Rudi's View | Feb 06 2013
By Rudi Filapek-Vandyck, Editor FNArena
I met Mister X many moons ago. Don't remember exactly how the initial contact was made, but we have been in contact irregularly since. Sometimes we spend hours chatting, sometimes it's all over in 15 minutes.
Mister X is what people would label an old hand in the finance industry. He is an intelligent free spirit, with international connections, who likes to talk straight and without inhibitions. He doesn't like talking to the media, but he enjoys chatting to me, knowing I will never reveal his identity. In my presence, Mister X can talk freely at all times.
Even though his tips and insights have been of great value throughout the years, I have seldom put anything in print. This time I am making an exception. Mister X's market observations are controversial, as per always; they will raise a few eyebrows here and there. Investors willing to keep an open mind to frank, non-consensus views and opinions will no doubt appreciate the initiative.
If you think the straight-looking, rising line on the price action chart for the ASX200 (below) or the All-Ordinaries index looks a bit over the top, if not "scary", you better start getting used to it, Mister X ensures me without the slightest hint of sarcasm in his voice or in his facial expressions. Forget about share prices trading on high PE multiples, or that earnings growth hasn't announced itself yet in Australia. This share market is all about primal spirits and herd mentality, he says. At the end of the day, everything about equities can be summed up via three easily to understand terms: fear, greed and monetary policy.
Right now in markets monetary policy is awakening the animal spirits around the globe, pushing general sentiment away from fear and into greed. This process is in its infancy still, but excessive liquidity is finding its way into equities. If we assume that central bankers achieve their goal, we should expect more of the same in the months and years ahead. Much more of the same. It is very well possible, says Mister X, that if we all look back on today's price chart for the ASX200 in a few years' time, we might conclude this, really, is nothing compared with what will have transpired by then.
Market support from central banks is what has kept Mister X's confidence up in years past. His clients' portfolios have been adding cheaply priced industrial stocks while those who needed liquidity have been taking advantage of underpriced dividend payers. He refers to Baron Rothschild with regard to buying when blood runs through the streets and to Warren Buffett's be greedy when others are fearful. Most importantly, he says, cyclical companies are best bought when the end appears nigh and financial results are deep in the red. Last year, his clients fared better than the 20% gain for the Australian market (including dividends).
To reduce risks he has mostly stuck to blue chip stocks, while avoiding the speculative end of the market. None of his clients became trapped when liquidity dried up for "speccies". He still refuses to go there. There's a time and place for everything, he ensures. Right now it's still too early to dive into micro-cap speccies. Instead, Mister X advises investors should focus on what can possibly be the next big trend in markets. 2012 offered a revival in healthcare stocks, building materials and sustainable yield as three grand themes.
Mister X's clients have been buying shares in the likes of Hills Holdings ((HIL)) and GWA Group ((GWA)). Both companies are still battling tough times, but Mister X ensures me their share prices will run well before there are signals of an improved trading environment. His view proved prescient, share prices have been rallying recently.
The biggest mistake, in his opinion, is for investors to focus too much on valuations and earnings at this early stage. It's all about catching the upward momentum, he offers, and about being on board when the train really leaves the station. One technique he is applying to his clients portfolios is to (gradually) sell stocks that are running hot (without ever selling everything) and to buy more of stocks that are lagging. The strategy secures profits, guarantees sleep at night and reduces risk overall, Mister X explains.
He used to have a rather large exposure to gold, but not anymore. When equities rally and market optimism in general is picking up, there's no chance in hell gold is going to have a good time too, he proclaims. But investors should not completely give up on gold, he quickly adds. Mister X is convinced gold will re-find investor interest, just not right now. Ultimately, he predicts, gold will run much higher than most investors, including himself, are willing to contemplate today.
Gold should remain on the investor's radar, he ensures, if for no other reason than because central banks and the wealthy are still buying bullion and coins.
What bothers him in the share market, and a great deal, are the blatant manipulations taking place. Mister X says everybody in the industry, from stockbrokers, big and small, to fund managers and others, are all too aware there's a lot of manipulation going on. But nobody knows what to do about it. The ASX has in years past reversed policies in place since the 1980s that have reduced market transparency. The result, he suggests, is that cowboys, robots and less savoury market participants pretty much have free rein and they are using the opportunity to the full extent.
Mister X says Singapore has developed into a major hub for uncontrolled, blatant market manipulations. Most investors would be disgusted if only they knew the stuff that's going on over there, he exclaims, adding the recent currency manipulation scandal over there represents but the tip of the iceberg. He says a lot of the market manipulations that take place from Singapore are directed at the Australian share market.
Ultimately, he believes, all these manipulations will come home to roost one day. But first, in the years ahead, it is more likely that manipulations will occur to the upside. Because that's where momentum is heading. Robots don't know anything about PEs, earnings or price targets, he says, this time with sarcasm. Under the right circumstances, these robots will simply push limits as high as they can possibly go.
This is not the only source of market manipulation. Mister X says central banks are in on it too.
Investors and the media are naive if they think that all central bankers have been doing since 2008 is printing money, buying bonds and saying the right things to sooth investor concerns. Mister X says it is no secret [Fed chairman] Ben Bernanke believes a stronger share market is an important tool for restoring confidence among business owners and consumers. So why hasn't anyone made the connection yet with indirect support/manipulations of share markets?
It is a public secret in the US the Federal Reserve has been providing liquidity to hedge funds, he says. Last year, when the Shanghai share market threatened to fall through the 2000 level, central authorities in Beijing ordered insurers and wealth managers to buy stocks to actively support the market [there have been press reports about this, RFV]. In Europe, the Swiss central bank has been revealed as a top five shareholder in telecom giant Nokia. Once the technology bellwether for the whole of Europe, Nokia has been doing it tough since late 2007. Its share price on the Nasdaq OMX exchange lost 90% of its price since. The past year saw Nokia's share price drop by more than 50% before it staging a mini-comeback.
What is the Swiss central bank doing on the register of Nokia, Mister X asks rhetorically? The information can be checked here:
[ SCHWEIZERISCHE NATIONALBANK on spot five from the top, acronym SNB, is the official name of the central bank of Switzerland.]
There are no indications as to whether the Reserve Bank of Australia has been conducting similar supporting moves in the local share market, but Mister X rightfully points out central banks rarely reveal their actions as publicly as the SNB has done with its equity in Nokia. In a low volume environment, it would only require a small number of ETFs to get things moving in the right direction, he speculates, while adding central bankers can read charts too. Arguably, there has not been as strong a case for support in the local market as there has been in the US, in China and in Europe. Mister X refers to the Asian crisis in the late 1990s when the central bank of Hong Kong ended up as a major shareholder in domestic heavyweight index stocks.
Of course, and as pointed out by Mister X, the real moral issue here is that nobody is overseeing the investments made by central banks around the world.
Returning to investment in the Australian share market, Mister X says there's a lot of talk and media coverage about the "Great Rotation" away from fixed income and into equities, but there is to date no evidence whatsoever of this actually happening. While there may be a few retail investors making the switch, he says the major players, both locally and globally, have shown no indication they are ready to switch funds from bonds into equities. [This observation is backed by other sources, RFV]. Ultimately, Mister X believes this is bullish for equities. By the time the real weight of money descends upon the market it will be at higher prices and this will then again push share prices to higher levels.
Criticism that all the extra liquidity in the world hasn't helped to generate real economic growth won't stop central bankers from guiding equities higher, he says, because the belief is there that higher share prices will ultimately lure businesses into more spending and consumers into more purchases. He adds that the fact that politicians the world around have proven quite impotent in dealing with global financial matters has only strengthened central bankers' resolve to do it their way.
Ultimately, he admits, it'll all likely end as it always has throughout history, with one big bang boom and bust cycle. This is, again, not good for the industry and not a positive for investment returns in general as there will be many big losers at the tail end of this process. The good news is: first we'll have more boom times ahead of us.
The Big Question mark, says Mister X, one that remains an enigma at this stage, is how are central bankers going to withdraw all the excessive liquidity without causing mayhem in financial markets? This matter may well remain unresolved for years, he says, even though there may come smaller bumps later in the year or in 2014. And that's precisely why investors shouldn't assume gold will remain off radar forever.
(This story was originally written on Monday, 4 February 2013. It was published in the form of an email to paying subscribers on that day. Investors should note Mister X's views do not represent the house view of FNArena (see our disclaimer). Information has been provided for educational purposes only; to potentially stimulate thinking and improve investment strategies and creativity in general).
(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)
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Rudi On Tour in 2013
– I will visit Melbourne in February for a presentation on invitation by the local AIA branche. Title: "The Big Confusion that is the share market". When: Tuesday 19th February 2013. Where: Telstra Conference Centre, Level 1, 242 Exhibition Street, Melbourne
– I will visit Perth in March for two presentations on Tuesday March 5 (AIA) and on Thursday March 7 (ASA)
