Stock Wins in an unlikely sector

Monday, 28 November 2022 — Albert Park

[7 min read]

Dear Reader,

‘I draw your attention to the curious incident of the dog in the night-time.’

So goes one of the most famous scenes in Sherlock Holmes.

The Inspector replies to the great detective, ‘The dog did nothing in the night-time.’

Holmes replies:

‘That was the curious incident!’

Sometimes it’s what doesn’t happen, rather than what does, that matters.

Case in point: retailer City Chic is not selling as much as it positioned for.

Now it’s stuck with too much inventory and has to discount to shift what it can.

The stock got hammered on Friday after the company told the market a more detailed version of the above.

Why does this stick out like the silent dog in the nighttime?

Because most other retailers are reporting cracking results!

Just in the last few weeks, I’ve seen positive updates from Myer Holdings [ASX:MYR], Accent Group [ASX:AX1], Cettire [ASX:CTT], and Super Retail Group [ASX:SUL].

They’re cashing in on the surprising strength in consumer spending.

The Australian Financial Review reports that the Black Friday shopping extravaganza is on track to set a record.

I did my bit and ordered a Nintendo Switch for the seven-year-old.

The point around this is that it’s not some airy-fairy observation.

There are tradeable moves that spring from this!

Cettire, for one, rallied 189% from early October to mid-November.

Stone the crows!

Why so dramatic?

A major part is that the market became way too bearish about the future economy when it collapsed back in June. That set terrible expectations about future results.

Now those results are coming out…and are much ‘less bad’ than assumed. Shares rally when this happens.

Hello! There are stocks still all over the floor. The ASX 200 has indeed rallied up in recent trading.

But this is being dragged up by the current strength in iron ore miners and big banks (another indicator that things aren’t that bad).

A lot of the stocks lower down in market cap are still super cheap, relative to where they were last year.

All I can do is urge you to start kicking over ideas and opportunities while this remains the case. I put five ideas in this report to get you started!

Here’s a bit more motivation for you…

Check out the weekend front page of the Australian Financial Review below:

Market experience tells me when a sentiment appears in the mainstream press like this, our instinct should be to go the other way.

Yes, I’m suggesting the contrarian position right now is to be bullish.

I’m not saying I can predict where the market goes any better than you can, but being overly negative is unlikely to lead to material profit.

Case in point: I put $20,000 into a UK bank called Virgin Money [ASX:VUK] not last week but the week before. I told a friend it wasn’t a trade, but I thought there was good value there.

I chanced my arm a bit. I knew Virgin Money’s update was due in November.

It delivered. They announced a fresh buyback and some nice metrics.

Nobody was more surprised than me when it rallied about 20% last week.

Now, think about that, it was only a month and a bit back that the UK pension system was in a tizzy because of rising rates.

Then the PM that lasted less time than a lettuce got the flick. You wouldn’t think a British bank would be all that hot, would you?

But you can’t forget what came previously — that bank stocks had been flogged. All we needed was news to be ‘less bad’ to get some upside.

Here’s the current gain right there from my broking account:

Where does it go from here?

I’m not sure there’ll be much left in this immediate move.

The news wasn’t that exciting. But long term, I like it. I’m still not sure if I’ll cash it in or hang about.

Not a bad problem to have!

There are potential opportunities like this all over the place. I’m already excited for the next recommendation I’m brewing up for readers of my Australian Small-Cap Investigator advisory service.

And as the retailer I mentioned above, Cettire, also shows, you don’t even need to hang around for the long haul.

You could have doubled your money in about a month (I missed that one).

I tell you, some of these ‘reratings’ can zing up in a flash.

Again, here are another five ideas for you to consider right now.

Is it risk-free? No way!

I’ve taken hits lately from trades in QBE and a REIT that got to me (in fact, I can’t remember which one it was — an indication that I deserved the hit I got).

But overall, I’m grinding ahead.

Don’t let the mainstream keep you scared witless. It’s a market of stocks more than anything else. Some go down, some up, and some sideways.

I’m not sure the retailers will keep running. Consumer spending could indeed be dicey in 2023.

But I’ve got another sector I think is going to rumble very soon…

Get amongst the action…and who knows? Maybe Christmas is a bit more fun this year.

Best wishes,

Callum Newman,
Editor, The Daily Reckoning Australia

Dear Reader,

Today, we turn our minds to the future, which may prove murkier still.

As we saw in China, during the 1930s and ‘40s, the government printed money to pay its bills. It ran up debt it couldn’t pay. And then, the hyperinflation of the 1950s opened the door to Mao’s communists. After that, it was one disaster after another.

Americans think they can continue to borrow and spend forever. Investors are trained to believe that stocks always bounce back. They think that if they just hold on, soon they will be making money again.

And if they owe money, they think they’ll soon be able to refinance at even lower rates.

But all that has changed. Now that we have inflation, it’s a whole new ballgame. The Fed can still print money, but now it will cause consumer prices to rise even faster. Your stocks may go up, as they did from 1966–82, but inflation will wipe out your gains. And when you go to refinance your house, you will be hit by a double whammy. Falling house prices may have erased your ‘equity’…while rising mortgage interest increases your monthly payments.

The bubble epoch, RIP

Everybody knows you can’t just print money and expect to get rich. Every nation that tried it turned into a complete disaster. In Germany, Russia, and China, high inflation led to the rise of the Nazis, the Bolsheviks, and Mao’s communists. High inflation destroyed the economy of Argentina in the ‘90s, of Zimbabwe in the ‘00s, and Venezuela in the teens.

They could call it ‘stimulus’ or ‘quantitative easing’, but it was nothing more than the old trick — spending too much and trying to cover up the excess by printing more money.

Eventually, the bubble becomes a bust.

We’ve already seen nearly US$100 trillion in losses — stocks, bonds, real estate, and private businesses — worldwide.

And here’s the important thing: this is not just a typical market sell-off. Stocks will go up and down…but the bubble epoch won’t come back.

Already, inflation is the worst we’ve seen in 41 years…and with no relief in sight…

Gasoline went to US$6 a gallon…and then back down to US$4. Now, inventory levels are at multi-decade lows. And winter looms large. Natural gas bills this season are expected to be 28% higher than last year.

Meanwhile, mortgage interest is at a 20-year high. New house prices are already down 10%.

US total debt now stands at US$93 trillion…and the federal government’s portion of that, US$31 trillion, is growing at US$3.8 billion PER DAY.

A vicious ‘culture war’ rages at home…while overseas, a war with a nuclear-armed adversary spirals out of control. Who knows where they lead?

Down…down…down…

As for stocks, companies that led the charge higher have plunged since Jan. 3, 2022:

Facebook’s Mark ‘Meta’ Zuckerberg has lost US$100 billion in the tech rout — more than any human ever has. House buyers have seen their monthly payments double over the last six months. Millions of homeowners will probably lose their homes in the debacle ahead.

Over in the go-go digital world, cryptos, meme stocks, and many high-risk assets have been all but wiped out…many investors won’t get back a penny on the dollar.

The Wall Street Journal says it’s the ‘worst bond market since 1842’. Remember, US Treasury bonds are the bricks and mortar of the entire US financial system. When they crack up, you may lose your pension, your savings, your insurance coverage, everything. Yes, even the Social Security system depends on US bonds. All are now in danger.

What we’ve lost so far is just a hint of what is coming…

Mark Mobius, CEO of Mobius Capital Partners says:

‘We probably have another leg down as the Fed continues to raise rates, I expect rates to go much higher…’

Billionaire investor Leon Cooperman told CNBC he thought the S&P 500 would fall 40% from its January peak in total…or another 25% from here.

JPMorgan CEO Jamie Dimon said stocks could fall ‘another easy 20%’ adding that the next drop will be “much more painful than the first”’.

And Stanley Druckenmiller warns, ‘there’s a high probability in my mind that the market, at best, is going to be kind of flat for 10 years, sort of like this ’66 to ’82 time’.

The real (inflation-adjusted) story

But as we explained, stocks weren’t ‘flat’ during that 1966–82 period. During those 16 years, they lost 72% of their value in real terms (that is to say, thanks to inflation).

Yes, dear reader, dead ahead is a ‘dark cluster decade’, when one crisis brings on another one. Prices shoot up. Shortages of food and fuel develop. Stocks crash. Recessions and or depressions begin.

Your savings…your retirement…your investments…your job…your house — the whole shebang, is in danger.

There are not many things in life where age is an advantage. But some things take time. It takes time to figure things out. And it takes experience to put them in perspective.

Most people today have neither. But if you were born before 1960, you might remember…

…how you could work two jobs in the summer and finish college with no debt...

…how you had to get up at 4:00am to get in line to buy gasoline during the ‘73 oil crisis...

…or how mortgage rates hit 16% in 1981.

Most people today can’t imagine it. Financially, most couldn’t survive it.

Could we suffer another ‘energy shock’? Yes, we could.

Could stocks go nowhere for the next 31 years? You bet they could.

Might you have to pay a 16% interest rate to refinance your house? Yep.

And it could be far worse...

Back in the ‘70s, the US economy and its major institutions hadn’t yet been corrupted by four decades of ‘funny money’. Federal debt was still under US$1 trillion until 1980. There was no bubble in the stock market back then. Or in the bond market. People still considered themselves either men or women. And not being a ‘racist’ was easy; all you had to do was to treat others with respect.

Democrats and Republicans were still talking to each other. We were not in a proxy war with Russia. China was still a ‘third-world’ nation. We didn’t have more than half the population relying on money from the government. And back then, if you had mentioned a ‘new civil war’ in the US, people would have thought you were nuts.

Today, it’s a very different situation….and a much more dangerous one.

Regards,

Bill Bonner,
For The Daily Reckoning Australia