How to Make Money
from the end of
the Mining Boom
Today I want to show you an investment approach designed for Australia's 'New Normal'.
While the ASX has fallen -10%, this 'New Normal' investment plan has gone UP 24%.
You don't need to be a millionaire to profit from this plan. And the best part is it offers you a lifeboat of financial sureness at the exact time large chunks of money are moving OUT of Australia.
Read on and I'll show you what this plan is... and more importantly, why you need to adopt it now...
'The only meaningful case for the iron ore price to go back up is for China's demand to resume rocketing like before.
'I believe it would not happen again.
'This is the end.'
That's from respected Shanghai economist Andy Xie.
I agree with him. Australia's iron ore boom is over. Everything I've been predicting in the Daily Reckoning for the last two years seems to be playing out right now. As an Australian investor, you need answers to some crucial questions...
I've incorporated the answers to these questions into a simple investment plan. It's a plan that's already achieved an average return of +24% over the last 19 months. In that time the ASX 200 has lost -10% of its value.
The reason this plan is working is it's tackling the core problem with the Australian economy. Here's the problem in a nutshell:
Australia is a relatively small economy that's heavily invested in mining.
In fact many Australians have no idea just how much of their savings are tied to the resources industry.
Australians have more than $1 trillion invested in retirement funds. These funds are massively overexposed to banks, and to the mining sector.
That was fair enough until now. For the last twenty years, housing and mining stocks have been great investments. It wasn't a problem that the share-market was dominated by those two sectors. It was a strength.
But the era of easy money is over
And the end of the era of high commodity prices will be bad news for your share portfolio. Unless you take the four simple steps I outline in this report.
What's happening now is a precursor to an outright crash of the mining sector in 2013. If this were the property market, it would be the equivalent of a 25% crash in 12 months.
That's what the bursting of the iron ore bubble is going to feel like for many unprepared Aussies.
They're going to look at their retirement pot shrinking week-after-week and think 'How can this be happening? What should I do? This is a disaster!'
Just like with a property crash (which could also happen in tandem) you could see a huge amount of wealth you thought you had disappear very quickly.
The iron ore price has dropped 36% since July.
Thermal and coking coal prices have hit 3-year lows.
But while this was happening the four-part plan I'm going to show you has produced a group of investments that have averaged double-figure returns.
It's nothing revolutionary. Simply a change in where you invest your money to take account of the fact that Australia's economy is at a turning point.
I'm not going to debate whether this turning point has been reached.
I'll leave that to the TV pundits. For me, the debate is over.
When Australia's Resource and Energy Minister goes on the radio to say 'The resources boom is over'...
When our biggest miner shelves $40bn in projects in a single day...it's blindingly obvious that the game is changing.
Today I want to show you an investment approach designed for Australia's 'New Normal'.
And I can tell you: it's already working.
You don't need to be a millionaire to profit from this plan. And the best part is it offers you a clear strategy for security at the exact time the Aussie market becomes more volatile and dangerous.
Read on and I'll show you what this plan is...and more importantly, why you need to adopt it now.
'An Epic Australian Bust'
Earlier this year American hedge fund manager Ivor Novgorodtsev wrote a paper showing how similar Australia is right now to America just before the subprime bubble burst. It was called 'An Epic Australian Bust'. He writes:
Commodity prices have fallen. Chinese imports are falling too. Falling Aussie exports may be the next domino in the chain.
When Australia's coal and iron ore export machine starts to sputter, 2013 could be a terrible year for many people who didn't make the right decisions with their money today.
You see, a huge number of Australian stocks are miners. And Australia has the fourth largest pension fund pool in the world. We also have the highest level of share ownership in the world.
Meaning: most Australians are betting their future financial security on commodity prices going higher in 2013, whether they know it or not!
If this concerns you, you're probably wondering what to do about it.
What you need is to have your money in investments that help you sleep at night — not investments that give you nightmares.
Places that give you the chance to grow your wealth from powerful long-term trends, but don't rely on iron ore, coal, or the myth that China's economy will expand forever.
I started developing a plan to invest in certain shares and assets based on this idea for readers of my newsletter over 19 months ago, in February 2011.
While this plan has been in action, the game slowly started to change.
The Chinese have stopped paying premium prices for Aussie iron ore and coal. Global supply has grown, thanks to increased production. Chinese demand has slowed.
That sweet spot where supply remained tight and demand continued to grow is now behind the Aussie economy.
Big Aussie miners have started deferring projects en-masse.
And the ASX 200 has fallen -10% since I put this plan into operation...
But if you'd bought all my recommendations while this
was happening, you could be sitting on an average gain of 24%
I'm now going to show you what this investment plan looks like.
Be clear: this is a plan for most (but not all) commodity prices going much lower over the next five or ten years.
You might disagree with me. If you do, you're not alone. There are plenty of respected economists who think commodity prices are simply 'moderating'. Me? I think Julia Gillard demonstrated deep denial when she told miners in Perth that China's growth will go on for decades, and so will our mining boom. It just doesn't gel with the facts.
The Aussie economy is still growing for now. But across Australia investments in major mining projects are going into hibernation. An Australian Financial Review analysis of mining and energy projects listed by the Bureau of Resources and Energy Economics states that about $100 billion in investments are about to stall.
I think this is the start of a new reality for Australia... And I think this is just the beginning...
But don't worry; I have a practical plan
of action you can take, starting now
As I've said, this plan is already proving effective at beating the index.
At the time of writing, I added the latest investment to this 'New Normal' Portfolio two weeks ago. A lot has happened in that two weeks. China manufacturing sunk to 2009 levels...the amount of people shorting iron miner Fortescue Metals Group doubled in 48 hours...Gina Rinehart started culling staff at her $10bn Roy Hill iron ore project.
But this latest investment is already up 5.5%, in just 10 trading days.
I can't guarantee it will keep up that pace. But I'll show you what this new tactic is, why it's working now, and why I expect it to work even better in 2013.
Before I do, you need to know why I'm qualified to pick good investments in trying market conditions...
'You have made me a better investor and a wiser person.'
-- Paul Foye
Over the last 15 years I've helped ordinary investors protect themselves and even make money during big economic changes.
I ran a newsletter from Baltimore during the chaos of the dotcom crash. People thought I was crazy when I recommended gold stocks when the metal was trading at $250/ounce (oz).
Those stocks went up between 30% and 253%.
A contrarian post-9/11 play I tipped went up 625%. You could have made 200% from what I called 'the end of the United States secular bull market'.
The point, as I wrote in my 2004 book The Bull Hunter, is that,
There's always a bull market SOMEWHERE
I went to China to write that book. It's about the shift from a US dollar-centric world to an Asia-centric world. The three investments I paired with this shift went up 165%, 63% and 184% respectively by October 2007.
Now a new shift is taking place here in Australia. Despite being right in front of them, it's going to blindside many Australians. Why?
Because many investors nearing retirement age have never even had to cope with a recession! The last technical one was in 1991.
'These numbers are a stunning achievement that leaves every other advanced economy in our wake,' Treasurer Wayne Swan proudly told a press conference in September.
Well, finally, it's Australia's turn for some pain.
I don't mean we're going to stop sending our minerals overseas. But China is going to DEMAND less and PAY less for them.
As each day passes, the bursting of the iron ore bubble claims another Australian casualty. On September 10th, BHP and Xstrata announced a combination of 900 job cuts from their coal operations in Queensland.
But most ordinary Australians aren't feeling the pain — yet.
You WILL feel the pain when the big share price gains that come from massive earnings growth at the miners disappear and don't come back.
Look, I take no joy bringing you any of this analysis. But my task since I began my career in the lead-up to the dotcom bust in the '90s has never been to make my readers feel good.
My job is to tell you what I think is really going on in the financial world. Since I don't have to worry about advertisers or get commissions on any kind of investment or financial product I talk about, I have complete independence to call it how I see it.
Soon, you will be able to buy world-class resource stocks at rock-bottom prices. Because another boom will come. That's how the cycle works.
Even better news is that I have a four-part plan to help you keep your returns ticking over in the meantime.
If you act now...and change where you have your money invested...you can actually profit from Australia's 'New Normal'.
The right investments to own as
a boom comes off the boil
This is nothing new in the commodity cycle. As an investor in a resources-based economy, you just need to know what stage the cycle is at.
It's pretty clear we're at the end of the current cycle. It doesn't mean the Australian mining industry is going to go bankrupt (although many of the juniors with high debt WILL cease to exist). Or that China will never build another road or city again. But the best times for the local mining sector, during this business cycle, are over.
At the time of writing iron ore — Australia's most important export earner — dropped below $90 a tonne. It was $127 a tonne at the start of July.
The Big Miners are hoping that Chinese stimulus on infrastructure will come to the rescue like it did in 2009. But He Fan, a senior researcher at the Chinese Academy of Social Sciences, has called any talk about government stimulus plans 'delusional'.
Even if China does go on another building binge, it will be smaller and have less of an impact on Aussie shares than in 2009.
For Australia's industrial resource boom, this is the end
So how do you protect all the money you've saved and invested? How do you avoid the stock price declines and dividend cuts the end of the mining boom is already bringing? Even harder — where, if anywhere, will you MAKE money in the coming years?
Now, I can't share the specific investments I've recommended.
That's out of deference to readers of my investment newsletter, The Denning Report. (You can access the full list of my recommendations by taking a risk-free 30-day trial though. You can do so by clicking here.)
But I will share with you the four areas I'll be targeting in 2013 as the mining boom continues to run out of steam.
Now these are mainly stock investment ideas. But at the same time they're ideas based on the assumption that the stock market is not going to be good to Australian investors over the next five years. I know that sounds contradictory. Let me explain.
As I wrote to my readers back in February 2011:
Since then the ASX 200 has plummeted from 4865 to 4325 (correct at 10/09/12).
But you can still get rich during severe market turbulence.
In the February 2011 edition of my monthly report, I went on to recommend a share that has gone up 47% over that same period.
The idea is to pick your big, home-run punts extremely carefully.
In fact you need to be more careful about every investment you make. Owning fewer but more carefully selected stocks seems like the best strategy to me.
As I said, it's working so far. It's a case of shifting your money from sectors that went up over the last ten years...to sectors that will go up over the next ten.
You make money in the parts of the market going up. And you stay away from the ones that are likely to go down. I know...easier said than done, right? But I can tell you, I've been doing it. Here's how...
I propose you split your money into four asset classes...
STEP 1: GO 25% STOCKS
Buy shares...but only the kind of shares that can go up
in a falling market, and at the end of a resources boom
If I'm wrong in my analysis, then the current dip in commodity prices will be temporary. Shares will rebound. Everything will be fine. You won't have to change a thing.
But if you're still with me, you agree that's probably not the case.
And if we're both right, a bigger correction than what we've seen in the ASX so far is coming. I'm talking about the sort of correction that takes stocks back to where they were in 2009. From now on, most mining shares will be re-valued on the expectation that China's boom is over. That means lower prices.
So let's get to the specific details of my plan...
To start: I'm recommending that if you have MORE than 25% of your money in stocks, you should scale back.
We are at the beginning of a big, brutal, cyclical crash. Most Aussies who are in the stock market haven't grasped that yet. They will be the ones who get killed on the way down.
But there ARE some shares that benefit. For example, if the Aussie dollar falls along with stocks (a normal pattern) then precious metals miners, industrials, and consumer non-cyclical shares ought to do much better than miners. They should do relatively better in the months ahead.
In fact some shares are ALREADY doing better than the miners. These are shares that I've incorporated into my 'New Normal' plan. This plan in action proves you CAN make money on the stock market even over a prolonged period where it goes lower. (You can find out which specific stocks I currently have on my buy-list here.)
But here are some of the types of shares I'll be chasing between now and the end of 2013 for way-above-market returns...
*** Positive Black Swans that could go up hundreds
of percent even in a crashing market
OK, so I think stocks are going to have a rough time in the near future.
The best reason to keep buying stocks is the chance to make five or ten times your money. In fact, the way I see it, that's the ONLY reason.
These kinds of stocks are what I call 'Positive Black Swans'.
Nasim Taleb used 'Black Swan' as a term for low-probability, high-magnitude events.
These events affect the whole economy. But they also affect stocks. Most of the time for the worse. But sometimes for the better — a Positive Black Swan.
A 'Positive Black Swan' in the stock market is where a statistically improbable event — say, another major war in the Middle East — can have a huge positive impact on the share price of one sector or one company.
These are shares that burst up hundreds of percent because of a specific event or trend...and completely independent of what the wider market is doing.
An example, I wrote to my readers last year...
'If the gas is there and can be economically
produced, they will come...'
-- Dan Denning, May 25, 2011
And they did come.
In my first report of 2011 I wrote: 'My focus this year is on shares that can deliver big capital gains from our key themes, without exposing us too much to 'the market'.'
I tipped three stocks which were right on the leading edge of Aussie shale gas exploration. At the time it was a low-probability event.
In fact shale gas was seen as a crackpot idea when I first started writing about it. And it was controversial — as you can see in the box to the right. But from as a speculative strategy it was very successful.
So what about shale in 2013?
Shale resources for the companies I tipped are now better defined and quantified than they were when I first researched them. That's why we've seen double- and triple-digit gains in the shares I recommended.
Because I believe the shale-gas revolution is just getting started in Australia — I still have five shares recommend as 'buys' in my report. And I'm lining up several new targets in the same sector.
In fact I've just updated a 67-page report giving the background on the shale gas revolution...and my latest research on what I think are the three best long-term shale gas plays in Australia. This report — Revolution in the Desert — takes you all the way back to the origins of the oil industry in Saudi Arabia and Persia (modern day Iran) to explain events today. To my knowledge, nothing like it has ever been published in Australia before.
You can access The Denning Report now simply by taking a 30-day no-obligation look at my newsletter. To do so click here.
But the idea, if you HAVE money you're willing to speculate with, is to create a small space in your portfolio for stocks with triple-digit potential. And within that 25% of your money in stocks, you should also be looking to own...
Income stocks that hold their value
There is a lot of talk about good dividend payers being the best stocks to own in a bear market. But sometimes even a great dividend doesn't offset the money you lose when a stock goes down. A good example is the market meltdown in 2007 and 2008.
But income from your shares IS especially important in hard times. I expect dividend-payers to get more attention than they probably deserve in the next few years from growth-starved investors. Blue chips with big dividends could easily become darlings of the funds management industry, too.
But you shouldn't hold an expensive stock just because it pays a good dividend.
Of course finding these stocks is hard.
We have several income generators in The Denning Report share list right now. One has consistently paid over 50 cents in dividends. It's one of Australia's largest pipeline network owners. And on top of the dividends, the share price is up 44%. My aim is to find more like these for you in 2013.
There's one final specific type of share that I'm on an active hunt for right now...
Why Energy Will Buck the Commodity Trend in 2013
I mentioned shale gas. But the whole energy sector is going to do well in 2013.
I know what you're thinking. We're at the end of a commodities boom. Energy is a commodity. Why buy energy stocks?
I'll try not to get too technical here. But this is an important part of the strategy. And as you'll see if you look at my portfolio here, it's the part that is paying off the most.
To understand why you need exposure to carefully selected energy stocks, you need to remember the wider context.
Someday, after this whole debt crisis is finally over, the world is going to start growing again. And when it does, it's going to need one thing above all else: energy.
Companies that find and produce that energy are valuable commodities. If you buy them cheap and hold on to them, it could be one of the best decisions you make over the next ten years.
Energy stocks are already acting differently to other commodity stocks as the mining boom ends: As I wrote to my readers: 'The destruction of bank capital globally puts a premium on energy resources.'
I then recommended a little-known uranium miner A-Cap Resources, which went on to go up +90% in just 11 months.
Right now I'm looking for good, undiscovered unconventional energy stocks. By unconventional, I mean companies that are extracting energy in non-traditional ways, like shale gas. But I'm confident that with so much technical innovation in the energy sector, there will be others.
If you pick the right stock developing the right technology in this arena, you can make a killing in ANY market.
Keep a look out in 2013 for the development of fully automated drilling rigs that move to targets via satellite, set up camp, drill, pack up and move on. From Bloomberg:
So far, it's Texan and Norwegian companies leading the way. I've recommended three of these companies in my 'New Normal' Portfolio. Since most of the innovators are outside Australia, I'll look even further afield in 2013 for your best energy bets.
If you'd like to get my next recommendations go here to start a no-obligation trial of The Denning Report.
STEP 2: GO 25% in a traditional safety play
But only with this little-known, just-listed 'Aussie ETF
Bundle' that's ALREADY beating a falling market...
If you want to REDUCE the amount of money you have in shares, you should probably think about shifting it into exchange traded funds (ETFs) that track the Australian bond market.
Keep in mind that an ETF is not a bond. It's a security that's been designed to imitate some other sector. I've found a number of intriguing ETFs that could profit from one of the big trends I'm forecasting: a flight to safety..
The reasoning is pretty simple...
I think the bursting of the iron ore bubble is going to spark a big change in the Australian retirement system. It's a shift that I believe will gain momentum in 2013. And I've found what I call an 'Aussie ETF Bundle' that I believe will benefit from it.
The deeper you dig, the more obvious it is that the end of the Aussie mining boom is going to change how Australians save for retirement...whether you like it or not.
You can get my full research and tips on this by accessing the May issue of my newsletter. If you take a 30-day trial the whole archive will be open to you. Click here.
Here's the gist of what you'll discover: a big shift is underway in Australia.
Take a look at this...
Retirement Fund Asset Allocation in Selected Countries
Source: 'Investment Insights July 2012' report, Centric Wealth
As you can see, Australia has the highest allocation of shares held in retirement funds in the world. We also have the lowest allocation to fixed income investments, which include corporate and government bonds.
Australians currently own HUGE amounts of shares. In large part, this is due to steady share market growth thanks to the mining boom.
But all that is changing.
Some of Australia's most powerful financial insiders are deeply concerned about the risks to Australia's economy and its retirement system.
In the last six months, they've launched a public campaign to change the system. This change could affect how your money is invested. The whole structure of Australia's retirement system could change. This change could affect your own retirement plans...
The coming 'attack from above' on Aussie shares
The best preview of what these guys are planning comes from a speech given by former Labor Finance Minister Lindsay Tanner. Tanner told a conference, 'It needs to be understood by the players in the market that it is not a given that there will be no government intervention on this issue.'
The exact kind of stocks that are starting to tank as you read this.
Tanner said that, 'On any measure, your typical Australian superannuation fund is massively overweight equities.' Tanner also said, with my emphasis added, that:
'If governments in the future of either side are facing extremely unhappy super fund members, that will generate enormous political pressure. We saw a bit of that in 2009, but it is not something we are immune from experiencing again in the future. There is a risk of some kind of government intervention.'
Tanner is telling retirement fund managers that if they don't put more money into fixed income investments and less into stocks, the law could be changed in order to force them to buy more bonds.
Voters who have seen three or four years of bad share market returns may be all for this change.
But you shouldn't wait for that to happen. If you understand what could happen now, I believe you can profit from it well ahead of time.
Here's the bottom line...there is a good chance that government pressure may lead to Australia's retirement savings being funneled AWAY from the Aussie share market and INTO the corporate and government bonds.
I list the reasons why this is likely to happen in my May, 2012 report.
I've also found three ETFs — which only listed in March — to play this trend. These tips have all gone up since I first recommended them in May by single-digits. But this is a long-term play over the next three years.
You'll get my full research on this shift, as well as access to recommendations, if you take a 30-day trial of my newsletter here.
STEP 3: GO 25% PRECIOUS METALS
New ways to profit from the yellow
metal's push to $4,000 and beyond
Gold has made new highs each year for the last 11. Will it make a 12th?
For much of the year, the gold price didn't go anywhere. That has shaken the faith of many new gold bulls. The dismal performance of mining stocks hasn't helped.
But now gold is heading up again. In the first week of September gold hit a six month high. At the time of writing it's sitting above US$1,700 an ounce.
'Gold is likely to hit a record high of US$2,000 an ounce in 2013, driven by fears over government deficits and worries that central banks will be forced into more money printing,' says Erste Group, an Austrian bank.
Morgan Stanley is a buyer too. Their strategists think bullion will hit $2,175 next year.
I reckon both estimates are too low. I think you could easily see bullion trading at US$3,000 next year. It's critical, with the implosion of the Aussie mining sector, that you own gold before this happens.
It's simple: in 2013 you're going to see a massive shift to a 'risk off' strategy here in Australia. In other words: as things get worse for the miners, investors will gravitate away from growth stocks and into safer investments, like gold and silver.
You'll want to own the precious metal shares I've recommended before this happens. They're all buys. The latest one I recommended just two weeks ago at the time of writing, is already up 5%. Gain access to the archive here.
I'm also looking at adding a small cadre of gold exploration stocks to the recommendations list. That could be the single best way to leverage profits from the next phase of the gold bull n 2013. That's a story for a future edition of The Denning Report.
What the coming gold mania will look like...
Don't get me wrong, we are not at the START of the gold bull market. Flick on the cable news and you'll see plenty of stories about gold on Fox, CNBC and even some local channels.
But most of the stories are about selling your gold for paper money!
Not buying it!
That tells me we are only at the beginning of what I'd call Stage Two of this bull market. What I think we're going to see in 2013 is gold hitting new record highs against ALL currencies in the world, not just the US dollar.
Stage Three starts when pretty much everyone you know starts talking about buying gold. I don't know what circles you move in, but for me that hasn't happened yet. Gold rushes are the very definition of speculative mania!
You could easily see what happened to gold in the 1970s: a flood of money into gold and silver, blasting their prices near vertical.
When all this happens, it does so very quickly.
So, my advice: make sure your portfolio has a 25% gold allocation.
I've written extensively on the best and most cost-effective ways to do this in my newsletter The Denning Report. You can get access to the latest issue, all the recommendations and the full archive for 30 days with no obligation to stay on as a subscriber. (Start your trial by clicking here.)
Now the final part of the plan...
STEP 4: GO 25% CASH
Money on hand to buy rock-kickers at rock-bottom
Now a caveat here: I actually think the value of the Aussie dollar is going to go down as the resources boom tapers off. I've made this case extensively over the past year in my report. You'll be able to read all my analysis in the archive section of my website.
With that in mind, why would I advise you to keep 25% of your money in cash?
There are two reasons I think you should keep 25% of your wealth in cash.
First, it's simply a way to make sure you're not overly-invested in Australian stocks while they are in a down trend.
But more importantly: you want cash on-hand to buy Aussie miners when they finally hit their lows.
According to my friend and resource expert Dr. Alex Cowie, a lot of mining juniors will simply disappear in 2013 for lack of capital. Their projects will die in a high-cost, lower price environment. Only companies with deep pockets and regular cash flows from diverse operations (and low operating costs) will survive.
But their stock prices are going to take an almighty hammering.
You want to be the one with the cash when all the assets must be liquidated by distressed sellers.
The assets — real assets in the ground — aren't going anywhere. In fact, a lot of them have been identified in this latest boom. It's at the bottom of the cycle that you'll have the chance to buy them for a song.
That's the position I'm going to try and work my readers into over the next 12 months.
And that's my 'New Normal' investment plan in broad strokes.
No one knows how bad things will get for the Australian economy in 2013.
But we DO know this investment formula has convincingly beaten a falling market so far.
Like all investors, you are working toward a personal financial goal. My aim is to help you reach that goal no matter how bad things get over the next three years. And preferably without the anxiety and fear that have dominated the last FIVE years.
The financial world has never been more confusing or uncertain. It seems hopeless. Yet you still have to do something with your money, don't you?
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ADAPT or DIE
I recently returned from a conference in Vancouver, Canada, where I spoke alongside the likes of Dr. Marc Faber and British economic historian Niall Fergusson.
The theme of the conference was Innovate or Die.
I think the best way to confront what's coming — in Australia especially — is to adapt, not innovate. Innovating is not something all of us can do. But adapting is easy. You can do it if you choose to.
What I want you to remember is that the next ten years on the Aussie market aren't going to look anything like the last ten years. You can't afford to invest as if nothing will change.
I've adapted my own investment strategy to this 'New Normal'.
It's ALEADY beating the market plus 24% to negative 10%.
If you want to start employing this strategy yourself, I invite you to join me.
Editor, The Denning Report
P.S. I hope you'll take advantage of the first-year introductory offer to The Denning Report and decide for yourself if my big picture views can contribute to a more comfortable retirement.
But if you'd rather not, that's fine too. I just want to make sure you're not without some guidance in the challenging investment situation.