Newsflash: A Market Correction is Underway!

But, but…Janet Yellen said that interest rates weren’t going up for ages…

Yesterday, investors bought stocks using the old playbook of, ‘Fed talks, market buys’. Today, that’s looking rather silly. The Dow plunged more than 300 points last night, and today the Australian stock market is having its worst day in a while. That’s saying something, as Aussie stocks have been battered from pillar to post over the past month.

The helpfully tells us that a market correction is underway.

‘Global equity markets are in the middle of a correction according to a growing chorus of investment managers. And key to their calls is the prospect of higher interest rates in the US.’

A correction is underway? Thanks for the heads-up guys…

The ASX 200 is now down around 5,200 and probably on its way to 5,000 over the next month or so. Any attempt to rally so far has been futile. That tells you market psychology has changed.

Investors have been ‘buying the dip’ ever since the stock market began its strong rally in late 2012. And it was a winning strategy. But it’s not working out now.

As we warned Sound Money. Sound Investments. subscribers this week, despite the recent sell-off the market as a whole is not cheap. You can make an argument that it’s OK value now relative to bond yields, but this is a story normally trotted out by asset managers who are keen to reassure you and to stop you taking your money away from them.

While there’s no need to panic, there is a need to make sure you’re not overweight any particular sector that has delivered good gains over the past few years. Like banks stocks. When market psychology changes, it is usually the past winners that suffer the most.

And looking at the charts of the big four banks, they’re all showing worrying signs that the long term uptrend is over and a new downtrend is starting to form.

I bring this up because last night I attended the Gold Symposium’s gala dinner, where many of the delegates from the two-day event also gathered. I got talking to someone who said they had done very well from the banks in recent years, but was now very much overweight the sector.

Asked for a general opinion on whether this was a position worth maintaining, I responded (with a general advice disclaimer warning as a preamble) that I probably wouldn’t want to be overweight banks right now.

Having said that, I haven’t been a fan of the banks for ages…which has been a bad call. But the tailwinds from the RBA’s latest rate cutting cycle have now washed through the banks’ profit statements. Also, the cycle of lower bad debt charges (which boosts profits) is also drawing to a close and will more than likely pick up as the economy continues to slow into next year.

In short, while there’s nothing disastrous on the horizon for the banks, the strong profit drivers of recent years now looks over. Throw in the threat of macroprudential controls to slow property investor speculation, and more onerous capital requirements stemming from the Murray Inquiry, and the party for banks is winding down.

But is the party for gold just getting started? Who knows; I’ve giving up trying to predict the gold price. Yesterday at the Gold Symposium in Sydney, there were a few hopeful bottom callers, saying a ‘triple bottom’ was now in place. But there were more people who were just hopeful.

When confidence and bravado have gone from a market, and only forlorn hope from long suffering investors is left, you know a sustainable bottom is not far away.

One of the highlights of the two day event was meeting a couple of gentlemen from Queensland. One of whom shared a few stories about Gladstone, the home of Australia’s newly emerging LNG export industry.

The place is a hub of activity apparently, but it’s not all good news. The bloke I was chatting with told me the place is toxic, but most of the news is swept under the rug by a compliant media who don’t want to upset the money-making apple cart.

As an example, he showed me an article from the local paper. Evidently a lost iPhone is bigger news than a burning coal bulk carrier. Check it out below, it’s hilarious:

The Gold Symposium was great fun and I met some wonderful and interesting people. If you want to learn more about the precious metals industry I highly recommend you put this annual event in your calendar and get along to it.

It’s been about three years since I was last in old Sydney Town. There were a few things I noticed from my short stay. The rail system is still rubbish, the nightlife is abysmal (the city shuts down early, thanks to the politicians) but you can still get a pretty good coffee for three bucks, which I didn’t expect.

And of course, the spring weather was beautiful, in contrast to the blustery conditions I arrived to in Melbourne this afternoon.

But let’s get back to see how the markets are travelling as we head into the final stretch before the weekend. In short, it’s not good out there. The iron ore miners are deeply in the red: BHP down nearly 2%, RIO down more than 2.5% and the little battler Fortescue down 3.5% and making a new low for the move. The juniors look downright ugly.

You can think of iron ore stocks as a leading indicator for the Australian economy. Australia got rich on iron ore…but now it’s in the process of giving some of that wealth back. The flow through to the rest of the economy will take time, but if the sharemarket is a leading indicator, right now it’s telling you the whole iron ore industry is under all sorts of pressure. The economy isn’t far away from a similar feeling.

BHP and Rio will survive, there’s no doubt about it. But their attempts to kill the competition by ramping up production in the face of oversupply will crush their profits over the next few years too. Expect more earnings downgrades for the big two miners in the next couple of months, especially once it dawns on the analysts that the days of US$100/tonne iron ore are long gone.


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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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