Overheard in a conversation between traders last week:
‘Both bonds and equites are priced off of fantasies. Bonds are priced like we’re about to see a 2008 meltdown. Meanwhile equities are starting to think there’s going to be some kind of AI-driven resurgence in stock prices. Literally kindergarten level shit.’
The clearly frustrated trader was responding to the weird divergence we saw in markets last week.
As the banking panic spread to Europe, causing all sorts of volatility in bond markets, including the end of Credit Suisse, equity markets seemed to shrug it all off.
And the ‘riskier’ end did best of all.
The tech-focused Nasdaq Index finished the week UP 1.66%, continuing its steady rise through 2023 so far.
It’s up 3.76% for the month and a whopping 12.63% for the year to date, as tech tries to make a comeback from its disastrous 2022 performance.
Is this due to the stunning rise of AI (artificial intelligence) of late, as the aforementioned trader exclaimed?
Or is it something else?
While I think AI has the potential to cause massive economic disruption in the future, I don’t think it’s the reason for the current optimism in tech stocks.
In fact, I think, in a weird way, it’s directly related to the banking and bond market issues.
Markets are forward-looking, and I think some investors now think the problems in banking will result in central banks easing off on their interest rate rises.
Otherwise, we could see a contagion effect in bond markets.
It’s the old Fed ‘put’ in action — the idea that when push comes to shove, central banks will rescue the markets if things get too bad.
Indeed, despite the Fed’s insistence otherwise, markets are now pricing in interest rate cuts later this year:
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| Source: Joe Consorti |
When the cost of money falls, tech companies do better as the current value of their future cash flows is higher.
So, in a way, I think these seemingly contradictory signs — the fear in bond markets and the optimism in tech — kind of makes sense.
But as usual, that’s just the weight of investor opinion right now. And in these volatile markets, sentiment could change very fast either way.
Times like these can be hard for investors.
When markets move up and down fast, when policymakers seem to be losing control, and when even the cash in your bank is at risk (as depositors in the US realised this month), most people freeze and do nothing.
But that can be a mistake…
The fact is, if you’re waiting to feel comfortable again to invest, it’s more than likely you’ve missed the boat to make good returns.
So, with all that in mind, where can you look today?
Here’s a little cheat I sometimes to use to drum up new ideas…
A little trick to drum up new investing ideas
There’s an old saying in markets that goes ‘there’s many reasons directors of a company sell shares, but only one reason they buy’.
Directors might sell shares for tax reasons, for personal expenses, maybe just to diversify their overall portfolio, or maybe they just want to buy a huge boat!
But as the saying suggests, the only reason they buy is that they think the value of the shares will go up.
Now, that’s not strictly true. But as a rule of thumb, it’s a good starting point, especially in bear markets.
When markets are falling, I definitely think it’s interesting to see what stocks directors are buying with their own cold, hard cash.
It can be a good sign that insiders — those that intimately know how the company is doing — see hidden value the market is missing.
For instance, last week I saw:
- A director bought $19,883 worth of shares in Alma Metals [ASX:ALM]. This is a $12.8 million copper explorer out of Botswana. A very risky small-cap stock.
- Several directors bought stock in Hancock & Gore [ASX:HNG]. This is boutique fund manager with a focus on small-cap stocks, unlisted companies, property, and private equity.
- A director bought $45,500 in Australian Rare Earths [ASX:AR3]. This is a $19 million rare earths company with a flagship operation in South Australia.
- A director bought $20,343 in Brightstar Resources [ASX:BTR]. This is a $13 million junior gold explorer.
- A director bought $932,530 in Atlantic Lithium [ASX:A11]. This is a $281 million lithium company with advanced projects in Ghana and Ivory Coast.
Anyway, that’s just some director buying I saw from last week.
And to be clear, this doesn’t necessarily make any of these stocks a good buy.
As I said at the start, it’s just an interesting way to help drum up ideas worthy of further consideration. Especially in down markets when many people are fearful and selling.
You can go here to look at more director buying for yourself.
Just make sure you’re looking at ‘On-market trades’ under the ‘Notes’ section, as there are other ways directors increase their shareholding related to their salary package as opposed to just a decision to buy.
But here’s the thing…
Something else going on here?
What’s interesting to me, in general, is just how much director buying of late there has been in early-stage mining explorers.
It’s no coincidence that four of my five examples above are in junior resources stocks. If you check it for yourself, you’ll see that sector is overrepresented of late.
This is something my colleague James Cooper has also picked up on recently.
You can see exactly what he’s tracking in the Phase One miner boardrooms right now by clicking here.
But James doesn’t just blindly follow directors or other buying or selling.
As an experienced field geologist, he usually understands the latent potential of a junior mining stock and its deposits — at least as well as the company themselves.
Certainly better than most investors.
In fact, he recommended one rare earths miner a few months before Australia’s richest woman, Gina Rinehart swooped in and bought 12% of the company for $60 million.
He’s doing a free run-through…and naming…of one of the next candidates on his list on Thursday.
A super small explorer.
Trading, at the time of writing, 24 March — at just 5.3 cents.
He’ll name and take you through the whole rationale behind this stock, including who the leadership is and what the directors are up to, on Thursday.
To make sure you’re in on that, click here.
Good investing,
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Ryan Dinse,
Editor, Money Morning
