Caroline Ritchie: Time to go against the nervous crowd

Sell in May and go away? Or Mary, Mary quite contrary? There's nothing like a decent pullback to bring out the larger buyers and last week was no exception. The nervous, climbing over each other to sell, were replaced by the keen who had been sitting on cash waiting for this entry point. Agricultural commodity funds were in particular demand, attracting 10 per cent larger inflows than normal for the month globally. Large American private banks, having decreed commodities overpriced two weeks ago, changed tack after the fire sale and declared them fantastic.
Contrarian themes have a history of being profitable, especially when basic market fundamentals remain materially unchanged. Irrational exuberance in either direction creates sentimental trading themes, which can have large self-sustaining and cumulative effects. We are in a long-term rising market for basic resources. The supply and demand constraints of an exploding population competing for finite commodities remains challenging. Even factoring in all known deposits and future predicted supplies of everything, it is clear that over the next decades the shortages will become worse. New technologies may ease the pain, but there will be a problem. The most pressing energy conundrum known to man; how to efficiently and cheaply store the energy of the sun, remains unsolved. Oil, coal, iron ore, industrial and precious metals only exist in certain quantities. Mankind's demand for commodities and resources will continue, the strong fundamentals are unchanged.
Other ideas supposedly scaring people have to do with the technology sector. Secondary market valuations of Facebook of $76 billion and the sale of Skype for $8.3 billion, (that's 400 times operating earnings), are being given a question mark. These kinds of numbers are making headlines not just because they look big, but also because they are taking place in restricted markets. Neither are publicly listed companies. There are concerns that a second dot-com bubble is forming behind the scenes and in the private-equity shadows. I'm not so sure. I think, like the giant bull market for resources, the fundamentals are strong for the best in technology. The insatiable desire to connect, to social network, and to purchase the devices that facilitate human contact are going to be in demand for a very, very long time. And, like resources, the pool of people willing and able to afford these things is mushrooming. The internet has about two billion users, predicted to increase dramatically with Chinese urbanisation and population growth in the emerging economies. The last 10 years have seen broadband go from an unheard-of technology to a virtual birthright. The previous paper tigers of the last dot com bust were nothing-companies with a lot of talk and no trousers, let alone earnings. Today it's rather different. Billions of dollars in sustainable profits and oodles of cash at bank is the modus operandi for these top tech companies. Slippery slopes in Silicon Valley? Not likely. Smooth paths to profits is what we are talking about and now, when doubt creeps into the main herd, is exactly the time to strike. That's clearly what Microsoft thinks.
Caroline Ritchie is an NZX adviser for Forsyth Barr in Napier and holds an NZX Diploma, BCom and BSc. For sharemarket advice contact her on (06) 835 3111 or caroline.ritchie@forbar.co.nz.
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