Month: February 2013

Source: ForexYard

The euro reversed some of its recent gains throughout yesterday’s trading session, as investors eagerly await the outcome of a European Central Bank (ECB) meeting later this week. Additionally, a report indicating an increase in Spanish unemployment weighed down on riskier assets. Today, the main piece of economic news is likely to be the US ISM Non-Manufacturing PMI, scheduled to be released at 15:00 GMT. If the indicator comes in above the forecasted 55.2, the US dollar could see bullish movement during afternoon trading.

Economic News

USD – Dollar Sees Bearish Movement in Slow News Day

The US dollar took moderate losses against several of its main currency rivals during a slow news day yesterday, as investors continued to digest Friday’s worse than expected Non-Farm Payrolls report. The GBP/USD advanced close to 50 pips during the European session, eventually reaching the 1.5750 level. Meanwhile, after advancing close to 40 pips during the first part of the day, the USD/CHF saw a bearish correction during the mid-day session, virtually erasing its earlier gains. By the end of the European session, the pair was stable at the 0.9090.

Today, dollar traders will want to pay attention to the US ISM Non-Manufacturing PMI, scheduled to be released at 15:00 GMT. Analysts expect the indicator to come in at 55.2, slightly below last month’s 56.1. A worse than expected result today is likely to reinforce the idea that the Fed will keep US interest rates at their current record lows for the foreseeable future, which would weigh down on the greenback during afternoon trading.

EUR – Spanish Unemployment Data Leads to Euro Losses

A report showing an increase in Spanish unemployment from last month resulted in the euro turning bearish during European trading yesterday. Against the US dollar, the common-currency lost close to 80 pips during the morning session, eventually reaching as low as 1.3547, before bouncing back to the 1.3570 level. Meanwhile, the EUR/GBP fell more than 60 pips over the course of mid-day trading, to trade as low as 0.8610.

For euro traders today, the main pieces of economic news are likely to be the Spanish and Italian Services PMI’s, followed by the EU Retail Sales figure at 10:00 GMT. Better than expected results for any of the indicators could help the euro recoup some of yesterday’s losses. Later in the week, traders will not want to forget to pay attention to the ECB Press Conference, scheduled for Thursday at 13:30 GMT. Any optimistic statements during the press conference regarding the EU economic recovery could boost the euro.

Gold – Gold Prices Fall amid Bearish EUR/USD

The price of gold fell more than $10 an ounce during the first part of the day yesterday, following a report showing an increase in Spanish unemployment which turned the EUR/USD bearish. A bearish euro means gold becomes more expensive for international buyers, which often leads to a drop in prices. After a reaching as low as $1661.40 during mid-day trading, a slight upward correction brought the precious metal back to $1668 by the end of the European session.

Today, gold traders will want to pay attention to the US ISM Non-Manufacturing PMI, and its impact on the EUR/USD. A better than expected figure may result in additional gains for the greenback against the euro, which if true, may lead to an additional drop in gold prices.

Crude Oil – Spanish Unemployment Data Leads to Losses for Oil

The price of crude oil fell more than $1 a barrel during European trading yesterday, following the release of the Spanish Unemployment Change figure which resulted in investors shifting their funds to safe-haven assets. After trading as low as $96.04 a barrel, the commodity was able to bounce back to the $96.50 level by the beginning of US trading.

Today, oil traders will want to pay attention to the US ISM Non-Manufacturing PMI, scheduled to be released at 15:00 GMT. If the indicator comes in above the forecasted level, speculations that US demand for oil will increase may help the commodity recoup some of yesterday’s losses.

Technical News

EUR/USD

The weekly chart’s Slow Stochastic is close to forming a bearish cross, indicating that a downward correction could occur in the near future. Additionally, the same chart’s Relative Strength Index has crossed into overbought territory. Opening long positions may be the smart choice for this pair.

GBP/USD

The Williams Percent Range on the weekly chart has fallen into oversold territory, indicating that an upward correction could occur in the near future. Furthermore, the MACD/OsMA on the daily chart appears close to forming a bullish cross. Traders may want to open long positions.

USD/JPY

The Relative Strength Index on the weekly chart has cross into overbought territory, indicating that a downward correction could occur in the coming days. This theory is supported by the Slow Stochastic on the same chart, which has formed a bearish cross. Opening short positions may be the smart choice for this pair.

USD/CHF

While the weekly chart’s Williams Percent Range has crossed over into oversold territory, most other long-term technical indicators place this pair in neutral territory. Traders may want to take a wait and see approach, as a clearer picture is likely to present itself in the near future.

The Wild Card

CAD/JPY

A bearish cross on the daily chart’s Slow Stochastic signals that this pair could see a downward correction in the near future. This theory is supported by the Relative Strength Index on the same chart, which is currently in overbought territory. Opening short positions may be the smart choice for forex traders today.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

By www.CentralBankNews.info     Australia’s central bank left its benchmark cash rate steady at 3.0 percent, as expected, saying its accommodative stance was appropriate but with inflation on target and growth slightly below trend it could cut interest rates if necessary.

By MoneyMorning.com.au

Over the past few days we’ve seen a bunch of references to something called the ‘Great Rotation’.

What does it mean?

The cynic in your editor says it’s just another catchphrase created by the financial drones. These are people who are incapable of +buying or selling unless there’s a fancy phrase to go along with it.

Want to sell stocks? Not until they’ve got a ‘fiscal cliff’ or ‘debt ceiling’.

Want to buy stocks? Not unless they’re in the midst of the ‘Great Rotation’.

So what’s the next catchphrase the financial drones will make up as an excuse to buy or sell stocks?

Who knows? But to be honest, we don’t care. We’ve long stopped caring what the self-important drones think. We’d rather stick to picking good stocks at a fair price.

Trouble is where do you start?

Well, it depends on the kind of stock you’re looking for.

If you’re after a beaten-down blue chip stock you can look at the usual financial metrics: balance sheets, income statement, price-to-earnings ratio, price-to-book value, return on equity, and so on.

You can then compare different stocks to figure out which is the best value.

In fact, even some of the basic online trading platforms include a simple screening tool that helps you filter stocks based on certain criteria.

For instance, you may have a theory that all stocks are worth buying if they have a price-to-earnings (PE) ratio of 7 or lower.

Plug that into the screening tool and hey presto! you’ll have a list of stocks with a PE less than 7.

Easy, right?

Well, it’s easy to get the info. But remember the old saying, ‘Put rubbish in, get rubbish out.’

In other words, if your theory about buying all stocks with a PE below 7 is a bad theory, then the screening tool won’t necessarily give you winning stock picks.

It may give you some winners, but it will probably give you a bunch of losers as well. So how do you pick the good from the bad?

There’s More to Picking Stocks Than Balance Sheets and Ratios

That’s what makes experience, practice and trial-and-error so important. It will help you figure out which ratios are relevant and which aren’t.

In fact, most analysts and stock pickers use several criteria to filter and pick stocks. Even then, it’s not cut and dry. Most analysts will also look at other aspects of a company — what the company does, who its customers are, who its suppliers are, and what’s the outlook for the company’s industry.

That means it takes a lot of time to analyse stocks. But perhaps the cruellest thing of all: after you’ve done all the analysis and separated the wheat from the chaff, you still may not have a stock to invest in…so it’s back to the drawing board.

But at least when you’re backing beaten-down blue-chip stocks you’ve got a place to start. That isn’t always how it is with small-cap growth stocks…

This is why small-cap growth stocks are so much riskier than blue-chip stocks. In many cases it’s not worth looking at the income statement because the company doesn’t make any money.

And the only reason to look at the balance sheet is to see how much cash the company has left. Most small-cap growth stocks eat through cash pretty quickly as they attempt to uncover the game-changing resource discovery or technology that could transform their business.

As for PE ratios, price-to-book ratios or return on equity, forget about it. When a small company is exploring for a new resource, or developing a new technology, those ratios are meaningless.

Of course, not all small-caps are resources explorers or small technology stocks. Some small companies are profitable but stay small because they operate in a niche market.

With those companies it is possible to analyse their financial statements (one of our small-cap value stock picks is up 86.2% including dividends since last June, beating the S&P/ASX 200 which is only up 20.4% over the same timeframe).

Here’s the Real Exciting Stock Story

But back to small-cap growth stocks. We suggest there’s still a lot of potential growth in this market…despite the strong rally since mid-November.

To put things in perspective, there are roughly 2,000 stocks listed on the Australian Securities Exchange (ASX). Yet, there are 1,323 stocks that have gained less than 15% over the past year.

That’s roughly two-thirds of the Australian share market.

So, when we hear some investors say they’ve missed the boat and that everything is too expensive, we don’t buy it.

Sure, there are a lot of expensive stocks. But there are many more stocks that are still cheap. And it’s not just because they’re bad companies with bad ideas (although there are plenty of those), it’s just that right now those stocks haven’t convinced investors they’re worth buying.

So it’s the job of the analyst and stock picker to filter through those 1,323 stocks to figure out which one could be the next big thing…which stock is on the verge of convincing investors it’s worth buying.

As you can guess, the numbers are stacked against the small-cap investor. But it’s also why if you can get on board a stock before it pops, the returns are much greater than if you buy lower risk blue-chip stocks.

All this sums up why we’re still picking stocks and backing potential little Aussie winners…while the mainstream focuses on the irrelevant and meaningless issues like ‘Fiscal Cliffs’, ‘Debt Ceilings’ and ‘Great Rotations’.

Given a choice we’ll take the risk and excitement of innovative small-cap stocks any day of the week compared to the fluff and nonsense that drives the share prices of lumbering blue-chips.

Cheers,
Kris

Join me on Google Plus

From the Port Phillip Publishing Library

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

Daily Reckoning: The Great Rotation Into Stocks

Money Morning: This Share Market Rally Has Angered Some Investors

Pursuit of Happiness: It’s Time to Set Your Retirement Gameplan

Australian Small-Cap Investigator: Why Invest In Small-Cap Stocks? And Why Now?

By MoneyMorning.com.au

The American comedian Will Rogers provided sage advice about investing: ‘Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.’

Changes in the economic environment and a world of low growth make following Rogers’ method more difficult than ever.

Stock spruikers argue that equities are ‘undervalued’. But changes in the economic environment may make quaint measures such as price-earning (PE) ratios misleading. In a world of low growth, the dynamics of corporate earnings, which ultimately underlie stock prices, have become more complex…

Perverse Profits

Profit margins and cash flow improve, perversely, in a period of low growth. Initially, companies cut costs, improving profitability. As revenues are stagnant, companies have no need to invest in expanding capacity or working capital, releasing cash flow.

Reduction in depreciation charges and the ability to use cash flow to reduce debt reduces interest expenses. In the present cycle, sharp decreases in interest rates, though not necessarily interest margins, have also improved profit margins.

These effects are short term. In effect, they misstate earnings. As English Economist John Hicks argued, true income must allow for sustained productive capacity, which is the amount that can be withdrawn or paid out without diminishing the ability to produce the same next year.

Plants must eventually be replaced. Cost cutting, productivity improvements and restructuring cannot be repeated endlessly.

In the long run, increases in profitability require revenue growth. But lower growth translates into lower demand, slowing revenue increases. Lower demand and also over capacity in many industries have reduced corporate pricing power, decreasing profitability.

A striking feature of recent corporate history has been low and poor quality revenue growth. Earnings have increased more than revenues. Where companies or sectors experience revenue growth, the causes are interesting.

Beneficiaries of government spending targeted at increasing demand have benefitted.

Artificially low interest costs have encouraged substitution of technology and mechanised equipment for human resources boosting revenues of technology and industrial equipment manufacturers. Commodity producers’ revenues have benefitted from rises in volumes (driven by emerging market demand) and higher prices.

Banks and financial institutions’ earning have benefitted from central bank activity to create artificially low interest rates and provide near unlimited funding.

Policy measures have provided additional ‘carry’ income, allowing banks to borrow at near zero rates to invest in government bonds or higher yielding assets.

These investors have also profited from capital gains as central banks have intervened aggressively to bring down asset yields. Low rates have also reduced loan losses, allowing weak borrowers to continue to service crippling debt.

In the US, specific actions targeted at the housing market have boosted returns for mortgage lenders. Unsurprisingly, bank earnings and stock prices have performed well.

Some firms have increased revenue by cannibalising competitors and adjacent industries. RIM and Nokia have lost market share to iPhones. Sony’s Walkman and other makers of mobile entertainment devices have lost market share to iPods.

Makers of personal digital assistants – Palm Pilots and Handsprings – were superseded by smart phones. Tablets have increased market share at the expense of desktop and notebook computers.

Picking the winners and losers in this game is difficult.

Cash Ahoy

The build-up of cash on corporate balance sheets is frequently cited as a sign of corporate health.

In the US, since 2008 companies have been net lenders rather than borrowers and now hold around US$1 trillion in cash. Japanese companies hold liquid assets of US$2.8 trillion. European companies to hold large cash balances.

Mark Carney, the newly appointed Bank of England governor, referred to the $300 billion of cash held by companies in his native Canada as ‘dead money’. He urged vainly for firms to ‘put money to work and if they can’t think of what to do with it, they should give it back to their shareholders.’

The high cash balances reflect uncertainty about future financing conditions and the willingness of banks to lend. But it primarily reflects the lack of investment opportunities.

The cash balances are a drag on corporate earnings, given the near zero interest rates in most developed markets. But cash surpluses have influenced stock prices and returns.

Following Mark Carney’s advice, many companies have returned capital, through stock buybacks and higher or special dividends. In late 2012, fear of US tax changes prompted such actions. But investors are now faced with the problem of where to deploy the cash.

Other companies have used surplus cash to purchase competitors, businesses or assets. Given the indifferent results of many mergers and acquisitions (many acquisitions by technology firms and resource companies come to mind), it is unclear that this will benefit anyone other than shareholders of the acquired company and investment bankers.

Tangential Values

Equity valuations increasingly will reflect changes in the market environment.

Changing demographics affect stocks. Investors approaching retirement may switch to more defensive asset and seek steady income, favouring bonds and cash. Low and declining returns over time have also undermined demand for equities. The reduction is evident in outflows from equity funds into other assets.

But a major factor is increasing distrust of the market itself.

Government policies, especially zero interest rate policies, quantitative easing and other forms of financial repression, now exert a significant effect on stocks. Low holding costs have driven stock prices. Dividend paying stocks have benefitted from the attention of investors seeking income.

With limited policy options and central bank desire to boost asset prices to protect financial institutions and increase consumption, further intervention, including direct purchases of stocks, cannot be ruled out. The Bank of Japan has purchased risky assets including corporate bonds and stocks. During the 1997/1998 Asian monetary crisis, the Hong Kong Monetary Authority purchased stocks.

Algorithmic trading now dominates stock markets, making up between 30% and 70% of all activity. While necessary to facilitate execution, computerised trading may increase volatility. Holding periods now average a few seconds. Computer generated market failures, such as the Flash Crash and the problems of Knight Capital, reduce confidence in the integrity of the market.

Average investment periods for traditional investors have fallen from 7 years in 1940, 5 years in 1960s, 2 years in the 1980s to 7 months currently. Short term trading feeds volatility and may distort values.

Responding to shorter investment holding periods, the European Union have proposed a quixotic investor loyalty plan (rather like a mileage scheme offered by airlines!).

Under the plan (which faces significant opposition), loyal shareholders in European companies would benefit from extra voting rights and higher dividends. This would be a significant change to the ‘one-share one-vote’ principle of corporate structures.

Despite the increase in computer driven trading, overall trading volumes have declined by 15-30%. The reduced liquidity affects stock valuations. Revelations of insider trading and expert networks designed to secure preferential access to tips have emerged.

As Robert Khuzami, director of enforcement SEC, put it in his successful prosecution of Galleon, ‘Raj Rajaratnam is not a master of the universe, but rather a master of the Rolodex.’ Institutionalised wrong doing further undermines investment interest, especially from retail investors.

Equity market analyst Laszlo Birinyi may have been right when he observed that, ‘The relationship between the stock market and the economy is tangential, not causal.’ But in the longer term, the disjunction between fundamentals of real earnings or cash flow and stock prices as well as changes in the structure of the market undermines investor interest in and demand for stocks.

Beauty Contest

John Maynard Keynes famously likened the stock market to a beauty contest, where success depended on anticipating the views of the judges rather than an investor’s own perspectives on pulchritude.

Stocks may or may not be undervalued. But fundamental changes in the drivers of stocks and trading in equities now make Keynes views on investing success more important than ever.

Satyajit Das
Contributing Writer, Money Morning

© 2013 Satyajit Das

Satyajit Das is a former banker and author of Extreme Money and Traders Guns & Money

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

EURUSD has formed a cycle top at 1.3711 on 4-hour chart. Range trading between 1.3430 and 1.3711 would likely be seen in a couple of days. Support is at 1.3430, as long as this level holds, the fall from 1.3711 is treated as consolidation of the uptrend from 1.2998, and another rise towards 1.4000 is still possible. On the downside, a breakdown below 1.3430 will suggest that lengthier consolidation of the longer term uptrend from 1.2661 (Nov 13, 2012 low) is underway, then deeper decline to 1.3300 area could be seen.

Forex Signals

On Friday, investors ignored the fact that the U.S. economy was in
“recession” at the end of last year. They said the fall in GDP in the
fourth quarter was a one-off fluke. The Dow went up 149 points.

They weren’t bothered by the failure of the Fed’s “QE to Eternity”
plan either. It’s buying bonds to reduce interest rates. Instead,
they’re going up. The 10-year note hit 2% on Friday.

This is not a good time to be in stocks or bonds, in our opinion.

But let’s move to another subject: revolving zombies.

The defining characteristic of a zombified system is the way it hands
out its rewards. In an honest economy people do their best. They work
hard. They take their chances. Some prevail because they are productive.
Others are just lucky. The chips fall where they may.

But as zombies take over the system, the chips fall where they are
told to fall. Rather than to honest and efficient producers, the rewards
go to those who curry favors.

The Strange Case of Elizabeth Fowler

Elizabeth Fowler knows how it works. She labored at the left hand of
Sen. Max Baucus (D-Mont.), drafting the collection of crimes and
punishments that came to be known as “Obamacare.”

Sen. Baucus admitted he had better things to do than read it. But he
didn’t have to. His chief health policy counsel, the aforementioned Ms.
Fowler, knew what was in it. As a former top lobbyist for Wellpoint,
America’s largest health insurance provider, she had made sure the chips
fell where she wanted them to.

“If you drew an organization chart of major players in the Senate healthcare negotiations,” wrote Politico at the time, “Fowler would be chief operating officer.”

Fowler had already been through the revolving door more than once or
twice. She worked for Baucus before joining Wellpoint… and after. When
she came back to Baucus she replaced Michelle Easton, another Wellpoint
lobbyist, who helped guide the senator on health policy while Ms. Fowler was on the Wellpoint payroll.

After the legislation was passed, the White House turned to the
clever lobbyist to implement it. After all, the sweet spot in the
legislation was the provision requiring people to buy products from
companies such as Wellpoint, whether they wanted to or not.

As America’s new Special Assistant to the President for Healthcare
and Economic Policy at the National Economic Council, she had to make
sure Wellpoint got a good return on its investment.

And then in December 2012: Whoosh… she went back through the
revolving door. Type in “Elizabeth Fowler” and “revolving door” into
Google and you will get the whole story. The “architect of Obamacare,”
say the papers, left the White House to go to the honeypot at Johnson
& Johnson.

What will she do there? Will she test the adult diapers? Will she
take out the trash or write advertising jingles? No, she is up to her
old tricks – in a “senior position” at their “government affairs and
policy group.”

You go girl!

(This is not the first time this sort of special privilege has been
granted in the USA. The ethanol industry got it coming and going. Tax
credits subsidized farmers for growing corn and then federal mandates
required fuel companies to buy it.)

How the Zombie System Works

Wellpoint was not the only winner in the healthcare sector last year. The New York Times reports:

Just two weeks after pleading guilty in
a major federal fraud case, Amgen, the world’s largest
biotechnology firm, scored a largely unnoticed coup on Capitol Hill:
Lawmakers inserted a paragraph into the “fiscal cliff” bill that did
not mention the company by name but strongly favored one of its drugs.

The special favor was buried in Section 632. It involved a kidney
dialysis drug, Sensipar, that was spared from cost-cutting restrictions
for another two years. This was the fruit of efforts by 74 Amgen
lobbyists. It is expected to cost the Medicare system up to $500
million.

That’s how a zombie
system works. Congressional staff members slip favors to private sector
companies. Then the companies return the favors, giving staff members
cushy jobs.

One of the chief Amgen lobbyists, for example, had been an employee
of Sen. Baucus, head of the Senate Finance Committee. Jeff Forbes was
the senator’s chief of staff. Amgen has given the politicians $5 million
since 2007… with $68,000 going to Baucus.

But poor Elekta AB. The Swedish maker of radiation tools got stabbed
in the back by the same last-minute legislation. That’s the way
zombiedom works: The rewards go to people who are best able to pervert
the political process.

Elekta was at a disadvantage. A foreign company, it couldn’t give
money to the politicians. Varian, its competitor, could. Plus, Varian
put 18 lobbyists on the case and managed to get Elekta’s payments cut in
half.

More to come…

Regards,

Bill

http://www.billbonnersdiary.com/

By Juergen Lahnsteiner

As everybody knows volatility is a measure for average price fluctuations. In other words, it is a measure for average daily percentage change in closing prices. Many times experts use it as a risk measure by telling you that high volatility implies high risk. In my opinion this is one of the biggest mistakes in investment theory. Why?

Lets take an example: in year xy some FX quote changed by 50% – up or down – and therefore displayed very high volatility, which means that this pair is now considered very risky to invest in. How can extreme movements with chances for huge wins result in high risk? It’s even more obvious with stocks. Why can a stock that rose by 50% be considered very risky? See the problem? Risk theory treats upward and downward movements in exactly the same way. So if you just look at volatility data, you will not know if a currency pair or stock doubled its quotation or if it went down by 50%.

So if volatility is no good when measuring risk, what is volatility good for and how can risk be measured effectively? In my opinion, risk is never a characteristic of a certain stock or forex quote, it is a characteristic of the model you use to predict price movements. Lets assume an extreme case:

You possess a prediction model or a crystal ball which enables you to forecast price movements with an accuracy of 100%. What are you going to invest your money in? Certainly in the most volatile currency pair or stock you can find since the high daily price movements will help you earn a fortune. How about an accuracy of 60%? Same answer! If you can be sure that 6 out of 10 trades are “right”, no matter if selling or buying, you will end up with more money if you invest in very volatile than in less volatile currency pairs/stocks. As you can see the risk lies in the accuracy of your predictions. How about an accuracy of around 50%? By investing at 50% accuracy level you might win, but you might as well lose. If you invest in highly volatile stock you’ll win/lose more than when investing in low volatility stock. This is basically all volatility is about – the LEVEL of gains/losses – not the FACT, if you win or lose. The FACT is always caused by your prediction quality.

However, who would invest with a 50% model? I would not. You might as well play roulette. The first thing is to find a prediction model with high accuracy, then you pick high volatility currency pairs or stocks which you can forecast at that high accuracy level. To spread risk you invest your money in more than one stock/currency pair, probably 5 to 10. This will help keep off ugly surprises. As shown above, low volatility won’t help you reduce risk. It is going to help reduce losses if you suffer them. With good predictions this won’t happen.

If you intend to follow a buy and hold strategy the problem is a totally different one: you have to find a currency pair (=a country and/or its economy) or a company with good prospects for the future. This doesn’t have anything to do with volatility! It is a matter of fundamental data, industry outlooks, technological development, politics etc. So no matter how you look at it: as a day trader or as a long-term buy-hold investor – volatility NEVER is a measure of risk. I perfectly well know that this is hard to get out of peoples minds but I certainly hope to make some readers think about this problem. If they do, they’ll find out that textbook wisdom on investment theory is definitely wrong in this point.

juergen lahnsteiner

email: [email protected]

twitter.com/jl_ebensee

neuralfx.wordpress.com

By The Sizemore Letter

Though it has been derisively been called “the river of no returns,” Amazon.com (Nasdaq:$AMZN) can call “scoreboard” on its critics.  Amazon is the last man standing of the generation of companies that rose to prominence during the 1990s tech boom.

Sure, plenty of the dot-com darlings are still alive and well and generating more revenue than at any time in their histories.  Microsoft (Nasdaq:$MSFT) and Cisco (Nasdaq:$CSCO) quickly come to mind.  But most have had reputational hiccups in the 13 years that have passed since the Nasdaq’s peak, and Amazon is the only one to see its stock surpass its old 2000 highs.

Note: Apple (Nasdaq:$AAPL) and Google (Nasdaq:$GOOG) don’t count; Apple was an also-ran in the 1990s that reinvented itself in the mid-2000s and Google was not publically traded at the time.   

Thirteen years after dot com went dot bomb, Qualcom(Nasdaq:$QCOM) is close to break even.  But Microsoft, Cisco and Intel (Nasdaq:$INTC) all trade for less than half their old highs and all trade at very modest multiples of earning—9-13 times expected earnings for the coming year.

Yet Amazon is up 300% and trades for a very dot-com-like 72 times expected earnings.  And this for a company with the skimpiest returns of the whole lot.   Mass-market retailing tends to be a low-margin business, but Amazon’s are razor thin even by retailer standards…as in barely existent at all.  This past quarter Amazon earned 22 cents per share…for a stock worth $265 per share at time of writing.  For the full year 2012, Amazon actually lost money.

What gives?

Investors are willing to give Amazon a free pass on low profitability because the company is growing its top-line sales by more than 20% per year and they see it as being the Wal-Mart (NYSE:$WMT) of the web.  And, so the thinking goes, once the company has achieved its scale objectives, it can stop investing so heavily in new infrastructure.  The savings will flow through to the bottom line, and investors will finally get the rewards they’ve been waiting for.

Maybe.  But let’s see how the “Wal-Mart of the web” compares to the original Wal-Mart.

Looking at the numbers, it’s hard to make a compelling case for Amazon.  It’s four times as expensive as Wal-Mart measured by price/sales and nearly six times as expensive based on forward price/earnings.  And again, this is Wal-Mart—the largest and most successful retailer in the world.

 To be fair, Amazon has certain assets that Wal-Mart does not have and likely never will.  Wal-Mart has nothing that can compare with the Kindle, for example.

Sure, Wal-Mart sells e-readers, and until recently the behemoth of Bentonville sold Amazon’s Kindle.  But that’s not the point.  As an inventory item in its own right, the Kindle isn’t worth much.  Amazon is willing to virtually give it because it knows the real goldmine is in selling the e-books.  The Kindle itself is little more than a facilitator, and Wal-Mart has no answer to Amazon’s e-book downloading service—which grew by 70% last year.

In the same light, Wal-Mart likewise has nothing to rival Apple’s iTunes; it discontinued its music downloading service in 2011.

Still, Wal-Mart has gone head-to-head with Apple, Amazon, and Netflix (Nasdaq:$NFLX) with its Vudu high-definition video streaming service, which has one of the largest movie and TV catalogues available.

Wal-Mart may or may not beat Amazon in the video streaming contest.  But if I were an Amazon shareholder, I would have much bigger concerns—such as Wal-Mart’s expanded presence online at walmart.com, Wal-Mart’s enormous logistical infrastructure and its ability to offer free shipping to any of its stores, and—perhaps scariest of all—the move by states to tax internet commerce.

Remember, in high-sales-tax states like California and Texas, online retailers had an enormous advantage over their brick-and-mortar rivals.  Their prices were 8% lower from the get go due to the lack of sales tax levied.  Alas, those days are over.  States have become more stringent in their definitions of what qualifies as having a physical presence on their turf.  Amazon now collects sales taxes in 8 states, and the rest will not be far behind.

None of this takes away from what Amazon has accomplished.  It is a wonderful company and a pioneer in internet commerce.  It’s a disruptor that almost singlehandedly put Borders Books out of business and remade the publishing industry in its own image.  I love the company and admire its founder, Jeff Bezos.

But I hate the stock.

At current prices, it is a terrible investment.  To pay 70 times earnings for a $129 billion company is ludicrous, and investors who buy at these levels are no less likely to get hammered than the investors in other great bubble stocks.

My recommendation?  Buy Wal-Mart.  And if you want to make a pair trade out of it, short Amazon.

Disclosures: Sizemore Capital is long WMT. This article first appeared on InvestorPlace.

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Strong start for equities in 2013. S&P 500 up by five percent in January – same as global equities. What’s driving the market and will it continue?

Senior Strategist Ib Fredslund Madsen with his take on those questions as well as a look at the financial highlights of the coming week.

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London Gold Market Report
from Ben Traynor
BullionVault
Monday 4 February 2013, 07:00 EST

WHOLESALE MARKET gold prices hovered just below $1665 per ounce Monday morning in London, having failed to hold onto gains in earlier Asian trading, as stocks and commodities also ticked lower along with the Euro, which retreated from recent highs following news of a political scandal in Spain.

Silver erased most of Friday’s gains this morning, dropping below $31.60 an ounce.

The gold price in Euros meantime regained some ground this morning as the Euro fell against the Dollar. Last Friday, gold in Euros dropped to its lowest level since May last year as Euro-Dollar touched a 14-month high.

In New York, the so-called speculative net long position of Comex gold futures and options traders fell to its lowest reported level since last August during the week ended Tuesday 29 January, weekly data published Friday by the Commodity Futures Trading Commission show.

The spec net long is calculated at the difference between ‘bullish’ long and ‘bearish’ short contracts held by traders such as hedge funds which are classified as ‘noncommerical’, and is regarded as an indicator of short-term sentiment in the derivatives markets.

“The ‘weak hands’ are further retreating from the gold market, which is a good thing in terms of the long-term price prospects,” says today’s commodities note from Commerzbank.

Spanish prime minister Mariano Rajoy, who travels to Berlin today for talks with German chancellor Angela Merkel, denied allegations in the Spanish press over the weekend that he received illegal payments from a slush fund run by his Popular party (PP).

Support for the PP has fallen six percentage points to 24% since the allegations were made, according to a poll published by Spanish newspaper El Pais, while 77% of those surveyed said they do not approve of Rajoy.

The number of unemployed in Spain meantime rose to 4.98 million last month, official figures published Monday show. Last month brought news that the unemployment rate rose to record levels above 26% towards the end of 2012.

In Italy, prime minister Mario Monti today criticized his predecessor Silvio Berlusconi’s proposal to reimburse taxes paid on primary residences that were levied by Monti.

“Berlusconi wants to buy the votes of Italians with the money that Italians had to turn over to cover up the shortfall left in the public accounts by Berlusconi,” Monti said.

A poll published last week showed Berlusconi had cut the lead of front runner Luigi Bersani to five percentage points ahead of elections in three weeks.

Bersani’s Democratic Party (PD) has faced criticism for allegedly receiving funding from Siena-based Monte dei Paschi (MPS), the world’s oldest bank dating back to 1472, which  is currently being investigated for covering up losses on derivatives trades and overpaying for its 2007 acquisition of Banca AntonVeneta.

MPS lost an estimated €2 billion-plus in 2012, following a €4.6 billion loss in 2011.

In Germany meantime, politicians have expressed skepticism over whether to accede to Cyprus’s request for a bailout from the European Union and International Monetary Fund.

“Without the introduction of effective controls on money-laundering and urgently needed structural reforms, we need not even discuss financial aid,” Rainer Bruederle, a member of the Free Democratic party which shares power with Merkel’s party, said over the weekend.

“Cyprus is based on a business model that damages us all,” added Johannes Kahrs of the opposition Social Democrats.

“Yet it is now supposed to be saved by the EU. The SPD will not support that.”

“There’s general unease…about the fact that Cyprus takes in a good deal of cash from Russians,” explains a note from Standard Bank.

Over in India meantime, traditionally the world’s biggest gold buying nation, Rupee gold prices fell to five-month lows Monday as the Rupee touched its highest level against the Dollar since October.

At the start of the year Indian gold dealers imported increased quantities of gold ahead of a rumored import duty hike, with the authorities duly raising the duty from 4% to 6% last month.

“Not many deals are happening [at the moment],” one dealer at a state-run bullion importing bank told newswire Reuters this morning.

“[The] market has to clear the old stocks, which could finish this week.”

Ben Traynor
BullionVault

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics. Ben can be found on Google+

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Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.