- Regime change? Buy bonds…
- A very lucrative strategy
- The time to act is now
Head slap! That’s immediately what I did after reading the Financial Times yesterday. Here’s why…
Before Christmas, I pointed out Jim Rogers’ suggestion to consider buying into the distress of Venezuela. I couldn’t come up with a good way to play that idea.
Hindsight: a suggestion could have been via the bond market.
The Financial Times reports that the Wall Street investment banks and distressed debt funds who bought up Venezuelan debt are loving life right now.
That’s because the prospect of the US government installing a new regime means a greater likelihood of them getting paid.
Venezuelan bonds have rallied ever since Trump recognised the country’s opposition leader — Juan Guaidó — as president.
The Wall Street Journal reported last week that the American plan to back the opposition had been developed secretly in the preceding weeks and ‘tightly coordinated’.
Here’s the deal…
Venezuelan international bonds have been in default since 2017.
Presumably US funds have paid cents on the dollar for some of these bonds.
They’ve bought them up cheap on the expectation of things turning around.
It doesn’t take much brain power to imagine a few calls going from Wall Street to the White House to urge the US government to put a new man in power down there…and make sure he pays up!
Even National Security Advisor John Bolton didn’t mind mentioning US companies would be glad to develop all that oil too — the largest proven reserves in the world, no less.
So: the oil royalties would flow to the new Venezuelan government…which would pay back its international debts…and Wall Street gets paid.
Russia and China have lent a lot of money to Venezuela…so the US could get a bit of leverage over them too with a friendly regime.
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Ah, the game of finance!
Of course, you and I buying Venezuelan bonds is a bit obscure.
But we can apply some principles here to the Aussie share market…
It’s this: buying assets when they’ve been knocked down can be a very lucrative strategy.
You just need a catalyst for the rebound.
I can see this in the small-cap stocks I follow for my paid service Small Cap Alpha.
Last year was not much fun across this sector, generally speaking.
Volume and speculative interest disappeared. The collapse in the US market in the last quarter really spooked everybody.
But here’s the thing…
How the shrewdest speculators operate
So much of this sell down was about investor psychology and perception.
Every quarter, every small-cap company releases a cash flow report. A lot that I’m seeing are very positive.
If you did nothing but read these you would be mystified why everyone is so worried.
I just see so many exciting developments coming up this year.
That’s the great thing about small-caps.
The broader economy that everyone obsesses about is secondary to whatever is their primary focus.
For example, did you know that in December New Zealand recently amended its approach to medicinal cannabis?
Probably not, I’m guessing.
Why would you care?
One ASX small-cap that can sell into this market is up 25% in the last week on the news it’s entering New Zealand. It’s doubled since October last year.
All this despite the deluge of words in the last quarter about Wall Street…China…interest rates…and all the rest of it.
Yes…sentiment in the short-term drives prices around like a yoyo…but over the medium-term eventually good businesses win out.
The gold sector in Australia is another example. It is flying right now.
The good news is I’m seeing more volume and interest coming back into the small-cap sector.
There’s too much value on the table — with the odds of a rebound increasing — for investors to ignore the opportunity.
The market priced in a possible recession last quarter…and if it doesn’t happen, the upside will be large across the whole market.
That’s the outcome I’m backing…and suggest you do the same. The switch in investor psychology — if it happens — could drive some prodigious increases in the small-cap space.
The point is you have to take a position now.
Go back to those Wall Street banks buying Venezuelan bonds.
They took a risk acquiring those. It’s possible all that paper goes to zero.
There are always risks with any investment.
But when the bad news is priced in…and there’s a potential catalyst for change…that’s when the shrewd speculators step in. That’s the profit opportunity.
It’s no good waiting for all the good news to come out and you ‘feel’ comfortable. It will be too late by then.
The time to acquire strategic stakes is now. By the end of 2019 you could be sitting on some prodigious gains.
All the best,