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Being a true contrarian investor isn’t just about investing in unloved sectors of the market or specific stocks. It’s also about conducting research and discovering indicators that the crowd doesn’t follow — indicators that can help give clues as to the next probable direction of risk assets. I’m always on the lookout for such indicators, and have compiled many of them over my years of trading and investing.
For example, the crowd often looks at the U.S. dollar as an indicator of risk sentiment for the markets and, to be sure, it is. Generally when the dollar goes up, it means investors are seeking the safety of assets like Treasuries. And when it falls, investors are moving to riskier assets, such as stocks and commodities.
But if you’re looking to become a savvy contrarian investor, there is another “dollar” that can often be a leading indicator of risk appetite across the globe.
I’m talking about …
The Aussie
Over the past several years, the Australian dollar has become a pretty reliable indicator for global risk appetite. The reason: Australia’s economy is heavily reliant on exporting its industrial commodities, including iron ore, coal, nickel, and uranium.
As a result, the Aussie economy grows when the global economy (and in particular China) is growing. And it shrinks when global economic activity is declining. But because Australia exports commodities that are so closely linked to economic expansion, their economy usually starts to improve before the rest of the world, as companies and governments begin expansion projects. The opposite happens during times of global contraction.
Like many other nations, Australia’s dollar rallies and falls with the economy: When the economy gets stronger, the Australian dollar rises as markets anticipate rising interest rates in the country to combat inflation — and when the economy stalls the markets anticipate interest rate cuts to stimulate growth.
We can see the predictive power of the Aussie dollar in the chart below. It peaked in early March, way ahead of the stock market and before the commodity markets broke down. Even more recently, it put in a bottom before the stock and commodity markets rallied.
It’s important to note, then, that the Australian dollar is now running into resistance at the downtrend line that dates back to the March top. Contrarian investors know to watch this closely.
If it breaks through that downtrend, it could be a leading indicator that risk assets like stocks and commodities may be getting ready to turn higher. Likewise, if the Australian dollar fails here, it’ll be a sign that the weakness we’ve seen in stocks and commodities is probably going to continue for a while longer.
How to Put This Indicator
to Work for You
Now, I’m not saying that the Aussie dollar is the absolute predictor of stock market direction. But it is a less followed indicator for risk assets generally, and it is monitored by savvy, contrarian investors.
One way to play an upturn in the Aussie is by investing in an ETF that tracks global shipping. After all, if this indicator is telling you that Australia’s economy is gathering momentum, the rest of the world shouldn’t be far behind, thereby boosting international trade.
You could consider Claymore/Delta Global Shipping (SEA). Its holdings include international companies that are involved in shipping oil, natural gas, and other commodities throughout the world.
However, you might prefer the potential of even greater returns that can come from individual stocks …
In fact, I’m holding one in the Million-Dollar Contrarian Portfolio right now. The company is a leading provider of international ocean transportation for “dry bulk” goods including iron ore, grains and other commodities.
Of course I can’t reveal the name … that wouldn’t be fair to my paying members. But I can tell you this: From a growth standpoint, I feel that the worst-case scenarios have already been priced into the sector and shares. So if we get any sort of uptick in global growth, which the Aussie dollar is telling us is a real possibility, these shares could skyrocket!
Being a true contrarian investor involves more than just buying out of favor stocks or sectors. It also takes looking beyond the mass-followed indicators to find ones that are less followed. And that’s where you find the next probable move for stocks and other assets.
Best,
Tom
Tom Essaye oversees Weiss Group’s Million-Dollar Contrarian Portfolio, in which company founder Martin D. Weiss has staked $1 million of his own money.
Tom began his financial-services career at Merrill Lynch, where he worked on trading desks on the floor of the New York Stock Exchange. While on the floor, he managed multi-million dollar equity trades from some of the biggest hedge- and mutual-fund firms.
{ 4 comments }
Would this concept also apply to the Canadian dollar?
Hi Tom
It needs to be remembered that the Australian Dollar is only a bit player on the world stage of iinternational currencies. Australia’s economy is slipping as a direct result of several factors.
1. The current administration in the last 4 years has presided over an increased debt load following the greek model. One large deficit after the next.
2. Cash interest rates for term deposits remain fairly high by world standards in an as yet tested reasonably stable currency.
3. Australia’s 2 speed economy is becoming a 3 speed economy as the ones who know how to protect themselves move further away from those who don’t.
4. Capital city housing prices have blown out of all proportion to affordability.
5. As contracts for commodities prices soften so will their parent company share prices.
6. Where sentiment is concerned, the Australian equities market is not a leader it is a follower.
7. Australia’s prime minister Ms Julia Gillard in trying to tell the rest of the world at the G20 to follow Australia’s lead makes most of us cringe with embarrasment at her incompetence.
8. The impact of the recently legislated carbon dioxide tax at $29 per tonne due to start from July 1st will result in further poorly considered outcomes for the struggling public. This government is filled with morons.
These are just some of the influences that continue to make for interesting investing as the larger global mess plays out.
Regards Howard
Yours is a one eyed view – sorry. The political rhetoric does nothing for the poorly constructed argument.
The country’s ratio of government debt to GDP is the lowest among OECD countries
Mining is 10% GDP etc etc
http://en.wikipedia.org/wiki/Economy_of_Australia#Australia.27s_balance_of_payments
Hi Murray
It is very fair to say mine is a one eyed view. Most opinions are, no need to apologise. What I would ask you to consider is what is happening now rather than just looking at history. In 2007 the Aust Fed Govt debt was a $B20 surplus.