The Best Stock Market Advice I Know: Get Ahead of the Business Cycle

By Mitchell Clark, B.Comm.

 

The timing isn’t quite right yet, but, in the not-too-distant future, there should be a reacceleration of U.S.-listed Chinese stocks. If you’ve been a speculator in these stocks, you’ll know that it’s been tough going. The entire group has been suffering from a lack of investor confidence and a lot of this sentiment is warranted. There remain, however, many very good companies out there whose stock prices have fallen along with the group and that are now excellent values in my view. I think we’re very close to achieving extreme pricing (on the downside) with many of these stocks and speculators should be putting a number of these stocks on their radar screens.

If you watch the stock market long enough, you’ll know that certain sectors experience waves of enthusiasm from investors. It’s like the latest trend in the fashion industry, only the business cycle in stocks changes extremely fast. One year, the darling of the market is solar energy stocks. The next year, silver stocks are soaring. The whole system in my view is about perpetual rolling interest from investors on the Street and getting ahead of these trends is the single most important contributor to making big money in the stock market. It’s not even about owning the right individual stocks at the right time; it’s about owning the right sector. Share prices move in groups and Wall Street takes no prisoners. The stock market isn’t a perfect system and valuations are always relative, but with so many participants on the long and short sides of the marketplace, prices are never true for long.

Stock picking has always been and always will be a difficult endeavor to get right on a consistent basis. Even in a bull market, it’s difficult to make money as a speculator, because sentiment changes so quickly and so do stock prices. One unfulfilled expectation and a stock’s price can be cut in half—in a matter of minutes! If stock picking were easy, there would be a lot more retired stock traders living on your street. Even Wall Street pros don’t last in the game for very long. Most investment banks make a lot more money selling you advice than trading stocks for themselves.

The one thing I’ve learned over the years is never to fight the market. The action is the action. It might not be rational; it might not even be fair. But the stock market is a system that is based on fear and greed, and emotions have more to do with prices than anything else. A big investor like Warren Buffett worries almost solely about valuation, because he is buying an entire company’s cash flow, not just a share. For equity investors (speculators more appropriately), a stock’s valuation is more about perception than anything. Understanding the market’s prevailing psychology usually wins out over the most stringent of analyses.

Right now, there are several sectors in the equity universe that are not participating in the current rally. If you’re a buy-low/sell-high kind of speculator, now is the time to be looking seriously. Here’s what my favorite stock picker likes to do (Jim Rogers); he waits for securities to achieve price extremes, then he makes his bets.

Mitchell is a Senior Editor at Lombardi Financial specializing in small-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, such as Penny Stock Reporter, Micro-Cap Stocks, and Monster Profits. Mitchell, who has been with Lombardi Financial for thirteen years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. While Mitchell is not working he enjoys fly fishing, motorcycling and tending to his hobby farm.Tweet

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The Best Stock Market Advice I Know: Get Ahead of the Business Cycle

By Mitchell Clark, B.Comm.

 

The timing isn’t quite right yet, but, in the not-too-distant future, there should be a reacceleration of U.S.-listed Chinese stocks. If you’ve been a speculator in these stocks, you’ll know that it’s been tough going. The entire group has been suffering from a lack of investor confidence and a lot of this sentiment is warranted. There remain, however, many very good companies out there whose stock prices have fallen along with the group and that are now excellent values in my view. I think we’re very close to achieving extreme pricing (on the downside) with many of these stocks and speculators should be putting a number of these stocks on their radar screens.

If you watch the stock market long enough, you’ll know that certain sectors experience waves of enthusiasm from investors. It’s like the latest trend in the fashion industry, only the business cycle in stocks changes extremely fast. One year, the darling of the market is solar energy stocks. The next year, silver stocks are soaring. The whole system in my view is about perpetual rolling interest from investors on the Street and getting ahead of these trends is the single most important contributor to making big money in the stock market. It’s not even about owning the right individual stocks at the right time; it’s about owning the right sector. Share prices move in groups and Wall Street takes no prisoners. The stock market isn’t a perfect system and valuations are always relative, but with so many participants on the long and short sides of the marketplace, prices are never true for long.

Stock picking has always been and always will be a difficult endeavor to get right on a consistent basis. Even in a bull market, it’s difficult to make money as a speculator, because sentiment changes so quickly and so do stock prices. One unfulfilled expectation and a stock’s price can be cut in half—in a matter of minutes! If stock picking were easy, there would be a lot more retired stock traders living on your street. Even Wall Street pros don’t last in the game for very long. Most investment banks make a lot more money selling you advice than trading stocks for themselves.

The one thing I’ve learned over the years is never to fight the market. The action is the action. It might not be rational; it might not even be fair. But the stock market is a system that is based on fear and greed, and emotions have more to do with prices than anything else. A big investor like Warren Buffett worries almost solely about valuation, because he is buying an entire company’s cash flow, not just a share. For equity investors (speculators more appropriately), a stock’s valuation is more about perception than anything. Understanding the market’s prevailing psychology usually wins out over the most stringent of analyses.

Right now, there are several sectors in the equity universe that are not participating in the current rally. If you’re a buy-low/sell-high kind of speculator, now is the time to be looking seriously. Here’s what my favorite stock picker likes to do (Jim Rogers); he waits for securities to achieve price extremes, then he makes his bets.

Mitchell is a Senior Editor at Lombardi Financial specializing in small-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, such as Penny Stock Reporter, Micro-Cap Stocks, and Monster Profits. Mitchell, who has been with Lombardi Financial for thirteen years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. While Mitchell is not working he enjoys fly fishing, motorcycling and tending to his hobby farm.Tweet

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The Gold Mining Business Model’s the Best There Is for Any Industry

The economic news out there still isn’t great, but the stock market doesn’t seem to care. Equity investors seem only worried about first-quarter earnings and the outlook for the numbers remains very bright.

Also looking good in this market are precious metal stocks, as spot prices remain very strong. This is a sector that needs rising spot prices for stocks to keep advancing, but the money continues to tumble in if you’re a gold producer. In fact, the business model is so good that most growing producers don’t know what to do with all their excess cash (what a great problem to have!).

As an example of the kind of profitability you can find in the precious metal sector, Avion Gold Corporation (TSX/AVR) is but one junior mining company that’s cashing in due to strong gold prices.

Avion Gold is a junior Canadian gold miner with exploration and production facilities in West Africa. The company holds 80% of the Tabakoto and Segala gold projects in Mali. Avion Gold announced strong earnings of 18.63 million dollars ($0.05 per basic and diluted share) for the three months ended December 31, 2010. This compares to net income of 3.97 million dollars, or $0.02 per diluted share, generated in the same quarter last year.

According to the company, it sold 27,908 ounces of gold at an average realized price of $1,370 per ounce, which represents a 10% increase over the average realized selling price of $1,234 per ounce in the previous quarter. Gold revenues were 38.2 million dollars, compared to 14.2 million dollars in the comparable quarter of 2009.

Where I’m from, a business that sells 38 million dollars’ worth of goods and generates over 18 million dollars in profits on those goods is really doing something right. Avion Gold produced 26,090 ounces of gold in the fourth quarter of 2010 at a total cash cost of $520.00 per ounce. For all of 2010, the company generated record earnings of 31.5 million dollars, or $0.09 per share, compared to 2.6 million dollars, or $0.01 per share, in the prior year. Total revenues were 115.3 million dollars compared to 33.6 million dollars in 2009 and total production grew to 87,631 ounces of gold. This year, Avion Gold expects to produce about 100,000 ounces of gold and the company is still predicting production of 200,000 ounces a year in 2012.

This gold stock is just one in a large universe of junior mining companies that are making money hand over fist with gold prices over $1,000 an ounce. It’s a great business model and it’s likely to stay that way for a considerable period of time.

Investing in gold has always been a risky business, because you can’t control how much gold is in the ground and what’s going to happen to the price of the commodity on the open market. All you can do as an investor is play the market as it is. In my mind, however, it’s no different than investing in a technology company. The risks are the same and so is the unknown.

Mitchell is a Senior Editor at Lombardi Financial specializing in small-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, such as Penny Stock Reporter, Micro-Cap Stocks, and Monster Profits. Mitchell, who has been with Lombardi Financial for thirteen years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. While Mitchell is not working he enjoys fly fishing, motorcycling and tending to his hobby farm.

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The booming gun business

by Tony Sagami on March 10, 2011

This is a story about a little gun maker near my Montana home but it tells you a lot about the economics of military/defense/gun industry and why it is an area that can prosper while the rest of the economy is suffering.

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Small Business Sentiment: Up Fractionally

Small Business Sentiment: Up Fractionally
March 8, 2011 The latest issue of the NFIB Small Business Economic Trends is out today (see report). The heavily watched Small Business Optimism Index is trying to break above recessionary levels. The fractional increase in February puts the index at the highest level since December 2007, the start of the last recession. This level, however, remains well below the levels achieved at the end of the two previous recessions.

Here is the opening paragraph (bolded text in the original): The Index of Small Business Optimism gained 0.4 points in February, rising to 94.5, not the hoped-for surge that would signal a shift into "second gear" for economic growth. Gross Domestic Product (GDP) growth in the fourth quarter was revised lower due to a large fall off in inventory building and weaker consumer spending than initially estimated. "Weak sales" still get the most votes by owners as their top business problem. Seven Index components advanced or were unchanged and three fell, but all of the changes, positive or negative, were small.

The first chart below highlights the 1986 baseline level of 100 and includes some labels to help us visualize that dramatic change in small-business sentiment that accompanied the Great Financial Crisis. Compare, for example the relative resilience of the index during the 2000-2003 collapse of the Tech Bubble with the far weaker readings of the past three years. The NBER declared June 2009 as the official end of the last recession, but the recession mentality still pervades the small business community.

Inventories and Sales: A Mixed Message

Elsewhere in the report we learn that "The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months was unchanged at a net negative 11%, 23 points better than March 2009 [the month the market bottomed], but still indicative of weak customer activity." The percent of owners expecting higher real sales continued to rise. However, plans to add to inventories declined, which is consistent with weak sales trends and not consistent with the improved outlook for real sales volumes.

Business Optimism Beginning to Outpace Consumer Confidence

The next chart is an overlay of the Business Optimism Index and the Conference Board Consumer Confidence Index. The consumer measure is the more volatile of the two, so I've plotted it on a separate axis to give a better comparison of the volatility from the common baseline of 100.

As the chart illustrates, in recent months the Small Business Optimism Index has been showing a faster recovery than the Conference Board's measure of Consumer Confidence.

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Response to HS2 Ltd on the business case for the new high speed line

Bruce Weston, from the HS2 Action Alliance, has been taking a look at the arguments made by HS2 Ltd on the Spectator Coffee House in response to my article about the business case for the new high speed rail line.  Here are his responses to the two key arguments that Alison Munro, their Chief Executive, has made:

Demand

The Department of Transport’s rail demand model assumes that for every 1 per cent more income, people will spend 2.8 per cent more on trips to London (economists would say it has fixed demand elasticities).  Clearly that can’t go on for ever!  The DfT’s previous approach of stopping such escalations at 2026 recognised that people will not keep spending an ever larger proportion of their earnings this way.  Sir Rod Eddingon in his review of transport priorities expressed concern about using this very same model for making forecasts over 10 years.  Last year DfT pushed this to 25 years (to 2033).  Now they are using it to make forecasts for 35 years (to 2043)!

We may need to make decisions about long lead time and long life projects, but we cannot sanely make them using forecasts based on stretching the period over which demand grows compared to people’s income to be ever longer until we get the answer we want.

Value of time

Recognising that people can, do, and increasingly will work on trains simply sinks the case for HS2.  The supposed productivity gain from reducing long distance train journey times is the largest benefit DfT attribute to HS2.  Without it the business case collapses.

But what of crowding?  Alison Munro is right, crowding can prevent both business and leisure travellers using their time productivily.  But on DfT’s projections (both in the consultation material, and in last March’s documentation), HS2 actually has more crowding than the alternative of upgading the WCML – for example they expect to double London – Manchester volumes, but their plans for Phase 1 of HS2 (between 2026 and 2033) provide no increase in capacity on the route!  And improvements to the existing services can be made incrementally and relatively quickly, so preventing crowding from ever becoming severe.  So another strike against HS2.

And people switching from cars and planes?  Yes they may get some productivity benefit, but DfT think that they will only be 13 per cent of passengers – the other 87 per cent come from transfer from conventional rail services and entirely new journeys.  And those travelling on planes will be able to use mobile technologies and be as productive as people on trains many years before HS2 could be built.

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