Greg Tolpigin

Back in my August 11, 2017 column – Could I Be Any More Worried For Australia – I expressed my negative views on the future of the country given what I was seeing in the residential property market, prestige car sales, wages growth, retail sales and specifically the impact this was having on ASX-listed companies exposed to these bearish trends. The Australian dollar was also seen at risk because of it viewed as a ‘proxy’ for everything that could go wrong domestically. At that time the Australian dollar was hovering around the USD0.80 mark and has since dropped to USD0.735

It seems in the current age of poor banking performance that funds are being directed into other companies and sectors with those staging the best performance over the past 12-24 months experiencing the best buying interest. However, we have always been told that past performance is not a guarantee of future returns when assessing fund managers and the same I believe is applicable to share price performance. It definitely can provide a false sense of security.

I finished the end of 2017 with a distinct bearish view on Australian banks and retailers warning of their extreme vulnerability to tightening lending conditions, rising living costs and a massive oversupply in the housing market. At the same time, many of the opportunities that presented themselves were all concentrated in the mid-cap space, specifically in the lithium, rare earths and other stock specific opportunities.

As we enter the final month of the year I thought it would be wise to begin focusing on what my most favoured potential winners for 2018 will be. So each week from today I will highlight the opportunities that I favour most for a stellar year.

The past few months I have been explicitly identifying long opportunities in what I call “The Green Movement” which essentially encompasses all the beneficiaries of the global push to a healthier lifestyle. Electric cars, clean energy and better quality foods.

Currently my market positions are 90% short in keeping with the bearish view I have expressed here on equity markets, particularly the Australian market. The local market continues to look increasingly vulnerable for a serious decline as the “excesses” of the past two decades begin to be a burden on consumers.

Today, I wanted to highlight gold. Like many I have been an underlying gold bull since late 2015 as my old columns will highlight, but have been frustrated by the lack of momentum that the bullion price and gold stocks have experienced. Where is the boom?

In my last note I highlighted many reasons why I am worried about the Australian market in particular the property market and its impact on the banking sector and the broader consumer. We have continued to see weakness in these specific spaces with many consumer stocks reporting poorly and a Four Corners program on the ABC airing this week that showed a small glimpse of the troubles property investors are already feeling.

As we approach the 10-year anniversary of the GFC, led by a housing collapse in the US, Australia is dangerously at risk of repeating the GFC of 2008 which we somehow miraculously escaped without a recession. This places Australia now as the longest streak of economic growth in history.

So how does 2017 look? This year will be littered with more uncertainty than ever before. Equity markets have already surged in the last quarter of 2016, seeing many of our trading opportunities already unfold, while the growing populism movement across the globe means potentially big corrections.

The last time I wrote an Uber bearish note was in December 2015, providing an outlook for the start of 2016. In fact I wrote more than one bearish article warning investors of an imminent market correction and we all witnessed a serious market correction over January and early February.

Using the major indices as the only means to be long or short, will mean missing out on a significant amount of opportunities. Let’s take the S&P 500 for example. The index is literally still trading at the same levels it was eight weeks ago. So anyone using the index as a sole ground for being long or short or only trading the index will have missed out on great opportunities at the stock level.

Like all of us short sellers win and short sellers lose. Knowing when they will lose can be a very powerful timing tool to enter stocks that could experience a significant short covering squeeze, leading to amplified rallies in share prices as they all rush for the exits.

After a long break in Europe (debatable whether it was deserved) I have returned to some new and in cases stronger revelations. Firstly, I have been a bond bull for a very long-time and in this column I even expressed the view that US Treasuries were the lowest risk, highest probability trade in global markets 18 months ago, 12 months ago and 6 months ago.

Technical Analysis, when done right, can be very powerful as it can give us a snapshot of history and compare how different markets performed through various cycles. Through this we can often produce a playbook of how the future may unfold. Developing trading strategies and portfolios then follow which in theory (and fingers crossed) evolve into real profits.

Remember peak oil back in 2007/2008? The world was going to run out of oil. I know a man who was worth billions riding that wave and fell in love. Rode it all the way back down. Now the world is awash with oil and nothing to show for all those paper profits.

Last week I highlighted that as we approach the commonly volatile and weak period of May through to October hence – “sell in May and go away” – investors should begin to reduce risk in their portfolio and begin to rotate out of certain sectors that are vulnerable to an ever changing landscape.

Around 80% of the time markets and stocks actually move nowhere. They gyrate and consolidate and when they do rise or fall to new highs or lows, it actually occurs in a very small window of time. Take a look at any stock or index and you will see that the vast number of time spent doing nothing. One of the factors that contribute to this is seasonal. The old saying is “Sell in May and Go Away” and as we approach this typically weak period (or at the very least a period with no direction at all), markets have enjoyed a strong comeback from the dismal start to the year.

As a proprietary trader whose income solely relies on the accumulation of profits it is important to be able to continually find new trading opportunities AND profit for them. A great trading idea doesn’t necessarily translate into profits if it isn’t executed well. Yes in my earlier years (and even still now) I have had great trade ideas that were right, but I executed poorly and lost money.

I noted in my March 17 column of the ongoing downside risks for the US dollar against the Yen and how tentative it looked technically for another leg to the downside. The past week has seen further weakness that is also dragging the Nikkei lower. The same has occurred with the Euro rallying and now being a drag on European equity indices. The large exporters are suffering as their native currencies appreciate and this weighing on share prices.

The Federal Reserve has backed away from its projection of four rate hikes this year, something we failed to see possible given the state of the US economy. They now only believe there will be two rate hikes this year.

I use that definition everyday when I trade and when I talk to other traders when discussing markets and assessing the portfolio of our proprietary trading desk. Now it might seem an impossible outcome of how can one make money when their trade view is wrong but the reality it is not. It’s exactly the same as great athlete who can still win when not performing well.

I am sure most of you saw the 60 Minutes segment on the approaching housing collapse in Australia and then a similar article in the AFR on Thursday, referencing some on the ground research conducted by Jonathan Tepper of Variant Perception. The on-air segment and article highlighted some of the very key points that I had highlighted since December last year warning investors to exit the banks due to their extreme leverage to a decline in property values, volumes and construction activity. Moreover this slowdown is coming at a time.

Last year on 16th October, I noted that another factor that confirmed global equity markets were in the late stages of its bull market was the changing tide in gold. After being a serious gold bear for several years, the lack of further downside in the metal in the same way it had fallen in prior years suggested that the trend was potentially shifting.

Readers have probably grown tired of my consistent bearish outlook on markets since November 2015 where I warned about an impending market retreat of significant proportions. I warned that sky high prices for asset managers – like Magellan, Bankers Trust, Platinum, IOOF and Macquarie Bank – were all due for a serious drop. Blow me over, surprise, surprise they have declined almost 25% just in 2016.