over?

In Wednesday’s Insider, I wrote:

Whether we’re at peak absurdity, or it’s still to come, is hard to tell.

But I think we’re close.

There are examples everywhere, especially in the tech space.

I pointed out the absurdity of Tesla’s valuation, and then compared it to what was happening in the local market:

A similar level of insanity has hit the local “tech” sector. Our “buy now, pay later” stocks are Australia’s version of high-growth tech companies. But they are really just old-fashioned consumer credit companies, with a 21st century lick of paint.

Is this market starting to believe this too?

It’s too early to say.

Let’s take opinion out of it for now, and just look at the charts. Here’s Afterpay Ltd [ASX:APT], the leader of the BNPL pack:

Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

Last week’s correction has done nothing to damage the upward trend. The price has not even come back to its 50-day moving average yet (blue line).

So if you care nothing for fundamentals — like valuation — Afterpay still looks good. Just make sure you have an exit strategy.

I say that because, on the balance of probabilities, APT looks wildly overvalued. Its market value is the same as Coles Group Ltd [ASX:COL]. Coles is expected to generate a net profit of $1 billion in FY21. APT, on the other hand, is forecast to deliver just under $6.5 million.

$1 billion versus $6.5 million…

I know, I know…it’s all about future growth.

Put another way, it’s all about belief.

This is how bubbles start and how they get out of hand.

It is my view that this tech bubble, both in the US and Australia, is in the process of bursting. If you’ve made good money from speculating, as I said last week, ‘get out, now’.

But I could also be wrong. This could just be a violent pullback in a bizarre and historic market melt up. If you want to roll that dice, make sure you have a stop-loss exit plan in place. It’s fine to believe in impossible things, but you need a get out clause.

Continue below for today’s ‘Week Ahead’ video update from Murray Dawes. In it, he shows you a microcap explorer with an impressive board that has a busy drilling campaign coming up over the next six months.


An Explorer with a Strong Board
By Murray Dawes


[Click on the picture to find out the name of the explorer with an impressive board drilling multiple large targets over the next six months.]

After the interest shown in the little company I chatted about last week, I thought I would follow up with another microcap explorer that should have a steady stream of news flow over the next six months as they drill some very interesting targets.

This company is exploring on land that had been locked up as a Defence Reserve since 1978 and is therefore underexplored. Recent rule changes by the federal government has allowed them to start drilling and they are the second largest landholder in the Kimberley region.

They have two interesting targets that they have compared to Glencore’s Ernest Henry mine. They will be announcing their drilling plans soon.

They are also looking for gold about 190km from Kalgoorlie and have a drilling campaign under way. The best strike so far has been 13m at 4.2g/t from 48m, so the follow-up drilling is going to be interesting to watch.

The thing that interests me the most about them is the members of the board who are heavy hitters. They have been exercising their options early and are building up sizeable stakes in the company.

These stocks I am showing you aren’t trading tips because I can’t help you manage the position over the long term as I do for subscribers in my trading service Pivot Trader.

I am showing you these companies to show you some of the things I look for from a fundamental and technical perspective. These small-cap resource stocks are extremely high risk so it’s important that you manage risk effectively when trading them.

My own method involves taking part profit along the way at key resistance levels, and ensuring that I have a stop-loss at a breakeven level for the whole trade once the stock has hit my initial target.


Murray Dawes Signature

Murray Dawes,
Editor, Pivot Trader