‘At the same time, with resources sector investment spending set to decline significantly, considerable structural change occurring and lingering uncertainty in some areas of the business community, near-term prospects for business investment remain subdued.’
Monetary Policy Decision, Reserve Bank of Australia
After nearly six years of central banks dominating the business pages, and terms such as ‘the Fed’, ‘the RBA’, and ‘Bernanke’ getting more than their fair share of use, we can only look back on yesterday with fondness.
You may think that’s an odd reaction, seeing as the S&P/ASX 200 fell 90 points. That was the index’s biggest drop since June last year.
So what was it that brought a smile to our face even while stocks fell?
It was the possibility — however slim — that maybe things are returning to normal…
Last year we set a target for the main Aussie stock index to hit 7,000 points. Our prediction was that the index would get to that mark in early 2015 (say around January or February).
Part of our rationale was that the continued money printing from central banks and record low interest rates would provide a ‘money torrent’ of fresh cash helping to push up stock prices.
We weren’t the only one to hold that view. Dr Marc Faber, keynote speaker at our upcoming World War D conference in March, calls the US Federal Reserve’s latest round of money printing ‘QE Infinity’.
That was a reference to the fact that the plan didn’t have a fixed duration or end date.
But maybe now it’s time to change that view. That doesn’t mean we’ve ditched our 7,000 point target for the ASX — far from it. But maybe now the driving force behind the stock market’s rise is no longer the central banks.
Cashed-up Miners
At the top of this letter we printed a quote from the latest Reserve Bank of Australia monetary policy decision statement.
We’ve printed it for two reasons.
First, it supports an argument made by analyst Jason Stevenson. He’s made it pretty clear where he stands on where the mining sector is going this year.
His view is that the mining sector is moving from an investment phase into a production phase. If you read the RBA statement it sounds like that’s a bad thing. But it’s not. In fact, it’s the opposite of bad.
A shift from the investment phase to a production phase means there are a whole lot of beaten down mining stocks that will soon have stacks of cash flooding into their bottom line as explorers become producers.
This will give investors the clearest indication they’ll have gotten in 10 years on whether a company’s management is all talk and no action. One of our biggest criticisms of the mining sector is that a company’s breakthrough project always seems to be ’18 months from production’.
Just as tomorrow never comes, for many mining companies production never comes either. But if investors become fussier about where they’ll put their cash (and by investors I mean the institutions providing direct funding on projects) it likely means investment dollars will migrate towards the most viable and potentially profitable projects.
That’s actually good news for retail resource investors, and flies in the face of the mainstream rubbish about the end of the resources boom.
And that’s why Jason is focusing most of his attention on the companies that have the greatest chance of turning exploration projects into production projects.
But that’s not the only reason to be positive about the markets…
If Bad News is Bad News, Then Good News Should be Good News
As we said, there is another reason to be positive. In fact, this is what cheered us the most. It wasn’t until 2.20pm yesterday afternoon, 10 minutes before the Reserve Bank of Australia was due to release its statement, that we remembered the RBA board was meeting.
(Incidentally, the RBA decided not to change the current Cash Rate.)
How different that was to even a year ago? Back then it seemed as though everyone was waiting for the RBA decision with bated breath. We even remember a few years ago when Sky Business channel had a countdown clock as a gimmick leading up to the RBA decision.
We haven’t watched Sky Business channel in years, so maybe they still do the countdown thing. It’s a pretty sad state of affairs when the only thing driving the market is the actions and comments of the grey suits in Martin Place.
Maybe it’s just your editor who had this feeling. But if you add this to the previous day’s action on Wall Street, where bad economic news actually translated into bad stock market news, perhaps investors should see this as a positive sign.
It’s always dangerous to use one or two events in order to formulate an entire investment strategy. But you’ve got to start from somewhere. For over a year we’ve based our entire theory of a soaring stock market on the belief that central banks will keep printing money.
There is of course an alternative: rather than central banks boosting stocks to 7,000 points, what if the boost comes from investors pouring money back into the market in the belief that a genuine recovery is underway?
It’s a crazy idea. But do you know what? It might just happen…and if it does, we’re betting on mining stocks to be some of the best performing stocks on the Aussie market.
Cheers,
Kris
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