Equities explosion coming

Key Points

• Synchronised global economic upturn in train
• Resource commodities about to surge
• Global equities now ready to BLAST higher
• A$ to rise as US$ safe haven diminishes
• Australian resources stocks cheapest assets on planet
• Small caps are 10-20 bagger gifts
• Well it seems that the human spirit is finally overcoming the adversity of Wall Street negative groupthink and markets all around the world are ready to blast off substantially higher.

It is not just me saying this.  It is the markets that are telling us as you will see.

In following global economic activity I have always used the World Steel Association monthly data to gauge activity in the real economy.  My observation of this data over the past few years showed there was no discernible slowdown in China despite all the hysteria and I stayed bullish.  Near real time data here is far superior to pontificating US Fed watchers.

The data is almost `live’ and is untainted by interpretation so gives me a good indication of real activity across the world and has encouraged me to stay bullish despite the Wall St negative groupthink.

Now I have just discovered another near-real time indicator and I think it is brilliant!  No longer do we need forecasts.  We can now have `nowcasts’!

The people behind the SWIFT international funds transfer have come up with an index of economic activity based on the character of the 2m or so funds transfers that it undertakes each day.

In their own words:-

This says that the Europe and the US are turning up and when combined with China on track, Sth America doing OK , MENA strong and Africa growing we have a synchronised global economic upturn.

And equity markets around the world are telling us that.

This week I reviewed my 26 October 2012 Market Update entitled Heed the Markets Not the Commentators  – Bull Markets Anyone?  Unfashionable at the time but that note predicted strong breakouts in the DOW, the S&P 500, the Wilshire and the Russell 2000, the DAX and the FTSE.  The All Ords looked OK.

Well, these markets have generally zoomed up indicating recovery was underway yet the overwhelming tone of the commentary of the past year was negative with continuing concerns over European banking system and Europe’s `depression’,  China stalling or falling and of course the US in dire straits.    And remember that mantra that investors `were only chasing yield’ so that only big mature companies were worthy of investment funds?  Remember that?

And what have been the results?

The case was made then, and even more now, that the small cap Russell 2000 Index and the very broad Wilshire 5000 Index were indicating that the recovery was indeed broad and that the performance of the smaller caps reinforced the growth aspects and not that the defensive stocks were the place to be.

So let’s look at the results in their own currencies.

Index	26 Oct 2012	26/7 September 2013	% change
Russell 2000	816	1078	32
Wilshire 5000	14774	18142	23
S & P 500	1412	1698	20
Dow Jones 30	13103	15328	17
DAX	7200	8664	20
FTSE	5805	6565	13
All Ords	4533	5302	17
Shanghai	2101	2155	3

It would seem that the US small caps have done best.  So much for the `chasing yield’ thesis.
Wilshire showed good breadth.  So much for the big cap only theme.

And the S&P outperformed the Dow.  Although NASDAQ was not included in my list, it was up 27%.
So equity markets generally went well and Tokyo was up almost 66%. So what about commodities?

Commodity	26 Oct 2012	26/7 September 2013	% change
Aluminium	1909	1775	-7
Copper	7850	7226	-8
Lead	2039	2069	1
Zinc	1821	1861	2
Nickel	16405	13755	-16
Tin	20550	23179	13
Cobalt	25000	26500	6
Molybdenum	24150	20000	-17
West Texas Crude	86.2	103.03	20
Gold	1719	1324	-23
Thermal coal*	88	78	-11
Iron Ore*	119	134	13

*Not used in table on 26 Oct 2012  

Apart from weakness in gold and nickel and soggy coal there is not much here to comment on.
So what about the rest of the Market Update of 26 October 2012 that was bullish on resources stocks?  Probably the less said about it, the better.  Unfortunately for us all.

Gold was looking good then and was lining up for a strong 2013.  Yeah, right.  Copper was heading higher.  China steel production was steady with a growth bias.  Iron ore had recovered from the <US$90/t blues.   It was setting up for a good 2013.
So what happened to resources stocks?  Just trashed.  Globally.

Stock/Index	26 Oct 2012	26/7 September 2013	% change
BHP	34.25	36.36	6%
ASX Metals and Mining	3505	3271	-7%
ASX Small resources	4073	2399	-41%
ASX Gold Index	5710	2586	-55%
US XAU	183	94	-49%

With these results of major highs in the major equity markets and nothing particularly significant in commodities and with the A$ about 10% lower then resources stocks should be about line ball with a year ago.  Worst case.

But they are not and that is the key.  Why did it happen this way?

Other than blind stupidity on the part of the Wall St negative groupthink I don’t know. (I think I do, actually! But that is for another time.)
But what extraordinary value has now been created for astute investors.

Note that the market is now stirring and the rises over the next few weeks will be very sharp for many stocks.  Don’t miss out.
Since the beginning of 2013, over 120 companies have come through our doors to showcase their projects.   Oil and gas, gold, iron ore, copper, fertilizers, coal, rare earths and much more.

Almost all wanted capital but in the falling market to June 2013 that was just about impossible to obtain.  Despite being priced at a fraction of their NPVs and with A$1515bn in Australian bank deposits.  So value in this sector has been outstanding all year and even more now.
I think that those companies with tenacious and persevering managers (many of whom have forgone salaries and fees and have actually made loans back to their companies)  and with reasonable projects will survive and will prosper.

You would be amazed at the number of major new resource discoveries that have been made by these companies and the extraordinary value that has been created yet totally ignored by a market place that is currently looking for safety when the world has already said `cash is trash’.
Resources stocks are at their lowest risk when at their lows.  If they survive.  But most have, and the window is opening for capital raisings again so most will survive. And prosper.

Make sure you don’t miss out.   It is here when the percentage gains are greatest and the risks lowest.
The `Optimism Upleg’ is now with us and I think it is about to really accelerate.

Make sure you contact us.  bdawes@psec.com.au

Use this link to access an account opening form

Now, for a little bit of fun.

Let’s go on a trip around the world of bull markets.

And just before we do you can put this little issue right at the front of your mind.  I put this in again after including it in the last issue of Dawes Points but it is the key to everything.  Capital flows.

THE WORLD NO LONGER NEEDS THE US$ AS A SAFE HAVEN BECAUSE THE GLOBAL ECONOMY IS OK.

Funds will flow from here and from the world’s overpriced and un-`risk adjusted’ bond markets.

Got that OK?

Now let’s start with the leading indices in the US which are leading everything else.  The Russell 2000 and the Wilshire.

Russell 2000 (bottom 2000 of Russell 3000 Index so `smaller’ companies) Uptrend clearly powering on and breakout made last December.

Ditto for Wilshire 5000 (6400 US-based stocks).

 

S&P 500 has a massive base that a technical analyst might say could support a substantial rise.

Dow Jones Industrial Ave (30 stocks) May be a touch stronger than S&P in the longer term

So much for the Greater Depression in the US!

Now looking at Europe

DAX Germany is not far behind the US but is already out of the starting blocks in a recovering Europe.

UK FTSE   Getting ready to fly!

French CAC   Nothing wonderful but an important short term upmove is coming.

Spanish IBEX    Again nothing great but the downtrend is broken

Italy Dow Jones Italy Index   Not the right one to be in but after a major decline a downtrend is broken

It would seem that the stockmarkets are agreeing with the SWIFT `Nowcast’ of a recovery in Europe!

So much for the Euro Depression too and collapse of the banking system!

And for the Euro to Zero crowd this one is for you.  A break above about $1.40 would be very telling. The Euro Zone trade surplus is currently running at well over Euro200bnpa.

Now let’s do a quick trip to Asia with Japan first.
Nikkei Index has broken a 22 year downtrend thanks to Abe-nomics.

Korea’s Kospi has a very strong uptrend and is about to break higher.

Taiwan seems to want to go higher as well.

India is testing its uptrend but there is a lot of energy here.  Should break higher.

Hong Kong’s Hang Seng has been basing for over four years and has weathered the China-bashing.

China  Shanghai is about to break a 5 year downtrend. A strong performer in the year ahead

So that brings it to us here in Australia.  Much like the rest of Asia.

Let’s just first think about it.  Major markets led by the US and Germany with other Europe just a little behind.  Asia in all regions just ready to fly.  Economic growth in Europe and US looking sound (SWIFT `Nowcast’) and Asia is always there.  Commodity prices are OK.  Oil, LNG, iron ore and copper are firm.  Coal is still soft but recovering and gold is good and looking better.  The A$ should rise against the US$.
Yes, the All Ords is on its way! Grab your internet banking log in, send some cash and get ready for some fun!

And for the resources sector proxy we can use BHP.  Almost ready to go.  Strongly

.

So after that around the world  tour to the major economic growth engines we have the following conclusions.

• As the world recovers and as the needs for safe havens are reduced, the US$ and the US T Bond markets will be the source of funds that will drive equity markets everywhere much, much higher.
• World equity markets will follow US and Germany and will improve confidence substantially.
• Our resources commodity sector has been unnecessarily beaten down and should benefit with the global recovery.

And a special factor comes into play here.  The `commodities falling’  mantra would have encouraged inventory shedding at the user level and with the weak share prices and bankers’ reluctance to fund new projects we will be coming up to a very special period of supply and demand.  Demand will exceed consumption so the already-low producer and terminal market inventories will be stretched.   And new supply has already been deferred.

Welcome to the resources `Optimism Upleg’!   Small cap resources stocks are gifts. This is a very special asset class where the underlying resource asset can increase geometrically in value over a cycle. 10 and 20 baggers abound.

Here the ASX Small Resources is back to the levels of 2004 and is still 65% below its 2011 highs. Bargains everywhere.

Barry Dawes

30 September 2013