Month: June 2013

By Profit Confidential

The Bureau of Labor Statistics reported this morning that the U.S. unemployment rate is now 7.6% percent, with 175,000 new jobs created in May. At the same time, the Bureau revised its April numbers down, saying 149,000 jobs were created in April, and not the initial 165,000 it reported.

 The unemployment situation in the U.S. in May was essentially the same as in April. (I wonder how the Federal Reserve looks at this. Does it say, “Wow, imagine what would have happened to the jobs market in May if you didn’t create $85.0 billion in new money during the month”?)

 My readers know I don’t care much for the “official” unemployment numbers we get from the government statistics office. I believe the official rate doesn’t show the real picture, because it does not include people who have given up looking for work in the jobs market and people who want full-time jobs but can only find part-time jobs.

 When we take into consideration these two important figures that the official numbers leave out, the underemployment rate, as it is referred to, was 13.8% in May—it’s been hovering around 14% for years now.

 A startling 7.9 million Americans are working part-time, because they can’t find full-time work in today’s jobs market.

 In total, there are still some 12 million people in the U.S. jobs market looking for work. What’s most troubling is that 37.3% of them have been unemployed for more than six months! The longer they stay out of the jobs market, the more difficulties these people will face in finding jobs as their skills become obsolete.

 Looking closer at May’s jobs market report (which I feel was an all-round terrible report), new employment in industries like mining and logging, construction, manufacturing, wholesale trade, transportation and warehousing, and financial activities witnessed next to no change in May.

 Yes, the growth in the jobs market is in low-paying retail and service positions. We have college graduates working jobs that pay minimum wage.

 Dear reader, there is something definitely wrong with this economic recovery. The government has increased its national debt by $17.0 trillion, and the Federal Reserve’s balance sheet has grown to $3.0 trillion…and we still can’t get create jobs.

 This so-called economic recovery smells funny to me. Maybe the recovery doesn’t even exist. Take out the sucker’s rally in the stock market, and there really isn’t much left to the economy.

Michael’s Personal Notes:

How can consumer spending in the U.S. economy rise under these circumstances…

In the first quarter of 2013, hourly compensation of Americans employed in non-farm businesses fell 3.8%. This was the biggest drop since the Bureau of Labor Statistic started to measure this statistic in 1947. (Source: Bureau of Labor Statistics, June 5, 2013.)

Consumer spending is not rising as one would expect in a real economic recovery. In fact, real personal consumption expenditures (excluding food and energy) adjusted for price changes rose less than one percent in the first four months of 2013! (Source: Federal Reserve Bank of St. Louis web site, last accessed June 6, 2013.)

And inventories of businesses in the U.S. economy also paint a grim picture of consumer spending. In March, manufacturing and trade inventories stood at $1.64 trillion, up five percent from March 2012. (Source: Ibid.) In an improving economy, like the one that the majority of media outlets and politicians tell us we are in, business inventories are supposed to decline—not rise!

No, businesses building up inventories are not a good sign.

But in spite of the pressures on consumer spending, the stock prices of companies in the consumer “discretionary” sector—that’s businesses that sell nonessential goods—continue to rise.

Take a look at the chart below of the Consumer Discretionary Select Sector SPDR (NYSEArca/XLY) exchange-traded fund (ETF) to get an idea of what’s happened to the stock prices of companies that sell discretionary nonessential items to consumers.

Chart courtesy of www.StockCharts.com

 Let’s call a spade a spade: the above chart is not an indication that consumer spending is rising. It’s a chart that simply shows that the stock prices of companies that sell consumers nonessential items are rising because investors are bidding up these stocks.

Don’t let the stock market falsely tell you consumer spending in the U.S. economy is improving and that businesses are doing great, because that’s simply not the case! The reality is that the opposite is happening.

Looking at the health of the U.S. economy, it is very, very weak. This is the weakest economic recovery following a recession I have ever lived through—I believe many Americans would agree with me.

Spending by U.S. consumers makes up more than two-thirds of the U.S. gross domestic product (GDP). If consumer spending isn’t increasing, we can’t have a real economic recovery; it’s that simple, regardless of what rising stock prices may allude to.

What He Said:

“For the economy the message from retail stocks is quite clear: Consumer spending, which accounts for roughly 70% of U.S. GDP, is in jeopardy. After having spent like ‘drunkards’ during the real estate boom years, consumer spending is taking the same trend as housing prices, slowing down faster than most analysts and economists had predicted. As news of the recession continues to make headlines in the popular media, the psychological spending mood of consumers will continue to deteriorate, lowering earnings at most high-end retailers and bringing their stock prices down even further.” Michael Lombardi in Profit Confidential, January 28, 2008. According to the Dow Jones Retail Index, retail stocks fell 39% from January 2008 through November 2008.

Article by profitconfidential.com

By Profit Confidential

One company I consistently like for long-term investors looking for dividend payments is PepsiCo, Inc. (NYSE/PEP).

This is the kind of company that can be put into retirement accounts and held for long periods of time with dividend reinvestment.

The equity market has been very kind to PepsiCo since the beginning of this year. Like many blue chips, it has ridden a wave of enthusiasm by institutional investors looking to bid the equity market with the safest names.

PepsiCo offers safety as a corporation with an array of beverage products that are sold worldwide. The many brands that the company maintains are complemented by its snack business. The two businesses go hand-in-hand.

As a multinational company, currency translation plays a big role in its numbers. In the first quarter of 2013, organic revenue growth was a solid 4.4%, but after currency translation, this fell to a mere one percent.

The company’s Americas Foods division was the highlight, producing organic revenue growth of six percent (five percent after currency translation). PepsiCo experienced business growth in all its Americas Foods segments, which include Frito-Lay North America, Quaker Foods North America, and Latin America Foods.

PepsiCo’s first-quarter financial results beat consensus, and big investors celebrated the modest stability.

The equity market has generally been a consistent accumulator of shares in this company. Featured below is PepsiCo’s 25-year stock chart, adjusted for splits:

Chart courtesy of www.StockCharts.com

Consistent with its previous guidance for 2013, the company expects seven-percent growth in its core constant currency earnings per share this year. Combined with its dividend yield of nearly three percent, that’s a decent equity market prospect from such a mature and relatively safe corporation.

PepsiCo plans to spend $6.4 billion in dividends and share repurchases this year. With a forward price-to-earnings (P/E) ratio of around 17 and a trailing P/E of approximately 21, PepsiCo is fully priced.

This company is one of my long-term “super stocks”—great blue-chip companies that offer earnings growth, dividends, and capital preservation. (See “The Best Kind of Stock to Own for the Rest of This Decade.”)

I’m a big believer in dividend reinvestment for a long-term portfolio. While saving for retirement, you can increase your total returns significantly with automatic dividend reinvestment plans.

And once you’re retired, you can stay in the equity market if you choose and use those dividends for income.

If you bought PepsiCo in August of 2009, your simple return to date would be around 43%. With dividend reinvestment into new shares of the company, your return jumps to 60% (recognizing that 2009 was an exceptional base for the equity market).

There are plenty of super stocks out there to consider in a correction, and the soda, beverage, and snack market is a good one.

PepsiCo’s corporate outlooks and equity market returns are generally quite reliable.

Article by profitconfidential.com

By Profit Confidential

I was watching CNBC Asia two nights ago and marveled at the talk of how well Japan was doing, noting the obvious enthusiasm for the record level of the stock market.

And just like it was back in late 1999, there are more bulls coming out on Wall Street and saying how high the Dow could run. I have heard talk of the Dow at 20,000 and the S&P 500 at 1,800.

Then there’s the recent cheerleading on the stock market from perennial bull Jeremy Siegel from the Wharton School of business, who thinks the Dow could trade at 17,000 this year. (Source: Navarro, B.J., “Jeremy Siegel Still Sees Dow 17,000,” CNBC, May 31, 2013.)

With all of this bullishness, I’m now thinking of an exit strategy. Everyone who thinks this stock market is going higher without some sort of correction may be surprised.

The way I see it is the stock market is vulnerable to selling, but as I said a few days ago, stocks will likely end up higher by the year’s end, as long as the Fed continues to offer easy and cheap money. (Read “How the Stock Market Staged a Rally and Not a Meltdown This May.”)

Never mind the speculation surrounding the Federal Reserve cutting its bond buying at the upcoming Federal Open Market Committee (FOMC) meeting on June 14 and 15; as long as the jobs picture remains fragile, the Fed will likely refrain from doing so until there are stronger economic signals.

The ADP Employment Change was weaker than expected at 135,000 new jobs in May (source: Automatic Data Processing web site, last accessed June 6, 2013), below the Briefing.com estimate of 140,000. If the non-farm reading today also comes in subpar, then I believe the Fed may think hard about cutting stimulus at this juncture.

Of course, you also have to worry about the bubble-like situation in the Japanese stock market. Yes, I say the Nikkei is in a bubble and may be set to burst. The reality is that the benchmark Nikkei 225 is way overvalued, and it fell another 3.8% on Wednesday. With the decline, the overhyped index is now down 15.7% from its high on May 22.

Apparently, Japan’s Prime Minister and the mastermind behind the country’s massive capital injection, Shinzo Abe, failed to discuss the Japanese economy in detail at a keynote speech. Perhaps Mr. Abe has something he wants to avoid talking about.

While the Japanese situation is 10,000 miles away, the ramifications of a major sell-off there would likely trigger a correction in other global stock markets.

The bull market is not done, but I’m seeing an upcoming opportunity to accumulate stocks.

Article by profitconfidential.com

By Profit Confidential

The stock market is down 500 points in just over a week…does this mean the Dow Jones Industrial Average has finally topped out?

Corporate earnings are weak; we know that. So far for the second quarter of 2013, more than 80% of the companies in the S&P 500 that have issued their corporate earnings guidance have provided a negative outlook. (Source: FactSet, May 31, 2013.)

Yes, the key stock indices have gotten ahead of themselves. In the first two months of the second quarter, the S&P 500 increased five percent; but as that was happening, earnings estimates for the quarter dropped by 3.4%!

At the end of March, analysts expected the S&P 500 companies to register an increase of 4.4% in their corporate earnings for the second quarter; now that number has dropped to a paltry 1.3%. (Source: FactSet, May 31, 2013.)

In the first quarter of 2013, companies in the key stock indices struggled with revenue growth. Only 46% of the S&P 500 companies recorded revenues above estimates for the first quarter, while the average for the last four quarters was 52%.

But there are further threats to corporate earnings. Demand is weak in the U.S. economy, as the American consumer is still under pressure—he or she is typically working at a job that pays the minimum wage (that’s where most of our jobs growth has been since the Great Recession ended), while the costs of basic necessities continue to rise in an environment where the government says there is no inflation.

I remain skeptical of the rise in the key stock indices, as they aren’t moving in line with the current business conditions in the U.S. economy. I continue to believe the bear market rally, which began in 2009, has done a great job in luring investors back into the stock market. The key stock indices are up significantly and have given investors a false hope that they will climb further.

The S&P 500 has been making lower lows and lower highs since May 22 (as you can see in the chart below), but from what I’ve read from stock advisors, they say to buy on dips—advice I’m not following.

Chart courtesy of www.StockCharts.com

What’s going on with the equity markets right now reminds me of 2007 all over again—that’s when the key stock indices were moving higher, regardless of what was happening with the economy. We are experiencing something similar to that right now, with the stock market and economy having gone in such opposite directions.

Predicting the exact point at which the top will be in for the stock market is difficult, if not impossible, but odds are we are very close.

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I have written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in Profit Confidential, January 21, 2008. Michael started talking about and predicting the economic catastrophe we started experiencing in 2008 long before anyone else.

Article by profitconfidential.com

By Profit Confidential

The average American Joe isn’t participating in the U.S. housing market. As a matter of fact, according to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey, investors purchased 69% of “damaged” properties in April 2013, while first-time home buyers accounted for only 16% of “damaged” purchases.

It is very well documented in these pages how home prices in the U.S. economy are being driven upward by institutional investors. Affirming my stance on the U.S. housing market, Suzanne Mistretta, an analyst at Fitch Rating Services, was quoted this week as saying, “The [housing price] growth is being propelled by institutional money… The question is how much the change in prices really reflects the market demand, rather than one-off market shifts that may not be around in a couple of years.” (Source: Popper, N., “Behind the Rise in House Prices, Wall Street Buyers,” New York Times Dealbook, June 3, 2013.)

Major financial institutions like The Blackstone Group L.P. (NYSE/BX) have become major buyers in the U.S. housing market. Blackstone has spent more than $4.0 billion for 24,000 homes in the U.S. housing market that it plans to rent out.

Rising prices on homes in various pockets of the U.S. housing market are a direct result of large institutional investors buying in.

Take Atlanta, for example. Blackstone bought 1,400 properties worth more than $100 million in Atlanta last year. (Source: Bloomberg, April 25, 2013.) And what happened to prices for homes in Atlanta? According to CoreLogic, a housing data compiler, home prices in Atlanta increased 12.4% in the 12-month period ended February 2013, compared to a 10.2% increase in the overall U.S. housing market.

Looking forward, I don’t hold a very optimistic view on the U.S. housing market for four very specific reasons: first-time home buyers (desperately needed in any housing recovery) are missing from the action; investors who are buying homes to rent them are pushing prices higher; new homebuilder stocks are down 14% in the past month, according to the Dow Jones U.S. Home Construction Index; and long-term interest rates are moving upward!

Consider Colony American Homes Inc. This company delayed its initial public offering, which would have brought in roughly $230–$260 million, due to what the company says are “market conditions.” This company was formed last year, and it purchased homes in mid- and upscale neighborhoods in the U.S. housing market. On April 30, Colony held 9,931 homes in nine states. (Source: Wall Street Journal, June 4, 2013.)

For institutional investors, at the end of the day, it’s all about the profit; they are buying homes and renting them out all in search of a higher return on their money. But institutional buying of American homes will not sustain a recovery in the U.S. housing market.

We need the average American to be involved in the U.S. housing market because he/she provides liquidity and pushes up consumer spending. Increasing home prices right now don’t mean the U.S. housing market has recovered; actually, it’s far from it when first-time home buyers are missing from the action.

As I wrote earlier this week, something is going on in the bond market. Yields on 30-year U.S. Treasuries are spiking. (See “What the Rising Yield on 30-year U.S. Treasuries Is Telling Us.”) Rising long-term interest rates could be another death-bed for the U.S. housing market. And by the way, those homebuilder stocks that went up last year on speculation, I don’t own any of them.

Michael’s Personal Notes:

The stock market is down 500 points in just over a week…does this mean the Dow Jones Industrial Average has finally topped out?

Corporate earnings are weak; we know that. So far for the second quarter of 2013, more than 80% of the companies in the S&P 500 that have issued their corporate earnings guidance have provided a negative outlook. (Source: FactSet, May 31, 2013.)

Yes, the key stock indices have gotten ahead of themselves. In the first two months of the second quarter, the S&P 500 increased five percent; but as that was happening, earnings estimates for the quarter dropped by 3.4%!

At the end of March, analysts expected the S&P 500 companies to register an increase of 4.4% in their corporate earnings for the second quarter; now that number has dropped to a paltry 1.3%. (Source: FactSet, May 31, 2013.)

In the first quarter of 2013, companies in the key stock indices struggled with revenue growth. Only 46% of the S&P 500 companies recorded revenues above estimates for the first quarter, while the average for the last four quarters was 52%.

But there are further threats to corporate earnings. Demand is weak in the U.S. economy, as the American consumer is still under pressure—he or she is typically working at a job that pays the minimum wage (that’s where most of our jobs growth has been since the Great Recession ended), while the costs of basic necessities continue to rise in an environment where the government says there is no inflation.

I remain skeptical of the rise in the key stock indices, as they aren’t moving in line with the current business conditions in the U.S. economy. I continue to believe the bear market rally, which began in 2009, has done a great job in luring investors back into the stock market. The key stock indices are up significantly and have given investors a false hope that they will climb further.

The S&P 500 has been making lower lows and lower highs since May 22 (as you can see in the chart below), but from what I’ve read from stock advisors, they say to buy on dips—advice I’m not following.

Chart courtesy of www.StockCharts.com

What’s going on with the equity markets right now reminds me of 2007 all over again—that’s when the key stock indices were moving higher, regardless of what was happening with the economy. We are experiencing something similar to that right now, with the stock market and economy having gone in such opposite directions.

Predicting the exact point at which the top will be in for the stock market is difficult, if not impossible, but odds are we are very close.

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I have written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in Profit Confidential, January 21, 2008. Michael started talking about and predicting the economic catastrophe we started experiencing in 2008 long before anyone else.

Article by profitconfidential.com

By MoneyMorning.com.au

Technology: Powering the Body Starts With The Mind

We’ve been talking about revolutions over the last few weeks. And there’s no doubt one of the most amazing developments over the next few years will be utilising the power of the mind.

Mind control is one aspect of this. Using the power of your mind to manipulate, enhance and control your environment is life changing.

An example of mind control research and development is happening right now. A group of European universities and companies have developed an exoskeleton for people with paralysis.

This is certainly not the first exoskeleton developed for people with paralysis. Other examples include the Ekso which is one of the finest pieces of tech to arrive in years.

It’s another great step forward in bionics and science. As we’ve said before, not one single technology will be the answer for everyone. But collaboration like this certainly shows us the potential for great minds to help solve great problems.

Health: The Far Reaching Benefits of The App Economy

‘[it’s] the biggest technology breakthrough of our time [being used] to address our greatest national challenge’ – Kathleen Sebelius, US Health and Human Services Secretary

Kathleen was talking about Mobile Health Technology (mHealth).

Make no mistake about it, the future of medicine is rapidly changing. The future practice of medicine will adopt mHealth as the norm.

Already there are companies heavily involved in the development of mHealth apps. They are creating multi-million dollar businesses because of this trend.

And there’s proof behind this change. The Economist Intelligence Unit gave Price Waterhouse Coopers (PwC) the directive to produce a report on the impact mHealth will have on society. We had a good look through the report this week.

Three of the key findings from the report include;

• Over half the people surveyed expected mHealth to improve the convenience, cost and quality of their healthcare over the next 3 years

• One of the barriers to widespread mHealth adoption is existing providers of services. Typically they’re unwilling to adopt the technology in order to protect their own interests.

• Emerging countries are more likely to be aware of and adopt the use of mHealth compared to developed countries.

What this shows is mHealth will become a part of the way we manage our health in the future. The transition to more proactive health management is underway now.

It does need some support though. People in general need to understand that mHealth can add value to their lives. It’s not just some app gimmick on smartphones.

The greater the awareness of the benefits mHealth has, the sooner it will become a normal part of the way we manage our health and the way medicine is practiced.

Those who stand opposed to it are more than likely protecting their self-interest or simply ignorant of the benefits it will have for society. Let’s hope that mind-set will change for the benefit of everyone.

Energy: The Most Efficient Battery Ever Made

We use the word breakthrough a lot. You see almost every week there is a new breakthrough in technology and sciences. And that why we believe it’s the most exciting and potentially profitable time to be alive.

When it comes to energy, it seems to be a divisive topic. Energy breakthroughs often attract their fair share of scepticism. The typical response is, ‘It’s a scam.’

I’m not sure why that is. It might have something to do with promises of the past. There was the bountiful energy promises of Nuclear Fission, the false start for electric cars (see: GM’s EV1) or the unscientifically-proven cold-fusion.

But those aside there are a lot of very smart people trying to figure out one of the world’s biggest problems, clean abundant energy.

Battery technology is one source of energy that is constantly in development and research. And thanks to the Centre for Solar Energy and Hydrogen Research Baden-Württemberg (STW) battery technology has taken another giant step forward.

The scientists at the STW have managed to develop a lithium-ion (Li-on) battery that is the most efficient Li-on battery ever.

Click to enlarge

After more than 10,000 cycles the batteries continue to retain 85% of its capacity. That means the batteries can be charged and run down for the equivalent of 27 years without losing power.

The car industry is now putting more time and investment into the potential of li-on battery technology. Li-on is great to use in full electric cars and hybrid systems as it’s efficient, powerful and easily manufactured.

Because of this STW say their aim is get their super-batteries into cars and high performance storage system within the next few years.

A breakthrough it is, but it’s not the silver bullet for energy independence. However research and development like this is another giant leap forward in a greener, sustainable energy future.

Sam Volkering
Technology Analyst
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Keep One Eye on Resource Stocks and the Other on the NASDAQ
31-05-2013 – Kris Sayce

Getting in on the ’99 Cent Craze’ with Crowdfunding
30-05-2013 – Sam Volkering

Buyer Beware: Japanese Government Bonds are Moving
29-05-2013 – Murray Dawes

The Best Contrarian Play on Gold I’ve Ever Seen…
28-05-2013 – Dr Alex Cowie

A Revolution in the Share Market is Coming…
27-05-2013 – Kris Sayce

By MoneyMorning.com.au

Today’s Money Weekend will talk about the most important industry of the next decade: technology. Some of the changes are shaping up to be like King Kong let loose in the city: highly disruptive. And that’s putting it mildly.

The first thing to do is to make sure you’re not in the path of the beast and in the companies getting knocked down. The second is to consider the businesses that stand to benefit after he’s crashed through. Technological change will rebuild economies and industries just as it destroys them.

Technology Trends You Can’t Afford to Miss

You might know already that Money Morning editor Kris Sayce is about to launch his new service, Revolutionary Tech Investor. He and technology analyst Sam Volkering will hunt all over the world to find the best companies who can make a motza from tech development. It’s an exciting project.

Take the latest report from the McKinsey Global Institute for example. It’s called ‘Disruptive technologies: Advances that will transform life, business, and the global economy.’

They argue that we’re on the verge of some massive changes over the next decade or more in 12 key sectors. These will impact how we live and work, not to mention reshaping whole industries and economies. The evolutionary rule will stand supreme: adapt or die.

What are the key sectors? Check them out, in order of the size of their potential impact. They are:

• Mobile Internet
• Automation of Knowledge Work
• Internet of Things
• Cloud Technology
• Advanced Robotics
• Autonomous and Near Autonomous Vehicles
• Next Generation Genomics
• Energy Storage
• 3D Printing
• Advanced Materials
• Advanced Oil and Gas Exploration and Recovery
• Renewable Energy

We’re talking stuff, in the words of the report, that has ‘the potential to affect billions of consumers, hundreds of millions of workers and trillions of dollars of economic activity across industries.’

If you consider the growth in tablets and smartphones, the possibilities and changes of just the top one are already pretty amazing. These barely existed a few years ago. Now they’re in the hands of one billion people and deliver the potential to bring billions more people online in the developing word.

Don’t forget the app economy of Apple and Android and all the new ways of servicing and reaching consumers. It has generated new payment systems in banking and new channels for advertisers. It’s generating astonishing amounts of data. Mobile technology will also soon feed into ‘wearable tech’ like Google Glass.

A quick snapshot of winners and losers from this kind of change is Nokia and Samsung. Nokia’s share price has collapsed from $58 in 2000 to around $3.50 today. Samsung, on the other hand, is now outselling Apple in the smart phone market.

If Joseph Schumpeter were alive, we’d encourage him to take a bow. One of the best insights from economics is thanks to his famous expression ‘creative destruction’.

It’s the idea that the heroes of the free market, the innovators and the entrepreneurs, will always hustle to disrupt the established order. Old institutions get swept away and replaced. That’s what we’re talking here. The winds of change seem to be blowing across so many different industries at the same time.    

The projections in the McKinsey report are only to 2025. Twelve years away is not that long really. Will 2013 feel like a lifetime ago when we get there?

On the Way to 2025

It’s true that the McKinsey report writers admit that a lot of the numbers they throw up and the scenarios they predict are at best educated guesses. There are simply too many variables to be precise. But you can only call it how you see it, and they see big change. 

It’s a world where you better have the right skills in information technology if you’re a worker and a pretty nimble business plan if you’re a company. The report sums it up like this:

‘By the time the technologies that we describe are exerting their influence on the economy in 2025, it will be too late for businesses, policy makers, and citizens to plan their responses. Nobody, especially business leaders, can afford to be the last person using video cassettes in a DVD world.’

The idea for investors, of course, is to try and get ahead of these changes before they’re obvious and gauge the right areas to profit. That’s the task Kris Sayce and Sam Volkering have set themselves. Stay tuned for Kris’s report on where he thinks the best action is.

Of course, an investment you may be more familiar with is property. You might recall we discussed the out and out property bull Phil Anderson last week and the presentation he gave called Remembering the Future. It’s available on DVD if you’re interested.

Before we say another word, we must admit that we have no major stake in this debate. We don’t own property, don’t invest in it and don’t pretend to know anything about the property market other than the fact that it’s expensive in Melbourne, where we live. Perhaps that’s a mistake. Phil thinks real estate people should learn about stocks, and stock market people should learn about real estate.

This is one reason Phil was 100% in cash in 2007. He saw a banking crisis on the horizon at the time. Little titbits like that make us curious enough to read his book, The Secret Life of Real Estate. We’ll let you know what we discover.

But Phil’s bullish call on property has certainly got plenty of people interested (and angry), so we’ve got some snippets from the rough cut of his Remembering the Future talk below for you. If you haven’t heard of him, Phil’s research has led him to conclude there is an 18 year US real estate cycle that you can use to time the property market in America, the UK and Australia.

Callum Newman.
Editor, Money Morning
Join me on Google+

PS. Don’t forget if you want to keep track of the latest things we’re reading and brief commentary on events that happen through the day, check out our Google+ page and Kris Sayce’s as well.

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Pursuit of Happiness: Improving Your Life Through New Technology

By MoneyMorning.com.au

An edited extract from a presentation by Phil Anderson

[Below is a response to a question on how he interpreted recent building activity and technology]

I saw that they’re starting to build the southern hemisphere’s tallest residential tower. What it tells me is this: it tells me the strength of the commodity sector, in a bizarre sort of way.

Every single cycle I’ve seen, certainly in America and around the world and in Australia, the tall buildings get built, they open up in recession and generally it takes 6–7 years to actually recover before we start thinking about building another tall building.

This is a little different. It’s been the first time I can remember where tall buildings are getting put on the drawing board so quickly after the downturn that we’ve had.

Now they’re even thinking in Dubai of building something, I think it’s even bigger than a mile high and both the Chinese and the Americans are working quite feverishly to develop new lift technology that will allow those buildings to get built…so you can get up and down the buildings very fast.

We’re here in Melbourne and if you walk around the CBD of Melbourne and you go to many of the suburbs, every single street in Melbourne has become a construction zone. I’ve just never seen things so busy.

That to me indicates the sustainability of the new cycle going forward, based as it is, particularly for Australia, and commodity producing nations and the Middle East on commodity prices. It’s become obvious now this sort of stuff is dependent on China and things going forward and everybody is really nervous about whether this can last or not

It wasn’t so obvious ten years ago — even though it was all on my website, you can see it. It’s the 64 million dollar question really.

[WD] Gann in 45 Years on Wall Street — and Gann put this book out in 1949, so its um more than sixty years old now — Gann suggested that during the past history of the world following each depression some new discovery or some new invention has stimulated business and progress and bought on another boom.

Now that’s happened for sixty years, 3 additional cycles after Gann died, I think we can expect another one. You can see, generally in the US, what has happened after each major real estate cycle, major downturn, you get one of two things happening that starts of the next boom.

You either get the creation of new technology or you get a new energy development that just allows costs to come down and new technology does the same thing.

The US at the moment is unprecedented. It’s now having those two things happening. So you’ve now got with the energy related stuff (leaving aside the environmental concerns) and getting the gas out of the earth, it’s going to prodigiously lower cost for business to such an extent that you’re finding that manufacturing activity is going back to the United States.

That’s very significant and could bring a new, in my view, it’ll bring another huge boom. At the same time as that you’ve got all this new technology developing. I was going through some of my old files in preparation for today’s talk and you know, I had a cassette tape drop out of the file and I thought ‘I wonder what’s on there?’

Do you know, I couldn’t find a machine upon which to play it. And that’s only been, what, 15 years? Ten years even? Does anybody still have a radio player or a cassette player in their car? Not many. I don’t. I actually had to get, go to a friend, an elderly friend, they still had one…just to play a cassette tape.

The technology is prodigious. The invention is prodigious and relentless and while inflation stays low as it is at the moment because it feeds on itself as costs come down it lowers the inflationary process, it means business can look long term…much more forward, so they can continue to innovate and create. So it’s a cycle that can feed of itself.

Now I know this has gone a long way from a simple tall building question, but because I think with the energy cost savings and the technology inventions this is probably going to make Ben Bernanke a hero and its going to allow him to get away with prodigious money creation.

Money creation, as you know, it’s supposed to be inflationary. But if he continues to create that credit but the deflationary tendencies of the energy and the technology taking place, then we’re not going to get so much inflation, so he’ll be allowed to do that for quite some time and it will allow quite a recovery to take place.

In my view, and I could be wrong but what it’s tending to suggest to me out of all the cycle history that I’ve studied, it’s tending to suggest that we’re very early in the next cycle.

We’re so early to get new buildings, it could be the next cycle is very, very productive and enormous wealth could be created and lead to quite a substantial boom. And now we’ve just had the US market go into all-time new highs; nobody was expecting this, except me and one or two others.

It’s very clear in America and it’s very clear in the UK that there’s rising rents and it will eventually lead to a major recovery, and you’ve seen that already in the US. It will spur new construction and you get into the next cycle.

Now we just have to wait really to see whether Australia will continue to traditionally follow the US and its cycle or whether Australia is changing over a little bit and timing itself to what might be a Chinese cycle.

Phil Anderson
Contributing Editor, Money Weekend

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By Chris Vermeulen, TheGoldAndOilGuy.com

This week has played out perfectly thus far. The expected volatility of intraday price swings and lower prices for stocks has happened. The Vix has collapsed the 15% which I mentioned would happen just 2 days ago and money is flowing out of precious metals and miners today in a big way as that risk off money is now moving into Risk-On Stocks.

My partner who focuses exclusively on Small Cap Stocks and 3X Leveraged ETF’s have been cleaning up this week also. Take a look at how he How We Nailed The Market Low for 4.6% in 24 hours

I just want to mention that all markets are connected (intermarket analysis) We are long the SP500 which is how I want to play this move because it carries the least amount of risk and volatility then other investments. That being said a trade could instead short gold or short the vix. Many ways to play moves like this in the market. One thing to remember though is that each of these moves are the same trade. so buying a position in each is just multiplying your exposure and if this bottom in stocks didn’t take place you would get your head handed to you on a silver platter. Again I am here for market guidance and to share low risk setups as I see fit. You can trade all you want around analysis as many of you do on your own.

Charts Show it all in Detail below:

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www.TheGoldAndOilGuy.com

Chris Vermeulen

Source: JT Long of The Gold Report (6/7/13)

The recent volatility in the gold market has investors taking a second look at their strategies. In this interview with The Gold Report, Frank Holmes and Brian Hicks of U.S. Global Investors discuss their criteria for their investment decisions, the factors they think will affect the gold sector and how ETFs are distorting the gold equities market.

The Gold Report: Frank, you are one of the most positive people I know. What happened to gold in mid-April, and could it happen again?

Frank Holmes: I often remind investors that gold has two drivers: the fear trade and the love trade.

The fear trade captures most of the attention. Many people who have put money into the SPDR Gold Trust (GLD:NYSE.A) and other gold ETFs have bought for the fear trade. The fear trade kicked in due to governments monetizing debt at an excessive rate, creating negative real interest rates. For example, last year Japan, Europe and the U.S. rolled over about $8 trillion from three-year paper to five-year paper below the inflationary rate. Historically, this is very important for gold.

The other half of the equation is the love trade, which is gold bought for cultural reasons, such as gift giving for holidays, weddings and birthdays. Given that China and India account for 40% of the world’s population, the rising per-capita gross domestic product (GDP) in emerging economies is important for the love trade. Even a modest slowdown on per-capita GDP in those countries has a significant impact on the demand side of the equation.

In the last year, India’s government tried to slow down the amount of gold being imported. In January 2013, India imposed a 6% tax, which slowed love trade demand in the short term. And the per-capita GDP of China and India slowed down modestly.

Still, the love trade remained strong over the entire year. According to official statistics from the World Gold Council, as of the end of the first quarter of 2013, the year-over-year change in consumer gold demand for jewelry, bars and coins rose 27% in India. In China, gold demand grew 20%.

TGR: If the love trade demand changed over the last year, why did we have that sudden, one-day fall in the price?

FH: I do not know. I try not to get caught up in all the conspiracy thinking out there, but rather appreciate cycles, where historically gold has climbed after Chinese New Year and had little rallies all the way until summer. Typically, in June, gold investors see a bottom. In late July and early August, 35 years of data show that the love trade demand picks up and runs until February.

TGR: What could happen between now and July when love demand historically picks up?

FH: We will have to see when the Indian and Chinese economies start to pick up. That will be important for the love trade.

But the love trade is not going away. Even in North America, when gold dropped, we saw gold going from paper hands in the exchange-traded funds (ETFs) to strong hands. Gold analysts in Toronto told me about lines of people 30 yards long waiting to buy gold. Everything smaller than 5 ounces was sold out.

TGR: In a May 11 article, you list <href=”#.UbIIyYVibA1″ target=”_blank”>three reasons to buy gold equities today. Can you tell me what you look for in a gold company today?

FH: We like a board of directors that is consumed with the return-on-capital model. One of the best ways to get a return on capital is to grow revenue, to have a profit margin for capital costs and to pay dividends. The final ingredient is to buy back your shares. With the S&P 500 making all-time highs, one can see the high correlation of companies buying back their stock and increasing their dividends. That is what has propelled the stock market to where it is.

Alamos Gold Inc. (AGI:TSX) is one recent gold company to have done that.

Many other gold mining companies, which people tend to think of as large market-cap companies, have been value destroyers. Newmont Mining Corp. (NEM:NYSE) has a market cap below $20 billion ($20B). It has spent $17B trying to increase its production, which has decreased from 8 million ounces (8 Moz) to almost 5 Moz/year. It would have been better off using $7B to sustain its cash flow from operations and spending $10B to buy back stock and increase dividends. Had it done that, it would have a much higher valuation. Now, all of a sudden, companies like Newmont say they will increase their dividends and share some of that return from the higher price of gold.

The other companies in a bad situation are those that issue stock options faster than they increase their reserves or their production. That dilutes shareholder interest. They make acquisitions that dilute on a reserve-per-share or production-per-share basis.

Investors want to look at companies that have the discipline to increase their dividends and have leadership like Alamos Gold’s that will increase dividends and buy back stock for the free cash flow.

TGR: Is paying a dividend an important part?

FH: Absolutely. Over the past 50 years, almost half of the total returns of the S&P 500 alone have been reinvested dividends.

Too many companies were hungry for cash to expand just for the sake of expanding. They destroyed capital rather than focus on margin. I think the gold industry is waking up to this situation.

Some of the silver stocks are showing increased capacity for dividends, more free cash flow and low cash-flow multiples. One of my favorites is Franco-Nevada Corp. (FNV:TSX; FNV:NYSE). It pays a monthly dividend, higher than what you can make on a five-year government note. It has high profit margins, and management is very disciplined about its return-on-capital model.

TGR: What about the explorers? Are there certain types of explorers or jurisdictions that you like?

FH: Three things will hurt the junior resource cycle for another couple of years. Number one, the laws of Mother Nature dictate that the odds are against junior mining companies in making a discovery. Number two, a lot of the geologists who are out there exploring have no relationship with money managers, sellside brokers or capital markets. Number three, you have layer after layer of governmental regulations that are not always well thought out.

The jockeys are very important in the explorer space. You have to have someone who puts money up, who has a successful track record. We really have to know the jockeys and their expertise, following and track record.

TGR: Brian, who are some of the jockeys you like to follow who fit those criteria?

Brian Hicks: Lukas Lundin, chairman of Lundin Mining Corp. (LUN:TSX), writes his own checks and puts up his own risk capital. We have had some success with him. Ross Beaty, chairman of Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ), is another; he also has skin in the game.

TGR: Your World Precious Metals Fund includes just over 79% gold and silver and 11% cash. It is down about 37% for the year. How are you adjusting your portfolio in this volatile environment?

FH: I think it’s important to outperform the ETFs that are out there competing for capital. Cash is one component of how we are adjusting to the volatility. Last year we looked at all the juniors we own; we scrutinized every quarterly financial statement to see how much cash each company had and the burn rate. If a company had no discovery or was early, we sold them. That helped us in the junior space.

BH: We continue to have a broad stable of 25 or so junior resource names, but we high graded the portfolio by eliminating the names that would be unlikely to get financing. We elected to take those stranded names out of the portfolio.

The space has seen so much carnage that it is difficult even now to say what was a junior and what was a small or mid cap.

FH: To add to what Brian is saying, we took a hard look at all producers that were producing less than 1 gram per ton (1 g/t).

TGR: How many were in that category?

FH: Not too many, since grade is king in any gold price environment.

TGR: Your Gold and Precious Metals Fund is about 41% mid cap, which you define as $1–10B, and 48% small cap, which you define as under $1B. The World Precious Metals Fund is 79% small cap. Do those small caps expose the fund to more upside?

FH: Yes, they expose it to more volatility. The World Precious Minerals Fund will look at greenfield and brownfield companies, therefore, that fund has more volatility.

TGR: If it gives you exposure to the upside, how do you protect from the downside?

FH: We do what we have described. We shrunk the number of names with greater risk; many of them have fallen—some as much as 90%—from a year ago. When looking at producers, we look for a higher grade.

Acquisitions are another phenomenon for gold mining companies in the capital markets. As soon as someone acquires another company, we tend to sell it. The stock is usually dead money for 18 months while the acquiring company digests the acquisition.

TGR: But you still get the upside from the bump up in the share price when it is bought, correct?

FH: Yes, and that has helped the portfolios, as we have had several companies that were purchased.

TGR: B2Gold Corp. (BTG:NYSE; BTO:TSX; B2G:NSX) dropped to $2/share. Is that because of its acquisitions in the last quarter or is that part of the industry trend?

FH: B2Gold has been a great mid-cap, higher-grade company that performs well. Its drop is the mutation that is caused by ETFs. Money has flowed into the Market Vectors Junior Gold Miners ETF (GDXJ:NYSE.A) and whenever a stock is one of the Top 10 positions, it gets tossed out because its market cap then exceeds $3B. It has nothing to do with the quality of the company; it is all about access.

B2Gold rebalanced when the company it acquired was also on the Market Vectors Junior Gold Miners ETF and its market cap got too big. It ended up orphaned because it lacked a U.S. listing and could not qualify for the Market Vectors Gold Miners ETF (GDX:NYSE.A).

The same thing happened with SEMAFO Inc. (SMF:TSX; SMF:OMX) and Romarco Minerals Inc. (R:TSX). Romarco exploded on the upside in 2010. The Market Vectors Junior Gold Miners had $400 million come in within three days.

TGR: Do you still like B2Gold’s fundamentals?

FH: We sold a lot of B2Gold going into the merger and then reloaded. The risk was that by March it would have to be pushed out of the Market Vectors Junior Gold Miners and would have to rush to get a U.S. listing.

As a fund manager, we have to factor in the change in holdings of these big ETFs because money flows, not gold companies’ discoveries or fundamentals, are dictating the price volatility of many small-cap stocks.

TGR: Are you nervous about the redemptions some large funds are experiencing? What is your strategy to calm down nervous investors?

FH: We advocate keeping a 5% or 10% weighting in gold and rebalancing. When gold moves, it moves explosively, and you end up buying at the top. Conversely, gold today is extremely oversold on all mathematical models. The value being offered by many of these companies is so much more attractive and compelling to investors.

If interest rates were to climb 2% above the inflation rate, it would totally distort the gold crisis. If short-term interest rates in the U.S. were to reach 4%, the boom in the housing market would end. That would affect job creation. But we do not see that happening.

TGR: What about the impact on bonds? In a recent interview with James Dines, he said bonds will blow out as soon as interest rates start to go up.

FH: They will, no doubt. Governments are always trying to manage their currency using relative purchasing power parity. They are using low interest rates to stimulate economic activity. We believe that will continue.

BH: I would echo that. We still have a large output gap and high unemployment.

There is a lot of complacency in the equity markets. That has taken some money growth out of gold, but as Frank has said in the past, gold is insurance. At some point, money will flow back into gold because of the tenuous and difficult state of the global economy. Gold is a good portfolio diversifier.

FH: Gold is volatile because it is the inverse of currency moves. The fundamentals that would change things are 1) a dramatic fall in the per-capita GDP of most of the emerging market countries and 2) a rise in interest rates 2% above the Consumer Price Index. We just do not think that will happen for a while.

The other long-term implication is the delay in new mines coming onstream. Every time a government moves the goal posts for taxing these companies, capital will be squeezed. Neither banks nor the equity markets will put up the money. The result will be a drop in supply for many commodities.

TGR: Particularly platinum and palladium, or gold and silver as well?

FH: Gold and silver, too, as projects get delayed.

TGR: Frank and Brian, thanks for your time and your insights.

Frank Holmes is CEO and chief investment officer at U.S. Global Investors Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned many awards and honors during Holmes’ tenure, including more than two dozen Lipper Fund Awards and certificates. He is also an adviser to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Holmes co-authored “The Goldwatcher: Demystifying Gold Investing” (2008). Holmes is a former president and chairman of the Toronto Society of the Investment Dealers Association, and he served on the Toronto Stock Exchange’s Listing Committee. A regular contributor to investor-education websites and a much-sought-after keynote speaker at national and international investment conferences, he is also a regular commentator on the financial television networks and has been profiled by Fortune, Barron’s, The Financial Times and other publications.

Brian Hicks joined U.S. Global Investors Inc. in 2004 as a co-manager of the company’s Global Resources Fund (PSPFX). He is responsible for portfolio allocation, stock selection and research coverage for the energy and basic materials sectors. Prior to joining U.S. Global Investors, Hicks was an associate oil and gas analyst for A.G. Edwards Inc. He also worked previously as an institutional equity/options trader and liaison to the foreign equity desk at Charles Schwab & Co., and at Invesco Funds Group, Inc. as an industry research and product development analyst. Hicks holds a Master of Science degree in finance and a bachelor’s degree in business administration from the University of Colorado.

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DISCLOSURE:

1) JT Long conducted this interview for The Gold Report and provides services to The Gold Report as an employee. She or her 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: Franco-Nevada Corp., Goldcorp Inc., B2Gold Corp. and MAG Silver Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Frank Holmes: 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. 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.

4) Brian Hicks: 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. 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.

5) The following securities mentioned were held by the Global Resources Fund, Gold and Precious Metals Fund and World Precious Minerals Fund as of 3/31/13: Alamos Gold Inc., B2Gold Corp., Franco-Nevada Corp., Lundin Mining Corp., Market Vectors Gold Miners ETF, Market Vectors Junior Gold Miners ETF, Newmont Mining Corp., Pan American Silver Corp., Romarco Minerals Inc., SEMAFO Inc., SPDR Gold Trust.

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