Tiho Brkan | Oct 07, 2012 01:31AM ET
When it comes to advice for the financial markets, there is a reason why the majority of people in this business lose money consistently, while only a handful are successful and make a profit on a consistent basis. These clowns come on TV channels like Bloomberg and CNBC and they all sound the same. I think I always say this to you, but I'll repeat it again: when it comes to financial advice, the best thing to do is to do your own research and run your own investments. It is basic advice, but it is very, very important. That way you lose your own money if you make mistakes, or if you do your homework and have a little luck, you make your own profits. Listening to financial "gurus / bloggers / experts / traders" who think they know everything, for the majority of time is a complete waste, and this includes me too.
I can be just as wrong as the common man on the street. As a matter of fact, because I spend a large amount of time in front of the computer reading, researching and studying all of this "stuff", the common man on the street probably knows a lot more about the economy than I do. I am talking about the common man that runs a business and isn't brainwashed by all these financial reports we read daily. That is because visiting local restaurants and night clubs, or just asking various taxi drivers how business is going can tell you a lot more than government statistics - which are all phoney anyway.
On that note, I can give you advice on what I see in the market place today and what I am doing with my money, but in the end I am no better than you or anyone else, so read as much as you can from as many people as you can and in the end, always think clearly by yourself.
On the stock market...
So when it comes to stock prices I can tell you my view: every man and his dog is optimistic, positive, strongly invested and quite complacent. That to me is a cocktail of trouble! Let me explain...
Notice that all the best investment opportunities and major market bottoms occurred when margins collapsed, like in 1974, 1982, 2002 and 2009 etc etc. When margins are depressed and earnings have collapsed due to a recession, stocks offer a great entry point and you get to catch the whole recovery. When you hear a lot of opinions regarding how positive fundamental picture is because "profits are at record highs" - that type of a parrot talk can usually be heard from all financial advisors and "gurus / experts" on TV near the peak of the stock market.
Look at the chart above and see how profit margins peaked during the 2006/07 period. Now focus on the chart below:
Fast forward to today and the market has now gained 113% in even less time, rising even more rapidly and yet profit margins are at all time record high. That means it is not probable that they will go even higher and most likely will do the opposite and mean revert downwards.
Remember, in capitalism, profit margins always mean revert. Currently, the market is driven by central bank's printing money and stimulating financial assets. This has forced a lot of speculation into the market, and yet constantly market participants argue that "there is a lot of cash on the sidelines" and that "funds are underinvested". Let me tell you that the market doesn't gain 113% in three years because everyone is underinvested and there is cash on the sidelines. How the hell did it get there, all by itself?
Notice that the US stock market has rallied over 110% in the space of three and half years from its lows in March 2009. The time to be an optimist has long passed. It was wise to be one back in late 2008 and early 2009, when profit margins and earnings collapsed. Back than, retail investors as well as "mum and pop" investors held large amount of cash on the sideline due to fear (chart above shows cash levels reached over 40% of the portfolio on average).
Today everybody is an optimist, even the bears are slightly invested, but the stock market rally of 110% plus has largely discounted the majority of good news such as record profits and record profit margins. Today, these same investors hold very small amounts of cash on the sideline due to greed, herding and being over exposed (chart above shows cash levels are now at 18% of the portfolio on average).
You will notice that whenever cash levels drop, stocks tend to correct almost always. At the same time, when retail investors sell stocks and raise cash… now that is when it is the best time to invest. That is when you will see me excited. As I always say, you are either a contrarian or a casualty. Warren Buffet could tell you a thing or two regarding the sentiment and the chart above:
"Attempt to be fearful when others are greedy and to be greedy only when others are fearful" ~ Warren Buffet
On the Precious Metals...
So the question is, if the stock market is not a good place to invest right now, could Gold or Silver present opportunities? Last time we talked, I told you that I wasn't doing anything. The reason for that has not changed.
Europe is still a mess and Greece or even Spain is heading towards a default of some type that will shock the system similar to 2008. I know that almost everyone doesn't hold that opinion anymore, but I still do. I also didn't do anything because I remain fully invested in Precious Metals, including Silver. That means I'd rather not buy extra than is necessary and overexpose myself.
Nevertheless, Silver has rallied from $26 to $35 from the middle of August towards the end of September, which is an impressive 35%. So since I am fully invested in this asset and the majority of my clients money is held there, my fund is up rather handsomely for the year (so far).
During a bull market or a boom, the best thing to do is to exercise patience. Besides, when I look at an average portfolio of an investment fund, I notice that stocks are commonly about 37%, bonds are even higher at 49% (bond bubble anyone?), money markets (aka cash levels) are currently at 9% - which I already stated is extremely and dangerously low for an overbought stock market, and finally Gold is only at 1% of exposure. This makes me think that Gold is not in a bubble as investors are still largely under-exposed to this asset class.
When I hear constant chatter on Bloomberg and CNBC from these so called "gurus" on how funds now hold 10% or 20% of their money in Gold, that is when I will become worried… and if and when Gold prices go high rapidly, I will most likely sell out. That is because, almost everybody will be super-bullish at that point.
They also talk about Gold moving towards $3,000 in the next several quarters or years, according to their chart. I don't really know what to tell you in the short term. Short term market movements are like gambling and probability. It could go up, but it might not.
It seems to be that a lot of investors are focused on these "technical levels" anticipating a breakout… the same levels you discussed in your email. In my experience, I've learned that it is not wise to focus on things that everyone else focuses on, because usually markets surprise and do something completely different. And it has also come to my attention that in the near term, investors are too optimistic about Gold and Silver.
I'm also fortunate to read a few newsletters from various investment banks and also individual traders. Technical guys who run these "shorter term" publications are all anticipating a breakout above $1,800 and are decently positioned for it.
I am not saying Gold cannot move higher, all I am saying is that personally I would not buy right here right now. I'd rather wait for a pullback or wait for a setup where the retail investors sell Gold so I can "buy when others are fearful" as Mr Buffett himself wisely stated. You see, Gold has good fundamentals and reasons as to why it is rising (unlike the stock market).
As central banks print money, maybe even more investors will rush in and Gold might not even pullback. After all, my long term view is that Gold will go much higher. So while I am not selling my Precious Metals due to a good long term outlook, I am also refraining from buying today and tomorrow, due to the short term "froth and heat" in the market.
If I miss the move, then I miss the move…no big deal. There is always another opportunity and that is one thing I've learned in this game. Another chance is just around the corner. Same goes for Silver, as Silver follows Gold rather closely, but just with larger downswings and larger upswings. If I had to buy one of the two, I'd rather buy Silver because it is cheaper on a historical basis.
Silver is still 30% below its all time peak of $50, while Gold is very close to new all time highs. That makes me think that Silver has some catching up to do. Therefore, holding both with the longer term view is still fine in my opinion.
On the Economy and Australian real estate...
Finally, read my recent blog post, which argues that we are now on the edge of a global rescission. When I look at Asia, it has been the powerhouse of the recent recovery out of the 2008 recession. However, their export volume is now declining, which signals to me that their customers - which are US and Europe - are showing signs of a slowdown and weak demand.
As all prices move on the premise of demand and supply, whenever demand decreases and supply increases, that tends to be the mortal enemy of future price action. When activity slows and the economy stalls, inventories build up and prices decline. Iron Ore inventories at Chinese ports are also through the roof too.
The Iron Ore fundamentals of demand and supply are even worse as prices have crashed recently. As you know well, Iron Ore is a main component of steel making and Australia's main export commodity. At the same time, China is the biggest producer of steel in the world, and therefore Australia's No 1 customer.
The Australian trade balance has now turned into a deficit as the mining boom slows further. That means, Australia is once again importing more goods and services than it is exporting. This weakens capital as it slowly leaves the country and it could most likely weaken the currency too. The slowdown will surely affect the economy. I also happen to think that government revenues will now fall, which could mean higher taxes for us, as the government will need to raise more money elsewhere. All in all, it does not signal great things ahead for the overvalued and overhyped Australian housing bubble.
You might already know that I am rather negative on this asset class and hold a friendly bet over drinks and dinner, with a close family friend, who's family owns and manages a large private commercial and residential property trust in Australia in excess of $100 million dollars. He believes that Australian real estate prices will move sideways and do not have large downside risks. I hope for the sake of everyone in Australia that he is right.
Furthermore, I am also quite aware that certain "experts" out of local investment banks, are now talking about how a mining boom end, signals a housing boom re-start (link here ).
I am quite convinced that once a recession occurs, Australian real estate could drop more than 20% from peak to trough. The level of mortgage debt Australians hold is now much larger than in 2006 when the US housing market turned south. And let me tell you that soon enough, our unemployment rate will also start to rise. So the question is, will this debt be serviceable?
Since I believe we are in for a mean reverting outcome, just like US profit margins, it is only a matter of time until the "the lucky country" takes a turn for the worse.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.