Month: August 2013

Source: Alec Gimurtu of The Metals Report (8/20/13)

http://www.theaureport.com/pub/na/mark-seddon-why-you-should-look-twice-at-an-ugly-duckling-metal

Tungsten just doesn’t have the sex appeal that made investors fall for the rare earth story. But maybe that’s its trump card, considering the boom/bust cycle that swept rare earths didn’t touch tungsten’s slow, steady price increases. Analyst Mark Seddon of Tungsten Market Research has long been watching the often ignored metal, and asserts that tungsten is a harder sell, but a better buy for investors. In this The Metals Report interview, Seddon outlines tungsten’s finer points and suggests miners are poised to reap rewards.

The Metals Report: Mark, what is the supply situation with tungsten?

Mark Seddon: China accounts for approximately 80% of global tungsten supply, so it’s the clear dominant player when it comes to both tungsten and rare earth elements (REEs), both of which are on most national lists of strategic or critical materials. The Chinese government has recently taken an active role in managing supply for a broad range of strategic metals, including tungsten, through export quotas, mining quotas and licensing systems. These actions have reduced the availability of ores, concentrates and intermediate products available for export. China’s goal is to add value to their natural resources by serving its own domestic markets rather than export these materials—and refining and manufacturing jobs along with it. That dynamic applies to both tungsten and REEs.

Another similarity is the fairly significant price rises in both markets. But while REE price hikes have been labeled a bubble, that’s not the case with tungsten, simply because there has not been a lot of interest from the investment community. It is possible that a bubble in tungsten will happen in the future as investors see prices for products rising and that feeds a self-reinforcing investment case and increases investor interest. But we are not anywhere near that now.

There are notable differences between the two markets as well. One of the big differences between tungsten and REEs is their applications. Tungsten is a very industrial metal. It’s mainly used as a carbide or “hard metal” in drilling and cutting tools used in heavy industry. Tungsten is not sexy in that sense. It’s a very solid industrial market. This contrasts with REEs, which are used in a lot of newer, high-tech applications that are much easier for the investment community to make into an exciting story.

TMR: So, the tungsten narrative is a little more staid.

MS: Absolutely. Here in the U.K., the national press was running articles about REE production in China and how the Chinese might cut off supplies. The result would be no more wind turbines. That narrative is the type that gets lots of attention. Meanwhile, tungsten is used in industrial applications that people don’t get as excited about. The image of the market is quite different. Another thing to keep in mind is that tungsten is just a single element with a few critical applications, whereas REEs include a number of different elements with many applications.

TMR: How large is the tungsten market?

MS: I evaluate it in terms of volume. The global market is approximately 80,000 tons of tungsten metal content. When looking at supply/demand statistics, it is important to make sure that you are using consistent units. For clarity, I use tungsten metal content (W) rather than WO3 or other intermediaries.

TMR: Overall, is the tungsten market growing?

MS: The largest segment of the market is in cemented carbides or hard metals, which probably accounts for about a quarter of the market. Tungsten demand growth, over time, has consistently outperformed GDP. In the mid- to late eighties, for example, tungsten demand increased up to 8–10% a year when global GDP was growing at between 4–5%. The historical use of tungsten metal in mill products like filaments for light bulbs accounts for around 15% of the market. The demise of the incandescent light bulb is not a major problem for the tungsten market, as tungsten is still used in some of the newer light bulbs.

TMR: Part of the REE narrative is the limited ability to substitute other materials in specific applications. Are consumers of tungsten required to use tungsten for their particular applications?

MS: Pretty much. In most current applications, there aren’t any viable substitutes for tungsten. Demand for tungsten is therefore relatively inelastic to price changes. Five years ago, when prices started to increase, demand didn’t drop. In fact, demand was still growing at the time. Consumers require tungsten and are willing to pay for it. There’s no real substitute.

TMR: How do you track the pricing trends in the various global markets for tungsten?

MS: One feature of tungsten, as with REEs, is there’s no terminal market. There’s no exchange where you can pull up the tungsten price like you can do with copper, gold or wheat. You’re relying on price discovery publications like Metal Bulletin, Metal Pages and Metals Weekly. Depending where they’re published, they give you an idea of regional pricing. Metals Weekly is a U.S. publication, so it tends to focus on U.S. prices. Metal Bulletin is based in Europe. Metal Pages has a very strong Chinese office so it can watch Chinese prices closely.

Even with those sources, it is still difficult to get exact prices for materials due to the nature of the contracts. But over time, you can see trends developing. Recently, because the European market has been weak, European tungsten prices have lagged behind China, where the tungsten market is growing quicker. Chinese economic growth is still at 7–8%, so they’re in a different part of the cycle than Europe, which has been a bit of a disaster area. But European prices are now starting to catch up and are similar to the Chinese export prices at the moment. Due to the nature of the market, pricing differentials do pop up in different regions from time to time.

TMR: Are there large players that can set prices across regional markets?

MS: Not really. I suppose if you’re looking at the price for tungsten, your first port of call is China because it accounts for so much of the market. The Chinese export market sets the world price and that’s a price you can buy Chinese tungsten—if it’s available. In the U.S., companies such as Global Tungsten Powders and Kennametal Inc. are quite big purchasers. In Europe, major consumers could include companies like H.C. Starck and Sandvik, for example. Whether they’re big enough to set prices, I don’t know.

Tungsten tends to be produced and sold to the consumer on relatively longer-term contracts, so spot business is less important. People tend to form their contracts based on the Metal Bulletin or Metal Pages price or whichever price source they feel most comfortable with. The contract will be for a certain amount of tonnage over a certain period of time and it could be a premium or a discount to the Metal Bulletin published price, depending on grade and quality.

TMR: How is tungsten price performance right now?

MS: The tungsten market is performing pretty well when you compare it to other minor metals—over both short and longer-term time horizons. Tungsten prices have been increasing for about five months in a row now. [See the chart below.]

The supply side will drive the tungsten price in the near future. China’s not going to change its strategic approach to natural resources management. The whole export license and export quota system will remain in place. Effectively, you’ll find less and less intermediate tungsten available for export from China. They’ll be shipping out more finished products whether it’s tungsten carbide powders, drill bits or cutting tools. The good news is that this presents an opportunity for tungsten mine projects.

TMR: In their yearly commodity summary for tungsten, the U.S.G.S. states that there are many tungsten mines throughout the world that are in various stages of coming on-line. Many of them are restarts of old mines. Will new mine supply make it to production given the difficulty of financing mining projects?

MS: You hit the nail on the head with financing. Securing funding is the biggest hurdle between projects and production at the moment. We’ve had many financial events over the past few years that have hurt confidence for lending. It’s not unique to the tungsten market—it’s pretty much universal. Tight lending is a macro condition that is working its way all the way down the food chain.

If you look at the fundamental situation, the tungsten market is going to need new production from somewhere. The Chinese aren’t pumping out extra tungsten. In fact, if anything they’re exporting less and less tungsten, particularly the intermediate and unrefined products. Demand in 2012 was level or down because of the problems in Europe. This year, I would expect demand to pick up a little bit.

The current producers of tungsten don’t have the capacity to materially increase production. The biggest mine outside of China, the Cantung mine in Canada, which is owned by North American Tungsten Corp. Ltd. (NTC:TSX), is producing at close to capacity and has only two or three years of reserves—and that’s a generous estimate. Most of the other mines, including a couple of mines in Europe, are producing close to capacity, so they don’t have much leeway. If demand starts to pick up, new projects or restarts will be needed to fill the gap.

In the last couple of years, the only major project that’s started production is the Nui Phao project in Vietnam, owned by Masan Group (private). It’s a Vietnamese company. That project has been through a number of hands and has been in development for quite a long time. At least $500 million ($500M) has been spent on the project. It is somewhat unique in that it is a polymetallic deposit. The process flow sheet is fairly complicated and getting the entire plant up and running will take some time. Other new producers include a smaller-scale operation in Australia andAlmonty Industries Inc.’s (AII:TSX.V) Los Santos mine in Spain. These are not particularly large projects, with annual production at less than 1,000 tons of tungsten each.

The largest projects in the tungsten market are up to $500M in size. That is small compared to world-class gold or copper projects. But it is large for this market, and far larger than many of the smaller mining companies can pull off. In that sense, the tungsten market falls between large-scale and small-scale mining. And there might be an opportunity in that space. You could say that the tungsten market “falls between two stools.”

In the context of an approximately 80,000-ton annual market with 3% growth, you need 2,400 tons of additional tungsten metal per year in supply, and with 5% growth you need 4,000 tons. That’s one new big tungsten project per year. It is difficult to see where that supply could come from. In the current market, miners can’t get the financing needed to take projects from a bankable feasibility study to construction. It’s a big problem.

The only other apparently fully funded project that I know of is the Hemerdon project in the U.K., which is owned by Wolf Minerals (WLF:ASX). That project is beginning construction now, but won’t be in production until late 2014 at the earliest. There aren’t any other significant projects that will come on-line in less than two years. Most of the larger projects have at least a two-year construction phase, but most of those projects aren’t fully funded yet. The fundamentals in the tungsten market are good. Price projections for tungsten are good. The problem is getting the funding. Add it all together and it appears that the tungsten market is storing up trouble. For many reasons, the tungsten market isn’t well understood by the investment community. The problem is that whoever’s looking to fund a project is waiting for tungsten prices to go crazy and then they’ll get involved. If an investor waits until then, the timing is just not right.

TMR: What are the ways investors can get exposure to the tungsten market? Are there ways to get exposure through refiners or specialty chemical makers? Is there any practical way to buy the physical commodity?

MS: Investment in mining companies is the only practical way to access this market right now. Tungsten is one commodity that’s mostly traded between producers and consumers. Historically, governments would enter the market and stockpile, but as an individual investor, you can’t really go out and easily buy a couple of tons of tungsten and warehouse it. That would be far outside normal market behavior.

If tungsten prices do take off, as I expect they will, the beneficiaries should be the producers. One of the larger current producers outside of China is North American Tungsten. Its current production comes from the Cantung mine, which hasn’t got much life left in it. The company has additional projects, like Mactung, that may be able to come on-line. A potential investor would need to examine each project closely.

In evaluating projects, investors have lots of variables to consider. What are comparable projects? What are the size, grade, operating costs and all the other details that need to be evaluated? Most importantly—what’s the funding situation? It is not always clear as to why some projects advance and others don’t. Mining is a risky business, but that is why there are rewards when it works out.

TMR: It has been great to talk to you.

MS: It has been a pleasure.

Mark Seddon has over 25 years of experience in the commodities industry as a trader, researcher, consultant and company executive. Seddon is an acknowledged expert in the tungsten market and writes a number of Roskill’s tungsten reports. He has presented papers on various minor metals at international conferences and was a speaker at the most recent International Tungsten Industry Association (ITIA) Annual General Meeting.

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DISCLOSURE:

1) Alec Gimurtu conducted this interview for The Metals Report and provides services to The Metals 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 Metals Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Mark Seddon: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

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Linear projections will often take you down the wrong path

By Elliott Wave International

Let’s begin with the old paradox: “The only constant is change.” This is the main reason why projecting present conditions into the financial future so often fails.

If someone had asked you in 1972 to project the future of China, would anyone have said, in a single generation, they will be more productive than the United States and be a highly capitalist country?

Project the U.S. space program in 1969, in fact many people did — there are plenty of papers you can read from 1969 to 1970 saying, well, it’s obvious that, at this pace, we’ll both have colonies on the moon very soon, and we’ll have men on Mars…

One could just as well ask someone to project, say, the Roman stock market in 100 A.D. I doubt if you’d have found anyone who said, well, it’s essentially going to go to zero.

— Robert Prechter in a speech given at the London School of Economics, (2009)
“Toward a New Science of Social Prediction”

Linear thinking can be detected in our common experiences as well. For example, what do you make of the socially awkward classmate in high school who grows up to be a successful business owner? Or the former class president who was voted most likely to succeed but now struggles to get by in adulthood? Projections for each of their futures were probably just the opposite of how their lives turned out.

In an article some years ago, my EWI colleague Robert Folsom addressed the flaws of linear thinking when he wrote about rogue waves, which a BBC report described this way:

“Freak waves are the stuff of legend. They aren’t just rare; according to traditional views of the sea, they shouldn’t exist at all. Oceanographers and meteorologists have long used a mathematical system called the linear model to predict wave height. This assumes that waves vary in a regular way around the average (so-called significant) wave height. In a storm sea with a significant wave height of 12m, the model suggests there will hardly ever be a wave higher than 15m. One of 30m could indeed happen — but only once in ten thousand years.”

Folsom then went on to explain that, in 2006, the European Space Agency had used a satellite to take thousands of photos of the ocean’s surface during a three-week period. It recorded 10 giant rogue waves, each at least 82 feet high.

So much for the idea that towering rogue waves could happen only once in 10,000 years.

Unexpected nonlinear occurrences can also unfold in the stock market.

Elliott can prepare you psychologically for the fluctuating nature of price movement and free you from sharing the widely practiced analytical error of forever projecting today’s trends linearly into the future. Most important, the Wave Principle often indicates in advance the relative magnitude of the next period of market progress or regress.

— Elliott Wave Principle, (p. 94)

What is the magnitude of the next market period likely to be? You may be astonished to find out, if you’ve been thinking linearly up until now. It’s time to start thinking differently from the herd and you can start doing just that with some help from a free resource from Elliott Wave International. See below for full details.

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By www.CentralBankNews.info

London Gold Market Report
from Adrian Ash
BullionVault
Tuesday, 20 August 09:05 EST

The DOLLAR PRICE of gold briefly jumped back above $1370 per ounce Tuesday lunchtime in London, before drifting lower as world stock markets fell hard with commodities.

 Reversing all of an earlier 1.2% drop – which analysts had called “profit taking” – spot gold prices spiked less sharply for non-Dollar investors as both Sterling and the Euro jumped to two-month highs.

Major government debt prices crept up, nudging bond yields lower from Monday’s new multi-month highs ahead of Wednesday’s release of minutes from the US Federal Reserve’s latest policy meeting.

“The gold price is holding up well despite the US 10-year government bond yield moving [higher] from the start of last week,” says a note from bullion dealers Standard Bank.

 “This is encouraging.”

 Gold prices “have been rising within an upward sloping channel for a month,” says a technical note from Société Générale.

 “Yesterday’s close…suggest[s] gold should pause at $1347.”

 “We feel that there’s at least a technical bounce here” in gold prices, J.P.Morgan analyst John Bridges told CNBC on Monday.

 “If you’re still uncertain about whether the financial crisis is truly over, then having some gold in the portfolio makes a lot of sense.”

 Following a report by Reuters meantime, a note from London bullion market maker HSBC adds that gold prices could also “find support from optimism that India’s bullion imports may resume.”

 India last week clarified its latest gold import restrictions, encouraging dealers to re-stock for the traditionally strong autumn festival season.

 New data this week show India’s gold imports rising in July despite the new measures, reaching $2.9 billion from $2.5bn in June.

 With the Rupee crashing to new all-time lows on the currency market, however, gold prices are near record highs for Indian households. So today’s Hindu festival of Raksha Bandhan is seeing only weak demand, according to the Wall Street Journal.

 New Delhi last week also raised gold import duty to 10% – up from 1% just 18 months ago – and banned the import of gold coins and medallions entirely.

 It further extended a rule demanding that 20% of all new gold imports be set aside for re-export to include unrefined dore, thereby affecting India’s domestic gold refining industry – originally a beneficiary of the government’s attack on gold bullion imports

 “We believe the currency will remain under pressure until the current account deficit narrows meaningfully, or capital inflows accelerate due to an improving growth outlook,” says credit ratings agency Moody’s.

 “The current macro context and consequently the monetary policy challenges are similar to those in FY1992,” says Barclays Bank, flatly contradicting Indian prime minister Manmohan Singh, who was involved in the reforms which followed India’s balance of payments and currency crisis of two decades ago.

 One major reform was then the liberalization of India’s strict gold import rules.

 “Major banks including HDFC Bank and Axis Bank have begun to raise lending rates,” reports India Express today, “which means people planning on festival loans will have to do a rethink.”

 “Opportunity exists for Dubai’s jewellery retailers,” says Zawya online. “Already a substantial gap has built up between gold prices here and what the same would cost in India.”

 Press reports in both Dubai and Singapore today say local gold dealers are seeing a sharp increase in buying by Indian visitors.

 “Speculative buying [in India] has picked up,” says Surender Jainani of the Bombay Bullion Association, “in anticipation of a further rise in gold prices…since the festival and marriage season starts soon.”

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 or Singapore 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.

By HY Markets Forex Blog

The European Market started the day with losses ahead of the Federal Reserve’s (Fed) meeting, which have been the main focus for investors as they await hints on the future of the central bank’s asset-purchasing program.

European Market

The European Euro Stoxx 50 lost 1.07% to 2,793.01 at the time of writing, while the German DAX fell 1.19% lower to 8,266.56. The French CAC 40 edged 0.97% lower at 4,044.26, while the British FTSE 100 declined 0.82% to 6,412.54.

The markets have been reacting towards the Fed doubts and speculations over whether the US central bank would decide whether to scale back on its monthly asset-purchasing program as early as September.

Investors are expecting the minutes from the Central Bank’s latest policy meeting to be released on Wednesday for further clues on the future of the asset-purchasing program.

The most recent economic data showed the US economy is picking up and improving, urging speculation that the Federal Reserve (Fed) may start reducing the asset-purchasing program next month.

According the latest economic data the world’s largest economy grew by 1.7% in the second quarter, as well as a boost in the job market as the jobless rate went down by 7.4% in July, the lowest since December 2008.

The Labour market is yet to show an improvement as prices have been falling below the central bank’s 2% target.

In Germany, producer prices dropped 0.1% month-on-month in July, while 0.5% annually, the Federal Statistical Office reported.

While in Spain, the government will auction treasury bills maturing in 6 and 12 months, with a target of €4 billion.

In Australia, minutes from the Reserve Bank of Australia (RBA) revealed the reason the bank decided to reduce its key rate to 2.5%.

“On balance, with growth expected to remain below trend for longer and inflation to remain within the target even with the effects of a lower exchange rate, members concluded that a lower level of the cash rate would better contribute to achieving sustainable growth in demand consistent with the inflation target,” the minutes stated .

The Reserve Bank of Australia (RBA) has been regularly cutting its interest rate over the past 20 months to support and boost the economy. RBA recently reduced its forecast to 2.25% from 2.5%, for the economy growth this year.

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The post European Market Declines Ahead Of Fed Meeting appeared first on | HY Markets Official blog.

Article provided by HY Markets Forex Blog

By HY Markets Forex Blog

Crude futures were seen trading lower on Tuesday as investors’ worries over the crises in Egypt, the warning of a storm in the Gulf of Mexico and supply disruptions in Iraq and Libya, among all the concerns is the worries of whether the US central Bank would begin to taper its asset-purchasing program earlier than expected.

WTI futures declined 0.68% to $106.13 a barrel on New York’s NYMEX at the time of writing, while the European benchmark Brent fell 0.75% to $109.08 after it climbed the $110-level during the Monday session.

Crude Futures – US Stockpiles

The North American crude declined for a second day, after hitting its longest advance in over three months. The speculation over the Federal Reserve’s (Fed) possible tapering forecast have been putting pressure on stocks and commodities, causing highly volatile trading.

Analysts forecasted that the US crude inventories reduced to 359.2 million barrels from previously forecasted 1.25 million barrels last week. If the figures from the expected Energy Information Administration (EIA) report match the predicted figures, it would be the lowest since September.

The US gasoline inventories are expected to drop by 1.25 million barrels in the week ended August 16, while distillate inventories are expected to show a rise of 750,000 barrels.

On Tuesday, a separate report is expected from the American Petroleum Institute (API) which would show the information collected on a voluntary basis.

Crude futures were seen in red right after the announcement from the US National Hurricane Center said that there were no tropical cyclone activities in the Atlantic basin. While the Oil Company BP Plc announced it would begin to return its offshore workers back to the oil and gas facilities in Gulf of Mexico.

While the oil-producing country Libya, has been affected by the on-going violence and crisis, pushing exports to its lowest since 2011.

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The post Crude Futures Falls On Fed Fears appeared first on | HY Markets Official blog.

Article provided by HY Markets Forex Blog

By www.CentralBankNews.info    Turkey’s central bank maintained its benchmark one-week repo rate at 4.5 percent but raised its overnight lending rate by 50 basis points to 7.75 percent and said “additional monetary tightening will be implemented whenever needed” until the inflation outlook is in line with medium-term targets.
    The Central Bank of the Republic of Turkey (CBRT), which in July raised its overnight lending rate by 75 basis points and also said it would tighten more if needed, kept the overnight borrowing rate steady at  3.5 percent along with the borrowing rate for primary dealers at 6.75 percent.
    The increase in the overnight lending rate, the ceiling in its interest rate corridor, was expected as the central bank’s governor said last month the repo rate would be maintained for a long time while the interest rate corridor would continue to be adjusted as lire volatility posed a threat to inflation. The governor also raised the inflation forecast.
    The central said today that “due to ongoing uncertainties regarding the global economy and the volatility in capital flows, it is important to maintain the flexibility of the liquidity management” and it would continue to adjust the composition of lira provided to the market.

   Turkey’s lira has been hard hit from the change in global risk assessments as investors prepare for a reduction in quantitative easing by the U.S. Federal Reserve, and the central bank said the weakness in capital flows that started in May had continued.
    “The Committee has indicated that these developments along with a more cautious monetary policy will bring the credit growth rates gradually to more reasonable levels,” the CBRT said.
    Turkey needs to attract foreign investment to finance its current account deficit and higher interest rates tends to support the currency and thus an inflow of foreign funds. In recent years the central bank worked to stem the inflow of capital, which stoked domestic asset prices and inflation, but since May capital has been flowing out and the central bank has had to reverse policy.
     The lira has fallen 8.5 percent this year against the U.S. dollar and was quoted at 1.949 to the dollar today. Last month the Turkish central bank raised its inflation forecast for the end of this year to 6.2 percent and for the end of 2014 to 5 percent.
    In July Turkey’s inflation rate rose to 8.9 percent from June’s 8.3 percent, the highest rate in 10 months, and well above the central bank’s 5.0 percent target. A depreciation in the lira’s exchange rate tends to raise import prices and thus inflation.
    The central bank said it expects inflation to begin to ease from August.
    Turkey’s current account deficit eased to US$4.4 billion in June from $7.3 billion in May and $8.3 billion in April. Last year the deficit amounted to 6.1 percent of Gross Domestic Product.
    The central bank said domestic demand and exports had shown moderate growth and the improvement in the current account continues, excluding gold trading.
    “The current policy framework, with the additional support from recent macroprudential policies, will continue to improve the current account balance,” the CBRT said.
     Turkey’s GDP expanded by 1.6 percent in the first quarter from the fourth for annual growth of 3.0 percent, up from 1.4 percent.
    Last month the central bank said growth this year may fall below a forecast 4 percent. A recent survey of economists, showed expectations for growth this year of 3.5 percent,  inflation at 7.3 percent and the lira-dollar rate at 1.93 at the end of the year.
    The central bank cut its repo rate earlier this year and shifted its interest rate corridor down to boost economic activity but since May it has been tightening policy to protect the lira due to an outflow of capital following news of a winding down of U.S. asset purchases and nervousness over the impact of demonstrations against the government.

    www.CentralBankNews.info

By WallStreetDaily.com

This is easily the most intriguing column I’ve written all year.

It’s about one of the most expensive books on Earth.

The book reveals a way to accomplish the impossible, which explains why Wall Street has been accused of burning as many of these books as it can.

It also helps explain why this book sells for as much as $2,500.

You won’t believe how I just found a copy.

Click here for the details.

Ahead of the tape,

Louis Basenese

The post Hijacked: The Most Expensive Book on Earth appeared first on  | Wall Street Daily.

Article By WallStreetDaily.com

Original Article: Hijacked: The Most Expensive Book on Earth

By Profit Confidential

“The company beat on earnings but missed on revenues”—that’s the story this past earning season, and a similar one to the last few quarters.

It’s a real problem. Corporations are squeezing expenses and employee productivity without investing in new operations. Excess cash is being returned to shareholders in a zero-growth environment, peppered with some price inflation. This is not the recipe for a rising stock market.

So many companies beat on one financial metric, but missed on another. And DENTSPLY International Inc. (XRAY), a well-known dental supply company, is no exception; a stable and profitable business, DENSTPLY, like so many others, has hit a wall in terms of growth.

According to the company, its second-quarter sales were $761 million, down slightly from sales of $763 million in the same quarter last year. Earnings grew to $87.2 million, or $0.60 per diluted share, up from comparable earnings of $80.8 million, or $0.56 per diluted share. Adjusted earnings grew seven percent to a record $0.66 per diluted share.

The company cited its European operations and currency translation as reasons for the zero top-line growth. Management revised its adjusted earnings-per-share (EPS) range for 2013 slightly lower to between $2.33 and $2.38 per share.

All in all, DENTSPLY is a good business that sells to well-heeled customers. But generating meaningful sales growth is proving very difficult, and it’s tough to make a case for investing in a company that isn’t growing both its revenues and earnings.

Investor sentiment in the equity market is a perpetual balancing act. The market will forgive underperformance in earnings if a company is experiencing strong sales; the opposite is true when revenues come in flat, but earnings surprise.

But this financial dynamic is not sustainable over time. While the liquidity in capital markets remains decent, the goal of generating real economic growth (over inflation) is not being achieved. If artificially low interest rates along the entire yield curve were meant to help jumpstart the U.S. economy, the result has only been stabilization, not growth. (See “Why Corporate Earnings Are Taking a Back Seat to the Fed.”)

In the end, improving balance sheets at the corporate and individual levels will serve the long-term interest of the economy. But presently, monetary policy has proven not to be enough on its own to kick-start the economy over the rate of inflation.

Getting corporations to invest their cash hoard is going to be very difficult. They require continued certainty and an above-average return on investment. Without the opportunity, it’s just easier to offer more dividends and/or buy back shares.

Many second-quarter earnings reports offered some growth in one financial metric. In a lot of cases, sales growth was just price inflation, which the marketplace is absorbing.

The absence of any real top-line growth will start to hurt earnings, and the upcoming third quarter should see this scenario unfold. It is, therefore, a tough case to be a buyer of equities at this particular time.

Weaker outlooks from companies like Wal-Mart Stores, Inc. (WMT) and Cisco Systems, Inc. (CSCO) are the canary in the coal mine. My outlook for the third quarter is definitely diminishing.

Article by profitconfidential.com