EURUSD remains in downtrend from 1.3415, the bounce from 1.2985 could be treated as consolidation of the downtrend. Another fall could be expected after consolidation, and a breakdown below 1.2985 could signal resumption of the downtrend. Key resistance is now at 1.3100, only break above this level will suggest that the downtrend from 1.3415 had completed at 1.2985 already, then the following upward movement could bring price to 1.3600 zone.
With another financial year behind us it’s worth looking at the performance of a few key asset classes – shares, cash, gold, and property.
However, one point worth noting is that this isn’t an exercise in saying you should put all your money in one asset class rather than another.
And we aren’t saying you should diversify your assets across an equally balanced portfolio.
Rather, we’re saying you should actively manage your investments and not be afraid to re-balance your portfolio at certain points during the year.
Because as the past 12 months have shown, those investors who refused to see that the market had change have missed out on spectacular gains…
First, let’s see how the various assets stack up over the past year:
There is no doubt shares were the best performing asset class over the past 12 months. Remember, we’re not being a ‘Hindsight Harry’ on this. We’ve said since late 2011 that it was time to build up your stock exposure (especially dividend stocks) after we had been bearish for the previous year.
The worst performing asset was gold. What more can we say? Gold is a great investment and you should own some. But it won’t make you rich.
As for property, that figure is of course the gross amount based on numbers from RPData. If you take into account financing and other costs of holding a property, then it has been a negative financial year for the average property investor.
Look, we know spelling this out won’t be popular. Bashing the stock market has become something of a blood sport in recent years. Heck, we’ve even given it a well-deserved smack around the chops.
But as we’ve continued to explain in Money Morning, whatever the knockers say, the stock market still remains hands down the best way to build wealth. Of course, the numbers we’ve just given you are last financial year’s numbers.
Who’s to say the stock market will give investors the best return this financial year?
The following chart shows you how the last financial year’s performance compares with previous years:
You don’t need that chart to tell you it has been a volatile seven years for stocks.
So after a standout year, can you expect this year to provide another big double-digit gain?
Well, our bet is that Australian stocks will hit a new record high in 2015. In order for the market to do that, the Australian market will need to gain 46% from Friday’s end-of-financial-year closing price.
That’s roughly a 21% gain each year.
It’s not impossible, but we won’t kid you…it’s a tough ask considering how volatile the market has been over the past seven years.
And it will be even harder following the market’s recent 10% fall.
Despite that, there is a precedent for the market to make stunning returns when few expect it to. You only have to look at the last nine months for a classic example.
But also look at March 2003 to October 2007. In four-and-a-half years the market gained over 150%. That’s three times the percentage gain we need for the market to take out a new high in 2015.
Of course, that’s longer than the two-year timeframe we’re looking at now. But how about March to October 2009? You may have forgotten about that period because it all happened so quickly.
In the space of just seven months, while most investors thought the entire world economy and financial system would collapse, the Aussie index gained 54%.
We agree that was an extreme time. But that’s exactly our point.
It’s at times when most investors, analysts and commentators have given up on the market that you should look to buy. But what and where?
Right now, from an Australian market perspective, we’ve got our eye on two key segments – companies that can pay a dividend and hopefully grow that dividend; and speculative stocks.
That’s not to say other stocks such as blue-chip growth stocks won’t go up, because there’s a good chance they will if the market pans out as we expect.
But the important factor is to get as much bang for your buck as you can, without unnecessarily putting too much of your money on the line.
Obviously, you’ll have your own attitude to risk. It will be different to ours and to other people’s.
If you’re as bullish on the stock market as we are, you need to shift more of your cash into it.
That doesn’t mean investing all your cash. It’s crucial to have a big cash buffer – even big corporations like Google [NASDAQ: GOOG] and Apple [NASDAQ: AAPL] keep plenty of cash in reserve. (At the end of March, Apple had USD$145 billion in cash, about one-third of its market cap.)
That’s why we like term deposits. It forces you to lock cash away for 3, 6 or 12 months at a time. It means you can’t succumb to temptation and invest more than you should in the stock market.
Even so, to our mind the conditions are ripe for another stock rally. Interest rates, regardless of recent spikes, are still near record lows globally. The Reserve Bank of Australia’s Cash Rate is at a record low and seems set to fall further.
And even if it doesn’t, the recent fall in the Australian dollar should provide a boon to Australian exporters and attract investors.
Finally, the overseas market that appears to influence the Australian market the most – Japan’s Nikkei 225 – has started to rebound after a torrid few weeks. For all the talk of the Japanese market crashing, it’s still up 52% for the year.
The Australian market has underperformed compared to the Japanese market in recent months. That’s due to the poorly performing resource sector. That trend won’t last for long.
In fact, after ignoring resource stocks for most of the past year, we say that resource stocks should be back on your shopping list. We’re looking around at a few beaten-down stocks now.
But as we say, that’s not the only bargain out there right now. Before you add risky resource stocks to your portfolio, you need to make sure you’re on board with the yield rally.
Despite the talk about the yield rally being over, the reality is different. It’s far from over. In fact, the recent stock price slump has created a bunch of opportunities investors would be foolish to ignore. And if we’re right, stock prices and high yields won’t stay this way for long.
Cheers,
Kris+
From the Port Phillip Publishing Library
Special Report: Just What are ‘Turbo Cap’ Stocks?
Daily Reckoning: How the Power of Tweets Saved Tesla Motors
Money Morning: Don’t Get Caught in the Market Crossfire
Pursuit of Happiness: Is Technology the Most Exciting Industry in the World?
Australian Small-Cap Investigator:
How to Make Big Money from Small-Cap Stocks
Everyone likes a good comeback story where large obstacles are overcome on the way to a favourable outcome.
And we’re about to see one in the investment world…
The shale gas boom seemed to be a disaster for the natural gas industry as the price of natural gas plummeted over a five-tear period to reach a multi-year low below $2 per million BTU in April 2012.
But as Money Morning Global Energy Strategist Dr. Kent Moors forecast, natural gas prices have rebounded with a vengeance since then. The price has more doubled (trading at about $3.80 now) since that bottom last spring, becoming this year’s top performing commodity. Nat gas hit a 20-month high of $4.43 per million BTU in April.
That trend of steady to rising prices is likely to continue thanks to increasing demand.
These factors, often pointed out by Moors, include the switchover by utilities from coal-fired power to gas-fired power, the start of exports soon of liquefied natural gas, and increased demand from industries such as the chemical industry.
And the trend is huge news for natural gas stocks, and their investors – especially when you look at what happened nearly 10 years ago…
First, let’s look at what has happened to natural gas stocks this year.
Logic would dictate that the last year or so has been a great time to be invested into natural gas stocks.
In the past few years, many natural gas companies have reduced their costs while keeping production in check in order to stay viable in a tough market environment.
This has put a good number of them in a position of strength to benefit from the higher natural gas prices we’ve seen in 2013.
The companies that are poised to benefit the most are those with the lowest cost of production and that are leveraged to the price of natural gas.
Robert Mark, oil and gas analyst for Canadian firm MacDougall, MacDougall & MacTier, told the Globe & Mail ’Companies that have been producing profits over the past two years [when selling prices have been low] have proven their worth and are attractive investments.‘
But the market is rarely logical. Despite the most sustained upward move in natural gas prices in over 10 years, the shares of most gas companies have yet to embark on a sustained move upward.
But we’ve seen this movie before. . .
As Mark Twain said, ‘History doesn’t repeat itself, but it does rhyme.‘
In this specific case, the ‘rhyme’ goes back to 2001-2002.
At that time, natural gas prices also tanked to below $2 per million BTU. Then over the next several years, prices more than doubled to over $4. Just as it has now, with the difference being the current rebound happened in a shorter time frame.
Yet, as now, the stocks of natural gas companies just sat there.
But eventually these stocks did move higher…and in a big way.
Over the next two years, natural gas companies soared in excess of 200%, a true comeback story!
In effect, sooner or later, the stocks of natural gas firms have to follow prices higher.
That should apply in the current market environment as well.
Tony Daltorio
Contributing Editor, Money Morning
This article first appeared in the US Money Morning on 27 June, 2013
From the Archives…
Why Your Financial Advisor Won’t Like This Investment Advice…
28-06-2013 – Kris Sayce
Is This Your Last Chance to Sell Before the Stock Market Sinks?
27-06-2013 – Murray Dawes
Is This the Ultimate Contrarian Opportunity…Or a Death Wish?
26-06-2013 – Dr Alex Cowie
How Central Bank Zombies Control the Stock Market
25-06-2013 – Dr Alex Cowie
Why The ‘Asia-Zone’ Crisis Makes Australian Stocks a Buy…
24-06-2013 – Kris Sayce
The US dollar advanced versus all the major currencies last week and rose higher against most of them for a second straight week as market traders continued to position themselves for the potential unwinding of the US Federal reserves quantitative easing program. This week has some very big fundamental events to watch for with the highlight being the US Non-Farm Payrolls Employment data on Friday.
There are also interest rate decisions out of Australia, the United Kingdom and the Eurozone to look out for as well as some manufacturing data out of the US and China and other 2nd tier releases. See more currency pair comments and economic event highlights below.
Read more Currency Pair Commentary Here….
The weekly Commitments of Traders (COT) report, released on Friday by the Commodity Futures Trading Commission (CFTC), showed that large futures traders and speculators decreased their total bullish bets of the US dollar last week for a fourth consecutive week.
Non-commercial large futures traders, including hedge funds and large International Monetary Market speculators, trimmed their overall US dollar long positions to a total of $13.28 billion as of Tuesday June 25th. This was a decline from the total long position of $14.55 Billion registered on June 18th, according to position calculations by Reuters that derives this total by the amount of US dollar positions against the combined positions of euro, British pound, Japanese yen, Australian dollar, Canadian dollar and the Swiss franc.
USD net long positions are at their lowest level since February 19th when bullish positions equaled $1.481 billion, according to Reuters data calculations.
See full COT Report & Charts here…
Sunday, June 30
China — leading index
Japan — Tankan manufacturing data
Australia — manufacturing index
Monday, July 1
China — manufacturing PMI
euro zone — consumer price index
United States — ISM manufacturing data
euro zone — purchasing managers index
United Kingdom — purchasing managers index
Tuesday, July 2
Australia — interest rate decision
euro zone — producer price index
United States — factory orders data
Wednesday, July 3
China — non-manufacturing PMI
Australia — retail sales data
Australia — trade balance
United States — ADP employment data
euro zone — retail sales
United States — weekly jobless claims
United States — trade balance
United States — ISM non-manufacturing
Thursday, July 4 – *American Holiday
United Kingdom — BOE interest rate decision
euro zone — ECB interest rate decision
Friday, July 5
Japan — leading index
Switzerland — consumer price index
United States — non-farm payroll report
Canada — employment change report
Canada — Ivey purchasing managers index
| COUNTRY | MSCI | NEW RATE | OLD RATE | 1 YEAR AGO |
| ISRAEL | DM | 1.25% | 1.25% | 2.25% |
| ARMENIA | 8.00% | 8.00% | 8.00% | |
| HUNGARY | EM | 4.25% | 4.50% | 7.00% |
| TAIWAN | EM | 1.88% | 1.88% | 1.88% |
| CZECH REPUBLIC | EM | 0.05% | 0.05% | 0.50% |
| FIJI | 0.50% | 0.50% | 0.50% | |
| COLOMBIA | EM | 3.25% | 3.25% | 5.25% |
| URUGUAY | N/A | 9.25% | 9.25% | |
| ANGOLA | 10.00% | 10.00% | 10.25% | |
| TRINIDAD & TOBAGO | 2.75% | 2.75% | 3.00% |
| COUNTRY | MSCI | DATE | RATE | 1 YEAR AGO |
| ROMANIA | FM | 1-Jul | 5.25% | 5.25% |
| AUSTRALIA | DM | 2-Jul | 2.75% | 3.50% |
| SWEDEN | DM | 3-Jul | 1.00% | 1.50% |
| POLAND | EM | 3-Jul | 2.75% | 4.75% |
| UNITED KINGDOM | DM | 4-Jul | 0.50% | 0.50% |
| EURO AREA | DM | 4-Jul | 0.50% | 1.00% |
Source: Brian Sylvester of The Gold Report (6/28/13)
http://www.theaureport.com/pub/na/15411
Resource equities remain under siege and Jeff Killeen, an analyst with CIBC World Markets in Toronto, preaches the importance of the two Cs, cash and catalysts, to investors in this shaky market. In this interview with The Gold Report, Killeen discusses what fundamentals he looks for and names some companies that have strong balance sheets and potentially market-moving news on the horizon.
The Gold Report: Resource equities have been rejected, beaten up and ignored. Make your case for small- and mid-cap gold stocks.
Jeff Killeen: It’s true that investment dollars have been moving out of the resource sector over the last year and gold exploration companies in particular have seen a drastic decline in market value over the last 12 months.
However, the space cannot be ignored. These commodity sectors are cyclical and putting investment dollars to work strategically in the space when equities are at such low valuations makes sense, but patience is required.
My recommendation is that investors focus on the fundamentals when looking at junior exploration equities. Does the management team have a proven track record? Does the company’s asset or assets have strong grades relative to the proposed extraction method, which can secure healthy margins, even at lower commodity prices? Does the company have balance sheet strength to significantly derisk and advance these projects?
TGR: What gold price are you using in your models?
JK: Our current long-term price is $1,500/ounce ($1,500/oz). The price deck would start at $1,700/oz for 2013, $1,800/oz for 2014, and then falling back to $1,500/oz from 2015 onward.
Most of the companies that I cover are junior exploration companies with production slated to occur in 2016 or later, so they are based on that $1,500/oz price.
TGR: With companies mining lower grades at deeper depths, they are often spending money to stand still. Is it sustainable to mine in the current price range?
JK: It is for some operations. There’s no question that the current gold price, given how much cost inflation has crept into the market in the past five years, will put a strain on many balance sheets and the profitability of some projects. We have seen some companies, in particular here in northern Canada, closing operations explicitly due to squeezed margins.
TGR: Many junior companies are expanding known resources via the drill bit, finding fresh zones of mineralization and publishing positive economic studies, yet their respective share prices continue to underperform. What’s it going to take to move these stocks?
JK: The lack of performance, despite positive news flow, has been prevalent in the last year, but it won’t become the new normal. This is a period where investment dollars have exited the space and the remaining capital is largely focused on stable, producing companies with positive earnings.
In a more bullish market, the potential for gain on investment is typically greater with the junior miners as they can more quickly add value through exploration. That value often translates into stronger share price performance.
If the gold price starts moving upward on a continuing basis, and I believe that will happen within the next year, the performance of junior exploration equities will revert.
TGR: How are institutional investors playing “best of breed” precious metals juniors?
JK: A company has to check off a number of boxes to be considered by institutional investors: good management, good jurisdiction, a strong balance sheet that will allow a company to further derisk its flagship assets without risk of dilution, a strong likelihood for significant resource expansion and achieving meaningful derisk points, such as completing a feasibility study.
TGR: The market is valuing small gold producers at around $75/oz to $150/oz. Companies are ridiculously cheap. Could the rerating of ounces on the balance sheets of larger companies be enough to spur a fresh round of mergers and acquisitions (M&A)?
JK: It’s possible. M&A of junior non-producers has been quite limited despite valuations. A suite of non-producers that we currently track have average valuations of $15–25/oz on an enterprise-value-per-ounce basis. Companies looking for acquisitions are in the driver’s seat to buy growth on the cheap. A rerating of producing companies upward would make such a scenario even more compelling.
However, I suspect that many midtier producers are being very cautious when considering buying growth at this time. The sentiment from institutional clients is that there’s a push for companies to focus on current assets, rein in cost inflation, curb capital spending and show profitability of core projects before looking at M&A.
TGR: Rainy River Resources Ltd. (RR:TSX.V), an exploration play in northwestern Ontario, received a $310 million cash-and-share bid by New Gold Inc. (NGD:TSX; NGD:NYSE.MKT). Did New Gold overpay for Rainy River?
JK: I don’t believe New Gold is overpaying for Rainy River. New Gold has offered about 0.4 times, or 5%, discounted net asset value (NAV) for Rainy River. Its offer is about $77/oz for current reserves and about $53/oz for total resources. That’s gold only. There is also a fairly significant silver resource and reserve at the project.
TGR: How does the Rainy River acquisition fit into New Gold’s growth profile?
JK: It is another asset in a stable location that can help secure that growth profile for New Gold into the future. It’s an advanced-stage project with a complete feasibility study. It’s in a good location in northwestern Ontario. It has easy topography. It has easy access to provincial roadways. It has positive agreements with the local First Nation groups. Strong grades for the proposed open pit over the first 10 years of production could make it profitable, even if commodity prices sag.
TGR: Are other companies on your coverage list likely to become “tuck-in” acquisition targets?
JK: A company like Belo Sun Mining Corp. (BSX:TSX.V), which has a large open-pit resource with strong grades in Brazil, is one possibility. The company has completed a prefeasibility study and is working to complete a fully bankable feasibility study by early 2014. The flagship asset, Volta Grande, has the potential to produce more than 300,000 oz (300 Koz) annually for more than a decade. This type of asset would add materially to many operators’ production profiles.
TGR: What are your thoughts on Belo Sun’s management?
JK: Management has steered the company and the project very well. It has been able to continually raise funds to keep the project moving forward despite choppy markets. There’s been a number of resource updates during the last two years, which continually realized resource growth in total ounces and maintained or improved grades.
TGR: What about some other names under coverage that fit into that tuck-in category?
JK: Pretium Resources Inc. (PVG:TSX; PVG:NYSE) could be a very attractive asset for many producers. The company has just completed a bankable feasibility study on the Brucejack project in northern British Columbia and is underway to completing an underground bulk sample from the Valley of the Kings zone, which constitutes the majority of resources at Brucejack.
Many people are awaiting the results of this bulk sample test to see how well it reconciles to the reserves listed in the feasibility study. If the sample and reserves reconcile well, Brucejack could be high on the list of many producers. It could be one of the highest grade mines in Canada in the future.
Premier Gold Mines Ltd. (PG:TSX) has an attractive portfolio of assets in stable locations and with good infrastructure. The company’s Red Lake Gold joint-venture project with Goldcorp Inc. (G:TSX; GG:NYSE)lies directly between Goldcorp’s Red Lake and Cochenour mines. If resource expansion continues at the project, Goldcorp may be compelled to own 100% of this ground.
Also, Premier’s Hardrock project in northern Ontario is about to complete a preliminary economic assessment (PEA). The project is located near the Trans-Canada Highway. It’s a high-grade resource with expansion potential. It definitely could become attractive to producers as the project gets further derisked.
TGR: Premier recently got its plan of operations for the Cove project in Nevada. What does that mean for the company?
JK: It will allow more exploration freedom and potential for quicker expansion of resources. The plan of operations will give the company the ability to expand its disturbance beyond 5 acres to 100 acres. It will also give it the ability to develop underground in the Helen zone.
TGR: Premier has a lot going on for a junior company. Where should investors focus?
JK: The focus for the company is certainly the Hardrock project in northern Ontario.
TGR: CEO Ewan Downie is the man behind Premier; he built it from nothing. I can’t think that he would graciously accept a takeover bid at this point.
JK: No, but a takeover bid isn’t necessarily what we’d be looking for. It could be as simple as a monetary transaction for the joint venture interest, provided Premier feels the value is appropriate.
For example, Kirkland Lake Gold Inc. (KGI:TSX) offered Queenston Mining Inc. $60 million ($60M) for the remaining 50% of its joint venture. We could see a similar transaction in Red Lake with Premier and Goldcorp.
TGR: One more tuck-in idea before we move on?
JK: Asanko Gold Inc. (AKG:TSX; AKG:NYSE.MKT) has a project in Ghana, with about 5 million ounces of open-pittable material with resource grades at about 1.75 grams per tonne (1.75 g/t). The company has a strong balance sheet with just less than $200M in the bank. Its asset is getting close to a construction decision.
TGR: You often get a firsthand look at exploration plays. What are some recent visits?
JK: I went to see Pilot Gold Inc.’s (PLG:TSX) assets in Turkey this spring. The company has two joint ventures there with Teck Resources Ltd. (TCK:NYSE; TCK.A:TSX): the Halilaga and TV Tower projects.
I find TV Tower very interesting in that it sits in the right location, geological speaking. One can stand on top of TV Tower and see Kirazli, which is owned by Alamos Gold Inc. (AGI:TSX); Kucukdag, the most advanced Pilot target with drilling intersecting high-grade gold; Sarp; Kayali; and Columbaz targets. The prospect for a significant resource to be defined at TV Tower in the near term and then expanded over time is quite likely.
TGR: How do you like Turkey as a gold mining jurisdiction?
JK: I’m very positive. At the most recent PDAC conference in Toronto, an entire day was devoted to Turkey. The Turkish Ambassador and the Minister of Mines gave presentations noting how positive the country is toward mining. It has experienced phenomenal GDP growth over the last decade, in large part due to mining.
TGR: We recently learned that Kinross Gold Corp. (K:TSX; KGC:NYSE) had walked away from one of the world’s biggest undeveloped gold deposits, Fruta del Norte in Ecuador. Does that cast a pall over other large gold deposits?
JK: Location is important to investors in making decisions, especially given what we’ve seen in places like Ecuador. We can’t tie what happened in Ecuador directly to any other country because they’re each so different. Even different regions within a country can have different approaches to permitting and development. It no doubt highlights the importance in understanding the process in a given location that much more.
TGR: What do you think about Colombia?
JK: It certainly is less established than other countries, like Chile, Argentina or Brazil. Colombia has a lot of small-scale artisanal mine operations, but has yet to see a world-class mine developed in-country.
That does present some challenges for developers given the lack of a track record to judge progression of a project. No established supply chains for mining companies exist. Nonetheless, I expect quality resources will continue to move forward along the development path in Colombia.
TGR: Orezone Gold Corporation (ORE:TSX) recently updated Bomboré’s resource. How does that change the economics of its project?
JK: There was an improvement in the economics largely driven by a slight expansion in the amount of oxide ounces. The oxide component’s estimated processing cost is cheaper. The greater amount of expansion in oxides definitely improves the overall economics. It was a meaningful step for the company. It also increased the total amount of Measured and Indicated ounces at the project.
It is suffering from its location in some respects, being in West Africa. There is a heightened sense of investment risk in regions like Burkina Faso, which is where its project is.
TGR: Do you have some parting thoughts for us?
JK: I’ve been harking on the two Cs recently—cash and catalysts. Given the bearish tone of the market, investors need to look at companies that have enough cash on their balance sheets to keep moving projects forward, that they’re not going to go completely into hibernation, and that there are a number of meaningful catalysts, like a resource update or feasibility study, on the near-term horizon.
If you can find a company with a combination of cash and catalysts, that’s the type of companies that will outperform, even in a softer market.
TGR: Thanks, Jeff.
Jeff Killeen has been with the CIBC Mining research team since early 2011. He covers and provides technical assessment of junior exploration and mining companies worldwide. Prior to joining CIBC, Killeen worked as an exploration and mine geologist in several major mining camps, including the Sudbury basin and the Kirkland Lake region. Killeen earned his Bachelor of Science degree from Carleton University and is an executive committee member of the Toronto Geological Discussion Group.
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DISCLOSURE:
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Pretium Resources Inc., Premier Gold Mines Ltd., Goldcorp Inc., Pilot Gold Inc. and Orezone Gold Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Jeff Killeen: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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Today’s Money Weekend takes a break from normal operations so we can bring you an exciting discussion on Port Phillip Publishing’s latest investment service: Revolutionary Tech Investor.
Editors Kris Sayce and Sam Volkering sat down with us for a chat about living through this fascinating period in technology and business. The insights, perils and potential profits for investors are plenty, so please enjoy….
Left to Right: Sam Volkering, Callum Newman, and Kris Sayce
Callum: You guys have just launched your new service Revolutionary Tech Investor. Why now?
Kris: Any time is a great time to invest in revolutionary tech stocks. But that’s even more so now. The world is at the cusp of a new technological revolution that’s set to deliver untold benefits to the human race.
Right now we don’t know what all of those benefits will be. It’s almost impossible to accurately predict the future. However, we can make some educated guesses based on history and on the trends we see happening now.
For instance, one of the more outlandish predictions is for the human race to conquer space. And I don’t just mean the odd trip up and back…or sending probes millions of miles into space.
I’m talking about tourist travel into space. I’m talking about commercial enterprises being established in space, such as asteroid mining companies. And if you think that sounds ridiculous, Sam recently spoke to the managing director of an Aussie firm that plans to mine some of the resource rich giant rocks that zoom past the Earth every year.
But we’re not just looking at the big and brash projects, we’re looking at the small projects too — the medical and technological advances that are taking place at the molecular level. Specifically the work scientists are doing with stem cells and DNA.
When you get down to that level the innovations are mind-boggling, such as the potential for doctors to grow and repair damaged tissue or replace organs without the need for patients to go on lengthy and often futile waiting lists. That’s revolutionary.
Sam: That’s right. We’re really at the doorstep of a huge shift in the way civilisation operates. We’re talking massive leaps in biotechnology, robotics, molecular technology, energy, computing, all happening now and increasing at unbelievable speed over the next few years. That’s why now is the right time to find out what are the best companies to be involved in for this upcoming revolutionary period.
Callum: As far as we know, there’s no service like this in Australia. What should subscribers expect from RTI?
Kris: Most analysts and research firms have a two-dimensional view of Aussie investors. They assume that because the Aussie market is dominated by banking and resource stocks, that’s all Aussie investors are interested in.
Our feedback shows us that’s not true. I’ve lost count of the number of comments I’ve received from readers saying this is just the type of service they’ve been waiting for.
As for what investors can expect, that’s easy. It’s Sam and my role to search the entire investing world for companies that are involved in revolutionary breakthroughs.
That’s an important point. This service won’t recommend big blue-chip companies that have already gained market dominance. So you won’t see a tip for Google, Facebook or IBM — not unless these firms come up with a genuinely revolutionary new product that could transform their business.
Sam: We’re bringing to readers a viewpoint that too many don’t have in the Australian marketplace: a positive outlook. Technology and innovation drive the advancement of civilisation; we’re looking at the here and now, but also for trends and technologies that will shape our future. The work we’re doing is looking for technologies that will make lives better and bring something to the world that’s never been done. That’s why it’s Revolutionary Tech Investor not Same-Same-But-Different Tech Investor.
Kris: Not only that, but contrary to belief, the Aussie market is rich with revolutionary stocks. Sure, the depth isn’t what it is on the US market, but there are many opportunities right here. Our first issue of Revolutionary Tech Investor highlighted this by recommending a stock that is set to be the global market leader in its field.
Callum: Can you elaborate on how you think Australia compares to the USA?
Sam: Sure. Australia sits in an interesting position. We’ve got great schools and universities, some fantastic scientists and researchers. We have some of the preeminent minds in medicine and medical research globally. But Australia has a problem of converting breakthroughs into commercial opportunities. There’s a fair share of great technology companies in Australia, and we’re doing our best to uncover them. But certainly we don’t have the depth of the US in this space.
But hopefully over the coming years that will all shift as (hopefully) leaders of our country realise the full potential for this country to be a global leader in technology. PriceWaterhouseCoopers recently did a study for Google Australia on this. One of their findings was, and I quote, ‘Australia has one of the best regulatory environments for entrepreneurship, and an engaged and strengthening culture of inclusion and openness.
However, we have a considerably higher ‘fear of failure’ rate than many other innovative countries (e.g. US & Canada) which is constraining the growth of our tech start-up sector.’
However the report also found that the technology, entrepreneurship and innovation could contribute over 500,000 jobs and over 4% of GDP to the economy over the coming years if enough time and resource goes into developing our brilliant minds and technological capabilities.
Kris: Let’s hope so. But right now Sam and I have identified a number of tech and biotech stocks on the Aussie market that are worth running our slide rule over. We’ve already recommended what we believe is the best Aussie biotech company, and we’re now researching and analysing others for upcoming issues of Revolutionary Tech Investor.
But also remember that this is an investment service without borders. Today it’s much easier to invest in international markets than it was even just five years ago. While most of our focus will be on the Aussie market, if we see a revolutionary opportunity on a foreign market we’ll look there too.
If investors want to make the most out of their returns they’ve got to look at expanding their exposure to non-Aussie markets. That means looking at overseas technology stocks and other sectors. It’s also a great way to protect your wealth against a falling Aussie dollar — as the Aussie dollar falls the value of your foreign assets should rise (all else being equal).
Callum: Your first report had some fascinating research. Can we expect this in every RTI issue?
Kris: Of course. The name of the service sets a high benchmark. [Laughs] Whenever we’re researching a stock it reminds us that we need to look for revolutionary tech stories.
It’s a great reminder to eschew mundane and everyday tech stories so that we can focus on the truly revolutionary stories.
During our weekly meetings Sam and I will discuss a number of opportunities. Almost all of them are great companies, but at the end of each discussion we ask a simple question of each stock — is it revolutionary? This usually results in us filtering out at least half of the stocks we’ve discussed.
It’s not that the companies are bad, it’s just that they don’t meet the criteria. And if a stock doesn’t meet the criteria of being revolutionary then it’s not likely investors will achieve the kind of big returns they’re looking for.
Sam: The most important thing is to understand the technology, its real world application and the trends of the next 10 years. So we’re drilling into the technology, the science behind the technology, the people behind the science to get a real understanding for what’s going on, what it means for the world and where it’s heading.
Callum: OK. One point. ‘Technology’ is a pretty broad term. What trends are you focusing on?
Kris: That’s a great question. You can split this into two subgroups: computerised technology and biological technology. The first is obviously has to do with bits and bytes, the type of technological advances that rely on computing innovations.
The other — biological technology — is to do with the human aspect. This includes biotechnology firms…companies that doing things to help improve your health such as extending your life or helping to repair body parts and tissues biologically rather than with prosthetics or transplants.
Sam: Yeah, one of the biggest trends we’re seeing is the nano-isation of things. By that I mean everything is going Nano sized, less than the width of a human hair. Whether it’s computing, medicine or robotics, things are more complex on a smaller level than ever before.
Kris: As Sam says, the nano-isation of technology is a key feature of our early research. I highlight some of these in the Sixth Revolution report. To take one part of that report, I talk about mind over matter and the ability in the near future for scientists to cure diseases before they happen. And I don’t mean through vaccinations which involve giving the patient the disease to improve immunity, I’m talking about scientists ‘hacking in’ to the genetic make-up of your body and flipping a switch to make sure you never get a particular — or any — disease.
Or there’s the potential for scientists to grow replacement body parts or organs in a laboratory and then transfer them to the patient. Unlike normal transplants it doesn’t need a donor patient to die, or in the case of kidney transplants leaving the donor vulnerable with just one kidney.
In fact the way science is going medical donors as you know them today will cease to exist. In the future donors will simply donate a key ‘nutrient’ from their body without leaving them in a weakened or adverse state. This is set to be a major revolutionary breakthrough for the healthcare industry and for the health of everyone.
Sam: Kris and I agree that we’re seeing everything being connected, too. You might hear us refer to it as the ‘Integrated World’. It means literally everything you come into contact with on a daily basis will be linked and be able to ‘talk’ with everything else. It’s an interconnected world like we’ve never seen before.
Callum: And that flows onto a world of unprecedented data right?
Sam: That’s right. There’s so much data being created, collected and communicated that it all needs interpretation to make sense of it all. So what you see is that one trend affects another which affects another. It’s a shift in how society interacts and operates with each other and their surroundings.
The other thing that’s going to turn our world on its head in the coming future is Space. I have no doubt as Space is commercialised entire new industries will be created.
There will be an abundance of new jobs and opportunities as we start to treat space as a stepping stone out into our solar system and the further galaxies. I was just last week talking to the Director of Mining and Processing of an Asteroid Mining company. And from what we talked about I’ve never been more excited about the potential the commercialisation of Space holds for the world.
Callum: The big picture stuff is awesome but great technology doesn’t mean a great company. What are the key things you’ll be looking for?
Kris: Sam wrote a great article about this recently so I’ll leave it up to him to explain it. But in short, just because a company has a great technology it doesn’t mean it will be successful. For example, Apple didn’t invent the smart phone. Nokia has designed and built a fully functional smart phone in the late 1990s. But it never went anywhere because they didn’t have the vision to market it at that time.
Also, it was just the wrong time. The internet was still in its infancy and mobile phones were just that, a phone that was mobile. The idea that a mobile phone would someday become a portable entertainment device was almost unthinkable back then.
Sam: You’re right Kris, it is a good question. The crucial need for a great tech company is a game changing technology and the ability to sell it to a big enough market.
We’re looking at companies that have great technology, an unmet market and the ability to tap that market. Importantly, the people that drive the company are almost more crucial to making a great company than a great technology. Think Gates, Jobs, Page & Brin, Musk, Branson. These are visionaries that inspire and create great things.
Callum: Yeah, and tech companies can sell to a global market. What are the potential returns from this sector?
Kris: That’s another great question Callum. The returns for revolutionary technology stocks can vary. Take Apple as an example. Today it’s not a revolutionary company, but ten years ago it was. If you had bought Apple shares in 2003 and held them until today you would have clocked up a 4,093% gain.
That’s a pretty good return by anyone’s standards. [Laughs] Of course, I can’t guarantee every stock we recommend will bag a big return like that. And in reality in some instances we may look for more modest gains such as 100%, 200% or 500%.
The expected returns really depend on the company and its ability to engage the market at the right time. If a company is too early or too late in meeting consumer demand it can mean the stock price missing out on its full potential. But if the company gets the timing dead right then triple- or even quadruple-digit percentage gains are possible.
Sam: That’s right. There are some companies that have seen returns over the years in excess of 10,000%. I mean go back to March 1986 to now, look at Adobe over 19,800%. Apple of course, over 12,900% in the same time frame, Microsoft over 33,300%. These are companies that in just 27 years have made ridiculous returns, but they’re all real.
Callum: Of course, but we also had the tech bubble. What are the major risks to investing in tech stocks?
Sam: Waiting is one. Take those 3 stocks above. If you’d have waited until January 1995 to invest you’d now be seeing returns of 1,072% [ADBE], 4,028% [AAPL] and 789% [MSFT]. Now that’s nothing to shy away from, but you get the point.
Kris: There’s no secret to this. All stock investments are risky so tech stocks are no different in that respect. Just as a high street retailer can fail by not understanding its market, a tech stock can fail by not understanding its market.
The difference is that investors tend to have higher expectations for tech stocks than they do for other companies. You usually see this reflected in a higher price to earnings ratio. Investors always price technology stocks for growth, so if the company doesn’t meet those expectations the stock price can take a big drubbing.
By contrast, investors tend to have lower growth expectations for retail stocks so you tend to see lower PE ratios and share prices that don’t climb as high.
But really it comes back to what I said before. The big risk for tech stocks is that the company doesn’t understand its market or gets the timing wrong. Competition can also hurt an unprepared company. In saying that, competition is also a positive as it confirms to a company that it’s on the right track.
Sam: I’m sure Kris would agree that the other major mistake people make is not properly understanding the technology and its real world application. It comes back to maybe having a great technology but not having anyone to sell it to. Likewise you might think a company has great technology but it’s really just mutton dressed as lamb. You need to dig in and understand the technology, the science and it potential to change the world or at least be sold to lots of people.
Callum: You touched on it earlier, but what kind of timeframe do tech investors need to factor in for RTI’s strategy?
Kris: That’s one of the beauties of investing in revolutionary technologies. You can never know for certain when the big revolutionary changes will happen. In some cases we’re looking at a 6–12 month timeframe, in other cases it’s a long-term trend that may not play out for 5–10 years.
I think of the Industrial Revolution as an example. Most historians pinpoint the start of the Industrial Revolution around 1750. For the capitalists who invested in the new iron, milling and manufacturing companies in the immediate years leading up to 1750 they could have made a lot of money.
But think about the capitalists who had visions about an Industrial Revolution in the 1710s or 1720s. They had a lot longer to wait in order to get a return on their investment.
So where are we today? Are we in ‘1710’ or ‘1749’? Based on the research we’re doing and the companies and ideas we’re digging up, I have no hesitation saying we’re currently living through ‘1749’ all over again.
Sam: Remember, revolutions don’t happen overnight. They happen progressively and sneak up on you until one day you realise it’s just a natural part of life. That’s kind of how Google has found their way to the pinnacle of the internet. Most people struggle to remember what the internet was like before Google was around.
Callum: Yeah. [Laughs] Speaking of Google, will RTI be looking at companies with existing operations and cashflow or more speculative plays? Or both?
Sam: Both. Our main focus is on the technology and the potential it has. It’s a similar mind set to how companies are built in Silicon Valley. If you’ve got a compelling idea/technology and it’s genuinely good enough then it’s easy to build a business around. The hard part is the right technology and the idea. If it’s good enough it will sell itself. And you can look at companies like Atlassian and Palantir that perfectly illustrate that great technology sells itself.
Kris: It sure does. We’re not just looking at brand new start-up companies. We’re also looking at companies that may be established but which are only now tapping into a new trend.
A perfect example is one of our US stock tips. This is a 100+ year-old company (hardly a dot-com start-up) that is developing leading-edge revolutionary technology.
It’s one of the few examples of an established market leading company that has positioned itself to take advantage of a new technological boom. Most established companies in other industries are more interested in protecting their existing market share rather than looking to establish an entirely new market. Not this company.
Callum: Are tech stocks volatile like resource shares can be?
Kris: Well, there are some similarities. A junior resource company typically has all its eggs in one basket. It’s investing in uncovering a resource that could make the company and its investors millions or billions of dollars combined. But if the resource company doesn’t uncover the resource they’re looking for it can have a bad impact on the share price. Resource stocks tend to rise and fall on any given day based on investor confidence of whether the company can find the resource.
As for tech stocks, they tend to have all their eggs in one basket too. They’re investing in creating a product or service that could make the company and its investors millions or billions of dollars combined. But if the tech company gets the consumer mood or demand wrong it can have a bad impact on the share price. Like resource stocks, tech stocks can rise and fall on any given day based on investor confidence. So yes, they are similar. Resource stocks are hostage to commodity prices while tech stocks are hostage to consumer demand. Both can be fickle at times!
Sam: Biotech stocks, absolutely. Like resource stocks they often ‘bet the house’ on one particular technology/cure/treatment. If it gets knocked down by the FDA or poor clinical trials are released, then you can see a company go from hero to zero overnight. Something like software and computing is a bit different.
By the time it gets to market it’s a proven technology, so then it’s about securing contracts and sales. That tends to mean not as high volatility but still typical risks of any listed stock. The thing is there isn’t a regulatory body that will say ‘no you’re software is crap’, and stop it from being sold. It tends more to be industry related performance, not regulatory related.
Callum: Right, I see. You’ve said that RTI will hunt all over the globe for opportunities. Does that mean buying stocks listed overseas?
Kris: Some of the stock tips will be overseas companies, but I expect most of them to be Aussie stocks. However, it’s important that investors have exposure to non-Aussie assets. Buying foreign shares is one of the easiest ways to do it…certainly easier than buying property overseas.
There are two ways to get exposure to foreign stocks. The first is to open a US brokerage account. Commsec, ETrade and Westpac Online Broking all offer this service at reasonable rates.
Sam: The downside of the Australian market is it’s just a speck in the ocean. There’s an abundance of Australian stocks, but we all know the Aussie market makes up about 2% of global markets. There’s so much more happening outside of Australia we couldn’t just look domestically all the time or we’d miss out on pioneering technologies elsewhere. Again, that’s not to say there aren’t opportunities in Australia, it’s just there aren’t as many when you look at the US, London or Hong Kong. Again our search is for Revolutionary Technology. And that means looking offshore sometimes.
Kris: I’ll add another option is to invest using contracts for difference (CFDs). Not every stock we tip will be available as a CFD — two of the four current stock tips can be traded as a CFD. And CFDs have their own set of risks that you don’t have as a share investor. If you decide to use CFDs just make sure you check out the risks. Reputable firms like IG and CMC Markets provide prospective clients with thorough information guides.
Callum: There’s one thing investors might like to know. Are traditional financial ratios any use with technology stocks?
Kris: Yes. Anything that lets you compare one stock with another is useful. However (and this may surprise you), the financial condition of a company is the last thing we look at when analysing revolutionary technology companies.
When you’re looking at big trends that could happen over the next 5, 10 or 15 years, looking at the current balance sheet or income statement is almost irrelevant. In fact, it can be a hindrance. Knowing that a company has falling revenue, debt or that it quickly burns cash can cloud our vision of the big picture.
Callum: OK.
Kris: I’m not saying we don’t look at these things, it’s just about prioritising things. If we look at the financials first, there’s a danger we could disregard the company without having looked at it in detail.
By looking at the technology and the opportunity first it reduces our risk of discarding a potentially revolutionary company due to current (and perhaps irrelevant) financials. Once companies make the first few cuts and we’re left with a shortlist of about five stocks, then we’ll consider the financials.
Sam: Take Tesla motors for instance. Their market cap is a tick over $12 billion dollars and they’ve only just turned a profit last quarter. Their P/E ratio is somewhere just north of 800 times.
Now that makes no sense, does it? You’d be terrified of a P/E at that level. But they’ve just paid back a US government ‘green’ loan, they’ve turned a profit, sales are picking up, they’re innovating like mad-men and it’s estimated their revenues will grow to over $3 billion by 2015. The technology they have is changing the entire auto industry so the share price is a reflection of that, not necessarily their current financial performance.
Callum: Economist Joseph Schumpeter coined the phrase ‘creative destruction’ to describe how capitalism drives change. RTI will obviously focus on the companies creating wealth but will it suggest companies likely to be hit negatively by developments in the tech space, like newspapers for example?
Kris: If you’re asking if we’ll recommend short-selling stocks then I would say no. Short selling from a fundamental angle involves just as much effort as recommending stocks to buy. And with so many revolutionary stocks on the market, I’d rather stick to analysing the positive and potentially ground-breaking technologies that could make investors a lot of money.
Besides, when you short sell your maximum possible gain is to double your money if the stock goes to zero. More likely you’ll only make between 20-60% as most short sellers get out of a trade long before the firm goes bust. So when you compare the potential returns of short selling dinosaur stocks with buying revolutionary stocks, it’s a no-brainer.
Also, picking a dying industry and betting against it isn’t as easy as it sounds. Punters who short-sold the New York Times Company at almost any point over the last two years are sitting on losses today. We may look at short selling in the future, but at this point the numbers just don’t stack up.
Callum: Your thoughts Sam?
Sam: We’ll highlight the companies we think are opportunities and great investment options. That means we’ll be looking at competitors and discounting them. We’re looking at the bigger picture when it comes to the technology and the industry they operate in because with revolutionary tech comes a change and attitude in how industry operates.
We want game changers not run-of-the-mill companies. For instance, to touch on Tesla again, if we think that’s a winner, then we’re talking about a potential future of cars not needing petrol…ever. That has a flow on effect for oil companies and combustion engine manufacturers doesn’t it? Likewise, green energy and advances in things like solar, wind and geothermal power mean bad long term news for oil companies.
I’m not saying oil companies will cease to exist, but in the future it will be a different world to what we’re all used to. That’s what we mean when we say we’re on the doorstep of a new era, and new age. Things will be vastly different to what you see now, and that in itself will bring opportunities like never seen before.
Callum: So Kris, where can people find out more about Revolutionary Tech Investor?
Kris: Investors should check out the Sixth Revolution report. I’m sure you’ll provide a link to this report when you print a copy of this transcript. In that report investors can find out about what I believe is the beginning of the biggest wealth-creating opportunity in human history. It also includes the four stocks that are perfectly placed to take advantage of this new monster trend.
Callum: Sure, I’ll make sure we link to that report. Until then, this has been great. Thanks for your time guys.
[Ed note: To get your hands on Kris’ Sixth Revolution special report click here. You’ll read why the world is on the cusp of the biggest wealth-creating opportunity in human history and how it could transform your life, your health, your wealth and your future… ]
Callum Newman+
Editor, Money Weekend
From the Archives…
The 12 Most Important Rules Every Investor Must Know
21-06-2013 – Vern Gowdie
The US Economy Butterfly Effect
20-06-2013 – Murray Dawes
Beware The Federal Reserve’s Deadly Game of Poker
19-06-2013 – Dr Alex Cowie
Why Thursday Could Be a Key Day for Silver…
18-06-2013 – Dr Alex Cowie
The Single Biggest Mistake a Technology Investor Can Make
17-06-2013 – Sam Volkering
By Profit Confidential
While the mainstream economists were quick to believe that the U.S. economy is growing as the key stock indices suggest, I stood by my opinion that it isn’t.
After the first estimates of gross domestic product (GDP) for the U.S. economy came out, a wave of optimism struck and stock markets rallied. It seemed as if everything was headed in the right direction.
Sadly, they were wrong.
In its third and final revision of GDP, the Bureau of Economic Analysis (BEA) reported that the U.S. economy grew at just 1.8% in the first quarter of 2013 from the fourth quarter of 2012—that is 25% lower than its previous (second) estimates, when the BEA said the U.S. economy grew 2.4%, and 28% lower from its first estimate of 2.5%. (Source: Bureau of Economic Analysis, June 26, 2013.)
The primary reasons behind the decline in GDP growth are that domestic consumer spending and exports from the U.S. declined.
Going forward, I see continued dismal consumer spending in the U.S. economy. There’s no rocket science behind my reasoning, just one simple economic concept. Economics 101: when interest rates increase, consumer spending declines, because it costs the consumer more to borrow, so they step back from buying.
Remember: consumer spending is the backbone of any growth in the U.S. economy. If it decreases, our economic growth becomes questionable.
What we have seen in the past few weeks are skyrocketing yields on U.S. bonds—suggesting long-term interest rates are rising. The effects of this will eventually trickle down to places where consumers in the U.S. economy borrow to buy. One example of this type of place is the automobile sector.
Consider this: car and light truck sales are on path to increase beyond 15 million units this year in the U.S. economy—in 2009, they stood at 10.4 million. (Source: Wall Street Journal, June 26, 2013.) Will consumer spending on cars be the same if interest rates on car loans start to increase? I doubt it.
And there’s another threat to consumer spending—unemployment. In May, there were 1,301 mass layoffs in the U.S. economy, involving 127,821 workers, an increase of 8.5% over April. (Source: Bureau of Labor Statistics, June 21, 2013.) When a person is unemployed, their spending is down and large credit purchases like cars are unlikely.
If consumer spending in the U.S. economy continues to struggle, it will start to show up in the corporate earnings of companies on key stock indices that are currently able to buy back their own shares and cut expenses to make their numbers appear better. Looking at the prospects of anemic consumer spending in the U.S., I remain skeptical. The optimism I see now is based on nothing but hope. Once the hangover from easy money goes away, I wouldn’t be surprised to see U.S. GDP numbers turn negative. Yes, that means back to recession.
The indicators of global economy are yelling economic slowdown ahead, but they are being ignored.
Consider the chart below of the S&P GSCI Industrial Metals Index:
Chart courtesy of www.StockCharts.com
This index tracks the price of industrial metals like copper, zinc, aluminum, nickel, and lead. The S&P GSCI Industrial Metals Index continuously declining suggests these metals aren’t being used as much—factories are not operating at their full potential in the global economy.
The reality is that the demand in the global economy is slowing down. According to Deutsche Bank and Macquarie Group, between 2013 and 2015, copper supplies are expected to exceed the demand by an average of about 500,000 metric tons a year. (Source: Wall Street Journal, June 25, 2013.)
The economic slowdown in the eurozone is still taking a toll on the global economy. Unfortunately, I think there’s more to come as the bigger nations in the common currency region—Germany and France—are showing signs of stress.
China, the powerhouse of the global economy, is witnessing an economic slowdown like never before. In 2012, the country performed poorly, and this year, it’s expected to do the same. China’s exports are hurting, manufacturing is struggling, and the amount of credit is becoming troublesome.
As I have been harping on about in these pages for some time now, the implications the economic slowdown in the global economy could have on the U.S. economy are very vast. We are not an island nation, immune to the troubles in the global economy. We trade with other nations.
Unfortunately, as the demand declines in the global economy, U.S. companies will suffer. They will be selling less. As a matter of fact; the first-quarter 2013 revised gross domestic product (GDP) reported by the Bureau of Economic Analysis (BEA) showed that exports from the U.S. economy actually declined. In the first quarter, real exports—adjusted for price changes—decreased 1.1%. In the fourth quarter of 2012, exports declined 2.8%. (Source: Bureau of Economic Analysis, June 26, 2013.)
As the economic slowdown continues to take a stronger grip on the global economy, I wouldn’t be surprised to see U.S. exports decline even further. Looking at the economic conditions worldwide, I don’t hold a view that suggests there’s prosperity ahead anytime soon—we have a long way to go. My advice: don’t believe the key stock indices; they are far beyond reality, and they’re doing a masterful job at luring in even more investors.
Article by profitconfidential.com
By Profit Confidential
The indicators of global economy are yelling economic slowdown ahead, but they are being ignored.
Consider the chart below of the S&P GSCI Industrial Metals Index:
Chart courtesy of www.StockCharts.com
This index tracks the price of industrial metals like copper, zinc, aluminum, nickel, and lead. The S&P GSCI Industrial Metals Index continuously declining suggests these metals aren’t being used as much—factories are not operating at their full potential in the global economy.
The reality is that the demand in the global economy is slowing down. According to Deutsche Bank and Macquarie Group, between 2013 and 2015, copper supplies are expected to exceed the demand by an average of about 500,000 metric tons a year. (Source: Wall Street Journal, June 25, 2013.)
The economic slowdown in the eurozone is still taking a toll on the global economy. Unfortunately, I think there’s more to come as the bigger nations in the common currency region—Germany and France—are showing signs of stress.
China, the powerhouse of the global economy, is witnessing an economic slowdown like never before. In 2012, the country performed poorly, and this year, it’s expected to do the same. China’s exports are hurting, manufacturing is struggling, and the amount of credit is becoming troublesome.
As I have been harping on about in these pages for some time now, the implications the economic slowdown in the global economy could have on the U.S. economy are very vast. We are not an island nation, immune to the troubles in the global economy. We trade with other nations.
Unfortunately, as the demand declines in the global economy, U.S. companies will suffer. They will be selling less. As a matter of fact; the first-quarter 2013 revised gross domestic product (GDP) reported by the Bureau of Economic Analysis (BEA) showed that exports from the U.S. economy actually declined. In the first quarter, real exports—adjusted for price changes—decreased 1.1%. In the fourth quarter of 2012, exports declined 2.8%. (Source: Bureau of Economic Analysis, June 26, 2013.)
As the economic slowdown continues to take a stronger grip on the global economy, I wouldn’t be surprised to see U.S. exports decline even further. Looking at the economic conditions worldwide, I don’t hold a view that suggests there’s prosperity ahead anytime soon—we have a long way to go. My advice: don’t believe the key stock indices; they are far beyond reality, and they’re doing a masterful job at luring in even more investors.
Article by profitconfidential.com
By Profit Confidential
The seesaw action in both the bond and stock markets is emblematic of this overly monetized world.
With all the cash sloshing around, and the huge cash balances swelling at big U.S. corporations, the solution to economic mediocrity is clear: get corporations to spend on new business operations.
But so far, this has proven to be very difficult. It’s just so much easier for corporations to buy back more shares and increase dividends. Investors win near-term, but longer-term, the economy loses.
And this is already noticeable in this quarter’s flat earnings reports. The numbers have been trickling in, but cash and cash equivalents are still going up. Dividends are also going up on flat numbers to keep shareholders happy.
Arguably, many large U.S. corporations are in excellent financial shape. Balance sheets have never been better for all kinds of companies.
Even General Mills, Inc. (GIS), which just reported earnings results that basically met expectations, has seen huge cash gains. The company’s cash and cash equivalents position jumped to $741.4 million, way up from $471.2 million comparatively. That’s a surprising jump for such a mature, predictable business.
And the company said that it plans to reduce its average net diluted shares outstanding this fiscal year by two percent.
The unwillingness of corporations to make new investments is holding back U.S. gross domestic product (GDP) growth.
According to Forbes, 2012 saw U.S. non-financial companies grow their cash balances by an additional $130 billion, bringing total corporate cash positions to a record $1.45 trillion.
Of this cash, approximately 58% is being kept overseas.
Some of the biggest cash hoarders are Apple Inc. (AAPL), Microsoft Corporation (MSFT), Google Inc. (GOOG), Pfizer Inc. (PFE), and Cisco Systems, Inc. (CSCO).
The technology sector is obviously the leading hoarder, followed by the healthcare/pharma sector, then consumer products companies. Not surprisingly, there have been a lot of increased quarterly dividends from companies in these sectors.
I’m a believer in raising dividends and dividend reinvestment for investment success. Rising cash balances, therefore, increase the probability of increased dividends this earnings season. (See “Equity Market Super Stock Adding Up to Solid Returns.”)
But the financial wealth is, in a sense, a Wall Street success, not Main Street. The two can’t diverge perpetually.
It’s been a good three years for dividends as corporations have returned increasing amounts of excess cash. In order for corporations to be enticed to invest and repatriate cash from abroad, a major overhaul of U.S. tax policy will be required—and that is a very tall order.
So practically, it’s likely that the status quo will continue to prevail. Mediocre earnings results should continue to be peppered with increasing dividends and more share buybacks.
Even though capital markets are bouncing all over the place, with this fundamental backdrop from corporations, blue chips that pay dividends continue to offer the best risk-adjusted returns.
Article by profitconfidential.com
