Month: February 2013

By MoneyMorning.com.au

Bubbles are blowing everywhere.

According to Bloomberg News this morning:

‘Yields on Mexican debt due in 2024 fell to an all-time low 5.07 percent after Gross, Pacific Investment Management Co.’s co-chief investment officer, said yesterday the peso was a “great currency” while praising the nation’s low debt level and interest rate stability. In June, Gross triggered a surge in the notes after saying he favored Mexican debt over German bunds…’

We don’t know much about Mexican bonds or the peso. But we do know that record low interest rates have had a big impact on stock prices.

And with the Australian stock market up 14.6% in just the last six months, most Aussie investors should have clocked up some strong gains. But that’s the past. What about the future?

After the big rally, are there any good value stocks trading on the ASX today? We think so, and we’ll show you where they are…

So, where do you look?

As you know, we’re obsessed with small-cap stocks…innovative stocks…technology stocks…game-changing breakthrough stocks.

But we don’t expect you to dump your entire wealth into those high-risk punts. If you’re investing in something potentially transformative, the key word is ‘potentially’…because ‘potentially’ the company may not succeed.

That’s part of the fun and excitement. Researching, analysing, reading about, and investing in these amazing companies. And if you manage to back the right one that has the right idea (and the ability to commercialise it) at the right time, you can make some terrific gains.

But as we say, you shouldn’t stick all your money into these stocks. You should start off with something much more boring, such as the five beaten-down blue-chip stocks we recommended last year.

Still Five Blue-Chips to Buy

In recent weeks we’ve received a number of emails asking if those five blue-chips are still worth buying. After all, with the market up 14.6% in just six months, and two of the recommended stocks up more than 35% during the same time, it’s a fair question.

You can see on the chart below how these blue chips stocks have performed:

Click here to enlarge

The only stock to do worse than the S&P/ASX 200 is Harvey Norman Holdings Ltd [ASX: HVN]. Even so, it’s a better-than-the-bank 8.3% gain.

The others have done much better: Qantas [ASX: QAN] up 36.1%; JB Hi-Fi [ASX: JBH] up 20.5%; Toll Holdings [ASX: TOL] up 25.3%; and Myer Holdings [ASX: MYR] up 37.1%.

To our mind, this is why it’s dumb to invest in an index or fully diversify a stock portfolio.

If you talk to most financial advisors, they’ll tell you to have at least 10 stocks in your blue-chip portfolio. And many others will say you should have 20 stocks in order to diversify.

We’ve long believed that’s bad advice. You’re better off doing some decent research or getting good advice on 5, 6 or 7 stocks. You can then spread your blue-chip portfolio across those stocks.

It’s a method we personally use. We’ve just double-checked our portfolio, and we own five blue-chip dividend-paying stocks (by the way, we don’t own any of the five stocks mentioned in this letter. We prefer not to mix business with pleasure. We also own a few mid-cap and small-cap stocks, but we’re only talking about safe blue-chips in this letter).

But as we said earlier, that’s history, what about the future? Well, when we updated the 5 Beaten Down Blue-Chip Stocks report, it hit us that all five stocks are still a long way down from the 2007 peak (2009 peak for Myer which didn’t list until that year).

It Pays to Stay Small in Investing

To show you what we mean, Harvey Norman is still down 66.8%, Myer is down 32.9%, JB Hi-Fi is down 23.7%, Qantas is down 68.9%, and Toll Holdings is down 54.1%.

Now, just because a stock has fallen that far doesn’t mean to say it will recover anytime soon…if ever.

But it does help to put the recent stock market rally in perspective. Yes the market has gone bonkers in recent months, and there’s no guarantee you’ll see a repeat over the next six months. But the Australian share market is still a long way from where it was in November 2007.

In short, we see no reason to treat the market today any differently to six months ago. It was risky then and it’s risky now. But by the same token there are still some good bargains today as there were six months ago – the five stocks we’ve mentioned in this report are among them.

And if we are wrong…if stocks do fall, let’s ask you, would you rather have to sell five stocks to clear out your portfolio, or 10 or 20 stocks as most mainstream financial advisors recommend?

It’s a no-brainer in our opinion. In investing, small is beautiful – whether it’s small-cap stocks or just holding a small number of companies’ shares.

Cheers,
Kris

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From the Port Phillip Publishing Library

Special Report: How to Hunt Down 2013′s Biggest Stock Market Winners

Daily Reckoning: How Australia-China Relations Are Caught in the Monetary Battle Space

Money Morning: Don’t be Long and Wrong on this Stock Market Rally

Pursuit of Happiness: Exchange Traded Options: A Way to Boost Your Retirement Income

Australian Small-Cap Investigator:
How to Make Money From Small-Cap Stocks

By MoneyMorning.com.au

‘It appears,’ says Numis Securities, ‘that $700-$800/oz is the new $500-$600/oz’.

The broker is referring to the sharp increase of the cost of gold mining that has taken place in the last year or two. In its latest review of the sector, Numis urges investors to ‘stick with gold’ – despite giving plenty of reasons for doing the opposite.

As we move into 2013, gold bulls are getting anxious. Depending upon your interpretation of charts, the price is either consolidating around the 1,600/oz level ahead of a renewed advance or else the ten-year bull-run has decisively faltered.

Ahead of the Indaba Mining Conference in Cape Town this week, another broker to broadcast on the sector is Edison Investment Research. It begins by pointing out that the last two years have been two of the worst for the gold price since 2001 and asks ‘is the gold bull market drawing to a close?’

The answer ‘is an emphatic no’, says Edison. Until governments show a real determination to fight inflation and preserve the value of paper currencies it thinks that the gold price will continue to rise, albeit at a more subdued rate.

But both of these brokers give several reasons for caution. The gold price was supposed to ‘power to $2,000/oz’ following the US’s quantitative easing programme last autumn. It did not happen. Investment demand has been falling. Other asset classes are starting to deliver better returns.

Governments around the world have started to confront their budgetary problems. And as the global economy continues its recovery from the financial crisis, the need for a safe haven is not so urgent.

Sentiment or Fundamentals?

The brokers acknowledge these factors. But with several gold miners amongst their clients, they are hardly likely to declare themselves outright bearish. And yet Edison says that ‘the years of exceptional returns may be behind us’.

Numis kicks the can down the road saying that ‘we need a prolonged period of sustainable growth to become bullish about the economy and we are yet to experience this’. But it cuts its predicted 2013 gold price by 7% to $1,775, while maintaining a long-term price target of only $1,300.

Numis also observes that ‘gold is a fickle beast and driven by sentiment far more than fundamentals these days’. I am not sure that I agree with this. Given that most gold ends up in underground vaults, sentiment has always been paramount.

And the idea that this sentiment is fickle is undermined by a price chart that shows a really quite smooth bull-market progression from 2001, followed by a period of consolidation in a narrow range.

Anyway, being of rational and sound mind, I have never been a big fan of gold. But that does not mean that I would not invest in a gold mine if it made good money. That, though, has not been as easy as you might think.

Gold mining stocks have lagged behind the actual gold price, thanks to a combination of those rising costs, political and labour hostility, operational delays and the mining of lower quality ore grades that only make sense at a high gold price.

2013 Could be a Good Year for Gold Shares

While Numis warns that Guinea, Tanzania, Cote d’Ivoire, the DRC and Zimbabwe may yet have nasty surprises in store for the miners, these headwinds may be easing off.

Selectively then, 2013 could be a good year for gold shares. But the big picture is surely of a world slowly returning to economic health and growth, a context that favours industrial metals over the safe-haven status of gold.

Amongst these industrial metals, my favourites are the select group, including cobalt, tantalum and rare earths, that are on EU and US government lists of critical raw materials. That in itself tells you that the supply/demand picture should be in favour of producers.

Tom Bulford
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in MoneyWeek

From the Archives…

Make Sure You’ve Updated Your ‘Stock Insurance’ Policy
1-02-2013 – Kris Sayce

Here’s Why We’re Still Buying This Stock Market
31-01-2013 – Kris Sayce

Revealed: Inside the Mind of a Share Trader
30-01-2013 – Murray Dawes

Buy Silver – the War Against the China Bears Begins
29-01-2013 – Dr. Alex Cowie

China’s Economy: Enter or Exit the Dragon?
26-01-2013 – Callum Newman

By MoneyMorning.com.au

Japan is a country in crisis, says US money manager Kyle Bass. ‘Its GDP is falling, its exports are collapsing and its debt is about to explode,’ he said in a recent CNBC interview. Moreover the new Japanese PM’s solution to those problems will just make things worse. ‘By aiming for a 2% inflation target they will detonate the timebomb of Japanese debt.’

43-year-old Bass is no stranger to dramatic calls. In 2006 he spotted a bubble in the US housing market and founded his own asset management firm to short it. Thanks to getting that, and subsequent moves, right, investors have flocked to the brash Texan’s firm. He now manages more than $1bn in assets, up from just $33m when he started out.

So far his call on the Japanese economy has taken longer to work out than his subprime move. He first started shorting Japanese debt two years ago and the collapse still hasn’t happened. Yet while he says it’s impossible to call the end of a ’70-year debt super cycle with complete precision’ he believes it is looking closer now.

The primary problem, says Bass, is that Japan has too much debt. ‘The total debt is 24 times central government tax revenue. Once you sail into that zone of insolvency nothing you can do will help.’

The fact is, says Bass, Japan’s central government spends 50% of its revenue on servicing debt. If interest rates rose by 2% then all of Japan’s tax revenue would be spent on servicing debt, leaving it with no money for anything else.

For now, the severity of the situation is masked by the fact that Japan pays very low interest, but that won’t last forever, says Bass. ‘The only reason bondholders put up with this is because of the implicit promise of deflation. People think Japanese bonds are safe and that the yen does nothing but strengthen.’ But all this will change now that the government is targeting inflation.

The only difficulty, says Bass, is predicting exactly when it will happen. One sign will be that elite members of society and corporations start moving their money out of the country. Another, more technical, sign will be when derivatives such as swaps start pricing in future inflation.

Pressed to give a guess Bass estimates that it might happen in 18 months time. And he has one piece of advice to investors who are buying Japanese equities in the meantime: ‘Be careful. You’re picking up dimes in front of a bulldozer.’

James McKeigue
Contributing Writer, Money Morning

Publisher’s Note: This article originally appeared in MoneyWeek

From the Archives…

Make Sure You’ve Updated Your ‘Stock Insurance’ Policy
1-02-2013 – Kris Sayce

Here’s Why We’re Still Buying This Stock Market
31-01-2013 – Kris Sayce

Revealed: Inside the Mind of a Share Trader
30-01-2013 – Murray Dawes

Buy Silver – the War Against the China Bears Begins
29-01-2013 – Dr. Alex Cowie

China’s Economy: Enter or Exit the Dragon?
26-01-2013 – Callum Newman

USDJPY remains in uptrend from 88.06, the fall from 94.05 is treated as consolidation of the uptrend. Support is located at the lower line of the price channel on 4-hour chart, as long as the channel support holds, the uptrend could be expected to resume, and another rise to 95.00 area is still possible. On the downside, a clear break below the channel support will suggest that a cycle top has been formed at 94.05, and lengthier consolidation of the longer term uptrend from 79.07 (Nov 9, 2012 low) is underway, then deeper decline to 91.00 area could be seen.

Forex Signals

By www.CentralBankNews.info     Poland’s central bank said a reduction in interest rates earlier today should boost economic activity and thus reduce the risk of inflation remaining below the bank’s target.

By www.CentralBankNews.info     The Czech Republic’s central bank left its benchmark two-week repo rate steady at 0.05 percent, as expected, and will provide further details of its decision on Thursday.
    The Czech National Bank (CNB) cut its key rate by 70 basis points in 2012 and left rates unchanged at its previous meeting in December when it said the risks to inflation were on the downside.
     The headline inflation rate in the Czech Republic fell further to 2.4 percent December, a new low for the year, from November’s 2.7 percent. The central bank targets inflation of 2 percent within a plus/minus one percentage band.
    It has forecast that inflation would remain above 2 percent most of 2013 and then decline to below the midpoint of its range in the first quarter of 2014.
    The country’s Gross Domestic Product contracted by 0.3 percent in the third quarter from the second quarter, the second quarterly contraction in a row, accelerating the annual economic shrinkage to 1.3 percent from a 1.0 percent contraction in the second quarter.
   
    www.CentralBankNews.info

By The Sizemore Letter

Charles Sizemore appeared on CNBC last night to discuss the Dell (Nasdaq:$DELL) leveraged buyout.

The $24.4 billion proposal to privatize U.S. technology giant Dell is part of founder Michael Dell’s efforts to transform the company into a ‘mini IBM’, said analysts, as the world’s third largest personal computer (PC) maker struggles to protect its market share against competitors.

If the deal is approved, tech experts said this will pose a threat to key rival Hewlett Packard, which has also been undergoing a similar strategy shift towards a greater focus on the higher-margin enterprise services space.

“What they [Dell] want to be is IBM – they are not there yet – but they want to focus on enterprise services and solutions – they want to run the IT departments of large and small corporations and government agencies, that’s the direction they want to go in,” Charles Sizemore, chief investment officer at Sizemore Capital Management told CNBC on Wednesday.

To read the full article, please follow this link.

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The post Sizemore on CNBC: “Dell Wants to be IBM” appeared first on Sizemore Insights.

By The Sizemore Letter

Last week, I wrote about the Barron’s Roundtable, commenting that its members rarely agree on anything.  I want to point out again that this is precisely why I enjoy reading the Roundtable comments every year.  Right or wrong, its members are anything if not independent, and this is what makes them valuable.

In the second installment, which was released this past weekend, the comments were…well…a little too conventional for my tastes.  It appears that the loss of the wildly eccentric Marc Faber has moderated the panel and to its detriment.

Still, there are plenty of years where the conventional proves to be more popular than the eccentric.   We shall see if 2013 is one of those years.

With that as an introduction, let us see what Abby Joseph Cohen of Goldman Sachs, Scott Black of Delphi Management, Oscar Schafer of OSS Capital Management and Brian Rogers of T Rowe Price have to say.

Cohen takes a somewhat contrary view with respect to the broader market.  While most seem to expect the market to have a great first half of the year, Cohen sees a stronger second half with a lackluster first half.

She also happens to be bullish on Asia and on American trade with Asia, recommending Expeditors International of Washington ($EXPD) and South Korean tire company Hankook Tire Worldwide.

I share Cohen’s enthusiasm for Asia, but Expeditors is too expensive for my liking and Hankook too difficult to invest in for most readers.

Moving on, I share Brian Rogers’ general market outlook—that 2013 will bring decent if not exceptional profit growth and that dividend growth will be strong—but I find his picks uninspiring.  Rogers likes PNC Financial Services Group ($PNC), also-ran retailer Kohl’s ($KSS) and cosmetics firm Avon Products ($AVP) among others.

Rogers’ one pick that might be worth a second look is energy company Apache Corp ($APA).  If gas prices rebound, Apache could have a good year.  Though considering that 20% of its production is in crisis-plagued Egypt, this stock is not for widows and orphans.

Oscar Schafer’s picks tend towards the conventional this year as well, though he had one that caught my eye—money transfer chain Western Union ($WU).  Western Union got completely obliterated 2012 on fears that its business model was failing to contend with cheaper online competition, falling from just shy of $20 to below $12.  But since November, the stock has enjoyed a nice rally.

In Schafer’s words, “Western Union’s growth is driven by global migration trends.  The typical customer for a money transfer might be a migrant worker, usually unbanked or underbanked, who is sending money back to his family in his home country.”

Western Union is an “old economy” way to play the continued rise of globalization.  And at 9 times earnings and with a dividend of nearly 4%, the company’s competition with newer economy rivals should already be factored into the share price.

Finally, we come to Scott Black.  Black chooses a “safe” pick in Qualcomm ($QCOM).  I say “safe” because Qualcomm is a convenient way to get exposure to the smartphone boom without betting on a single high-profile brand, like Apple ($AAPL) or Samsung.  There is a little bit of Qualcomm in pretty much every smartphone, so the company should do fairly well no matter who comes out on top.

I also liked Black’s recommendation of Medical Properties Trust ($MPW), a REIT that invests in hospitals and other health-related real estate.  Medical Properties yields a mouth-watering 6.1%, and Black contends that the dividend is safe, with the dividend accounting for only 75% of funds from operations.

Medical Properties has not raised its dividend since 2006—and in fact, it cut its dividend substantially during the 2008 crisis.  Still, if you believe that demand for medical facilities will increase over time, then Medical Properties is not a bad way to play that trend.

Disclosures: Sizemore Capital has no position in any security mentioned.  This article first appeared on MarketWatch.

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The post And the Roundtable Says… Part II appeared first on Sizemore Insights.

By Richard Wiltshire – Chief of Foreign Exchange Dealing at ETX Capital

As anyone with any experience of the Foreign Exchange markets will tell you, just as we manage to convince ourselves that something is about to happen or will continue to happen (e.g a trend or theme developing or continuing ) then the market, for whatever reason, does an about turn and catches you out.

And so it was Monday, as “risk” was definitely “off”’ as stocks were hit hard on the back of Spanish and Italian woes.

Whilst buoyant stock markets, improving PMI readings and an ECB tolerant of a stronger currency has resulted in a more bullish market view on the EUR over the last few weeks, we should know by now that a political concern is never far away when it comes to the Euro zone and, despite much optimism, it tells us something about how nervous this market is; the way it runs for cover (and in to perceived “safe havens”) when any negative news appears.

The political situation in Italy is something of a farce.  Even the contemplation that we may see a return to power for Berlusconi, is almost unbelievable (the likelihood of a Berlusconi win is small, but he has historically been able to get 3-4% more support in the actual vote than the polls suggest, and he is currently only circa 6 % behind Bersani).  If you made up this story no one would believe you!

Meanwhile in Spain, responding to allegations of having received questionable payments amid worries about political corruption, Prime Minister Mariano Rajoy worryingly insisted “it is all untrue – except for some things (the media has published)”.  Not exactly the way to quash rumours outright.

These “jitters”, in combination with profit-taking ahead of tomorrow’s ECB meeting and Hollande’s comments on Tuesday where he issued a clear warning over the current strength of the Euro damaging the European economy, should likely see the EUR remain a sell on rallies.

There is much speculation that the upcoming ECB meeting will see Mario Draghi (ECB President) try and talk down the Euro, leaving room for rate cuts etc.  However, as Mr Draghi himself stated, at last month’s press conference,  “so far, both the real and the effective exchange rate of the euro are at their long-term average” which in turn has been backed up by Nowotny’s comments of only a week ago that EURUSD “remains within a normal long-term range”, both of which suggest to me that the message from the ECB  will remain the same, with all avenues left open.

Tuesday saw a lively open where macro name EUR/USD demand set the tone for an early session rally (allied to Middle Eastern names buying euro/yen) which took EUR/USD from the 1.3460 lows and stronger Spanish and German PMI data sparked more short covering, as EUR/USD regained a foothold above the 1.3500 handle to run stops and take out some offers at 1.3525/30. Only for the rally to stall against supply above 1.3540/50 and drift off to the 1.3520 area as Hollande’s comments that the Euro zone needs a foreign exchange policy, hit the wires.

The focus will remain firmly on the Euro kin the next 48 hours, with all eyes on ECB as near term trading conditions are likely to remain “rangey” given the proximity of key resistance levels, but with the medium bullish theme still intact.

The examination of EUR/USD true credentials will come on any test of the 1.3790/1.3835 zone, but short term resistance at 1.3575/00 needs to be cleanly breached first while 1.3450/60 and 1.3390/00 levels should act as key initial supports.
Buona fortuna!

About the Author

Richard Wiltshire is Chief of Foreign Exchange Dealing at ETX Capital – a spread betting provider based in London.