Two things I’m thinking about today…

1) Mr Market is really messing with us lately.

Not only did Mr Market dive in April, he turned around and soared straight back up.

That’s despite none of us thinking that outcome remotely likely in such a short time frame.

Now Israel and Iran are going hammer and tongs.

Mr Market is throwing us – or me, at least – another curveball.

Here’s how…

Earlier today I sent out an update to my paid subscribers.

One of the points I made was that the market usually doesn’t sell off in a big way when we get the kind of geopolitical flashpoint we’re seeing now.

However, I must admit I still expected the Aussie market to be down at least something this morning.

As I write, it’s mildly green. Are investors being too complacent here?

In theory, oil could spike to US$100 per barrel, Iran close the Strait of Hormuz or Israel disrupt the entire Middle East energy industry.

Clearly, the market thinks these outcomes are unlikely, or the world can weather it all in the short term. Hmm.

I suppose, adjusted for inflation, US$100 oil is not what it used to be. It’s not 2008 anymore.

Oil would probably need to go to US$250 to have the same kind of macro effect on the general economy as it did nearly 20 years ago.

Indeed, over at the AFR, they report that a US$2 trillion asset manager saying he’s not concerned about oil at all.

I can point out what does worry him…

2) Which is the US federal deficit and Trump’s “big, beautiful bill”. The AFR writes…

“He says his clients – big superannuation and sovereign funds – are talking about capital flowing out of the US, and whether there’s another obvious home.”

Clearly, one of those is gold. But even gold is not big enough to absorb the huge ocean of capital that sits inside the US currently.

It may be a decent chunk of that money finds a home on the ASX.

I think this is important in the context of the Australian market’s supposed “high” valuation.

The team at L1 Capital told us last week that the P/E of the ASX is nearly 19x earnings now. The long term average is around 14.5x.

However, we’re in wild geopolitical world right now. Australia looks very solid in this context. Capital will go to where it feels safe. The ASX fits the bill.

Here’s another thing: if there is one massive investor mistake I saw over the last decade, it was avoiding the US stock market because of its (supposed) high valuation and/or high Price to Earnings ratio.

Let me emphasise that I saw this appear as an objection FOR YEARS.

Could the same happen here, from now? I think it could.

Granted, it’s easier to bag out Australian stocks as being low growth and “old” industry, certainly more so than US stocks. So a valuation argument carries more weight.

However, if big global pension funds want to diversify, they’ll park their money here all the same.

And who’s to say Australia’s old firms can’t get a new lease on life thanks to AI?

For example, how many costs can CBA or BHP cut out of their operations with this tech?

It could be billions over time, via automated loan processing or driverless trucks and remote drills and God knows what else.

That’s why basic measurements like the static P/E ratio and long term averages can be such a trap. The world is a dynamic place and sits still for no one.

Personally, I’m hanging on the ride. I expect it to be wild, but still profitable.

If I ever decide to jump ship to cash in a big way, you’ll be the first to know. A moderately high P/E is unlikely to be one of the reasons.

Best wishes,

Callum Newman,
Editor, Small-Cap Systems and Australian Small-Cap Investigator

Murray’s Chart of the Day –
Brent Crude Oil

By Murray Dawes, Monday, 16 June 2025

After a massive jump in oil prices from oversold levels due to Israel’s attack on Iran, the question must be asked, ‘Is it finally time to jump on oil stocks?’

My simple answer is that Brent Crude Oil must finish the month above US$75.43 to begin the process of shifting the currently bearish long-term picture on oil.

The long-term trend described by the 10-month EMA (exponential moving average) vs the 20-month SMA (simple moving average) remains in downtrend.

While that is the case you should expect stiff resistance on each retest of the 20-month SMA.

Geopolitical events like this are notorious for causing huge volatility in the short-term which subsides quickly as the event enters the rear-view mirror.

Therefore it pays to remain sceptical until concrete technical signals are generated.

In the chart above I have pointed out three occasions in the past 18 months when the oil price has turned down in the sell zone of the previous down wave.

The most recent down wave started in January this year and the current price is in its sell zone.

Also the current price is testing the 20-month SMA, and we still haven’t had a monthly buy pivot confirmed.

That’s why I think the first thing we need to see is a monthly close above US$75.43 before entertaining the prospect that the worst is over for oil in this three year bear market.

Regards,

Murray Dawes,
Editor, Retirement Trader and Fat Tail Microcaps