What goes down, must go up.
Following hot on the heels of Monday's horror day, yesterday saw the ASX post its strongest session in five months.
Today's looking good too, the S&P/ASX 200 Index jumping another 30 points higher, even in the face of this dire headline in The Sydney Morning Herald…
You can't say I didn't warn you.
I've long been predicting a lower Aussie dollar and lower interest rates, and positioning my portfolio accordingly — buying U.S. quoted stocks, and buying dividend paying stocks, ahead of the curve.
It's not rocket science, which suggests most economists must moonlight as astronomers, for precious few have either seen this coming, or had the guts to change their predictions.
As Motley Fool Pro's Joe Magyer recently tweeted…
"Chief economists (have reputations to protect) and backtracking looks bad"
Whichever way you look at it, higher interest rates in 2014, as has been the consensus for quite some time, look as likely as Tony Abbott winning a popularity contest against Hugh Jackman.
Source: news.com.au
So, where to from here?
Lower interest rates continue to look increasingly likely, although not until February at the earliest.
Glenn Stevens and his merry men at the RBA are taking January off to recharge their batteries after a year in which they didn't once move interest rates, up or down. Tough gig.
The Aussie dollar — it's going nowhere but down.
As for the share market, truth be told no-one knows where it does from here — not today, tomorrow, next month or next year. Bear that in mind as the silly season gathers pace and investment bankers roll out their predictions for the year ahead.
I have just one prediction — that all predictions will be wrong.
But forced to make one — in the face of lower interest rates, low inflation, a lower dollar, a flat to down share market this year — I'd say the odds are we'll be looking at an ASX higher this time next year than now, perhaps substantially so.
That said, please take my prediction, and any predictions, with a grain of salt — although it must be noted, unlike chief economists, I'm both happy to admit when I'm wrong, and when the facts change, happy to change my mind.
Take oil. I'm heavily invested in one small Canadian-quoted junior oil producer. It was cheap. Dirt cheap. It was profitable. It has an almost 100% strike rate with its drilling program. It has production visibility for years ahead. What could possibly go wrong?
Try a 40% plunge in the oil price. What started this year as one of my largest positions has also been one of my most disappointing, the shares down 45% in 2014.
Thankfully, and hopefully due to some level of skill, my portfolio is still up so far in 2014, substantially out-performing the market.
Big winners have included Apple, Berkshire Hathaway and Facebook, all U.S. quoted companies.
The first two stocks are recommendations on the U.S. side of the Motley Fool Share Advisor scorecard, a scorecard that is also substantially outperforming the index. If you haven't tried investing Stateside, you're missing out.
Locally, my SMSF has been killing it, my two biggest winners both being Motley Fool Share Advisor recommended ASX stocks.
The share price of one is on a tear again today, not far shy of a 400% gain since Scott Phillips first recommended it to Motley Fool Share Advisor subscribers.
(For the record, I bought after subscribers were first alerted, paying a higher price, but hey, when a stock goes up almost 400%, missing the first 20% means nothing.)
The other is Vocus Communications Limited (ASX: VOC), one of my largest positions, and another one of Motley Fool Share Advisor's biggest winners.
Its shares have jumped another 60% so far in 2014, putting my total gain since I first bought the shares — again, after they were recommended to Motley Fool Share Advisor members — at 220%.
Nice work if you can get it — even nicer when your portfolio has to contend with a dud like the aforementioned junior Canadian oil producer.
I'm deliberately not naming the small Canadian oil stock here, as I may wish to top up my holding. The Motley Fool's strict ethical trading rules mean if I publicly mention the name of the company, in whatever capacity, I have to wait at least two full trading days before transacting in the stock.
Yes, it does place some restrictions on my personal investing. But that's a small price to pay for putting our readers and our subscribers first. Plus, front-running a stock is an offence that could see me spending time behind bars. I value my freedom.
As somewhat of an aside, on Tuesday morning, I did open a new position in a large blue chip stock, one I already own. I'll be in a position to reveal its name, and the unique way I played it, in the coming days, when our trading rules allow. Watch this space.
Like many, I find it hard to resist a bargain, and the Canadian oil producer is as cheap as they come. Recent 3rd party research — and admittedly this is before the oil price fell to around $US70 a barrel — said that in 3 years time, based off its forward estimates and today's depressed stock price, the company would be trading at a P/E of 0.64.
That is not a typo. The research suggests the company is trading on a 3-years forward earnings multiple of less than one.
Now, a lot can go wrong between now and 2017. Oil prices could plummet to $US40 a barrel, and stay there for an extended period of time, a scenario that would likely see this company, and many, many others, shutter their operations.
That said, given the marginal cost of production of a new barrel of oil is widely accepted to be around $US80 to $US90, economics 101 says oil simply must trade at, or slightly above that level, as a minimum, over the medium term.
Of course, all this somewhat goes against what I said yesterday — that now was not the time to try to bottom-fish the oil sector.
Through my 25 years of investing experience, time and time again, I've seen share prices fall much further than you can ever imagine.
A very recent case in point is Metcash Limited (ASX: MTS). A profit warning on Monday, coupled with a big cut to its dividend, saw the shares fall 15%.
You'd have thought that would be the worst of it, especially given the shares had already fallen over 30% so far in 2014. Remember, we're not talking about some risky small cap stock here — the owner of the IGA chain is a $2 billion company.
But you'd have been wrong. Yesterday, the shares fell another 13%, hitting a 13-year low of below $2.00 a share.
Holy Black and Gold. Total carnage is the only way I can describe the unholy mess.
I'm always on the look-out for a bargain, particularly where it looks like there has been panicked and indiscriminate selling.
Metcash seemed to fit the bill perfectly.
As usual, before diving in, likely to something I'd later regret, I consulted by own personal stock picking expert, Motley Fool Share Advisor's Scott Phillips.
Just as well too. Here is the full transcript of our brief but very valuable Skype conversation…
[2/12/2014 3:59:32 pm] Bruce Jackson: Did you see MTS down another 13% today?
[2/12/2014 3:59:42 pm] Bruce Jackson: Any interest?
[2/12/2014 3:59:58 pm] Scott Phillips: Huge operational leverage works both ways
[2/12/2014 4:00:16 pm] Scott Phillips: If they can't get meaningful growth in volumes, it'll eat the business from the inside out
Enough said.
I'm lucky enough to be able to call on Scott in such circumstances, although I'm not the only one. Thousands of Motley Fool Share Advisor subscribers have access to Scott's real-time thoughts via our vibrant member-only discussion boards.
I must admit I'm usually a little too busy to venture onto the boards (you can literally spend hours reading the thousands of messages and posting them yourself), but today I waded in on the discussion board of one popular Motley Fool Share Advisor recommended stocks.
Out of respect to that service's paying subscribers, I don't usually give out the names of our live buy recommendations.
But today, I'm going to make an exception to that rule, and let you know the name of the company is child-care aggregator G8 Education Ltd (ASX:GEM).
The company entered a trading halt yesterday afternoon pending an announcement regarding financial guidance and the dividend for the year ending December 31st 2014.
I've been around markets long enough to know most "financial guidance" notifications are of the downgrade variety, and as such, wreak total havoc on the portfolios of unsuspecting shareholders.
Now if you thought the punishment meted out to Metcash was severe, if the same fate was to befall high-flying G8 Education, you'd be looking at a share price crash of 50 – 70%.
Thankfully for the Motley Fool Share Advisor subscribers who own the shares — they are up 38% since Scott Phillips first tipped them, soundly out-performing a flat market over the same period — if the press is to be believed, the news appears to be good.
According to the AFR (with my emphasis)…
"G8 is expected to provide earnings guidance above market consensus on Wednesday or Thursday, and lift the company's dividend above the current payout of 5¢ a quarter."
Scott's not counting any chickens yet, and nor are the Motley Fool Share Advisor members, although one did say…
"If you're right Bruce (about it being an earnings upgrade) you can send me a subscription renewal notice."
I hope I am right, and not just for the renewal.
As I write, G8 shares remain in a trading halt. Wednesday marches on. As ever, time will tell.
