Buy Panic: Here’s How I Did It |
Monday, 20 March 2023 — Albert Park | By Callum Newman | Editor, The Daily Reckoning Australia |
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[6 min read] Quick summary: We can all remember 2020…what a time to go shopping that was! I see a similar opportunity today. I was buying last week. I’ll tell you the two stocks I picked up…and why. Then I’ll introduce you to a third angle on this situation… |
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Dear Reader, How glib and easy the phrase ‘buy panic’ can sound when you hear it in the abstract. It’s not so hunky dory when the financial system starts to look like a wheezy drunk with a bad leg…and you have to put your hard-earned money on the line. And yet the best values are clearly when stocks get dumped indiscriminately. We can all remember 2020…what a time to go shopping that was! I see a similar opportunity today. I was buying last week. I’ll tell you the two stocks I picked up…and why. Then I’ll introduce you to a third angle on this situation. Let’s dig into the banking crisis first. You know about Silicon Valley Bank on the US West Coast and Signature on the east. Between them, they have US$300 billion in assets out of the US$23 trillion US banking sector. In other words, this is no Lehman moment. They’re too small. However, former bank regulator Sheila Blair recently wrote that the powers that be are clearly worried that the rot runs deeper, judging by their actions. US banks are believed to carry US$620 billion in bonds that are underwater. This need not be an issue if they can hold them to maturity. Then they’ll receive the face value of the bonds. Or now, the Fed’s created a new facility where they can swap these bonds for cash — but pay market rates for the privilege. Much of what happens from here depends on what US depositors do. Two analysts I respect give different takes. One says the whole situation is overblown. US banks are fine…and we’ll all move on shortly. Another’s worried there really is the threat of contagion. My inclination is to think the Fed and regulators will throw everything they can at it to make the problem go away. I’m also intrigued by the following quote…it comes from a 1998 book that looked at some of the best years in US stocks up until that time. Here’s the conclusion the writer found: ‘Stock prices begin at a depressed level, reflecting fears that inflation fighting central bankers will inflict more pain. ‘Suddenly a financial crisis reduces the price level to a secondary consideration. As the fed liquifies the system, the stock market quickly and radically adjusts to the changed circumstances.’ That was written 25 years ago. Could it happen again? I think it could. That’s why I did some shopping. One caveat: The below are not recommendations for you. Merely what I did. The first stock I bought last week was Abacus Property Group [ASX:ABP]. It’s a Real Estate Investment Trust (REIT). REITs are copping another pounding lately after a horrible 12 months. The market cap for Abacus is currently $2.6 billion. Its assets, would you believe, are valued at around $5 billion. Roughly 50% of these are in the Storage King self-storage brand and business, with the other 50% in commercial property (mostly offices). Think about that for moment. We can debate the future of the office, but without question its commercial portfolio is worth more than zero. It also has around $260 million in another listed REIT called National Storage REIT [ASX:NSR]. Most of its debt is hedged and on a modest 2.6% interest rate for the moment. It currently pays a 7% yield. It plans to float the self-storage assets in a separate REIT later this year. Seems to me there’s a lot of margin of safety there, looking out to the medium term. I’ll tell you how I go in a year or so. The second stock I bought was BHP [ASX:BHP]. Here’s a table I like to trot out every now and again. It shows the iron ore price going back to 2015: Today, the iron ore price is trading around US$125–130. You can see how exceptional that is relative to previous years. It will gush a river of free cash flow through iron ore miners while it continues. The Economist reports India is going through an infrastructure upgrade in scale only seen before in China. BHP is also building a big presence in copper — a metal with extraordinary prospects in the next five years. A single electric vehicle requires 83 kilograms of the stuff. The above two ideas are, to my mind, fairly conservative. There’s a way to take on more risk and higher potential reward… One effect of this current banking crisis is to cut off funding to riskier projects as banks become more conservative. Another group likely to suffer the same fate are investors. Who does this have implications for? The junior resource sector. Suddenly, they might find themselves a little starved for funds. In times like these, it’s great to have cash because they’re going to need it and will be more prepared (or forced) to offer value in return for it. The energy transition isn’t going away because of a US technology bank unable to manage its interest rate risk. We still need copper, cobalt, and coal to run the world economy. But suddenly, the smallest stocks on the market are on the floor because sentiment is so terrible. Here’s what a fund manager recently said: ‘“There’s a lot of negativity out there. I don’t remember sentiment being this bad in the smaller end of the market in over 15 years. I’d compare it to the Global Financial Crisis at times,” he says. ‘“There’s just a complete lack of interest, particularly in the micro-cap end of the market.”’ He said that before the banking blow up. How long before investors and other players start moving to take advantage of this? Not long, by the looks of things. Just this morning, gold producer Ramelius Resources [ASX:RMS] announced a takeover offer for gold speccy Breaker Resources [ASX:BRB]. And Australian Clinical Labs [ASX:ACL] is making a play for Healius [ASX:HLS]. What can I say? When sentiment and value are on the floor like this, the best and the brightest get active. My colleague James Cooper is on the hunt for the super-small, speculative mining stocks to snatch up right before other investors take notice of them. If there’s one person that can find a high-potential stock even before drilling begins, it’s James. You’ll find out more about his methodology, as well as how to become a part of his premium trading service, right here in The Daily Reckoning Australia over the next couple of weeks. Stay tuned… Best wishes, Callum Newman, Editor, The Daily Reckoning Australia Advertisement: ALERT: 64% off This Bargain Small-Cap! It’s a cracking Aussie firm positioning to service the mining sector — just as iron ore and gold are starting to boom. And you can buy it at a 64% discount from its high — but likely only for a limited time. Click here to learn more. |
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| By Bill Bonner | Editor, The Daily Reckoning Australia |
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Dear Reader, The second largest…and third largest…bank failures in US history continue to dominate the financial headlines. From CNN Business: ‘Dow falls 500 points as banking fears spread’. From our point of view, the failures were expected. We were waiting for things to break…now, they’re breaking. And now, somehow, somewhere, sometime, by someone…the losses must be reckoned with. Who will pay them? That is our subject for today. Bag holders ‘No losses will be borne by the taxpayers’ said Joe Biden on Monday. Where were the ‘fact checkers’…the truth seekers on the alert for misinformation and lies? They must have been taking the day off. For if there were one thing you could count on it is this: ultimately, the taxpayers will have to bear the losses, probably in the form of inflation. As more banks break, the Fed will have to bail them out…and eventually, it will abandon its rate increases. Consumer prices will rise; households will pay. Who else would cover the losses? Who always pays? The 1980 S&L crisis — in which members of Congress, the Keating Five, played a leading role — cost taxpayers US$124 billion. The 2008 bank bailout, TARP, cost US$500 billion. Investigative reporter Jim Bovard says that more than 4,000 financial institution employees got US$1 million-plus bonuses as a result. The ‘zero rate’ fantasy of the Fed, after 2008, cost US household savers US$4 trillion. And thanks to the reform measures of Barney Frank and Elizabeth Warren, in 2010, which were intended to prevent another banking crisis, banks are now saddled with US$600 billion in unrealised losses on their portfolios of government or government-backed securities. That is not just a ‘paper’ loss. That is a real loss. Someone will have to pay. Magic elixir Usually, you have to pay to borrow money…which forces you to think carefully about what you’re going to do with it. If the interest rate (after inflation) is 4% (the ‘hurdle rate’)...you need to find an investment that will give you more than 4% interest. Otherwise, you will stumble on the hurdle, lose money…and drop in the esteem of your friends, family, and rivals. Normally, too, there aren’t a lot of investments that will pay off for you…for the very obvious reason that when there are a lot of good investments, people borrow to make them, and the hurdle rate rises. The system is normally self-regulating, preventing too much speculation and too much debt. But along comes the Fed with its magic elixir — interest rates below inflation. Suddenly, the ‘hurdle’ disappears. Almost any gamble — cryptos, NFTs, new tech, Treasury bonds! — could pay off. And so, it came to pass, between 2009 and 2022, that people borrowed wantonly. They invested recklessly. And they lost prodigiously. All fine and good. But what now? Will the deciders decide that they — the ones most responsible for the borrowing bacchanalia — will pay the losses? Barney Frank, Elizabeth Warren, Joe Biden, Janet Yellen? No, in their wisdom, they’ll decide that someone else will pay. But this is the nature of the regulation-rich, responsibility-poor, judgment-free world. No one should have to bear the costs of his own ill-health, bad judgment, incompetence, job loss, or bank failures. The ‘unhoused’ person — who was evicted for not paying the rent — believes someone should provide a decent home for him. The ‘unwed’ mother expects the government to provide her with childcare. Whatever the need…the misfortune…or the misconduct, someone else should pay for it. The insurance company…the government…the rich…someone should bail you out! Whence cometh the capital? In the case at hand, the feds now say the bank’s wealthy shareholders will lose, but not the wealthy depositors. Currently, deposits are insured by the FDIC up to US$250,000. But 97% of Signature’s deposits were for more than that amount. They were accounts used by hedge funds, corporations, and speculators, not by Mum-and-Pop savers. The bank itself no longer has the money to make those depositors whole. So, where will the money come from? The deciders who were supposed to make the banks safe? Or the Wall Street hustlers who used the Fed’s cheap money to make billions — trillions — over the last 12 years? Or the Fed governors, whose ultra-low interest rates created the bubble that is now losing air? Joe Biden says the taxpayers won’t pay a cent. Whoopee! The losses have vanished. What will happen next? Ray Dalio describes a scenario. From Markets Insider: ‘In his newsletter Tuesday, the Bridgewater Associates founder called the bank turmoil a “very classic event in the very classic bubble-bursting part of the short-term debt cycle.” ‘The cycle lasts roughly seven years, Dalio explained. In the current phase, inflation and curtailed credit growth catalyze a debt contraction, according to Dalio, and that causes contagion until the Federal Reserve returns to a policy of easy money.’ Most likely, a few more bank failures…and the feds will take another giant step forward towards a risk-free world. They’ll take over the entire banking system…including US$9 trillion in uninsured deposits. But remember. The feds cannot make the losses go away. They can only move them around…from the people who deserve them to the people who don’t. Stay tuned... Regards, Bill Bonner, For The Daily Reckoning Australia Advertisement: THE BEST ZINC PLAY ON THE ASX (WITH AN ACE UP ITS SLEEVE…) James Cooper has recommended a zinc player emerging from the Pilbara. Once thought of as a giant slab of iron ore...the region is now seen as a richly endowed critical mineral province. A new generation of explorers are rising there. And this stock is one of the most promising… Now, more than ever, it pays to follow the insiders who made their fortunes in the LAST mining boom. They have an uncanny ability to buy the right projects at precisely the right time in the market. James has been tracking one such insider…and turned his attention and experience to THIS soon-to-be-zinc producer. This guy turned a particular 1-cent shell into a major $15 billion producer in the last cycle. In 2023, he’s turning to critical metals. And THIS little-known player… |
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