Dividend Stocks: The Best Dips to Buy Now

By The Sizemore Letter

May 22 was not a kind day for income investors.  It would appear that this was the day that income investors collectively realized that the Fed’s QE infinity really wouldn’t go on…well…for infinity.

Fears that market yields would rise became a self-fulfilling prophecy.  The 10-year Treasury yield, which had reached a new low just above 1.6% in late April had started to creep upward in early May and on May 22 it shot above 2%.

Income focused investments got absolutely clobbered as a result.  MLPs and REITs, as measured by the JP Morgan Alerian MLP ETN ($AMJ) and Vanguard REIT ETF ($VNQ), respectively, fell by 11% and 9% from their May 21 closing prices through June 5.  Utilities and mortgage REITs, as measured by the Utilities Select SPDR ($XLU) and Market Vectors Mortgage REIT ETF ($MORT), respectively, shed a good 7% each.

As a point of comparison, the S&P 500 was off by less than 5% at time of writing.

So, what should investors do now?  Use the recent sell-off in all things income as a buying opportunity?  Or view any rebound as a dead-cat bounce that should be sold?

It’s a little of both actually.

But before I go any further, we need clarify a few points:

  1. Bond yields won’t be shooting to the moon anytime soon.  In fact, they are already starting to ease; at time of writing the 10-year Treasury yield had slipped from its recent high of 2.16% to just 2.05%.  As Japan has proven for over 20 years, in the wake of a credit meltdown yields can stay far lower than anyone expects for far longer than anyone expects.
  2. There was a lot of speculative froth in the income-oriented market sectors; REITs, MLPs, and other income-focused sectors had massively outperformed the market throughout 2013 at a rate that was not at all sustainable.  What we just experienced was a much-needed correction that brought the prices of income securities closer in line to the rest of the market.

I expect to see the 10-year yield fluctuate within a fairly tight band of 1.8% to 2.8% for the next 1-3 years and perhaps longer.  In this sort of environment—one in which yields rise slowly and stay low by historical standards—dividend growing stocks should perform just fine.

But that is the key point: notice I said “growing” and not “paying.”  In order for income investors to remain interested, these stocks need to provide a competitive current income stream but also one that will grow to keep pace with inflation.

Most equity REITs and MLPs meet this requirement easily.  With the US property markets continuing to heal, equity REITs should enjoy several years of improving occupancy and higher rents, not to mention appreciating property values.  All of this bodes well for higher REIT prices and dividends.

And with America’s domestic energy boom still firing on all cylinders, there should be plenty of demand for high-quality midstream pipeline assets for years to come.  This should mean continues strong distribution growth among MLPs as an asset class—and higher prices for MLP shares.

I also see value in “non-traditional” dividend stocks, such as Old Tech giants Microsoft ($MSFT), Intel ($INTC) and Cisco Systems ($CSCO).  All have been aggressively growing their dividends in recent years and all healthily yield more than the 10-year Treasury will any time soon.

What about utilities and mortgage REITs?

Though I expect both might enjoy a nice short-term bounce, I’m a lot less enthusiastic about their prospects.  Utilities, as part of a highly-regulated industry, cannot be expected to keep up with MLPs and REITs in terms of dividend growth.  And considering that, even after the sell-off, utilities trade at an earnings premium to the rest of the market, this is a sector best avoided.

Mortgage REITs also leave a lot to be desired.  While equity REITs are backed by real property and thus have built-in inflation protection (not to mention growth potential), mortgage REITs are essentially single-strategy “hedge funds” that borrow short-term funds cheaply and invest the proceeds in longer-duration mortgages.  If market yields rise even modestly, it is going to crush the book values of the mortgage REITs’ long-duration mortgages.

The yields on mortgage REITs are attractive—MORT yields just under 10%—but it is not realistic to expect much in the way of dividend growth going forward, and dividend shrinkage might actually be the more likely scenario.

Bottom line:  Once the dust settles, income investors should load up on high-quality equity REITs, MLPs and “non traditional” dividend stocks in the technology sector.  But utilities and mortgage REITs are best avoided, and investors looking to reallocate their portfolios should use any short-term strength as an opportunity to sell.

Disclosures: Sizemore Capital is long MSFT, INTC, CSCO, VNQ and AMJ.  This article first appeared on InvestorPlace.

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Mexico holds rate steady, but risks to growth rise

By www.CentralBankNews.info     Mexico’s central bank held its benchmark target for the overnight interbank rate steady at 4.0 percent, as expected, saying this stance is consistent with slower growth in the first months of this year, a fragile global environment and the stable outlook for inflation.
    But The Bank of Mexico, which cut its rate in February for the first time since July 2009, said downside economic risks had risen following the depreciation of the peso and the rise in domestic interest rates, “primarily in response to the expectation of changes in U.S. monetary policy.”
   “Even if there is a recovery of economic activity in the second half of the year driven by U.S. industrial performance, the downside risks to economic activity in Mexico has intensified,” the central bank said after a meeting of its governing board.
    Last week Mexico’s currency, along with other emerging markets, fell in response to fears that the U.S. Federal Reserve would soon start to wind down its asset purchases.
    Although liquidity in international markets is expected to remain abundant, the central bank said possible changes in U.S. monetary policy is likely to lead to further exchange rate volatility but Mexico’s strong economic fundamentals would influence exchange rates in the medium term.


     The central bank said recent data point to continued growth in the United States but this has lead to uncertainty over when the purchase of assets would be reduced, triggering a significant rise in interest rates and “turbulence in international finance, particularly in emerging economies.”
    There are still significant downside risks to global economic growth and lower raw materials prices, along with more moderate growth in emerging economies, is expected to reduce the inflationary outlook in most countries.
    Mexico’s economy slowed down in the first quarter with Gross Domestic Product up by 0.45 percent from the fourth quarter. Although this was much better than expected, on an annual basis growth was only 0.8 percent, the weakest since the 2009 recession, due to weak external demand.
    The central bank, known as Banxico, said recent information shows that some parts of domestic demand have reduced their rate of expansion and it does not expect any pressure from overall demand on inflation in the foreseeable future.
    Mexico’s inflation rate in May was 4.63 percent, marginally lower than April’s 4.65 and still sharply above the central bank’s 3.0 percent target.
    But the central bank said that the recent rise in headline inflation was due to temporary factors and inflation is expected to ease slightly in June and “intensify the downward trend from July to settle at the third and fourth quarters between 3 and 4 per percent.”
    Meanwhile, Mexico’s core inflation rate has remained below 3 percent for several months, suggesting convergence toward the bank’s target.
    “By 2014 it is anticipated that the annual headline inflation locate close to 3 percent. Meanwhile, it is estimated that annual core inflation will remain even below that level in most of 2013 and 2014,” the central bank said.
     Looking ahead, the central bank said it would “continue to monitor developments in all the factors that could affect inflation” and keep an eye on any second-round effects of recent price changes to “be able to respond, if necessary, to achieve the inflation target.”

    www.CentralBankNews.info

US Jobs Data Whip Bullion Prices as Hedge Funds Stay Bearish, Indian Jewelers Decry Import Curbs

London Gold Market Report
from Adrian Ash
BullionVault
Fri 7 June, 08:50 EST

GOLD and silver prices whipped sharply Friday lunchtime in London, as new US jobs data matched analyst forecasts with a 175,000 rise in Non-Farm Payrolls for May and a slight rise in the jobless rate to 7.6%.

Having touched 1-week highs above $1419 per ounce on Thursday, gold fell back through $1400 Friday as European stock markets erased earlier losses.

Silver lost and then regained 30¢ per ounce before falling again through $22.40, also near this week’s lowest level.

“The market [had] the feeling that it wants to go higher,” said one broker earlier Friday.

“While the technical downtrend is still in place,” says bullion market-maker Scotia Mocatta in a technical note, “the trend is weakening as gold slowly grinds higher.”

With gold still headed for a slight weekly gain, the 33 analysts, traders and retailers surveyed each week by Bloomberg’s commodities team are “more bullish” than any time since March 22 – three weeks before the worst crash in gold prices in 30 years – the newswire reports.

Nineteen respondents expect gold prices to rise next week, against 8 bears and 6 neutral.

In the market, however, the number of hedge funds worldwide investing in gold fell from 310 to 290 between December and May, reckons EurekaHedge Pte Ltd., a Singapore-based consultancy, quoted by Bloomberg.

Latest data from US regulator the CFTC said speculative traders held the greatest number of bearish contracts on gold futures on record last week. Accounting for bullish bets, that move cut their net position as a group to a 5-year low equal to 171 tonnes.

Data for the week-ending Tuesday 4 June will be released after US markets close today.

Ahead of Friday’s jobs report, a new research paper from the Chicago Fed said Thursday that the US economy needs to add 80,000 new jobs per month to keep the unemployment rate steady.

“It’s time that we begin to gradually unwind [QE and zero rates],” said Philadelphia Federal Reserve president Charles Plosser – a voting member of the Fed’s policy committee at alternate meetings in this year – on Thursday.

But markets have “over-reacted” to talk of tapering the Fed’s $85 billion in monthly QE, he said.

“The markets seem to take this very seriously at some level, which I think is probably a mistake.”

The Federal Reserve has said it will only consider raising interest rates when the jobless rate falls below 6.5%.

After the European Central Bank left its policy unchanged yesterday, France’s trade deficit and government deficit both showed a rise for May in new data Friday morning.

German industrial output surprised analysts by growing 1.8% month on month, but the Bundesbank today cut its forecasts for economic growth from 0.4% to 0.3% for 2013, and from 1.9% to 1.5% for 2014.

“Weak credit trends in the Eurozone,” says Standard Bank’s currency strategist Steve Barrow, “reflect themselves in continued recession and low inflation.

“[So] we expect the ECB to cut rates further, possibly as soon as next month.”

“The European banks had no choice but to shrink their balance sheets and sell assets,” Reuters quotes a “senior source” commenting on the dramatic fall in lending to commodity traders since 2011.

With Europe’s share of global commodity lending now down on one estimate from 75% before the Eurozone crisis to 50%, “I can’t see them becoming dominant again,” the newswire quotes Jean-Francois Lambert, head of commodity trade finance at HSBC.

Meantime in India – the world’s heaviest gold-buying nation – the government’s new campaign against household gold demand was challenged today by the jewelry industry, as well as market analysts.

“We are with the government on the need to reduce the current account deficit,” the Wall Street Journal quotes but not at the cost of damaging the industry,” chairman of the All India Gems & Jewellery Trade Federation, Haresh Soni.

“The recent round of initiatives to put a check on imports,” says Pankaj Parekh, vice chairman of the Gem & Jewellery Export Promotion Council, “will make lives of small and medium jewellers difficult in the coming days.”

Some 3.5 million people work in India’s gold and jewelry sector, says theEconomic Times, with 80% of them living in Bengal province.

But “The [government] knows they can’t control jewellery demand,” says Motilal Oswal analyst Kishore Narne to the Financial Times.

“They probably just think they might as well make some money off it.”

Adrian Ash

BullionVault

Gold price chart, no delay | Buy gold online

 

Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can buy gold and silver in Zurich, Switzerland for just 0.5% commission.

 

(c) BullionVault 2013

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

 

 

 

Sri Lanka holds rate, inflation seen in single digits

By www.CentralBankNews.info     Sri Lanka’s central bank held its benchmark repurchase rate steady at 7.0 percent as two recent rate cuts are expected to boost economic growth in coming months and inflation is expected to remain in single digits.
    The Central Bank of Sri Lanka, which cut its key rates in May and December by a total of 75 basis points, said financial institutions and markets have responded as expected with deposit rates, call money and prime lending rates declining.
    “It is expected that the easing of monetary policy since December 2012 would transmit smoothly to lending rates in the near future, thereby stimulating a sustained increase in longer term credit growth to the private sector, thus contributing to a higher level of economic activity, over the coming months,” the central bank said in statement.
    The central bank’s decision was widely expected following statements earlier this week by its governor, Ajith Nivard Cabraal, that rates were appropriate following the two rate cuts.
    Sri Lanka’s inflation picked up speed in May to 7.3 percent from 6.4 percent in April but still below the 9-10 percent rate seen in the nine months from June 2012 through February.

    The central bank attributed the rise in prices to an adjustment in electricity prices, but added that core inflation continued its decreasing trend from February and was at 5.7 percent in May so both core and headline inflation have remained in single digits for 52 consecutive months.
     “Going forward, inflation is expected to remain at single digit levels, supported by supply side improvements and the absence of demand driven inflationary pressures,” the bank said.
    Growth in broad money moderated further in April to 15.2 percent from 15.6 percent in March, in line with the central bank’s expectation, but growth of credit to the private sector decelerated to 10.2 percent in April from 10.9 percent, partly reflecting the high base, the bank said.
    Sri Lanka’s balance of payments continues to be in surplus and is expected to improve further, and the central bank has bought some US$ 580 million from the domestic market so far this year, raising the gross official reserves to US$ 6.9 billion by the end of April, the equivalent of 4.4 months of imports, with the rupee strengthening against major currencies during the year.
    The central bank’s two recent rate cuts were aimed at boosting economic activity and the central bank governor confirmed this week that first quarter activity had been slower than expected. First quarter data will first be released by the middle of this month.
    However, the central bank was maintaining its 7.5 percent growth target for 2013, up from 2012’s 6.4 percent but down from 2011’s 8.2 percent. Inflation this year is forecast to average some 7 percent.

    www.CentralBankNews.info

Gold, Silver & Precious Metal Miners Signals

By Chris Vermeulen, thegoldandoilguy.com

It has been a very long couple of years for the precious metal bugs. The price of gold, silver and their related mining stocks have bucked the broad market up trend and instead have been sinking to the bottom in terms of performance.

Earlier this week I posted a detailed report on the broad stock market and how it looks as though it‘s uptrend will be coming to an end sooner than later. The good news is that precious metals have the exact flip side of that outlook. They appear to be bottoming as they churn at support zones.

While metals and miners remain in a down trend it is important to recognize and prepare for a reversal in the coming weeks or months. Let’s take a look at the charts for a visual of where price is currently trading along with my analysis overlaid.

Weekly Price of Gold Futures:

Gold has been under heavy selling pressure this year and it still may not be over. The technical patterns on the chart show continued weakness down to the $1300USD per once which would cleanse the market of remaining long positions before price rockets towards $1600+ per ounce.

There is a second major support zone drawn on the chart which is a worst case scenario. But this would likely on happen if US equities start another major leg higher and rally through the summer.

PriceOfGold

 

Weekly Price of Silver Futures:

Silver is a little different than gold in terms of where it stands from a technical analysis point of view. The recent 10% dip in price which shows on the chart as a long lower candle stick wick took place on very light volume. This to me shows the majority of weak positions have been shaken out of silver. Gold has not done this yet and it typically happens before a bottom is put in.

While I figure gold will make one more minor new low, silver I feel will drift sideways to lower during until gold works the bugs out of the chart.

 PriceOfSilver

 

Silver Mining Stock ETF – Weekly Chart:

Silver miners are oversold and trading at both horizontal support and its down support trendline. Volume remains light meaning traders and investors are not that interested in them down where and it should just be a matter of time (weeks/months) before they build a basing pattern and start to rally.

SilverMiningStocksETF

 

Gold Mining Stock ETF – Weekly Chart:

Gold mining stocks continue to be sold by investors with volume rising and price falls. Fear remains in control but that may not last much longer.

GOldMiningStocksETF

 

Gold Junior Mining Stock ETF – Weekly Chart:

Gold junior miners are in the same boat with the big boys. Overall gold and gold miners are still being sold while silver and silver stocks are firming up.

GoldJuniorMiningStocksETF

 

Precious Metals Trading Conclusion:

In the coming weeks we should see the broad stock market top out and for gold miners along with precious metals bottom. There are some decent gains to be had in this sector for the second half of the year but it will remain very dicey at best.

If selling in the broad market becomes intense and triggers a full blown bear market money will be pulled out of most investments as cash is king. Gold is likely to hold up the best in terms of percentage points but mining stocks will get sucked down along with all other stocks for a period of time. This scenario is not likely to be of any issue for a few months yet but it’s something to remember.

Get My Daily Precious Metals Report Each Morning And Profit!
By Chris Vermeulen

thegoldandoilguy.com

How to Play the Invest-for-Tomorrow Game in Medtech: Alan Brochstein

Source: George S. Mack of The Life Sciences Report (6/6/13)

Alan Brochstein of AB Analytical Services blogs, publishes and creates model portfolios for retail investors and consults with institutional investors. He leans heavily toward medical technology because he sees the industry’s devices, instrumentation and molecular diagnostics as huge efficiency creators and money savers for hospitals. He never pulls the trigger on a stock unless it has adequate insider ownership and superb management—two ingredients that almost always lead to success. In this interview with The Life Sciences Report, Brochstein highlights several turnaround stories that he believes can create real shareholder value and make money for investors.

The Life Sciences Report: Alan, you hold a multitude of advisory positions both internally and externally. Please connect all those dots for me and explain your business model.

Alan Brochstein: I was working at Piedra Capital Ltd., then a $500 million ($500M) assets-under-management equity firm, and left in 2006 to start my own firm, AB Analytical Services. The original plan was to work almost exclusively with small investment advisers, and I continue to do that to this day. But the business has evolved along the way. I currently work with a few registered investment advisers, and I sit on the investment committee at Friedberg Investment Management Inc.

I’ve stuck with those original parts of my business model, but in early 2007, I started blogging for Seeking Alpha. I really enjoy connecting with the public through that interaction. I started a model portfolio service in 2008, and have three different models. One of the stock models is called Top 20. It’s very eclectic and represents my best ideas. My Conservative Growth/Balanced portfolio is more disciplined, and contains 60% stocks and 40% bonds. The goal of the latter is income and capital growth, and also capital preservation. I just hit the five-year anniversary of Top 20; it has returned approximately 133%.

Yet another part of my business has had a huge impact on everything I do. For four years I’ve been working with Bethesda, Maryland-based Management CV. This independent research firm provides an analytical framework for evaluating management teams, and I’ve contributed hundreds of due diligence reports on management teams to the business.

TLSR: Management CV helps investors determine the quality of management. Is this a proprietary product that’s offered to institutional investors?

AB: Yes. It’s an institutionally oriented service focused on larger, publicly traded companies.

TLSR: You’re a chartered financial analyst (CFA). Do you create discounted cash flow (DCF) models on companies you follow?

AB: I do some modeling, but my approach is mainly to review other people’s models instead of building my own. Building models is not the best use of my time. It’s more important to me to understand what’s driving the numbers in a model.

TLSR: I know you follow medtech, which is what we are going to talk about today. What other industries do you follow?

AB: I’m a generalist, but a lot of my companies are in healthcare. I have a disproportionate number of stocks in medtech, which is an area that has fascinated me for years, and I’ve been able to find a lot of interesting names in that space. I tend to be focused, but not exclusively, on smaller companies. Some of them might even be considered micro-cap.

I have a watch list of 100 stocks that I follow. These 100 stocks aren’t the same every week; they are rather a living, breathing group of companies. If a company on my list is acquired, I have to find a replacement. Though I focus on 100 stocks at any one time, I like to think that I focus on more.

TLSR: My understanding is that you have been exploring the idea that insurance companies like medical technology companies because they save money on drugs. Would you expand on that idea for me?

AB: One specific example of this phenomenon is a new technology called renal denervation (RDN). It’s a device-based technology for treating hypertension that has been resistant or unresponsive to conventional or first-line therapies. The therapy represents a huge opportunity, and it’s not going to be a monopoly. Medtronic Inc. (MDT:NYSE) will be first to market, and St. Jude Medical Inc. (STJ:NYSE)will be a fast follower. Medtronic’s Symplicity, available in some markets already, could be available in the U.S. later this year, while St. Jude’s EnligHTN received the CE mark in Europe a year ago and could be available in 2014. A lot of smaller companies involved in this technology have been acquired, but there are still several other players. Patients can go in for a quick, minimally invasive procedure, and then they may not have to take blood pressure medications for years. The benefit goes beyond comparing the cost of the medicine to the procedure; it is also about patient compliance issues and the side effects of the medications, as well as mitigating complications that may arise from unmanaged hypertension.

TLSR: These are large companies. St. Jude has a $12 billion ($12B) market cap, and Medtronic is more than four times that size, with a $52B market valuation. Can RDN technology actually move shares of these companies?

AB: St. Jude called out the market as a $25B opportunity a little over a year ago. I don’t know if that’s true or not, but optimism rules when you’re talking about the future. I have seen estimates that 25% of hypertensives fail to respond to conventional drug therapy, and St. Jude suggests that 4% penetration of the 250M global patients that fall into this category would yield a ($25B) market opportunity. I have also seen estimates that the market could be $2-3B per year within the next decade. According to government data, we spend more than $20B per year on prescription medicine to treat hypertension in the U.S. alone. Unfortunately for these companies, trying to get a lot of growth when so much of the business is exposed to the cardiac rhythm management market (CRM) market is challenging. I don’t follow Medtronic, but given that it’s larger, I would imagine it will be more difficult for RDN to affect share price. On St. Jude, I think RDN can definitely move the needle. But, is it enough to double the value of the company? No.

TLSR: Alan, I’m thinking that even as a minimally invasive therapy, RDN is going to be a difficult sale when there are alternatives. Nevertheless, it’s certainly going to be a valuable service for many patients.

AB: You are right. It’s not a first-line treatment; that’s for sure. But perhaps it could become first-line once safety and efficacy are better proven.

TLSR: You follow some surgical robotics names. Hasn’t hospital consolidation been a problem for this industry? Can you address this?

AB: I’m not sure we’ve reached the point where hospital consolidation is an issue with surgical robotics. I don’t think that’s been a problem for Intuitive Surgical Inc. (ISRG:NASDAQ) and its da Vinci Surgical Systems, which are used for prostatectomy, hysterectomy and many other procedures.

The other surgical play I’m following closely is MAKO Surgical Corp. (MAKO:NAS). Its challenge hasn’t been a macro issue with consolidation or other big-picture issues, but rather one of getting early adopters to its system, the RIO Robotic Arm Interactive Orthopedic System, which is used to perform minimally invasive MAKOplasty procedures for partial knee resurfacing and hip replacements. The company has been able to get surgeons to use the system, but it has tapped out that pool of single users and has had to move up to the executive or CFO levels at hospitals to get sales. Hospitals are saying the system is good, but they must get more surgeons to use it to achieve economies of scale. The selling process takes time, and that has been the problem with MAKO. It’s not as far along on the adoption curve as it would like to be.

TLSR: Could you address some other names and their value propositions?

AB: I have mentioned St. Jude Medical. The value proposition there is the great franchise. St. Jude does a lot of research and development (R&D), but it’s never the one that invents a new product or procedure. Instead, the company comes up with a better version, a better mousetrap.

Management is a very important consideration for me. Chairman and CEO Dan Starks is very passionate about cardiac health, which is most of St. Jude’s business. Dan and his former CFO John Heinmiller, who now serves as executive vice president, own tons of stock in the company. St. Jude’s is very well run. For years, it stood out from Medtronic and Boston Scientific Corp. (BSX:NYSE) for its quality, but then ran into quality issues with the Riata Silicone Defibrillation Leads for its CRM devices. The company voluntarily stopped selling the Riata leads in December 2010. That was a disaster, but it’s mostly behind the company now. There were residual questions about the Riata replacement technology, the Durata lead system, which has come under attack. But data released by Population Health Research Institute at Heart Rhythm 2013 seemed to refute the reported problems.

CRM has been a tough area for all the players because of changes in the market. Defibrillation products may have been overused. Cardiologists, like all physicians, want to do procedures—that’s what they do. People were getting CRM devices when they might not have needed them. In any event, that market has been very sluggish recently. We’re starting to see it come back now, just like the hip and knee market. Especially with recent information about Durata not having the feared flaws, St. Jude can get its premium valuation back.

TLSR: You mentioned MAKO before.

AB: People who have been successful in the past are more likely to be successful in the future. I knew about MAKO because Management CV had done a profile on the company and its CEO, Maurice Ferre, who has a history of building and selling companies. I was very familiar with MAKO as a good management story.

Well, that kind of fell apart last year. By the time I looked more closely at it, MAKO had missed two straight quarters, and went on to miss another. I think MAKO is a high-growth story where people’s expectations were probably too high. The stock was decimated after the company had to reduce RIO placement guidance in Q2/12 and Q3/12 and then its procedure expectations in Q4/12. The company’s procedure growth has slowed from about 50% to 30%. But it seems like the management team has now figured out what the challenges are.

TLSR: MAKO is up 14% over the past four weeks, but is down 48% from a year ago. Do you like it now? Do you see it as a value play?

AB: I do, but value is a tough word to use for this company. I have it in my Top 20 model portfolio. It has high gross margins, but it is not profitable right now. I think the stock could double to $23 per share or so, but the company has to hit its numbers. That’s been the problem.

TLSR: No company is going to continue to grow revenues at 50%.

AB: That’s probably true, but I think the decline happened a little quicker than people thought.

TLSR: Go to your next idea, please.

AB: Masimo Corporation (MASI:NASDAQ), based in Irvine, is interesting. I was charged by my clients to find a replacement for one of my stocks, Synovis Life Technologies, which was acquired by Baxter International Inc. (BAX:NYSE) at the end of 2011. I needed to find another Synovis. That meant I was looking for a rapidly growing company that investors didn’t appreciate for whatever reason.

Masimo struck me as a similar opportunity. It was hurt by declining earnings after it settled with Covidien Ltd. (COV:NYSE) and accepted lower royalties for its pulse oximetry technology. The idea was that as Masimo progressed, investors would realize the core underlying growth was pretty high and that vanishing royalties from Covidien were a one-time hit. Again to management: The company’s CEO, Joe Kiani, is an entrepreneur and a brilliant guy who invests for the future. A lot of investors like that, but other investors want to see earnings today, right now. Kiani has done some dilutive acquisitions—technology buys—that have chipped away at earnings. However, he has a better appreciation now for the balance between investing for the future and letting some drop to the bottom line today. He has made some large open-market purchases, too, at great prices, including a purchase of 50K shares near the lows at $18.47 a year ago.

TLSR: What’s the growth driver at Masimo?

AB: The main opportunity that I see for this company is its ability revolutionize the way hemoglobin is monitored. Right now, it is guesswork, meaning early transfusions on a preemptive basis. The current standard is to draw blood, run it to the lab and then wait for an answer, which is time-consuming. Masimo can monitor hemoglobin in real time, allowing surgeons to avoid early transfusions. Transfusions are dangerous and expensive, but Masimo’s noninvasive Total Hemoglobin monitoring system, based on its Rainbow technology, has been clinically proven. If cost-benefit analyses are performed, hospitals see that a lot of money is saved by using the system. In fact, Masimo guarantees it.

TLSR: I note that you have a small cardiovascular play in coverage where investors may be able to get a significant bump.

AB: I have followed Volcano Corp. (VOLC:NASDAQ) for years, and the stock has always been pretty expensive. The company has alliances with many companies, except for Boston Scientific, which is its competitor in intravascular ultrasound (IVUS), and St. Jude, which competes in fractional flow reserve (FFR). Volcano is focused on percutaneous coronary intervention (PCI), which is a minimally invasive or nonsurgical method of dilating narrowed coronary arteries to place stents.

Volcano’s original technology is IVUS, which aids the interventional cardiologist in placement of a stent. The company grew market share in that area; it was a big growth business. All of a sudden the company’s PCI business hasn’t been quite as good. Medicare and insurance companies have questioned potentially excessive stenting, which has been a problem for Volcano as procedures have actually declined. On the other hand, the company has developed its FFR technology, which helps determine if the PCI should even be done. The company has both angles covered. The company also has been very heavily focused on Japan, and recently that’s been a problem because of the currency moves between Japan and the U.S.

Volcano seems to compete very well with the giants in the field. The bottom line is that Volcano is a company that saves the healthcare system money, which addresses a theme of mine. FFR can prevent unnecessary surgeries.

TLSR: The medtech category also includes a lot of diagnostics and prognostics technology. Can you mention something in this realm?

AB: That gets me to the final company I want to talk about, Luminex Corporation (LMNX:NASDAQ), which is based in Austin, Texas. One of the things that attracted me to Luminex is its CEO, Patrick Balthrop, who has been running the company for nine years. He spent 20 years at Abbott Laboratories (ABT:NYSE), mostly in its diagnostics division. This guy really knows how a molecular diagnostic company should work. I can’t tell you I understand all the technology, but what I can tell you is it has a lot of royalty revenue coming from a total of 40 paying partners.

The company is known for its respiratory test panel, and has recently introduced a gastrointestinal pathogen panel that allows rapid diagnosis of bacteria, viruses and parasites. Molecular diagnostics allow for quicker diagnosis, which is a money saver and potentially saves lives as well.

TLSR: Diagnostics seem to have a short shelf life. They lose market share rapidly when another test appears on the market. What about the future?

AB: Luminex is investing 20% of its revenue in R&D, and that goes to the problem of obsolescence. Like Masimo, this is a company with a vision for the future. I imagine it could show more profit now, but it is investing for 5–10 years out, not next year. Unlike a biotech company, which needs U.S. Food and Drug Administration (FDA) approval—if it doesn’t get it, lights out—Luminex has revenue and is growing that revenue at 15–20% per year.

Unfortunately, from an earnings standpoint, Luminex is reinvesting everything it makes, so it ends up with a sky-high price/earnings ratio, and that scares off investors. But I’m very happy with what it’s doing. I feel like it’s a great story.

TLSR: The invest-for-tomorrow game is very difficult for most smaller companies. Are investors just afraid that they can’t pull it off?

AB: Investors are often focused on the short term, unfortunately. In this market, investors are focused on mature, dividend-paying companies, not growth and not speculation. There’s just not a lot of interest in small-cap medical device companies in general. The other issue for these companies is the 2.3% medical device tax. Because it’s an excise tax, it hurts a small company more than a big company.

TLSR: Thank you for these insights, Alan.

AB: I really appreciate it, George.

Alan Brochstein, CFA, has worked in the securities industry since 1986. He managed investments in institutional environments until he founded AB Analytical Services in 2007, and now provides independent research and consulting services to registered investment advisors. In addition to advising several hedge funds and investment managers, including Friedberg Investment Management, where he participates as a member of the investment management committee, Brochstein is also a senior analyst for the independent research firm Management CV. Brochstein also offers the Analytical Trader service at Marketfy, where he uses fundamental and technical analysis to offer specific trade ideas geared toward swing traders.

Want to read more Life Sciences Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

DISCLOSURE:

1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences 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 Life Sciences Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Alan Brochstein: 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.

4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.

5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.

6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

 

 

Friday Charts: Schizophrenic Investors, More Pickups and Why Yield Matters So Much

By WallStreetDaily.com

Words mean little on Fridays in the Wall Street Daily Nation.

Instead, I select a handful of graphics to put important economic and investing news into perspective for you.

So I’ll try to shut up now…

Another Pick-Up for Pickups

Last week, I did my best Jeff Foxworthy impression and mentioned that you might be a redneck if you drive a pickup. But you’d be a pretty darn smart redneck if you also owned a few hundred shares of Ford (F).

Well, that’s even truer today.

Since then, Ford F-150 sales data for May came out. And it looks like the boom times are back for dealerships!

Ford sold a total of 72,000 trucks in May, which brings the year-to-date total up to almost 300,000. That’s a 21.5% increase over last year – and the highest total since the recession hit.

As Americans keep buying pickups, is your portfolio built Ford tough? It should be.

Get a Grip, Would Ya?

The summer months promise to bring volatility to the stock market. But investors really need to get a grip on their emotions.

 

The latest bullish sentiment reading from the American Association of Individual Investors (AAII) dropped to 29.5%. Keep in mind that two weeks ago, it stood at a jubilant 49%.

So we’re talking about the largest two-week decline in bullish sentiment since the bull market began, according to Bespoke Investment Group.

And all it took was about a 5% selloff for the S&P 500?

Again, investors need to get a grip. I get that their risk appetite remains “almost paralyzed,” as UBS Group’s (UBS) CEO, Sergio Ermotti, said. But there’s no such thing as investing without volatility. Unless you’re Bernie Madoff.

I must confess. The contrarian in me rejoices when I see this data.

As average investors get more and more cautious about the rally, it’s a strong indicator that stock prices are going to head higher still. Bring it!

Wherefore Art Thou, Yield?

Yesterday, I chastised Bloomberg for preying upon everyday investors’ insatiable hunger for income.

Today, I want to flip the script and share why we’re such easy targets: We’ve watched yields literally collapse ever since the Great Recession hit.

“In the past six years, central banks around the world have cut interest rates 515 times, increased global liquidity by $12 trillion and crushed bond yields to the point that almost 50% of all global government bond market cap currently trades below 1%,” says Michael Hartnett at Bank of America (BAC).

That’s left investors of every stripe wondering if they can get any income at all these days.

Sure you can. Just not a lot. Not from the old tried and true investments, at least.

Now you know why I’m such a fan of merger arbitrage opportunities in this zero-yield world. It’s a proven (but largely overlooked) way to earn short-term yields of 5% to 10% (or more).

Speaking of which, it appears that one of my recent merger arbitrage recommendations, Zhongpin, Inc. (HOGS), will close in the next 30 days or so. But fear not, I’m researching several new opportunities and will be in touch immediately once I find a suitable one.

That’s it for this week. Before you go, though, let us know what you think of this weekly column – or any of our recent work at Wall Street Daily – by sending an email to [email protected], or leaving a comment on our website.

Ahead of the tape,

Louis Basenese

Article By WallStreetDaily.com

Original Article: Friday Charts: Schizophrenic Investors, More Pickups and Why Yield Matters So Much

Doom and Gloom Creates Buying Opportunity in Stocks…

By MoneyMorning.com.au

Did the recent stock price action surprise us?

No. Just the opposite in fact.

The recent stock price action confirms what we’ve said in recent weeks.

While the mainstream press and many analysts banged on about the search for yield driving stock prices, we said investors didn’t really want yield at all.

Or not just yield anyway. They wanted more than that. It just goes to show, you need to pay more attention to what investors do rather than what they say…

The recent fall is exactly why we suggested you should tread with caution before buying income stocks at the high.

It was good to be cautious. The Australian market has slumped 400 points in two weeks. That means we’re in ‘correction’ territory now.

So, what was it about the market action that stumped so many in the mainstream?

Simple. Most folks looked at investors rushing into dividend stocks and assumed investors wanted income. While that’s partly true, it doesn’t tell the whole story.

The fact that dividend stocks reached a peak and then fell in recent weeks tells you investors want more than dividends…they want growth too.

Dividends Just Won’t Cut it

Look, it’s not hard to work this out. If investors as a whole really only want dividends they would keep buying while stocks are travelling high.

After all, paying a sky-high price for Commonwealth Bank [ASX: CBA] to get a dividend yield of 5% is still better than anything you’ll get in a savings account.

But the fact is it’s not just about yield. There are a bunch of other factors involved. One of them is risk. You can lose some or all of your capital in the stock market, whereas thanks to the government guarantee you can’t lose capital from a bank account (subject to government-imposed limits).

There’s another reason. Foreign investors piled into the Australian market while it looked as though the Aussie dollar would keep climbing. Remember all those forecasts about the Aussie dollar hitting USD$1.50?

Well, now that foreign investors realise the Aussie dollar can fall, they’re quickly taking measures to protect their money. Either they’re selling Australian stocks and repatriating the dollars back to their home currency, or they’re putting in place hedging strategies to protect their Australian dollar exposure.

Both have the effect of putting further downward pressure on the Australian dollar. Of course, if the Australian dollar reverses and heads back up, the unwinding of these hedging transactions would increase the upward pressure.

That’s what happens in a leveraged market. You get bigger swings.

But perhaps the biggest fib about the recent move was the story that investors had given up on growth…

Greedy Investors Want More

It’s just not true that investors didn’t or don’t want growth. However, it’s not that they want growth instead of dividends (or vice versa) it’s that they want growth and dividends.

And you can’t blame them. When you’re getting 40-50% capital growth plus 5-7% dividend yield, it’s easy to be greedy. But with income stocks trading at full valuation, there wasn’t room for further growth.

So it’s not surprising that stocks fell back from the peak, just as we expected (and feared) they would. The question now is whether stocks will fall further.

The benchmark S&P/ASX 200 is already about 100 points lower than we had bargained for. Our bet was that stocks would trade between 4,900 and 5,200 points for the rest of the year.

For now we’ll stick with that view. Odds are the market has experienced what Murray Dawes calls a ‘false break’. That’s where an index or stock goes through a previous support or resistance point, but rather than continuing to fall or rise it reverses back with the range.

A Buyers’ Market for Sensible Investors

That’s why we continue to be bullish on stocks – and not just dividend stocks either. We’re especially excited about the opportunities in the technology sector.

We suggested you start to ‘average in’ to stocks when the index got to around 5,000 points. That means buying one-third or one-half of your usual transaction size.

If you followed that advice, we’d suggest buying another third or half of the position today. While there’s still a risk stocks could fall further, investors with a sensible stock exposure should be able to invest through this volatile period without any worries.

Furthermore, the recent fall shows perfectly why we still recommend a relatively conservative approach to the stock market.

The market can turn on a sixpence quickly. If you have too much of your wealth in stocks, these big moves can cause you to panic and sell when you should be looking to buy stocks.

In short, this recent short-term fall has given you a great opportunity to top up your stock portfolio while over-exposed investors sell.

Although the growth and dividend picture may not be as great as it was 12 months ago, even some of the big blue-chips could give you 20-30% growth plus 6% dividends over the next year.

Again, we know it’s not a popular view to take in this market, but stocks look pretty good value right now. It’s definitely a time to buy rather than sell.

Cheers,
Kris

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From the Port Phillip Publishing Library

Special Report: How to Buy Better Stocks

Daily Reckoning: Why it’s Going to Get Ugly When Interest Rates Rise Again

Money Morning: Signs of Stress in the US Bond Markets

Pursuit of Happiness: Improving Your Life Through New Technology

Australian Small-Cap Investigator:
Why Now is a Good Time to Invest in Small-Cap Stocks

The Difference Between Great Technology and Great Technology Businesses

By MoneyMorning.com.au

How many times do you come up with an idea and think to yourself, ‘Wow, I should really do that.’

People in general have the capacity to come up with great ideas. We are all inherently creative to some extent. But there are a few key factors that separate great ideas from great technologies and from great businesses.

In this current global economic environment, a lot of businesses are struggling. There’s a lot of doom and gloom about. Yet it seems every other day there’s a story about successful technology companies making billions of dollars.

Recently the ‘Billion dollar Buy-out’ is the catch phrase running around tech hubs like Silicon Valley. But what takes a company from being worth nothing with a great technology to, to a billion dollar business?

Before we look at the answer first I should point out that, like with the English language there’s an exception to every rule. There are some companies that just have technology so good it sells itself.

A good example of that is Atlassian. Atlassian is an Australian private company that has no sales force, just a great software solution. They develop proprietary software that helps companies track information, analyse data, collaborate on documents and develop their own programs.

Not quite a billion dollar company yet, Atlassian has gone from start-up to about $200 million in just 10 years. Their clientele includes eBay, Facebook, Twitter and LinkedIn.

Also there are some great technology companies worth billions of dollars like photo-sharing website Instagram, and microblogging platform Tumblr. But…that doesn’t make them great businesses either. Mainly because they don’t actually make any money. These two are examples of a great idea that people love, but don’t pay for.

But there are a lot of great ideas in the world. A lot of inventions, a lot of smart people coming up with world changing ideas. Some get lucky (like Instagram and Tumblr), some fail and some take years of hard work.

For those ideas to become great companies, the pathway to that destination is relatively simple.

  1. Have an idea,
  2. Turn the idea into an invention,
  3. Sell the invention to some people to see if it’s good,
  4. Create a business to sell invention to more people,
  5. Have plan for business, make it big,
  6. Sell invention to many people,
  7. Make invention better,
  8. Make company bigger,
  9. Repeat cycle and add to business model,
  10. Sell for a billion dollars.

Sounds simple enough? Well unfortunately it’s not. Most people get to step one easy enough. But then most people will fail at step 2.

For the very few that make it to step 2. Most of them will fail at step 3. And for those that make it to step 4…they are likely to fail in the first year of business.

The Best of the Worst and the Best of the Best

But some do make it through the other side, and still can’t take great technology to a great business. Here’s a couple of examples of great technology, but not great businesses.

  1. Segway.

    The launch of Segway had hype and fanfare like nothing before. It was the answer to the problems of personal transportation. It was a game changer…well that’s what the owners believed at least.

    The Segway is actually an amazing piece of technology. With inbuilt gyroscopes it’s a self-balancing battery powered transportation device.

    It’s got a swathe of computers and motors that work in tandem to make the machine work. But Segway never really took off as a business. Why?

    Well the technology is great and the sales pitch is outstanding. But the Segway didn’t actually solve a big problem. It was just something new and interesting. It ultimately failed to disrupt the transportation market it was aiming at, personal transport. People couldn’t afford it and didn’t find it particularly helped them in any way.

  1. MiniDisc.

    Cassette tape ended the reign of the record player. The ability to have a compact portable audio device was ground breaking, but then CD’s came along and spoiled the party for cassette tapes.

    CD’s were the major format at the time, and dominated the music industry for many years. But in 1992 a new technology and format came out that was going to spell the end of CD’s forever. It was great technology, it was the MiniDisc.

    You could quickly search through discs, and even record and edit on the portable device itself. It was better tech than all other audio formats.

    But the problem with MiniDisc was hot on its heels was still better technology. Technology that would change the way we listen to music, and change the whole music industry forever. MP3′s and MP3 players.

Each of these examples highlights a different problem that stops great technology from being a great business.

Segway had tunnel vision and weren’t prepared to accept that as great as their technology was it didn’t really solve a problem for lots of people. And although they are still a business, they certainly aren’t a great technology business.

MiniDisc weren’t open and aware to other technologies in the market place. They failed to appreciate the market in which they were trying to build a business. Within a few years a superior technology simply overtook it.

But for point of comparison, let’s look at some great business, and see what made them stand out in a competitive world of technology.

  1. Apple.

    You simply can’t go past Apple when it comes to turning great technology into a great business.

    When Steve Jobs and Steve Wozniak put together the first Apple computer they didn’t know the impact it would have on the world. But what they did have was a great vision to put a Personal Computer in the homes of millions of people.

    The benefit they had here was that they started a whole new industry. The Personal Computer didn’t exist at that stage. So the two Steve’s had the advantage of being early movers.

    That’s not to say there weren’t competitors. IBM and Dell became competition, as did Microsoft when it came to operating systems and software. But what Apple did was make their products beautiful and easy to use. And what they were able to do was design, market and sell their products like no one else.

  1. Nokia.

    Although not at the pinnacle it once was, Nokia is an example of taking great technology and turning it into a great business.

    Mobile phones were all the rage from the late 80′s into he 90′s and of course the smartphone revolution today. But Nokia dominated the mobile phone market through the 2000′s. How?

    What Nokia did was make a product accessible to the masses using available technology. Mobile phones were expensive devices that only the affluent and rich could afford.

    Nokia changed all that by putting to market an affordable mobile phone for everyone. This led them to having the top 6 bestselling mobile phone models of all time.

    They sold almost one billion units worldwide between those top 6 models alone. Nokia phones are still the number one used phone in developing nations across Africa.

There a couple of key factors that made these two companies tech giants of the world.

Apple had the combination of a great technical guy in Wozniak, but a great salesman in Jobs. Without the creative and marketing genius of Jobs, Apple would simply be a company for computer hobbyists.

If Wozniak had gone it alone he wouldn’t have had a great company. If Jobs had done it himself the company wouldn’t have had great technology.

Likewise Nokia didn’t necessarily have the marketing genius and personality of a Jobs-like leader. But they identified an unmet need in a market that affected millions of people.

They created a big solution to a big problem. And that was to put affordable mobile phones in the hands of everyone. They also had the advantage of being the first company to mass market cheap mobile phones.

The Great Business Checklist

When we look at these basic examples of great technologies, it’s fair to say not one technology is necessarily better than another. They all meet an unmet need, and they all were new technologies of their time.

But what companies like Nokia and Apple were able to do was have the leadership and management in place to make great technologies into great businesses. They also met an unmet need that impacted millions of people around the world and were also able to make their technologies simple and accessible to everyone.

And that’s the key difference between great technology, and great technology companies. It’s really got nothing to do with the technology at all.

It’s about the people that lead the technology and the team that’s involved to take it from good to great. It’s about making it accessible and relevant to lots of people, not just one small segment.

These companies also had the foresight to see when something wasn’t working. For them failure was par for the course, just a part of the process. And both Apple and Nokia had their fair share of failures. But they saw the problems, and fixed them the next time around.

So here’s the checklist that makes a great business from a great technology.

❑ Great Idea.

❑ Great Technology.

❑ Technical People: Innovators, Programmers, Scientists.

❑ Non-Technical People: Visionaries, Marketers, Sales people.

❑ A plan to change the world.

❑ Humility to know if something isn’t as great as you thought it was.

❑ Drive to keep going if the idea and the technology is great enough.

With the steps outlined and the checklist above, there’s potential to turn great technology into a great business. It’s hard, takes years and there’s a very good chance it won’t work.

But the right tech, the right people, the right plan and the drive to make it happen, gives a fighting chance of making a truly great technology business.

Sam volkering.
Editor, Money Morning

Join me on Google+

From the Archives…

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

Bernankenstein’s Financial Monster

By MoneyMorning.com.au

Just when you think central bankers are as clueless as our Treasurer, they go and surprise you. The release of minutes from the latest US Federal Reserve Advisory Panel meeting was a bit of a revelation.

The Federal Reserve’s ‘mad scientists’ appear to realize they have created a financial monster. Call it Bernankenstein’s Monster if you like. Take this extract (bold emphasis is mine):

‘There is also concern about the possibility of a breakout of inflation, although current inflation risk is not considered unmanageable, and of an unsustainable bubble in equity and fixed-income markets given current prices.’

Concern about an ‘unsustainable bubble‘? Given the Federal Reserve’s previous track record of creating bubbles (housing rings a bell), all they can muster is ‘concern’. What about fear and alarm?

Here’s another bit of genius from the minutes:

‘Uncertainty exists about how markets will reestablish normal valuations when the Fed withdraws from the market. It will likely be difficult to unwind policy accommodation, and the end of monetary easing may be painful for consumers and businesses. Given the Federal Reserve’s balance sheet increase of approximately $2.5 trillion since 2008, the Fed may now be perceived as integral to the housing finance system.’

‘Reestablish normal valuations?’  Is this Fed code for the fact we now have abnormal valuations? The minutes insinuate the ‘mad scientists’ know they have stuffed it up.

The Experiment Has Gone Too Far Now

And as for the idea that the withdrawal of stimulus ‘may be‘ painful, please spare us the ‘may be’. The market is a highly dependent ‘junkie’. When the Federal Reserve turns off the ‘juice’ (voluntarily or involuntarily), a world of hurt waits.

Haruhiko Kuroda (Bank of Japan Governor) can’t afford to be as contemplative as the Fed. He is a modern day kamikaze – if he thinks of the inevitable outcome, he would never have signed up in the first place. Kuroda is zeroing in on the battleship called ‘deflation’.

A lot of others have moved into Kuroda’s slipstream and had a free ride on the devaluing yen and rising Nikkei. But poor old Kuroda has run into severe turbulence. This is tossing the markets around like a single seater in a cyclone.

Uncertainty and volatility are the hallmarks of Japan’s experiment in printing their way to inflation. The Nikkei’s wild swings (of up to 500 points in a day) illustrate investor nervousness.
According to Wikipedia ‘about 14% of kamikaze attacks managed to hit a ship‘. I think Kuroda’s odds of achieving his mission are even lower.

Central banks believe (publicly at least) asset bubbles can rescue the global economy. History doesn’t just tell us, it shouts at us; asset bubbles don’t fix anything.

The pain of the bust far outweighs the euphoria of the bubble. Time and again this is the lesson central bankers never learn.

Andy Xie, from Caixin Online summed it up:

‘Japan and the United States are using asset bubbles to revive their economies. They are struggling to manage the speed of bubble expansion or contraction. This dancing on a pinhead brings big uncertainty to the global economy. When they fail, a global recession may follow.’

Welcome to the Real World  

Central bankers tell you they are busy conducting an ‘experiment’. But the economy isn’t a scientific research project. They can’t control it. The global economy is a complex and unpredictable ecosystem. Its evolution is a function of the decisions the seven billion people who inhabit the earth make every day.

A handful of bureaucrats and academics with computer models can’t control this ecosystem, any more than marine scientists can control the ocean.

Acknowledging this fact is a step towards understanding the gravity of the situation. Otherwise, these crackpot scientists will blow the lab sky high.

We only have to look back a dozen years to see how their previous experiments (of lesser intensity) have failed.

US fund manager John Hussmann made this observation in his latest report:

‘… the last two 50% market declines – both the 2001-2002 plunge and the 2008-2009 plunge – occurred in environments of aggressive, persistent Federal Reserve easing.’

The significant share market losses suffered during the ‘tech wreck’ and ‘GFC’ occurred when the Fed was aggressively intervening (meddling) in the economy. The Fed’s tampering only makes a bad situation worse.

If we look further back in time, Hussmann discovered:

‘…the maximum drawdown (loss) of the S&P 500, confined to periods of favorable (meddling) monetary conditions since 1940, would have been a 55% loss. This compares with a 33% loss during unfavorable (non-meddling) monetary conditions.

According to Hussman the market collapses ‘were preceded by overvalued, overbought, overbullish euphoria‘. This is what asset bubbles do. The animal spirits run strong – the need for greed drives values well above rational levels.

Anyone with a passing interest in the financial world knows the current level of meddling is without precedent. So if all the previous periods of ‘Fed intervention’ resulted in 50+% losses, what pain is in store for this market?

The following charts show the current level of disconnect between the market and the economy.

The first chart tracks US economic activity. In 2008/09 (the grey shaded area represents a recession) all measures of economic activity fell into a crater.

The important take from this graph is 2010 onwards. After the economy ‘recovered’ from its initial GFC shock, it has steadily declined. This is in spite of the US Fed spending trillions (over the past four years) ‘stimulating’ the economy. The Great Credit Contraction is proving far more powerful than the printing press.

This next chart compares the performance of the S&P 500 index with the level of margin debt (borrowing to invest) in the US. Talk about a mirror reflection. 

While the economy (Main Street) is tanking, Wall Street is gearing up and milking the experiment for all it’s worth.

The next wave down in this Secular Bearmarket will be gut wrenching. It’ll make the previous two corrections look like gentle slippery slides.

Interest rates are destined to go lower, but being in a cash bunker is still the best place to observe the inevitable detonation of this experiment.

Vern Gowdie
Contributing Editor, Money Morning

Join Money Morning on Google+

From the Archives…

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