Five bargain shares…going, going, goi ng…

Monday, 19 December 2022 — Albert Park

[6 min read]

Dear Reader,

‘In any economy, money dominates.’

That’s how economics professor Steve Hanke likes to sum things up in the financial world.

The same is true of the stock market. Abundant liquidity drives asset prices up, and tight money drives them down.

We got a hint of what’s happening here via the recent data on margin debt on the ASX.

This is credit that investors borrow to buy stocks…or ‘leverage’, as the Americans say.

The Australian Financial Review reports:

‘The total value of margin lending has fallen by 23 per cent, or $4.9 billion, since its most recent peak in June last year, according to official statistics from the Reserve Bank of Australia.’

You can guess the reasons. Leveraged investors jump out when shares fall. And higher interest rates make it harder to make the maths work.

However, you and I can take this as a positive sign. The less margin debt in the market, the less vulnerable it is to a big collapse.

Margin debt can bid up stocks way beyond any rational estimate of fair value.

It’s no coincidence that the peak in margin lending on the ASX was before the global financial crisis in 2008.

The same dynamic played out in 1929 too.

The fact that margin debt is falling in Australia makes me, somewhat paradoxically, bullish on the market in the years ahead.

There’s still scope for aggressive buying to come back.

Are there other reasons to be hopeful?

According to investment advisor Ken Fisher, the answer is yes!

He writes in The Australian:

‘Recession likely isn’t nearby. Why? Lending overall remains really robust globally — fuel for investment and incongruent with deep recession. Businesses and households generally don’t borrow money to sit on it.

‘They spend it soon. Global loan growth has accelerated every month since March, reaching 9.3 per cent year-over-year in September.’

Go back to the Steve Hanke quote I began this article with.

Money dominates!

What do these two men mean?

More lending is bullish for the world economy because it involves credit creation.

Also note those lending figures are rising despite central banks raising rates.

Why then all the fuss about recession and slow growth in 2023?

Well, the inverted yield curve is one thing to give us pause. Over in the US, short-term rates are above long-term ones.

This is often flagged as a reliable recession indicator. And it has been.

But could it be, dare I say it, ‘different this time’?

The men and women at Quay Global think so.

It’s making the case that long-term rates are not pricing in a recession as much as lower interest rates in the future.

Most commentators refer to the ‘70s when thinking about the latest outbreak of inflation.

Quay don’t think that’s the right comparable. Rather, they think the 1940s is the better pick.

Here’s what happened back then:

This could be what bond investors are seeing right now in 2024.

That doesn’t mean the US has to be in recession. It could just take a ‘normalisation’ of supply chains, monetary policy, and wage growth to make it happen.

Of course, your crystal ball is as good as mine.

All we need to know today is that holding off investing in shares because the US may be in recession is not necessarily the best strategy.

It’s certainly not mine.

In fact, I’ve maxed out my self-managed super fund buying shares in this downturn. I don’t know what 2023 will bring.

But I’m willing to back good companies to create value in the years ahead.

And one dud year in stocks doesn’t change the outstanding track record of the share market to create wealth over time.

You’re supposed to accumulate in bear markets…that’s when you get the best prices!

Officially, I should say, the ASX 200 is not in a bear market. It’s only down about 5% for the year.

But this is misleading. Most of the smaller stocks on the ASX have been crushed in the last 12 months.

And there’s just little sentiment or narrative to keep them moving currently.

I remember in 2018 there was a stock I really liked called Credible Labs [ASX:CRD]. The share price was dead as a dodo for ages. I never understood why but I kept recommending it to my subscribers.

Then suddenly, out of the blue, Credible shares took off like a rocket and ended in an official takeover offer from News Corporation.

This is the kind of situation I see today. Shares with great value lying around because of poor sentiment and investor fear.

From my perspective, it’s a great time to buy because you’re not paying the premium you usually do in bull markets.

The trade-off here is you need some patience and conviction to hold on without the immediate positive feedback loops of low volatility and bullish investors bidding up prices and volume.

Big investors are beginning to move on these bargains. I can say that because I recently put five bargain share ideas down in this report.

Already, one of those suggestions is a rumoured takeover target because one investment firm is accumulating stock in the company.

More may be coming!

This opportunity won’t hang around forever. I suggest you take it while it’s there.

Best wishes,

Callum Newman,
Editor, The Daily Reckoning Australia

Dear Reader,

‘Won’t someone rid me of this turbulent priest.’

Attributed to Henry II,
before the murder of the Archbishop of Canterbury

The first thing we noticed when we got back to Ireland was the cold. There’s frost on the cars. And the canal in Ranelagh is iced over.

‘This is a record cold we’re having.’ said the taxi driver.

‘The temperature went down to 27 degrees last night. That’s Fahrenheit. We don’t see that very often in Ireland.’

Ireland has a mild climate. Rarely very hot. Rarely very cold.

‘It happens only about once every 10 years.’ continued the taxi driver.

Unlike much of the rest of Europe, Ireland doesn’t depend on the Russians or the Americans for its gas. It seems to have enough of its own. People here don’t need to chop down forests or steal firewood from each other’s front porch.

Meanwhile, here in Dublin, the shops are adorned with the usual Christmas bling…the restaurants are full…the bars are noisy…

…and at 4:00pm you will have a hard time getting a table for tea at the Westbury Hotel.

Market blues

Today, we’re going to leave our usual beat. But before we do, we check in on Wall Street and note that in this hinge season…the stock market is turning back towards deflation. From CNN:

‘The Dow plummeted nearly 765 points, or 2.3%, Thursday, and it is down 4% in December following solid gains the previous two months. Verizon (VZ) was the only one of the 30 Dow stocks in positive territory.

‘The S&P 500 fell 2.5% and the Nasdaq was 3.2% lower Thursday. The S&P 500 is now off 4.5% for the month while the Nasdaq has sunk nearly 6%.’

Asset prices are going down. If we’re right, they’ve got a lot further to go.

But let’s switch topics.

The remarkable upshot of Elon Musk’s takeover of Twitter is that he decided to release the records that show what the feds are up to. In effect, they outsourced the suppression of the First Amendment. Twitter executives colluded with federal authorities to censor what writers could write and readers could read.

Private companies can do what they want, is our view here at our headquarters. But there’s a lot more going on here…and it’s worth exploring.

We, the elite

The idea of the US, its Constitution, and Bill of Rights is that government should be limited. There are things it can do. And things it shouldn’t be allowed to do.

Most importantly, it can’t take anything away from ‘The People’ without ‘due process of law’. It can’t take away their property, or their liberty, or their right to go about their business.

In the case of ‘free speech’, the prohibition is very clear: ‘Congress shall make no law’ that keeps people from saying what they want.

In other words, the American system is meant to protect people from their government. And we know, too, that ‘the government’ is just an abstraction. What the restrictions really do is protect the common man from the elite who control the government.

This worked reasonably well. But gradually, laws and regulations ate away at the restrictions and took a big bite out of the rights reserved ‘to the people’. The elite wanted not only to control ‘the people’, they wanted to enlist them in their pet projects.

It wasn’t enough to let people pursue happiness in their own way, they also had to change the way they interacted with one another. There’s a whole body of ‘labour law’, for example, that tells employers and employees how they need to treat each other. And there are laws and regulations up the gazoo, telling restaurants, banks, and hotels how to deal with customers.

Those laws grew into today’s disputes over whether a pastry shop has to put two gay guys on a wedding cake…or whether website designers may be required to work for people of whom they disapprove.

But now, the Twitter files reveal a whole new dimension to the elite’s efforts to control ‘The People’; now, in full contempt for the First Amendment, they want to regulate what ideas and news people may read.

How does this work?

You’ll recall that until fairly recently, the US took a dim view of torturing prisoners. So, in the War on Terror, prisoners were sent to ‘Black sites’, where they were tortured by allies and friendly nations. In effect, the Pentagon outsourced what it didn’t want to do itself.

Now, let’s imagine that the feds notice that some people don’t vote the way the elite would like. ‘For the good of the country’, they might get together with a private printer to make sure that some people got illegible mail-in ballots.

That would clearly be wrong.

Or imagine that the elite — acting through the government they control — contact Visa and say: ‘It would be a lot better if some people were denied credit cards; they just send their money to the wrong things. Some drive too much and harm the environment. Some eat too much and overburden the hospitals. Some give money to wingnut causes.’ And then, couldn’t Visa, a private company, advised by the federales, decide for itself who should get a credit card?

Or take the actual case at hand.

Apparently, some government officials — those from the FBI and Homeland Security have been mentioned — said to Twitter executives:

‘Won’t someone rid us of this troublesome information? Look, some people have the wrong ideas. We can’t censor the news. But you can. How about making sure “The People” don’t get any misinformation?’

Twitter honchos were eager to help. They met with the feds regularly, deciding what should be published and what shouldn’t. The government effectively outsourced what it couldn’t do directly — ignoring the Constitution and censoring speech. Doing so, it took away from citizens their First Amendment rights…

…the right to hear both sides of the story…and decide the truth of it for themselves.

It will be interesting to see what happens next. But we will take a guess. The media will find the story not worth reporting. And the public — always easy to gull or bamboozle — won’t care.

Regards,

Bill Bonner,
For The Daily Reckoning Australia