Cycles and Networks in Financial Markets

The first month of the financial year is in the can, and Australian stocks hit a six year high this week. Indeed, Aussie shares had their strongest month for the calendar year in July. Yeeha! The question is can they keep going?

Well, they didn’t get off to a good start in August! Putting my Cycles, Trends and Forecasts hat on, this week we suggested subscribers start cautiously putting some money aside. Phil Anderson and I are waiting for a retracement in major stock markets. Note the word retracement, not collapse. The next few issues ofCycles, Trends and Forecasts (CTF) will be keeping subscribers up to date on that.

Mind you, there were two real-estate related stocks on the all-time high list this week — Commonwealth Bank, which hit $83.92, and Genworth Mortgage Insurance Australia. Genworth only recently listed on the stock exchange. CTFsubscribers got a heads up about Genworth a few weeks ago. Take a look at its recent performance:

The trend is up for now. Of course, it’s also a question of timing. Here’s some evidence that the best thing you can do for your long term wealth is understand the real estate cycle and how it relates to stock markets. The Saturday Paper gave you a taste on July 19 in this piece by lawyer James Wheeldon.

His main point is ASIC, as a regulator designed to protect investors, is a farce. Don’t rely on it and don’t trust it. But it was interesting to see one of the examples he gave. In 2007, RAMS Home Loans Group floated on the ASX, netting its chairman and major shareholder, John Kinghorn, a $500 million pay day. RAMS collapsed three weeks later.

About the misleading (though still legal) RAMS prospectus, Wheeldon writes:

‘Only those with the stamina to grind through the fine print would find the buried hints about the truth of the situation… The “mums and dads” who bought into the prospectus were left with near-worthless paper.’

Had those investors been listening to my colleague Phil Anderson, editor of CTF, at the time, there was no way they would have gone near RAMS stock. Here is one early warning he gave as far back as 2006: ‘A credit provider collapse brings the party to an abrupt end usually — but by the time this makes it to the public news, insiders have well and truly cashed out.’

Simply, the timing of the RAMS listing within the context of the cycle would have told you to grab your wallet and run. You simply must understand it.

Read the rest of this article at The Daily Reckoning