Wednesday, 3 April 2024

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

[2 min read]

Dear Reader,

Check it OUT.

The Aussie market is around all-time highs.

Oil, uranium, copper and gold are barnstorming their way up…and taking the related Aussie miners with them. 

You could call this ripping scenario a ‘stock picker’s market’.

No!

Don’t do that.

People said 2023 would be a stock picker’s market too.

And look what happened, according to a guy called Ben Smythe, writing in the Australian Financial Review recently.

He writes that last year…

‘Once again highlighting the challenges for active equity managers, with more than 75 per cent of all Australian large-cap equity fund managers underperforming the ASX200 benchmark for 2023.’

What’s going on here?

I’m not 100% sure.

You don’t become a portfolio manager of an investment fund if you’re a dill. It’s an incredibly difficult job, requiring a lot of different skills.

Markets are hard work. One reason is because they’re so unpredictable.

Case in point: in November last year the Aussie market was in the dumps. Four months later and it has rocketed up almost without a pull back.

It’s not alone, either. The US market is the same. It’s up 10% and with the lowest volatility since 2017.

Most of this barnstorming action has happened in 2024.

I suspect Aussie fund managers could have a lot more to show for their efforts by the end of 2024.

This is consistent with my experience at my small cap advisory, Australian Small-Cap Investigator.

Let me tell you…

It is staggering how different 2024 is playing out to 2023.

Last year was a tough grind.

On the flip side…

2024 has been great fun for my readers.

Let me give you some recent examples.

In November last year I recommended a stock called Avita Medical [ASX:AVH].

It’s currently up 45%.

In December I recommended a stock called Virgin Money [ASX:VUK].

It recently received a takeover offer. I told my guys to bank their 30% win.

It January I recommended a stock called Playside Studios [ASX:PLY]. It’s currently up 62%.

In February, I gave five recommendations for my special report on Artificial Intelligence.

The best one so far is up 55% already.

Of course, I don’t always get it right, not every recommendation performs like the above…small-cap stocks sit at the riskiest and most volatile end of the market…

…but nonetheless, these are cracking gains in a very short amount of time.

And yet I can’t help feel that most people aren’t just that excited about the stock market.

Maybe their mortgage rate is too high? Or their expenses are hurting them? Perhaps the Ukraine and Gaza geopolitics worry them?

I can’t tell you what the problem is.

But there’s no giddy, wild speculating going on right now. I’ve lived through those type of markets.

Those stock returns above are coming about because small caps mostly got hammered for two years.

They’re now bouncing back. My view is that it’s professional money driving the market today, and not retail punters.

That’s good news for you.

That tells me the small cap bull market my readers are riding now can continue for some time yet. I believe it could run all the way to 2027.

History shows market and economic expansions don’t go up in a straight line…and they don’t end after four months either.

Darkest before dawn

There’s a big disconnect that has to close too.

As above, most people are worried for the future. It all seems a bit tight and tough out there.

The reality is that world trade is getting along just fine. Check out his chart of shipping volumes to see that…

In fact, this outcome is what tripped up some of those underperforming fund managers in 2023.

Here’s Ben Smythe again from the AFR…

‘The start of 2023 was full of predictions of a US recession and poorinvestment market returns as interest rates soared from near zero to 30-year highs.

‘As it turned out, economic growth was strong, and the global sharemarket was up 23 per cent for the year.’

As it happens, I was one in the minor group that was bullish in 2023. Here’s me publicly laying my neck on the line in April last year…

I was a bit early there, at least as far as the Aussie market went.

But better early, than never!

Now the bull market is here. If you’re sitting on the fence, I urge you to get active.

2023 was tough, no doubt about it. But 2024 is shaping up as a barnstorming year.

What are you waiting for?

Get amongst it via my favourite plays right now.

Best,

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

Callum Newman is a real student of the markets. He’s been studying, writing about, and investing for more than 15 years. Between 2014 and 2016, he was mentored by the preeminent economist and author Phillip J Anderson. In 2015, he created The Newman Show Podcast, tapping into his network of contacts, including investing legend Jim Rogers, plus best-selling authors Jim Rickards, George Friedman, and Richard Maybury. He also launched Money Morning Trader, the popular service profiling the hottest stocks on the ASX each trading day.

Today, he helms the ultra-fast-paced stock trading service Small-Cap Systems and small-cap advisory Australian Small-Cap Investigator.

By Bill Bonner Editor, Fat Tail Daily

[3 min read]

‘It’s not possible to even pretend that the equity value has any relation to the underlying business. At this point, owning TMTG is basically an in-kind donation to Donald Trump. Both financially and reputationally.’

Dan Primack

Have we told you about when we got SPAC​-​ed?​ Hard.​ 

A few years ago, when SPACs were riding high, we sold a business to one of them. It was a disaster. We spent a fortune on lawyers’ fees, commissions and performance bonuses... and ended up with little to show for it. 

What brings this to mind is the news that Donald Trump has just had his own​, entirely different,​ SPAC experience. The Financial Times reports: 

‘Trump Media and Technology group was taken public last week in a merger with a blank-check company, which increased the former US president’s wealth on paper by billions of dollars. After yesterday’s fall in the stock price, Trump’s stake in TMTG is worth about $4 billion, while a small group of unheralded financiers and hedge funds that helped take the company public have stakes worth more than $100 million...’ 

To make a long story short, in our case the ‘small group of financiers... that helped take the company public’ made a lot of money. The company’s actual owners, operators and founders – including us – got nothing but trouble. 

We have only ourselves to blame. We never thought going public was a good idea — not for a company that was outside the media mainstream, depending on contrarian ideas and opinions. We also thought that SPACs were a scam, for reasons we will explain. But mostly, we just weren’t paying attention... counting on the financiers and lawyers to look out for us. Big mistake! 

Deal or No Deal

Special Purpose Acquisition Companies (SPACs) are a strange and pernicious creation. Even from the get-go it was obvious that they were one-part fraud, one-part bubble-debris, and one-part wishful thinking. They took in money from public investors... as public companies... even though they had no business, no products, no profits, no sales, and nothing at all that would make them successful companies. The idea was that they would take the money thus raised and buy a real company.  

Trouble is, the SPAC guys have no way of knowing a good business from a bad one... no reason to especially care (they can get paid either way), and no reason not to do a deal, even a bad one. That is the most insidious feature of all.  

The SPAC organisers take a portion of the business they buy, for themselves. But they only get it if they do a deal within two years. If they don’t do a deal, they have to give the money back to investors, bearing the costs of lawyers, accountants and financiers themselves. So​,​ doing a deal — any deal — becomes more important than doing a good deal. 

As it turned out, ours was actually a good deal for the SPAC. Our company was profitable... with sales of approximately 60 times those of TMTG; it was growing, with good management. 

But the timing was unfortunate. The deal was completed just as all Hell was breaking loose in the financial markets. The financiers panicked and dropped the ball. Nothing happened the way it was s’posed to happen. 

It was a learning opportunity! 

And we have a feeling that TMTG investors are about to get a hard lesson too. 

We opined about TMTG when it was first created. Its managers were Trump cronies, as near as we could figure, with little actual knowledge or skill that would make success likely. We guessed that investing in the company would be a mistake. 

And were we ever wrong! The company recently hit a market value of $14 billion. On paper, the original SPAC investors had a 500% profit. Which just shows you that the numbers in the financial markets can be as squirrely as those from the Bureau of Labor Statistics.  

Destined for Failure

SPACs were always an investment oddity... and always destined for failure. But the SPAC that bought Trump’s TMTG was especially odd. It was set up not to find a good company to buy... but to buy a bad company, TMTG.  

In other words, Donald Trump and his pals controlled both sides of the deal. They were sellers as well as buyers... SPAC-ers... and SPAC-ed. They were raising money to buy a loser company. How likely was it — ever — that investors would come out ahead? And yet, even more odd, investors can still make a profit… as long as they don’t wait too long to get out.

TMTG had total sales last year of less than $4 million. When the company was announced, it was advertised as a rival to “Big Tech.” But it is still very much little tech. And getting littler. In the most recent quarter, sales actually fell. And last year, it lost money... as you might expect. Charlie Bilello: 

‘The Truth Social app currently has only 1 million daily active users and $4 million in revenue, incurring a net loss of $58 million in 2023. Reddit ($RDDT) had a similar market cap with $804 million in revenue and 73 million daily active users.’ 

The stock fell 24% on Monday. Even so, it’s priced at $10,000 per daily user. And it loses $58 on every one of them. As Dan Primack remarked, the equity value has nothing to do with the business value. 

Regards,

Bill Bonner,
For Fat Tail Daily