The Next Speculative Bubble
TONY LOCANTRO: Since March 2011 the markets have not been conducive to speculative bubbles and in fact the lull in Australia reminds me of 2001/2002 when activity and interest in the juniors dried up considerably.
Following the madness that was Dotcom we have seen speculative bubbles in:
• Retractable syringes
• Childcare
• Uranium
• Potash/Phosphate
• Coal
• Iron Ore
• Rare Earths
• Molybdenum
• Lithium
• Micro-breweries
• Nickel
• Geothermal (short-lived and confined to a small number of stocks)
• Regional mini bubbles in Cloncurry and at Doolgunna (Sandfire and surrounding companies)
• West African gold stocks
• Mongolia
For those with pay TV and in fact any TV, you may have noticed the ridiculous number of ads for funeral plans, income and life insurance, and products for seniors, and pets.
The sports betting craze continues on now and companies are offering money back promos on protests, paying out on fourth placed horses and a refund if your football team is leading with ten minutes to go and gets beaten.
I follow and analyse a number of sports, however, apart from my once a year splurge on the Melbourne Cup I am going nowhere near this as it’s all about human nature and addictions.
Black Caviar has been great for racing and bringing the crowds in but placing a large bet at teeny weeny odds on favourites is a strategy likely to bring even the most seasoned gambler unstuck.
Outside of insurance and gambling we have also seen a cider bubble that has spread from apple to pears and more exotic fruit combos.
I don’t know how Strongbow sales have been, however, I have occasionally splurged on one over many years but on this occasion it is all about the more arty, retro and hip brands.
Please note, I am pretty good at stereotyping and general observations but have no psychic ability whatsoever.
The odds are that something will go ballistic that isn’t on the list (citrus shirts and marble wash anyone?).
Graphite
Stocks have been performing very strongly in Canada and to a lesser extent in Australia. (Syrah Resources the notable exception)
Similarities exist with the lithium bubble and how it formed in Canada. I have also noted an increase in blogs and calls for graphite to become another “fad” investment.
Based on activity and hype the bubble is already underway, however, it could well be a case of how powerful it gets and when it will deflate.
Results from Archer Exploration in March 2012 saw the stock rise 52 per cent at its peak from its Campoona graphite project, which indicates increasing investor interest.
If markets can remain stable to even slightly negative over the next six to 12 months it may even help the cause as frustration increases with non-performing sectors/stocks and higher returns are sought.
Potential sales pitch: Did you know that it in a lithium-ion battery there is more graphite than lithium itself?
Zinc
Who would have thought that iron ore, coal and Susan Boyle would have become sexy?
Whilst we don’t hear of analysts referring to zinc in the same manner they love their airlines, it has been a sector that hasn’t aroused much in the way of speculative fervour.
Zinc has been an underperformer in 2011 and with plentiful supply the remainder of 2012 isn’t looking much better.
I have read a number of forecasts but will use Barclays Capital Research who provided the following:
“The key swing factor for the zinc market outlook over the next few years is supply. While currently plentifully supplied, a medium-term concentrate crunch may be looming, although the timing and extent of this will be partly defined by prices (high prices will encourage marginal production).
“The three likely causes for this shortfall are: mine closures (such as Brunswick 215,000 tonne per year, Perseverance 135Ktpy); steep declines in ore head grades (the reason for the almost halving in Century’s production in 2014 to 290Ktpy); and an expected decline in tightening in metal supply and a period of much higher prices starting 2013.”
The issue I have here is the zinc situation has been so well documented and reminds me a little of the uranium bubble that was due in 1998.
The uranium bubble was an almighty event but turned up seven years later no doubt testing the patience of those expecting it much earlier.
Potential sales pitch: Yeah I know zinc stinks but why don’t we get a few stocks just in case these analysts are right.
Gold Stocks
Apart from a few growth stories including Regis Resources, Silver Lake Resources, Ramelius Resources and Northern Star Resources it has been tough going for the Australian gold sector.
The African stories Perseus Mining, Gryphon Minerals, Amplella Mining, and Azumah Resources have fared better along with Azimuth Resources in Guyana but a number of juniors in Australia and North America/Canada are yet to escape some very low valuations.
Outside of looking for the next growth stocks the sector needs a major discovery and/or Merger and Acquisition activity to see it fire up.
Gold equities suffered through much of 2011 in line with markets and it could be argued that they will require a more stable environment to thrive and this may involve lower spot prices.
I have suggested a number of sub-five cent gold stocks to my subscribers and I must admit it only takes a run to seven cents to provide some excitement.
When you look back at the great gold stock bubbles of 1985 to 1987 and 1978 to 1980 even thinking of taking profits at seven cents looks ridiculous.
If gold stocks suddenly become sought after I would expect silver juniors to outperform due to a limited number of ASX-listed companies.
In the short to medium-term I cannot see silver stocks going it alone although I would love to be proved terribly wrong.
Potential sales pitch: The gold stocks are finally moving we better get set before the herd moves in.
Alternate Energy
I will never forget the quote, “The alternate energy bubble will be like the Nasdaq on steroids”.
There have been a number of brief spurts in geothermal, solar, wind and fuel cells.
The sector has shown some promising signs, however, in the case of geothermal there have been considerable funds thrown at exploration/drilling for not much return on the scoreboard.
With carbon pricing initiatives to commence from July 2012 two new institutions (Clean Energy Finance Corporation (CEFC) and the Australian Renewable Energy Agency (ARENA) have been created to oversee over $13 billion in financing and funding initiatives.
This could see renewed interest in the sector; however, it may take further oil price shocks to again see alternate energy attract more attention.
Still a market for the stock pickers and I often suggest investing with funds you don’t need tomorrow
If a bubble forms I would expect the fear of missing out and the fact you cannot watch prices trade 24/7 could see it eventually go much further than anyone expects.
Other Threats
Potash/Phosphate were the scene of a number of very strong rallies and despite positive arguments could need more time before they really go again.
Watching the movie Contagion again got me interested in the biotech sector and if the next flu season is a bad one I can see another rush for the vaccine stocks.
The rare earths sector suffered in September 2011 on the back of a JP Morgan downgrade of Molycorp, whilst Lynas has been the subject of protests in Malaysia with an appeal being lodged on the approval of its temporary operating licence.
There is always the possibility that the next speculative bubble could involve something not mentioned or widely known.
The key will be to recognise the early signs and look at ways to profit from it.
The broader market in Australia has underperformed the U.S., however, I still regard conditions as being conducive to seeing a sector finally rise to prominence.
There is so much to research against a backdrop of negativity that could well lead into something powerful and ultimately destructive.
To finish off here is a great quote from George Soros who has a handy back catalogue:
“Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.“
Tony J Locantro
Managing Director
Email: tony@locantro.com
