Why stock prices are a rational response to irrationality
By Ryan Dinse in Albert Park, Melbourne On Monday, I wrote that bitcoin [BTC] had the potential to become a new ‘safe haven’ asset for the modern era. It’s an idea we’ve been exploring over at our entry-level cryptocurrency investor service — Secret Crypto Network — for a few years now. Perhaps you thought that sounded like a crazy notion? Well, it seems the head market strategist over at Invesco, a global investment company with over US$1.1 trillion in assets under management, might now agree with us. She just said so in an interview at CNBC overnight. Interesting…. Anyway, I’ll post the link to the interview at the end of today’s article for you. Yes, change is certainly in the air when it comes to the world of finance and economics. And over the last few years, Afterpay Touch Group Ltd [ASX:APT] has been one company making hay from it. You might be thinking this is an old story. The stock has flown up and has made early investors 10 times their money over the past three years. But I still think it’s worth considering today. Let me explain why… ..............................Advertisement.............................. | Be one of the first in Australia to get a hold of Sam Volkering’s… In it you’ll discover: How to BUY, SELL and SECURE your cryptocurrency… How to set up your own personal crypto wallet… And the details of a brand new crypto king that could soon overtake the $112 billion behemoth that is bitcoin. To get all of this and much, much more, click here… | .......................................................................... |
Buy in gloom The former market darling is copping a bit of flack at the moment. Last week, the Australian Financial Review reported that Bell Potter — the broker behind the recent whopping $317 million capital raising — was reminding clients they’d ‘agreed’ to hold onto new shares for at least 12 months. Except they hadn’t agreed. Not in any legal sense, anyway. This email seemed to be a veiled threat of some kind. You see, the Afterpay raise was a ‘hot’ offer. So, I guess Bell Potter was trying hard to persuade its clients that such offers might not be so forthcoming in the future, if they reneged on their word. In a Don Corleone sort of way… Now, the reason for this unprecedented reminder to not break investing ‘omerta’ was due to the recent falls in the Afterpay share price. Falls that came after the capital raise. That wasn’t supposed to happen! So, what did happen? The share price fell when regulator AUSTRAC issued a notice saying the company had to appoint an external auditor to check over its compliance with anti-money laundering rules. The reason for the almighty stink is that this announcement came just days after the completion of the new capital raise. And also, after the founders had just pocketed $100 million from said raise. Whatever the legitimacy of the circumstances, it’s still a huge fail of the investor pub test. But could it be a storm in a teacup? Could these falls be a great opportunity for you to jump into now? Let’s take a look… A fatal blow? The first question you’ve got to as yourself is this: Is the AUSTRAC situation fatal for Afterpay? My best guess is no. But you’ll have to make up your own mind. I personally think it’d be remarkably heavy handed of a government regulator to try to cripple one of Australia’s fastest growing international fintech businesses with a massive fine or other restriction on trade. Although, we’re living in a post Royal Commission world, so who knows? The risk for investors is that they do take severe action. Remember that the Commonwealth Bank of Australia [ASX:CBA] copped a fine of $700 million from AUSTRAC last year for such breaches. That’s the immediate danger… But if that cloud passes over, I think Afterpay could become a pretty hot stock once again. And it’s all to do with the value of their customer base… The true value of Afterpay lies here To ‘Afterpay’ something is now shorthand in Millennial speak for paying by lay-by. Becoming a verb is a pretty big deal for any business. Think how you ‘Google’ something when you to search online, for instance. You don’t ‘Yahoo’ or ‘Bing’ it. And you certainly don’t ‘ANZ’ your home loan! That’s what’s so exciting about this company. They’ve captured the imagination of a new breed of younger customers in a way the old banks never could. This large and important customer base is the true value of Afterpay, in my opinion. In the old days, banks could rely on new customers literally walking through the door. They’d usually give them a free money box at school and pretty much lock in a customer for life. But not today… The finance world is changing so fast you can barely keep up. But the one thing you have to understand is that the best customers for banks are now the younger generation. After all, these are the customers who will borrow for the years to come. Not the retiree reaching the natural end of his or her banking life (at least, as far as lending profits go). By having a strong ‘in’ to the lucrative Millennial market, Afterpay has value more than the just the sum of its profits. Bear that in mind. The way they’ve achieved this feat wasn’t even that original… Afterpay is really just a modernised ‘buy now, pay later’ system. But thanks to some savvy marketing, they literally own that old idea when it comes to millions of younger people. And now they’re taking this concept to the world… USA! USA! USA! The recent US roll-out is the key to short-term financial success. They have over 1.5 million customers in the US and 3,300 merchants already with plans to quadruple their sales volume to over $20 billion by 2022. At around 4% commission on each transaction, you can easily work out the potential revenue if they achieve this. Short answer — it’s big! Of course, there are risks to consider too. And not just the immediate AUSTRAC situation. Like all successful business innovators, copycat companies are springing up all around them. You’ve got Sezzle and Quadpay in the US. Zip and Flexigroup here in Australia. Sceptical investors might see the recent founder share sell downs as a sign the competition is starting to bite. You’ll have to weigh up the opportunity and risks here… But whatever happens, there’s no doubt that huge changes are coming to banking and financial services. Afterpay is yet another sign of how banking will need to change, to meet the needs of the next generation of customers. Make no mistake, there are fortunes up for grabs for the companies that get that right. Worth keeping an eye on I say — or maybe even a down payment in Afterpay stock… Good investing, Ryan Dinse, Editor, Exponential Stock Investor PS: As promised, here’s the link to the on CNBC. [Editor’s note: The above article was originally published by Money Morning on Wednesday, 26 June. 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Why Stock Prices Are a Rational Response to Irrationality By Greg Canavan in Melbourne, Australia Once again, all the action was in the precious metals markets overnight. While the main stock indices stood still, the US dollar gold price surged another 1.5%, to around $1,420 an ounce. The various gold stock indices shot up around 3.5%. As I said yesterday, you should expect to see some short-term strength in gold following last week’s breakout. But keep in mind, there will be a pullback to follow, so be prepared for that. That’s especially the case for Aussie dollar gold. Overnight, it traded as high as $2,040 an ounce, up from a low of $1,775 in mid-April. The market needs to correct a little to restore some short-term balance. To show you what I mean, have a look at the chart below. It shows the Aussie dollar gold price, along with a key momentum indicator called the relative strength indicator (RSI): Not including the overnight move, the RSI for gold is over 90! That is an extreme reading and suggests that a short-term pullback is imminent. With all eyes on gold, let’s take a look at what’s happening in other major markets. After all, gold’s not operating in a vacuum. The same forces are driving asset prices everywhere. That is, a global central banking shift to ‘dovishness’ on interest rates means investors want to be anywhere but in cash right now. The common refrain is that there is lots of cash ‘sitting on the sidelines’ and it’s now moving into equities. That is true to some extent. But the cash doesn’t disappear when you buy a stock. It just goes into the sellers account. And then they use the cash to buy something else. The better analogy is that cash becomes a hot potato in this type of market. No one wants to hold it, and they pass it onto the next person as quickly as they can. This is reflected in greater trading volumes, more volatile share price moves, acquisitions and share buybacks. Anyway, let’s have a look at how the major equity markets are going in this hot potato market. We’ll start at home, with the ASX 200. Like gold, stocks are seriously extended here. The index is well above the 50-day moving average, which is unusual. Also, the move over the past few weeks has been vertical, which is not sustainable in the short-term. Don’t get me wrong, this is a bullish looking chart. The fact that it’s driven by RBA negligence of our currency is neither here nor there. But it does have the feel of a melt-up scenario. That is, it’s a move driven by investor fear of missing out and fear of sitting in cash. I could be wrong, though. So ignore me, and listen to the market. As long as the index can hold above support around 6,350 points (green line), the market remains bullish. Moving over to the US, let’s have a look at our old mate, the NASDAQ. I’ve said for a while now that this is a key index to follow, given its tech heavy nature. Tech drove the bull market higher, and it will likely lead on the way down, too. Right now, the chart is inconclusive. The recent rally hasn’t managed to break to new highs (unlike the S&P 500, below), which suggests it could still be in a topping out phase. At major peaks, volatility often picks up as investor indecisiveness kicks in. This is known as distribution. If the NASDAQ can’t break through support, and turns down again, it will increase the probability that distribution is taking place, and that a top is forming. If, on the other hand, the rally can punch through to new highs, it suggests the bull market has more legs. You’ll find out soon enough. The question for investors now, is who is the leader here? The NASDAQ, or the S&P500? If it’s the latter, the situation looks a little better. Last week, the S&P500 broke out to a new all-time high. As you can see below, it’s not convincing yet, but it puts the index in a bullish position. It doesn’t matter whether it’s a breakout based on a dovish Federal Reserve, or increased corporate earnings. A breakout is a breakout. But as I said, it’s not convincing. And not (or net yet, anyway) confirmed by the tech heavy NASDAQ. So, this could be a trap for the bulls. While I lean toward a bearish outcome, given where we are in the business cycle, never underestimate the power of cheap money. While a continuing stock market rally might seem absurd at this point, keep in mind the absurdity resides in central banking policy. Investors are just responding rationally to irrational policymaking. Regards, Greg Canavan, Editor, Crisis & Opportunity [Editor’s note: The above article was originally published by The Rum Rebellion on Tuesday, 25 June. 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