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Global Mining Investing is a reference eBook to teach investors how to think and act as investors with a underlying theme of managing risk. The book touches on a huge amount of content which heavily relies on knowledge that can only be obtained through experience...The text was engaging, as I knew the valuable outcome was to be a better thinker and investor.

While some books (such as Coulson’s An Insider’s Guide to the Mining Sector) focus on one particular commodity this book (Global Mining Investing) attempts (and does well) to cover all types of mining and commodities.

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Wednesday, April 17, 2013

Market poised for a correction - Dow Jones and ASX equities

The Australian, US and other global equities have enjoyed a very positive and persistent rally over the last few years. The US Dow Jones reached a new high of 18,865 points, and its otherwise been a monumental rally from 6,626 points set in the first quarter of 2009. The market was of course buoyed by stimulus, but in actual fact there are some underlying positive fundamentals which apply to the global market.

Judging from the following indices, we can expect the US Dow index to fall back to a support level of 13,610 points, and possibly even 13,228 points, however I suspect that would only be a short term intra-day phenomenon. It can also be expected that the 14,000 psychological level will also be important, as it was a difficult level to exceed.

Do I expect this uptrend to break? This is an interesting issue given that the market until now has been held using stimulus. Do I think the US will continue with the stimulus? Undoubtedly the answer is - if necessary. I would however expect the US to be aided by a recovery in property markets, as new home buyers enter the market. There has been some level of job creation in the US, and its probable that this will continue as property prices are actually not so high in 'unemployment' zones. So this is a favourable basis for growth in US jobs and economic activity. For this reason, I would fully expect a recovery from the US market, but its probably doubtful that it would exceed 14,865 points. I would be looking for a double-top, and a lot of short term rallies for the next few years before we see the development of a new trend, or the next phase of the cycle.

You might wonder if matters are any better for the Australian market. Australia is of course strongly tied to Asian markets. The Asian markets have strongly relied on strong US consumption in recent years, and given that these economies remain strongly export-orientated, you can expect that to continue, though to a declining degree. It will take time for Asia to purge its 'US-centric' reliance, even though intra-regional trade is being encouraged. They remain competitors more than compatible exporters.
Australia is of course a major exporter of minerals, energy and food. You might expect strong volumes growth to offset weaker prices in coming years. This will mean a relatively strong Australian economy, and thus one can expect a resilient AUD currency, as well as only subtle weakness in the ASX-200.
It seems unlikely that the ASX-200 will collapse as low as 4,000 points. I would expect a fall back to 4,400 points, with some resilience at 4,600 points.
 Two serious threats posed to markets could be a game-changers in terms of their effects:
1. The prospect of a military intervention in the Middle East (Iran) or North Korea.
2. The prospect of bird flu in China spreading to other countries. Those "preppers" might just be on to something. Expect there to be a huge crisis if consumers stop going out because they are concerned about contracting bird flu.

Clearly the bird flu event is the more serious 'vulnerability'; as war is stimulus because its more spending and because its contained in parts of the world which will not impact industrial output. North Korea and Iran have no industrial activity, and there is every reason to think these countries can be contained without serious threat to other countries in their regions, or to freight movements.
The bird flu crisis threat will ultimately depend on the extent of its virility (i.e. how deadly), its communicability (i.e. how easily it spreads), and how well the threat is managed. There is every reason to think that it will be able to spread internationally. If that is the case, then that means people staying home and not spending money. That has to hurt confidence. It takes 6 months to develop an anti-viral and another 6 months to produce sufficient quantities to contain the threat. The implication is that its a year of 'vulnerability' allowing for:
1. The worst market conditions you have seen for a long time - given the high levels of indebtedness
2. The best rally you will ever see after the virus is contained

If there is a serious viral threat, you might expect the ASX to collapse to its historic low of 3,145 points (set on March 2009, and perhaps 10,000 points for the Dow Jones. There is a lot of 'economic grey' in between, but consider that it might be difficult for the market to anticipate the extent of the threat. That means that the carnage to unfold would be self-fulfilling, and there is no prospect of government stimulus working. i.e. You can't force people to go out for a 'killer latte' - at least not when they think it will kill them within the week. Otherwise 'radium lattes' would be all the rage.

I am a trader in the 'spec mining' end of the market, so given the spectre of 'upside' in the mineral explorers and emerging miners that I follow, you might at least expect 'company-specific' news. This is sadly little protection for two reasons:
1. Emerging miners carry some forward-looking value that is not going to be realised in terms of earnings in the short term, i.e. They are not going to be paying dividends, but repaying debt, or exploring to prove up more resources. This is reason to sell until there is light at the end of the tunnel.
2. Developers will be adding value to resources, and whilst that is 'tangible' in the sense that it exists as 'bankable resources', its not 'realised' in the sense of generating cashflow, with the double-edged problem of 'costing' you in terms of dilution to fund exploration. In these conditions, you are inclined to be conservative. Under these conditions, even positive exploration results get forgotten. Tangibility of say a JV partner committing money to project spending bodes well, but its still a bad market outlook, so that's a mixed signal, but still negative.

Appreciate that the market has not yet priced in war or bird flu. These are still peripheral issues at the moment. It is therefore critical that people follow North Korea, Iran and China (bird flu) for news, whether they are looking for an exit or entry point. Want to learn more about mining investment - read our book. There is no better time to learn that in these types of market conditions. You can trade in these types of markets as well, but that requires more skill; particularly if you are trading against the trend.

Happy trading!

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Investment Strategy

If you are investing for the long term, you still need an investment strategy. Dont be fooled by the rhetoric of fund managers. The reason they advise you to 'buy & hold' is because they dont want to compete with you in sell-offs. Markets and industrial sectors are cyclical, so they demand trading to get the best returns. Fund managers actually cant hope to match the performance of small investors (if you are half good) because they have to manage huge amounts of funds and charge you a fee besides.
MY ADVICE is (i) look at a range of market indices and decide upon what level of correction would give you the justification you need to get in & out of the market. It might be a 5-10% retracement or a break of trend. (ii) Diversify if you dont have an intimate knowledge of the company or management. More than 30% in one company is aggressive.

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