Cycles and Networks in Financial Markets

The first month of the financial year is in the can, and Australian stocks hit a six year high this week. Indeed, Aussie shares had their strongest month for the calendar year in July. Yeeha! The question is can they keep going?

Well, they didn’t get off to a good start in August! Putting my Cycles, Trends and Forecasts hat on, this week we suggested subscribers start cautiously putting some money aside. Phil Anderson and I are waiting for a retracement in major stock markets. Note the word retracement, not collapse. The next few issues of Cycles, Trends and Forecasts (CTF) will be keeping subscribers up to date on that.

Mind you, there were two real-estate related stocks on the all-time high list this week — Commonwealth Bank, which hit $83.92, and Genworth Mortgage Insurance Australia. Genworth only recently listed on the stock exchange. CTF subscribers got a heads up about Genworth a few weeks ago. Take a look at its recent performance:

The trend is up for now. Of course, it’s also a question of timing. Here’s some evidence that the best thing you can do for your long term wealth is understand the real estate cycle and how it relates to stock markets. The Saturday Paper gave you a taste on July 19 in this piece by lawyer James Wheeldon.

His main point is ASIC, as a regulator designed to protect investors, is a farce. Don’t rely on it and don’t trust it. But it was interesting to see one of the examples he gave. In 2007, RAMS Home Loans Group floated on the ASX, netting its chairman and major shareholder, John Kinghorn, a $500 million pay day. RAMS collapsed three weeks later.

About the misleading (though still legal) RAMS prospectus, Wheeldon writes:

‘Only those with the stamina to grind through the fine print would find the buried hints about the truth of the situation… The “mums and dads” who bought into the prospectus were left with near-worthless paper.’

Had those investors been listening to my colleague Phil Anderson, editor of CTF, at the time, there was no way they would have gone near RAMS stock. Here is one early warning he gave as far back as 2006: ‘A credit provider collapse brings the party to an abrupt end usually — but by the time this makes it to the public news, insiders have well and truly cashed out.

Simply, the timing of the RAMS listing within the context of the cycle would have told you to grab your wallet and run. You simply must understand it.

Of course, there’s plenty of other things you have to understand as well. One of those, I firmly believe, is China’s ‘hukou’, their system of household registration. So it was with interest I noticed this buried in the back of the Australian Financial Review yesterday:

The Chinese government has issued proposals to break down barriers that a nationwide household registration system has long imposed between rural and urban residents and among regions, reinforcing inequality, breeding discontent and hampering economic growth.

A lot of the social stresses in Chinese society stem from this policy. As of now, the hukou is a leftover of decades passed, designed to limit social mobility within China in the years of collectivisation.

Unfortunately, its legacy is to give China’s urban elite access to social welfare and public services while rural workers who have moved to the cities are treated like foreign, illegal workers. This creates slums and millions of disenfranchised ‘citizens’ shut out of the consumer economy. Sounds like a breeding ground for violence, crime and disease, too, if not outright insurrection.

But if you’re betting on Chinese development and the growth of consumption, a lot’s going to depend on how this reform takes place to bring these millions into urban society. And yet it’s discussed as almost an afterthought in the mainstream media, if at all. Of course, I’m no expert on China and there’s a limit to what investment angle I can draw from this.

Thankfully for us, Ken Wangdong, editor of New Frontier Investor, IS an expert on China. Nuances like this are something he’s going to cover as part of his service. That’s hard to find anywhere else.

One of the nice things about Port Phillip Publishing now, as it’s grown, is how its professional reach into different areas. That means we can bring a more detailed view on subjects like Chinese society — and a whole lot else.

Even better, however, is we’ve taken that network to the international level. How? Through accessing the wider global network of Agora Publishing — a company that operates out of Baltimore, London, Paris, Mumbai, Johannesburg, Buenos Aires, Melbourne and Waterford, each with dozens of analysts and researchers. The good news is we’ve just created a way for you to access their expertise.


Callum Newman
For Markets and Money

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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