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The Market’s Declining Response To ‘Open Mouth’ Operations

You know stocks are in a bull market when the underwriters can’t wait to sell you more of them. In today’s issue of The Daily Reckoning, we look at the pipeline of initial public offerings (IPO) in Australia. It’s a motley crew of companies that tells you what’s going on in the economy. It also tells you that today is a lot more like 2007 than 1982.

But first, excuse our nerves. Your editor is back behind the wheel of The Daily Reckoning for the first time in a few months. We’ve taken a back seat in order to steer an entirely different project, a black-box trading system on five ASX stocks and the index itself. That’s still in development stage. If you’re a subscriber to one of our publications, you’ll hear about how you can view a prototype tomorrow.

In the meantime, today we’ll reckon with more conventional manners, like the cabal of bankers who’ve taken over America’s financial system. Stocks, gold, silver and platinum group metals (PGMs) all fell on Friday when another Fed governor opened his big mouth. This time it was James Bullard from the St Louis Fed. What did he say?

Bullard took to Bloomberg’s airwaves to say that the decision NOT to taper was ‘borderline’ and only reached after ‘weaker data’ came in. He added that ‘It’s possible you could get some data that change the complexion of the outlook and could make the committee be comfortable with a small taper in October.‘ Calamity ensued.

Well, not quite calamity, but certainly confusion. Just like that, the taper that was off on Thursday was back on by Friday! And by next month, no less! One day investors were euphoric that the Fed would be there to backstop reckless behaviour ad infinitum. The next day, the end is nigh!

It’s the sign of a degenerate empire that the attentions of the people are focused on palace intrigues. The Federal Reserve is like a court of financiers. Bullard is somewhat hawkish. Ben Bernanke is on the way out. Janet Yellen, a dove, waits in the wings to be crowned. Perhaps Bullard is trying to exert some moderation on Fed policy (and asset prices) in the inter regnum between King Ben and Queen Janet.

This is the trouble you have when your only remaining policy tool is your mouth. You can talk markets up. You can talk them down. But you can see that each major Fed ‘bombshell’ has a smaller effect on the market and lasts for a shorter time than the last. With no rates left to cut and no realistic ability to dial back bond purchases, the Fed is trying to bluff markets.

But sometimes markets are in the mood to go along, if going along means higher prices for a while. One reliable indicator of the social mood is the IPO calendar. It’s filling up again. Over $13 billion in IPOs could hit the market in the next months, according to Bridget Carter in today’s Australian. There hasn’t been that kind of action since 2007, when 135 IPOs hit the market with a total capitalisation of $66 billion.

The recovery in listings, then, is modest. But it IS telling, especially when you look at the companies involved. You’ve got Veda, a credit alert company, being floated by private equity. Nine Entertainment could go public soon, too. OzForex is due to leave the gate. Genworth, a mortgage insurer, may finally go public after many delays. And the private equity firm that bought Dick Smith’s for $94 million is looking to sell it to the public for more.

There are two things to note about all that activity. First, private equity buys during the crash and sells during the boom. Buy businesses and assets when they’re cheap and sell them when people want to buy stocks again. That is an excellent strategy for private equity firms. It’s probably not a good strategy for individual investors.

Second, look at the types of businesses the owners are selling shares in: credit alerts, mortgage insurance, forex trading…these are all businesses that depend on the expansion of credit and debt for earnings. They may be a refreshing change from hard rock miners and exploration companies, but as businesses they depend on the same underlying expansion of debt.

You should always ask yourself why, if a business is so good, the owners are interested in selling shares to the public. Some of the answers are obvious and some aren’t. One obvious answer is that a business needs capital to expand. That’s an obvious (and relatively healthy) reason to sell shares. The less obvious reason is that you sell shares in the business because you can make a lot of money doing so.

Not that there’s anything wrong with making money. It’s just that when the insiders are selling businesses to the public, it’s probably not a good time to be buying. It means stocks as an asset class are being ramped up by the investment industry publicity machine. This happens before a crash – which cashed up investors love, because during a crash you can buy assets on the cheap.

You never feel comfortable buying investments that have gone down in price. If you were buying shoes, furniture, or a car, lower prices would feel like getting a bargain. But when it’s stocks, you feel like you’ve made the wrong decision and already lost money. Fighting this feeling is a big challenge for long-term investors.

What else? The Germans have had their election. Frau Merkel has won in a landslide. We wonder if the slowly turning wheels of European Central Bank (ECB) monetary policy will begin to speed up. Hmm.  The Federal Reserve has been the main antagonist in the global currency war. But with Germany’s political situation clearer, can we expect the Europeans to combat dollar devaluation?

That’s one of the topics we’re sure will come up next month at the Gold Symposium in Sydney, October 16th and 17th. The day-to-day movements in stock prices are not the most important story in today’s world. The global currency war is. And the fate of huge debt bubbles.

Those monetary events would seem to tell you that the only winner in a currency war is sound money. But conferences are a kind of contrarian indicator too. The higher the gold price went in the last five years, the more people at the Symposium. What will you see this year? We don’t know, but if the crowd is half the size it was in 2011, then gold will be twice as attractive to buy.

Regards,

Dan Denning+
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+

From the Archives…

How Long Can the Government Charade Continue?
20-09-2013 – Vern Gowdie

The End of Australia’s Boom Economy
19-09-2013 – Satyajit Das

Super… Who’s Going to Buy Your Shares When You Retire?
18-09-2013 – Nick Hubble

Australian Banks in the Firing Line
17-09-2013 – Nick Hubble

Yellen at Stocks to Go Up
16-09-2013 – Nick Hubble

Dan Denning
Dan Denning is the Editor-in-Chief of The Daily Reckoning Australia and the author of 2005’s best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 as a small-cap analyst. From 2000 to 2005 he was the managing editor of Strategic Investment, where he recommended gold and warned of the US housing bubble. Dan has covered financial markets from Baltimore, Paris, London and, beginning in 2005, Melbourne Australia, where he is the Publisher of Port Phillip Publishing. To follow Dan's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.

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