Dear reader,
In 1996, legendary investor Philip A Fisher wrote in his classic book Common Stocks and Uncommon Profits and Other Writings that independence of thought was vital for outperformance:
‘This matter of training oneself not to go with the crowd but to be able to zig when the crowd zags, in my opinion, is one of the most important fundamentals of investment success.
‘Huge profits are frequently available to those who zig when most of the financial community is zagging, providing they have strong indications that they are right in their zigging.’
Zigging when others are zagging is a crucial market skill.
It’s also the principle driving Fat Tail Investment Research’s latest podcast featuring Greg Canavan — What’s Not Priced In.
It’s a podcast that reacts to every news story with, ‘Yeah, yeah…but tell me what’s not reflected in the consensus view’.
The pod is already a running gag in the office.
Any time someone shares a news item, someone else will quip, ‘That’s already in the price! What’s not priced in?’
In its own little way, the podcast is having a cultural impact.
Narrow and greedy tech rally
Sometimes, to figure out what’s not priced in, you must identify what already is.
With that in mind, this week Greg and I unpacked the latest Fed decision and surprising moves in the US stock market.
The benchmark S&P 500 is in a technical bull market, up by more than 20% since its October 2022 lows.
But that’s largely due to a handful of mega-cap stocks like Apple Inc [NASDAQ:AAPL], Nvidia Corp [NASDAQ:NVDA], and Microsoft Corp [NASDAQ:MSFT].
Source: Financial Times
Apple alone is worth more than the entire Russell 2000 Index of smaller US companies!
This is all highly unusual.
I asked Greg if he was surprised by the moves of the US tech stocks, and he admitted it’s peculiar.
Especially when you consider the latest readings from CNN’s Fear and Greed Index — the gauge is screaming ‘extreme greed’, hitting its greediest level in a year.
Greg then brought up a great chart, matching the S&P 500 with instances of the index hitting the extreme greed level.
Source: Optuma
As you can see, extreme greed readings often coincide with corrections.
Is the US tech rally set for one soon?
We delved into that question on the pod.
Source: Financial Times
Unemployment falls … but is that good news?
We also discussed the fresh Aussie jobs data.
Unemployment is down (to the surprise of many pundits), falling to 3.6% in May. The number of employed in Australia hit 14 million for the first time.
Just before the pandemic, that number was less than 13 million.
So, the Aussie economy is adding jobs. That’s good, right?
Not necessarily.
As we mentioned last week, labour productivity is subpar. GDP per hour worked fell 4.6% across the year to the March quarter.
Employment figures are lagging indicators. Greg thinks businesses will start shedding workers to preserve profitability — profitability that is already under pressure. Just look at retail stocks.
Don’t forget the mortgage cliff
All up, the Aussie consumer is set for some tough times ahead.
Why?
The looming mortgage cliff as a huge number of fixed rate mortgages reset.
Greg bluntly summed it up in his latest monthly for the Fat Tail Investment Advisory:
‘Household finances are going to take a big hit in the September quarter (starting in a few weeks). This will occur at a time when people are starting to lose their jobs. Labour productivity is woeful, and businesses will shed workers to preserve profitability.’
Source: RBA
Greg thinks the market is underpricing the impact of these fixed mortgages resetting to much costlier variable rates.
For many Aussie mortgage holders, repayments will soon rise to uncomfortable levels.
Source: Australian Financial Review
Contrarian property play
But doom and gloom is a great time for contrarian investors and Greg thinks one sector in particular offers neglected potential…despite the headlines.
To find out more, watch the full episode!
Regards,
Kiryll Prakapenka,
For The Daily Reckoning
PS: We ended the discussion with pizza — Domino’s Pizza Enterprises [ASX:DMP] pizza that is.
