You could call it the tale of two stock markets.
On one, margin debt has hit a nominal all-time high.
On the other, investors have taken it down to a ten year low.
The two exchanges are the New York Stock Exchange and the ASX.
But which is which and what does it mean for your investments?
You’ve probably already guessed. It’s Australia where it’s hitting a low. Take this from the Australian this week:
‘ALTHOUGH share values have risen to levels not seen since before Lehman Brothers went broke five years ago, retail share investors are more risk averse than ever, with the volume of margin lending falling to a 10-year low.
‘Reserve Bank figures show the number of client accounts with margin loans has fallen by a third to 170,000 since the beginning of 2010, while the $12 billion in loans outstanding is down 44 per cent since then and is 70 per cent below its pre-crisis peak.‘
Now compared that to what Dan Denning, editor of The Denning Report, revealed this week about how things are playing out over in the US:
‘At the beginning of October margin debt on the New York Stock Exchange (NYSE) was nearing an all-time high at $378 billion. Adjusted for inflation, it’s still just below the 2007 highs, but well above the 2000 highs. If you ever needed proof that today’s highs on the S&P 500 are heavily leveraged, the chart below provides it.‘
Dan’s take is that investors in US stocks are taking massive risk based on the expectation stocks will continue to rise thanks to the US central bank, the Fed. His conclusion? A highly leveraged, dangerous stock market.
In this case, Dan is talking about the US. Now, a major correction in US stocks usually knocks the stuffing out of the Australian index as well, which must be on Dan’s mind because he’s
predicting a recession here too.
But we can’t help but think the Australian stock market is a less risky proposition if you compare the two based on this trend.
That’s not to say it’s easy to find value. But it does give you a better idea of your risk profile. And IF the current margin debt trend reverses in Australia, that could put some wind at the back of the Australian market in 2014. Emphasis on the ‘could’, of course.
Over at Australian Small-Cap Investigator, Kris Sayce must like the idea of buying up stocks when investors are wary and risk averse, because the buy list is growing by the month.
So far, the only ones not in the black are some of the resource stocks. Everything else is humming along quite well, especially the dividend payers, which Kris reasoned would catch the eye of the market.
Could sentiment be changing in the natural resource space?
Sentiment is a subjective thing. But there were some interesting moves from some of the big players this week. That’s one way to get a drift of how they see things.
BHP chipped in with a healthy September quarter upgrade. The big burly Aussie miner and fellow iron ore giant Rio Tinto are tabling expanding their iron ore operations in the Pilbara, with a possible US$10 billion in new investment.
Then came news that global energy giant Chevron could splash $500 million on oil and gas exploration, according to The Australian, in the Bight Basin, off South Australia’s coast.
‘Federal Industry Minister Ian Macfarlane said yesterday that exploration permits had been awarded to Chevron to explore in two frontier offshore blocks spanning more than 32,000sqkm — almost doubling the US group’s total offshore acreage holdings in Australia. The Bight Basin, part of the Great Australian Bight, is believed to be highly prospective and is similar in size to the Gulf of Mexico.‘
Source: The Australian
Click to enlarge
Over at ASI, Kris doesn’t look at companies as big as Chevron and Rio Tinto. In the resource space, he’s after the developers and explorers. They have not fared well in the last two years, across all commodities, perhaps with the exception of some of the oil plays. But we don’t think you’ll see a turnaround in the junior space until the big boys lead the way in a sustained way.
That’s why Kris is focusing on small cap businesses with revenue and profits. These are companies that offer the prospect of organic growth, but with income for investors as well.
With investors focusing on income and cash flow, junior resource stocks don’t really fit the bill in the current climate. That’ll change somewhere down the line. It always does.
Hopefully we’ll be able to report back shortly on how resource veteran Rick Rule sees the market when he does a free speech to a select bunch of PPP subscribers next week. Stay tuned.
Callum Newman
Editor, Money Weekend
From the Port Phillip Publishing Library
Special Report: UNAVOIDABLE: Australia’s First Recession in 22 Years
