S&P downgraded US debt on 5th August 2011. I placed my first trade on 8th August 2011: 1041 ASX:LYC @$1.92 ($2003.31 including $15 brokerage fee).
(ASX:LYC closed Friday +4.44% @$0.47. I caught the tail end of the 2008-10 speculative bubble in rare earths. Lynas Corporation has since faced project delays in Malaysia; activist lawsuits; headline risk; and regular ‘shorting’ due to convertible bond arbitrageurs and exchange traded funds. I entered the market on a distribution phase — expecting a further rise — and instead faced a markdown, in terms of Richard D. Wyckoff‘s technical analysis methodology.)
The next five or so months got very interesting regarding market volatility and contagion effects. I read up again on international political economy. I also learned more about transmission shocks; political risk; hedge fund activism; and share ‘warehousing’. In October 2011, I did some further research whilst on holiday in Tokyo, Japan, including an eventful visit to the Tokyo Stock Exchange.
Drezner and I are both political scientists. One book I turned to was Timothy J. Sinclair’s The New Masters of Capital: American Bond Rating Agencies and the Politics of Creditworthiness (Ithaca, NY: Cornell University Press, 2005). A gem I discovered by accident in Sinclair’s book was about how Victoria’s conservative Kennett Government used S&P and Moodys ratings downgrades in 1993 to cut $A730 million “from Victoria’s education, health, and other programs” (Sinclair 2005: 103). In 1992, my father had co-founded Victoria’s nursing agency Psychiatric Care Consultants, which responded to the new competitive market environment. So, the S&P and Moodys downgrades had deeper personal and familial significance.
These examples illustrate how research can change the researcher.
When you look at what’s being developed today, whether it’s the deep oceans or the Arctic or shale gas and shale oil, you’re seeing levels of investment costs and danger that are unprecedented, and levels of environmental risks that are unlike anything we’ve seen before. You wouldn’t go to these lengths if easier resources were available.
My 2005 Masters essay on Klare’s research program (PDF).
In mid-2010, Ben Eltham and I discussed various ’emerging’ threats to traditional military strategy. One of them was rare earths: 11 elements used in defence, automobile applications, consumer electronics, and next generation turbines. We foresaw but didn’t act on the speculative bubble that occurred in rare earths between October and December 2010. There’s a lot driving market sentiment: ‘China’, ‘commodities’, ‘political risk’, ‘first mover advantage’, ‘iPods’, ‘greentech’, ‘next generation automobiles’, and ‘defence’.
Jason Miklian, a researcher at Oslo’s Peace Research Institute did act. Miklian invested in ‘day trade’ stocks of rare earth companies using $US9000 in personal savings. His account is revealing for several reasons. Miklian also foresaw the speculative bubble and continued to do fundamental research on the sector and markets. He timed his market entry. Then, Miklian lost what he had gained through attempting to ‘short’ the market in December 2010.
Miklian blames the market but perhaps the error lies in his ‘day trading’ strategy. Miklian traded a small account. He used options which increased his potential profits yet could quickly engulf his trading account if wrong. He bet on firms like the US-based Molycorp (MCP) which, although their stockprice doubled, are still years away from resolving the production problems with its Mountain Pass facility. Many other firms had questionable earnings and their stocks rose on mainly speculative activity. Others are relying on bullish activity when new production facilities come online in the next 18 months and major deals are signed. What Miklian perhaps needed was a valuation model and assessment of future earnings as well as his sector research. Finally, Miklian mistimed his exit. The volume of trade activity means that despite some market skepticism, trading in major stocks will continue. Technical analysis suggests that stocks of rare earths companies will trade within a range, rather than suddenly collapse.