This Stock Will Warn of the Next Credit Crisis

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The Aussie market looked like having a breather yesterday. The Dow and S&P 500 fell 0.25% and 0.3% respectively Monday night, while oil prices fell almost 4%. Gold was up nearly US$10 an ounce, to $1,183, while US Treasuries gained.

In other words, it was ‘risk-off’ trading session as investors looked to lock in profits after a few months of very good gains.

Is this the start of a deeper correction?

It could be. But if it is, it shouldn’t surprise you. Check out the chart below, which shows the ASX 200 index. Since the ‘Trump Reversal’ in early November, the Aussie market has screamed nearly 800 points higher.


Source: bigcharts.com
[Click to enlarge]

After such a strong rally, it would be out of the ordinary for a correction not to unfold. It’s simply how markets work. The question is, does it start now or will it keep pushing higher?

I have no idea. As a guess, it wouldn’t surprise me to see the market continue higher until it gets close to 6,000 points. That was the 2015 market peak, and represents a major area of chart resistance.

From a technical or charting perspective, it makes sense that a major correction would start from that area. But the market doesn’t make sense, and will do what it wants regardless of my opinion.

The best way to approach it is to expect a correction, and let it happen without too much concern. The fact is the market looks quite strong here. The trend is headed higher, and that’s bullish.

So keep this in mind when the correction does get underway. And ignore the bearish voices that will talk about the ‘Trump rally’ turning into a crash.

On that note, let me show you a chart of a stock that I call my ‘credit crisis barometer’. I’ve been tracking this for my subscribers at Crisis & Opportunity for the past few years…and I wrote about it in The Daily Reckoning last year too.

The rationale is that if another credit crisis is REALLY brewing, you’ll see the evidence surface in certain companies’ share prices first. In other words, the market will throw off warning signs that something major is going down.

If you follow these signs, you won’t get out at the top (no one can do that) but you will get out before the proverbial hits the fan.

And if you want to be a decent investor, this is the attitude you need to take. That is, you can’t sit on the sidelines worrying about another credit crisis. You will simply miss too many opportunities.

And if you’re worried about missing too many opportunities and watching your life go by sitting in a miserly term deposit, the alternative is being in the market and stressing about the credit crisis that you expect (and know!) will hit at some point.

It’s stressful either way.

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Stressed is not a good state to be in. It will probably kill you before the ‘next’ credit crisis blows your portfolio up.

But investing doesn’t have to be a stress fest. You just need to learn to let the market guide you. Which brings me to my ‘credit crisis barometer’ stock.

The company is Macquarie Group [ASX:MQG]. Every facet of its business requires the free flow of credit around the world. If credit conditions are tightening, you’ll see it in MQG’s share price.

But as you can see below, MQG’s share price looks very healthy indeed. Yesterday, it broke out to its highest level since 2007!

This chart tells you that credit conditions are getting looser, not tighter. If you cast your mind back to the heady days 2007, MQG was involved in an attempted leveraged buyout of Qantas.


Source: bigcharts.com
[Click to enlarge]

We’re nowhere near that point of financial recklessness at the moment, but MQG’s recent play at Tatts Group [ASX:TTS] suggests that things are heating up again.

At this point, you can curl up in a shell and think, ‘Here we go, financial stupidity is back, I’m outta here.’

But you can’t make moral judgements if you want to do well in the market. The fact is, the easiest way to make money in times of financial stupidity is to join in.

Just don’t drink the Kool Aid. Always keep an eye on the exits.

For the record, I don’t think we’re close to an exit point. Things feel like they’re just starting to heat up. That might make no sense to you, given the big rally global markets have enjoyed since the 2009 bottom.

But as I always remind you, markets only make sense in hindsight.

Governments and central banks are invested and involved in markets like never before. The intervention and manipulation has been extraordinary. Just last year, bond yields went negative across parts of the world, thanks to central bank buying.

And you expect the market to make sense?

To start getting bearish on the overall credit cycle, I’d want to see MQG’s share price start to reverse and head into a longer term downtrend. But given it’s just broken out to a near 10-year high, that’s a low probability outcome.

Playing the markets is akin to playing probabilities. Making big bets on low probability outcomes is high risk. In the same way, betting on another credit crisis right now comes with a very large opportunity cost.

I know it’s a pervasive fear. But there is simply no evidence of another credit crisis unfolding anytime soon.

We’ll get a correction, for sure. But a correction is not a crisis.

Greg Canavan,
For The Daily Reckoning

Editor’s Note: This article was originally published in Money Morning.

Greg Canavan
Greg Canavan is a contributing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg'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. For more on Greg go here.
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