Month: August 2013

By Profit Confidential

On May 16, 1997, Amazon.com, Inc. (NASDAQ/AMZN) closed at $20.75. Fast-forward 16 years and the company, started by Jeffrey Bezos, is now trading just below $300.00 with a market cap of $131 billion. The stock is expensive, trading at 102-times (X) its estimated 2014 earnings per share (EPS), along with a massive price/earnings-to-growth (PEG) ratio of 9.14—meaning Amazon.com is trading well above its five-year growth rate.

While the significant valuation assigned by the stock market appears extreme at first glance, considering that other high-flyers are trading at lower valuations, like Google Inc. (NASDAQ/GOOG) at only 17X and even Facebook, Inc. (NASDAQ/FB) at 39X, there is also plenty of optimism.

Chart courtesy of www.StockCharts.com

Amazon.com has an aggressive online selling strategy to expand its business into nearly every facet in which money can be made. Initially a seller of books and music, the company, under the direction of Bezos, now wants a piece of just about every market sector. Just like Wal-Mart Stores, Inc. (NYSE/WMT) or Costco Wholesale Corporation (NASDAQ/COST) on the brick-and-mortar side, where these companies are selling everything, Amazon.com is trying to do it via the virtual arena.

In my view, the strategy adopted by Amazon.com makes a whole lot of sense. The numbers shopping online have evolved and are now a significant part of America’s economy.

For instance, I bank online, buy clothes, books, and music online, stream videos, and just about anything else you can think of. The Internet has become the real deal.

Amazon.com recently announced its streaming online video business that will go head-to-head with incumbent Netflix, Inc. (NASDAQ/NFLX) and Hulu. (Read “Now That the Video Streaming Wars Have Begun, Who Will Win?”) Amazon.com has the subscribers to monetize any business idea. The company will simply aim to sell more products to its massive subscriber base.

So it is not a surprise that Amazon.com may be extending its online grocery business “AmazonFresh” to New York City, expanding from the current Los Angeles and Seattle metro areas. While still at its infancy, the concept of ordering groceries online for same-day delivery has been around for over a decade, but really has not caught on with any major player. Maybe Amazon.com will become the dominant player, since I wouldn’t bet against Bezos.

But even if AmazonFresh fails to pick up steam, the aggressive expansion strategy of Amazon.com into numerous business segments is intriguing, which is why the company has been given such a high multiple. The valuation is clearly excessive but you get a sense that Amazon.com has what it takes to become one of America’s top companies going forward.

Article by profitconfidential.com

By Profit Confidential

Consumer spending in the U.S. economy is bleak. Until it picks up, you can’t expect the U.S. economy to see growth; after all, consumer spending does make up 60%-70% of U.S. gross domestic product (GDP).

Wal-Mart Stores, Inc. (NYSE/WMT), a bellwether stock for consumer spending, reported corporate earnings of $1.24 per share in its fiscal second quarter (ended on July 21). That’s an increase of 5.1% compared to last year—but just like other big public companies, Wal-Mart purchased $1.9 billion worth of its own shares in that quarter to prop up its earnings.

Here’s what the company’s CFO, Charles Holley, had to say about consumer spending in the U.S. economy: “…the retail environment remains challenging in the U.S. and our international markets, as customers are cautious in their spending…” (Source: Wal-Mart Stores, Inc. press release, August 15, 2013.) With this, the retail giant lowered its net sales and corporate earnings expectations for the year.

Wal-Mart isn’t the only company complaining about poor consumer spending in the U.S. economy.

For its fiscal second quarter (ended August 3), Macy’s, Inc.’s (NYSE/M) sales declined 0.8% from the same period a year ago. Macy’s Chairman and CEO, Terry J. Lundgren, said, “…second quarter sales performance was softer than anticipated and we are disappointed with the results. Our performance in the period, in part, reflects consumers’ continuing uncertainty about spending on discretionary items in the current economic environment…” (Source: Macy’s, Inc. second-quarter earnings press release, August 14, 2013.)

If Wal-Mart and Macy’s are complaining about soft sales, this tells me two things: First, retail stocks might not be the best investment right now. The Dow Jones Retail Index is down five percent this month alone. Second, a pullback on consumer spending tells me the U.S. economy isn’t growing as it is perceived to be.

We’ve already seen the first-quarter U.S. GDP revised lower due to weak consumer spending. After hearing from bellwether companies like Wal-Mart and Macy’s on the current status of consumer spending in the U.S. economy, I expect the second-quarter U.S. GDP, initially reported at 1.7%, to also be revised downward.

Michael’s Personal Notes:

Risks in the bond market continue to pile up quickly. Bond investors need to be very careful. They need to be very vigilant about their next step.

June was the first month since August of 2011 that U.S. long-term bond mutual funds experienced a net outflow. A total of $60.4 billion was withdrawn from the bond mutual funds in June 2013. (Source: Investment Company Institute, August 14, 2013.) While I don’t have the exact numbers yet, bond investors continued to exit bond mutual funds in July.

Why are investors in the bond market exiting stage left? As yields continue to rise, the price of bonds are falling and investors are taking their losses and moving on. Just look at the chart below of the bellwether 30-year U.S. Treasury bond.

Chart courtesy of www.StockCharts.com

Since the beginning of May, yields on long-term U.S. bonds have skyrocketed, as the chart above so clearly shows. The yield on the 30-year U.S. bond has gone up from 2.8% in early May to over 3.8% today.

This is very significant, as yields on long-term U.S. bonds—such as the 30-year bonds—are benchmarks for yields across the bond market. If yields on U.S. bonds go higher, you can bet the same for other kinds of bonds in the bond market as well.

Since the beginning of the financial crisis, we saw investors rush to the bond market because it was considered to be a safe place and because they had bet (correctly) that the Federal Reserve would drop interest rates to help the economy. Bond prices increased significantly under the Federal Reserve’s easy monetary policy.

Now, with conflicting signals from the Federal Reserve, the bond market is a fragile place. Bond investors leaving the market shows they don’t have an appetite for holding bonds in their portfolios as they did a few years back.

If interest rates continue to rise, losses in the bond market are going to be immense. Consider this: Pension funds and insurance companies hold bonds in their portfolios. As the yields continue to increase, they are going to face scrutiny.

Those who are saying the recent dip in the bond market is a great buying point should rethink their options. The risk-to-reward ratio is poor for bond investors.

What He Said:

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

Article by profitconfidential.com

By Profit Confidential

Risks in the bond market continue to pile up quickly. Bond investors need to be very careful. They need to be very vigilant about their next step.

June was the first month since August of 2011 that U.S. long-term bond mutual funds experienced a net outflow. A total of $60.4 billion was withdrawn from the bond mutual funds in June 2013. (Source: Investment Company Institute, August 14, 2013.) While I don’t have the exact numbers yet, bond investors continued to exit bond mutual funds in July.

Why are investors in the bond market exiting stage left? As yields continue to rise, the price of bonds are falling and investors are taking their losses and moving on. Just look at the chart below of the bellwether 30-year U.S. Treasury bond.

Chart courtesy of www.StockCharts.com

Since the beginning of May, yields on long-term U.S. bonds have skyrocketed, as the chart above so clearly shows. The yield on the 30-year U.S. bond has gone up from 2.8% in early May to over 3.8% today.

This is very significant, as yields on long-term U.S. bonds—such as the 30-year bonds—are benchmarks for yields across the bond market. If yields on U.S. bonds go higher, you can bet the same for other kinds of bonds in the bond market as well.

Since the beginning of the financial crisis, we saw investors rush to the bond market because it was considered to be a safe place and because they had bet (correctly) that the Federal Reserve would drop interest rates to help the economy. Bond prices increased significantly under the Federal Reserve’s easy monetary policy.

Now, with conflicting signals from the Federal Reserve, the bond market is a fragile place. Bond investors leaving the market shows they don’t have an appetite for holding bonds in their portfolios as they did a few years back.

If interest rates continue to rise, losses in the bond market are going to be immense. Consider this: Pension funds and insurance companies hold bonds in their portfolios. As the yields continue to increase, they are going to face scrutiny.

Those who are saying the recent dip in the bond market is a great buying point should rethink their options. The risk-to-reward ratio is poor for bond investors.

What He Said:

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

Article by profitconfidential.com

By Profit Confidential

The second-quarter earnings season is considered over, but there are still a number of companies reporting. And the same trend continues—the numbers are anemic.

Making the case for a rising stock market in the face of little sales growth and earnings results that are basically just meeting expectations is difficult. The stock market’s performance for the last few years has been very much due to the monetary expansion, followed by a slight improvement in general business conditions.

What is clear is that corporate balance sheets continue to be extremely healthy. However, the lack of investment in new plants, equipment, and employees remains a big problem. There is more certainty in the marketplace, but corporations just aren’t making much in the way of bold new investments.

Despite the mediocrity, there are still a number of blue chips whose earnings estimates are being increased by Wall Street. In a lot of the earnings results from blue chips over the last several quarters, sales increases have mostly been due to rising prices, not necessarily rising volumes. This is emblematic of the very slow growth environment the U.S. economy continues to experience, as well as the economic misnomer that price inflation is tame.

The velocity of money, which is the willingness of both corporations and individuals to spend cash, continues to be faint. Improving balance sheets is an excellent development for the long run, but cash hoarding means no growth near term. It’s a trend that’s likely to continue.

While not much of an advocate for buying in the stock market today, I do think that it’s wise for investors to stick with the safest names—to keep holding those blue chips who have been the market’s leaders to date.

Some of these names include: The Procter & Gamble Company (PG), Johnson & Johnson (JNJ), Pepsico, Inc. (PEP), The Walt Disney Company (DIS), Nike Inc. (NKE), The Home Depot, Inc. (HD), and Union Pacific Corporation (UNP), to name a few. (See “Where to Find an Investment Opportunity in a Market That’s Much Too High.”) These are the proven blue chips, with increasing dividends providing the earnings certainty that institutional investors will continue to pay for.

The way the stock market finishes this year is highly dependent on the Federal Reserve and the amount of monetary stimulus stirring the system. This is a market about the perception of certainty, not the reality of it. Economic news of late shows the U.S. economy to be very tame in its recovery, with regional- and industry-specific fractions very much a reality.

As things go in capital markets, good news in the form of positive economic statistics or earnings produces a falling stock market. Good news also increases the probability of a reduction in monetary stimulus.

This is the reality of the extreme short-term focus of capital markets. For equities, the market –extremely focused on the Fed; corporate earnings are secondary.

Article by profitconfidential.com

By Profit Confidential

When gold failed to hold above $1,800, I became skeptical. The stock market was on fire, so why would anyone want to buy gold, as the easy money was already made? Then we saw spot prices fall below $1,700, $1,600, and then $1,500…when I turned bearish. (Read “Is Gold’s Near-Death Crisis Over-Exaggerated? Concerns of a Market Meltdown May Not Be.”)

Well, fast-forward four months, and I continue to be neutral-to-bearish. I just don’t see any point buying the precious metal at this time: there’s minimal inflation and the world is not going to blow up anytime soon, plus you have so much money funneled into stocks.

When gold broke below $1,300 towards $1,200, I suggested traders buy on the dip, but also sell on rallies. That’s still my contention at this point; with the spot price at $1,326, I would not be a buyer. Now, if the yellow ore fell below $1,300, I would consider buying as a trade.

If I’m wrong, then so are investment gurus John Paulson and George Soros, who are running for the exits and divesting a major portion of their gold holdings. According to filings from the U.S. Securities and Exchange Commission, the SPDR Gold Trust run by Paulson sold off over half of its gold holdings in the second quarter. I simply wouldn’t be betting against these two.

The global demand is also at a four-year low, according to the World Gold Council. The organization attributed the decline to investors selling bullion funds and lower buying by the world central bankers. (Source: Harvey, J. “Gold demand hits 4-year low as investors pull out – WGC,” Reuters web site, August 15, 2013.)

When I look at the chart, I cannot say there is any optimism. After a series of multiple tops at $1,800 in 2011 and 2012, the metal has been sliding as I discussed.

The chart shows some support, but I believe prices could falter again towards the next Fibonacci Level, at around $1,210. Goldman Sachs has a $1,200 target on gold; failing to hold here, the metal could slide to around $1,050.

Chart courtesy of www.StockCharts.com

Whatever the situation, I still see more downside risk than upside potential, based on my technical analysis. The supporters will tell you how the metal is limited and how you need to accumulate positions. While I do agree with this, I just don’t feel it’s that time just yet.

Article by profitconfidential.com

By MoneyMorning.com.au

If you didn’t know it yet, this is a federal election year.

That’s not that unusual in Australia, seeing as they happen every three years.

Leading up to every US presidential election you hear analysts explaining what happens to markets after an election and whether a Democrat or Republican is better for the market.

So maybe you’re wondering if there’s a link between Aussie elections and the Aussie market?

We wondered the same thing. Here’s what we found out…

Unfortunately, our data for the Aussie All Ordinaries index only goes back to 1984. So we only have limited stock data. It means the data only covers the last 10 federal elections.

Even so, is there a clear result on what happens during an election year and which party helps the stock market most?

We’ll let you decide that one. Here’s the chart of the All Ordinaries index going back to 1984. We’ve plotted the election year with a coloured dot above the chart line.

A blue dot indicates a Coalition win. A red dot indicates a Labor win.

Index Data: Yahoo! Finance

How you interpret the chart will probably depend on your political allegiance. At first glance we notice one thing: both Labor and Liberal have presided during exuberant bubbles – Labor leading up to the 1987 crash, the Coalition leading up to the 2008 crash.

But aside from that, we’re not convinced there’s any link between election results and stock markets. Here’s why…

It’s Important to Know What’s Not Important

The reality is that there isn’t as much difference between major political party policies as they would have you think. That goes for any political party in the western world.

So it’s pointless to say that one party is better than the other.

Besides, the main drivers behind stock market growth have been the loosening of monetary policies and improvements in technology. This has occurred under political parties of both the so-called Left and Right.

In short, any attempt to link the performance of stocks to the election of a political party is just plain junk. So why are we wasting your time by devoting today’s Money Morning to the subject?

Well, sometimes it’s just as important to show you what’s not important as it is to show you what is important.

And devising your whole investment strategy around which political party can buy off the most votes is no way to invest.

However, if you’re determined to play around with stocks as a way to make a buck or two from the federal election, there is one stock that appears to have become the barometer for the electoral fortunes of the two main parties…

Use Company Fundamental Analysis Not Political Analysis

Punting on a stock or index purely based on which party could win an election is a mug’s game.

That said, if you’ve paid much attention to the news in recent weeks you’ll know the federal government changed the rules on the fringe benefits tax (FBT) treatment for work vehicles. It caused a storm, with car leasing firms laying off workers within hours of the announced changes.

One of the companies hit the hardest was ASX-listed McMillan Shakespeare [ASX: MMS]. The stock fell from $18 before the announced change to as low as $6.75 just a few days later.

Since then McMillan Shakespeare has recovered some of the lost ground as investors bank on a policy U-turn. Now, that could come from either party. But there’s little doubt that most investors see the prospect of a Coalition victory as the main reason to punt on the stock.

But it’s a big gamble. As you can see from the following chart, the stock was trading at a record high just before the change to FBT rules:

Source: CMC Markets Stockbroking

The stock price had climbed from $2.50 in 2009 to $18.64 just a few weeks ago.

But even if the FBT rules change, there’s no guarantee the stock will return to its former glory. After such a big run-up there’s always the chance that the company couldn’t have kept up with investor expectations anyway.

And that’s not the only risk. You also have to consider how much investors have already priced in a Coalition or Labor victory. So even if the Coalition wins, there’s no guarantee the stock price will climb further.

And likewise, a Labor victory won’t necessarily mean the share price will fall.

As we say, using elections to bet on stock market returns is a mug’s game. Stocks rise or fall based mainly on earnings and interest rate expectations. An election result or policy can impact that, but it’s not the only factor.

There are much better ways to play the market than studying election results.

You should invest based on company or market fundamentals (such as Nick Hubble’s brilliant analysis of a multi-billion Chinese ‘white market‘ play) not based on how many punters a political party can swindle into voting for them.

Cheers,
Kris+

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From the Port Phillip Publishing Library

Special Report: Make the Chinese Pay For Your Retirement
 

Daily Reckoning: Australia’s Economy: Complex, Fragile or Centralised?

Money Morning: Why Conservative Investors Shouldn’t Invest Conservatively…

Pursuit of Happiness:  Inflation is Not Progress, This is Progress…

Australian Small-Cap Investigator:
How to Make Big Money from Small-Cap Stocks

By MoneyMorning.com.au

(Ed note: This article is an extract from The Money for Life Letter, 4th July 2013.)

Philio of Alexandra, a blogger, coined the term Reynold’s Law: ‘Subsidizing the markers of status doesn’t produce the character traits that result in that status; it undermines them.’ That doesn’t make much sense unless you look at the context the law was created in.

Another blogger, Glenn Reynolds, wrote the piece which led to the discovery of Reynold’s Law:

‘The government decides to try to increase the middle class by subsidizing things that middle class people have: If middle-class people go to college and own homes, then surely if more people go to college and own homes, we’ll have more middle-class people. But homeownership and college aren’t causes of middle-class status, they’re markers for possessing the kinds of traits – self-discipline, the ability to defer gratification, etc. – that let you enter, and stay, in the middle class. Subsidizing the markers doesn’t produce the traits; if anything, it undermines them.’

The result of undermining these traits is an economic crisis.

In America, the kind of policy Reynold’s Law applies to was directed at housing. Owning a house was the American Dream. But the government policies designed to make the American Dream easier to achieve simply drove people into owning houses even though they never had the underlying traits you need to own a house.

They didn’t have savings, an income or stability in their lives. In the end, Reynold’s Law caught up with this policy and the sub-prime crisis began. People discovered that all those borrowers couldn’t repay their loans, and the financial system failed.

Doing the Opposite of What Works

Before we get to applying Reynold’s Law to your retirement, here’s another example of it in action.

In Europe, the welfare state funded lifestyles people couldn’t have earned for themselves. Greece is the poster child of this. Public servants are paid bonuses if they arrive to work on time, and receive payment for two extra fictional months each year.

On the island of Zakynthos, hundreds of people declared themselves blind to receive welfare cheques while some work as Taxi drivers at the same time. But this economic mirage is now over and the Greek government can’t pay what it promised.

The trouble with these policies is that they encourage exactly the opposite kind of behaviour you need to reach the goal the policy is advocating. To encourage the American Dream, you need to encourage savings and a steady job.

But economic policies instead did the opposite – you needed neither to own a home. People who would’ve saved and worked no longer needed to. And that worsened the problem. The same goes for Greece, where the best and the brightest went to work for the lavish government sector and made their living off those who paid taxes.

Reynold’s Law Alive and Well in Australia

Now that you understand how Reynold’s Law works, let’s apply it to your life. But not your retirement just yet.

When you flew the nest and set out on your own, a whole new set of traits were required. Budgeting, saving, planning ahead, looking for job opportunities, making a good impression and competing with your peers would’ve been the new skills you had to learn.

Reynold’s Law was in operation back then too. Those who learned these new skills fast, or took the time to practice them before stepping into the ‘real world’, had an edge. Those who stuck to the shelter of their family, school and friendships were naive and learned lessons the hard way when they really mattered.

Pocket money is a great example. Learning to budget by receiving a fixed income would’ve taught you the price of spending all your money the day you get it.

Back then, your parents would have had the biggest say over the application of Reynold’s Law. If they protected and subsidised you in the wrong ways, the traits you developed would’ve betrayed you in the real world. If they carefully allowed and encouraged you to learn some of life’s lessons before they had to be applied, you would have had a head start in life.

Now you can’t help who your parents were. So Reynold’s Law was either a painful or a pleasant experience to discover back then. But retirement is your opportunity to make the most of Reynold’s Law on your own terms. And, quite frankly, I hope you do.

You see, the government of Australia, like just about all other western governments, has subsidised retirement. But that has undermined the traits you need to secure that retirement. Now, the fact that you’re a subscriber to The Money for Life Letter is a big hint that you are aware of this and already trying to resist. But it’s still worth making the point in a way that will make you even more aware.

But what’s the need for this awareness if the government will take care of you anyway? Well, that emotion didn’t work out well for the welfare states of the past. Greece, Spain, Portugal and many cities in America are all struggling with their pension burdens.

The solution is always the same. In the 90s, Scandinavian countries went through a similar crisis as Southern Europe is going through today. Their welfare states had become so bloated, the country suffered. They reformed and pensions were cut and privatised.

Now I don’t know when such a crisis will happen in Australia. We’re much better off than Europe and America, for now, and have a very different retirement savings system with less government control.

But I am sure that relying on anyone but yourself for your retirement is dangerous, not just because those promises might not be kept, but because you’ll undermine all the traits you need to have a prosperous retirement no matter what.

So here’s what I suggest you do: Practice and perfect the traits that will serve you well during retirement before they really matter. Break Reynold’s Law.

If you don’t, subsidies from the government will slowly teach you bad traits and habits like indifference and ignorance. Of course, if you’re already retired, it’s never too late to realise what has served you well and what you need to change.

What are the Desirable Traits of Retirement?

Well, it’s much easier to stay in work, or to transfer to less demanding work, than it is to rejoin the workforce. So knowing when to retire is the first trait. It’s pretty similar to knowing when you should give up on education and try and begin earning a living. Making the move too early or too late has costs.

Health problems in retirement can be a dangerous drain on your finances. And so avoiding them where you can is a major financial benefit. The traits you need for this are quite obvious – being health conscious about what you eat, drink and do is something you won’t regret. Unfortunately, you will never find out how many illnesses you avoided by staying healthy. But you’ll probably enjoy a longer happier retirement either way.

There are hundreds of ways to reduce your spending bit by bit without giving up on a lavish life. And in retirement, you have the time to figure them out. But it takes practice. There are people who give up their day jobs to compete in radio and online competitions, trivia nights, and other games.

 Many people drastically cut their cost of living by making the most out of all the coupons, discounts and ‘freebies’ they can find. If these people can do it during the prime of their lives, when they should be earning and saving for retirement, you can do it during retirement.

You’ve been paying taxes all your working life. Retirement is a great time to recover some of that money you earned. At least that’s the way I see it. If Julia Gillard gets her enormous pension and a driver paid for by your hard work, why shouldn’t you get some cash back from the government to pay for the good life? Making the most out of government benefits, tax concessions and loopholes should be standard procedure for retirees.

Remember, the point of Reynold’s Law is that you shouldn’t be lulled into a poor set of traits by the government. Don’t rely on the pension, your Superannuation or anyone else when preparing for your golden years. Instead, you should begin practicing those traits which you can use to improve your resilience. Whether you need them or not, they’ll improve your retirement.

Nick Hubble+
Editor, The Money for Life Letter

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From the Archives…

How Many Warren Buffett’s in a Bar of Gold?
16-08-2013 –  Kris Sayce

Two Points to Consider from the Commonwealth Bank…
15-08-2013 –  Kris Sayce

Take Control of Your Superannuation, but Know the Limits
14-08-2013 – Vern Gowdie

Why I’m Glad I Missed a Dividend Stock That Doubled…
13-08-2013 – Kris Sayce

No Profit in the Federal Reserve Divination
12-08-2013 – Dan Denning

Article by Investazor.com

Fundamental analysis is a method of examining the factors that influence and characterize a company or a market. When looking into details of a company, fundamental analysis takes into consideration its financial statements. When applied to futures or forex, it takes into account a broad palette of factors that influences the economy as a whole.

Fundamental Analysis or Technical Analysis? This is the first question that arises to the persons interested in this domain. F.A. is known for the analysing of the present situation having a more rapid effect. Meanwhile, T.A. is mainly based on past patterns based on which long term strategies can be built. Some considers that the T.A. is more accurate and some believes that the F.A. offers the real signals of trading. In my opinion the healthier way is the combination of both technical and fundamental analysis if a careful supervision of the market is wanted.

Why fundamental Analysis? It offers to the investors an overview of the investment opportunities encountered in the market. An important advantage is offered by the possibility to predict which stocks are valuable and which are not. This way, an investor can remark in advance the overestimated assets (in which case the investor is advise to enter a sell position) and underestimated assets (in which case the investor is advised to enter a buy position). Moreover, fundamental analysis provides the investor with a profound understanding of the instrument and the market that he targets. This way, he is able to take smart investment decisions.

How can you apply the fundamental analysis? There are two approaches when using the fundamental analysis. The first one, top-down analysis, requires the investor to take a look at the bigger picture, the general condition of the economy followed by a tightening of the research to the specific domain of interest and a closer look the specific asset. The second approach consists of the bottom-up analysis when the investors pay attention first at the specific asset and after that they can expand its research towards the industry of interest.

Fundamental analysis based on the asset that interests me! Depending on the financial instruments included in your portfolio, there are various factors that need to be considered. Thus:

– When trading FX, you should pay attention to macroeconomic indicators as: interest rate, labour market, consumers’ confidence, inflation;

– When trading on the Equity Market, you should consider financial indicators as: general aspects of the company and assessment indicators (Price to Earnings Ratio, Price to Book Value, Price to Sales, dividend yield);

– When trading on the Commodities market, you should pay attention to:  supply, demand and factors of impact (technological developments, new resources);

We can conclude that Fundamental Analysis represents the use of financial and macroeconomic indicators, along with news with impact strength in order to evaluate an asset. In order to compose an investment portfolio, a careful fundamental analysis is required.

The post Fundamental Analysis – An Inside Look appeared first on investazor.com.

Source: Kevin Michael Grace of The Gold Report (8/19/13)

http://www.theaureport.com/pub/na/chris-mancini-the-good-the-not-so-bad-and-the-maybe-ugly-of-gold-equities

With gold in the $1,300s, Gabelli Gold Fund Research Analyst Chris Mancini recommends performing triage on the gold equity sector. In this interview with The Gold Report, Mancini says that companies with cash and cash flow will survive the crisis, while those with the ability to take advantage of the downturn, like streaming companies, will do the best of all.

The Gold Report: Were you surprised by the collapse of the prices of gold and silver?

Chris Mancini: Yes, I was very surprised. I thought that the macro backdrop for gold and silver was very positive at the beginning of the year. The Federal Reserve had just begun its process of Quantitative Easing 3 (QE3): printing $85 billion ($85B) a month. Japan announced it would undertake its own QE program, which would be a much bigger percentage of its GDP than the U.S. plan.

TGR: And Mario Draghi said he’d do “whatever it takes”?

CM: Yes. The president of the European Central Bank said he’d do whatever it takes to ensure that there was a recovery in Europe, implying a willingness to buy bonds with printed money. It seemed that all this liquidity splashing around should have been positive for gold.

TGR: What, if any, is the relationship between QE and the price of gold?

CM: I think what drives the gold price is the view that gold is the ultimate savings instrument. It can’t be tampered with, is not replicable and is nobody else’s liability. With QE1 and QE2, that money found its way to the highest-growth economies: China, India, Thailand, Vietnam and other countries in Asia. These countries experienced high rates of inflation because this money was chasing scarce resources. And so the average guy on the street was getting 3–4% interest rates on his savings in a the equivalent of a six-month certificate of deposit versus price increases of goods of more than 10%. In other words, negative real interest rates. Holding cash in the bank is a money-losing proposition. This led to an increased demand for gold.

With QE3, we have continued to see a lot of demand from China, India and other countries in Asia, especially as the gold price has come down. But we also heard this steady drumbeat of talk that QE was going to end because the economy was doing really well. And because the economy was doing well, people should be in income-producing investments, like stocks or even bonds. So they started getting into them.

This became a self-fulfilling cycle: stocks went up, which meant that the economy was supposedly getting better, which meant that QE was ending, so you shouldn’t have any gold. Then we had the crash in April.

TGR: Don’t some people believe that QE is the only thing keeping us from economic disaster?

CM: Over the past three quarters, we’ve had enormous and unprecedented amounts of fiscal and monetary stimulus, while the U.S. economy has grown on average by less than 1%. What I don’t understand is why people expect the economy to grow at 3–4% without any monetary or fiscal stimulus.

Interest rates were pushed way down by QE, and so people needed to find yield. They weren’t finding any in bonds. So they went into dividend-paying stocks. So you had this enormous rise in the stock market so far this year, which I think has been mostly due to QE and forcing investors out of other assets, bonds specifically.

TGR: That’s what they say about inflation—the money has to go somewhere, right?

CM: What the stock market is showing us is the effect of the creation of $85B every month.

TGR: Let’s assume there will be a tapering of QE. What effect will this have on the price of gold?

CM: I don’t think a relatively small tapering of QE would have a meaningful effect because it has already been priced in to a large degree. If QE ends completely, I think the S&P 500, Dow and NASDAQ will correct meaningfully. And then you’ll hear a tremendous clamor from the markets for more QE. If that happens, there will be a realization that we’re in this for good, and I think that this would be good for gold.

TGR: You have probably come across these stories of skullduggery in paper gold. One story heard often these days is that the Comex in London has no physical gold. Another is of tremendous amounts of paper gold being leased in order to drive down the price. Do you put any credence in these stories?

CM: I don’t know the intricacies of it, so I can’t really say. However, the severe drop in gold on those two days in April made very little sense from a pure supply and demand perspective. It just didn’t smell right.

TGR: Even before the gold price collapse, gold equities were in the doldrums. So with gold in the $1,300s, what is the case for gold equities?

CM: The equities are highly leveraged to the gold price. So if the price of gold goes back up to where it was at the beginning of the year, $1,500–1,600/ounce ($1,500–1,600/oz), the profitability for gold miners is going to be highly leveraged on the upside. The other case to be made is that given that the average all-in cost of production is around $1,100/oz and there are plenty of mines that produce at $1,350/oz or above, there will be mines that will come offline. So that supply coming offline should support the gold price. The companies are cutting costs right now, and the cost base should be relatively fixed. With gold at, say, $1,600/oz, the companies will be very profitable given the cost cuts taking place now. I believe they’ll then pay down debt, and then they’ll hopefully start returning cash to shareholders in the form of dividends. I think there is a very good argument to be made that if you own the miners now and you want exposure to upside movement in the gold price, the miners are a very good way to do it.

TGR: You’ve divided gold companies into three categories “relative to their ability to be able to weather the current storm.” These categories are the “Good,” the “Not-So-Bad” and the “Maybe Ugly.” Which criteria determine the good company?

CM: Access to cash, access to cash flow and the ability to take advantage of the current distress in the market. The best example now is a royalty or streaming company.

TGR: What royalty and streaming companies do you like?

CM: I like Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX), Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) andSilver Wheaton Corp. (SLW:TSX; SLW:NYSE). All of these companies have access to cash. They are all cash-flow generative. None of them has real operating leverage. They have royalty or streaming rights to lower-cost mines, which really aren’t at much risk of coming offline in the lower gold-price environment.

Some are taking advantage of the downturn. Franco-Nevada bought a royalty on Pretium Resources Inc.’s (PVG:TSX; PVG:NYSE) Brucejack deposit in British Columbia. It bought a royalty on Midas Gold Corp.’s (MAX:TSX) Golden Meadows deposit in Idaho, so that Midas could finance its existence going forward.

TGR: Is Franco-Nevada your second-largest holding?

CM: Yes. We’ve held it since its initial public offering. Franco is able to benefit in good times because companies expand and also find more gold, but it doesn’t have to put up any capital. And it has the ability to capitalize during the bad times by picking up some good royalties and good properties at very good valuations, which is what it has done in the past couple of quarters.

TGR: Could you name some other companies in your good category?

CM: B2Gold Corp. (BTG:NYSE; BTO:TSX; B2G:NSX) has net cash on its balance sheet and generates cash flow. The company is building its Otjikoto project in Namibia, which is low cost. Once that is completed, it has no further capital commitments. It has a credit line of about $150M that it could use to finance another project. If it doesn’t make an acquisition, it should be fine. If it does, it has the ability to make a very accretive acquisition.

Another company in the Good category would be Fresnillo Plc (FRES:LSE), a Mexican company.

TGR: Your fourth-largest holding?

CM: Yes. Fresnillo has net cash on its balance sheet. It has some of the lowest-cost production in the industry for silver and gold. It is generating cash flow now. It is building mines. And it is starting to fund some juniors that are running out of cash. Now is a great time to do it.

TGR: When you spoke to The Gold Report in January, Randgold Resources Ltd. (GOLD:NASDAQ; RRS:LSE) was No. 1 of your holdings, around 12%. At the end of June, that’s up to 13.8%. Why do you like it so much?

CM: Randgold has been through a number of cycles. It has net cash on its balance sheet and has low-cost operations. It should be able to benefit from this downturn when we come out on the other side. The company has good managers, and it is building in an environment where input costs are becoming less tight. Its Kibali project in the Democratic Republic of Congo should begin production at the beginning of 2014. After that, I could see Randgold buying exploration-stage properties in distress or continuing to earn into properties by financing their exploration.

TGR: What characterizes the Not-So-Bad companies?

CM: Access to enough cash that they won’t need to finance anytime soon or access to capital through cash flow. One example is Comstock Mining Inc. (LODE:NYSE.MKT), which built its Nevada mine in an unconventional way. In a typical Canadian model, a company would go out and spend a lot of money drilling a deposit, then trying to finance it into production or sell it. Comstock knew that it had gold: a very economic, small, oxidized, heap-leachable deposit. It decided to bring that into production while still exploring. So now it is cash-flow generative and will become more so as the mine scales up. As it explores, it will be able to show how big the deposit could be. That said, Comstock’s balance sheet is kind of tight right now: only a few million at the end of Q2/13. Hopefully, it won’t have to finance again. If it doesn’t, I would promote it to the Good category.

TGR: What are some other companies in this category?

CM: Detour Gold Corp. (DGC:TSX) is coming into production and should be cash-flow generative at $1,300/oz gold. It has a little bit of debt and just did an equity deal to get it through this startup period. I’d put Detour in the Not-So-Bad category now, but once it’s at full commercial production, if it operates according to plan and begins to pay down some of its debt, I would promote it to the Good category.

I would rate Continental Gold Ltd. (CNL:TSX; CGOOF:OTCQX) in the Not-So-Bad category. It can weather the storm. It has a lot of cash. The company can get its project in Colombia to the preliminary economic assessment or prefeasibility stage with the cash on its balance sheet. Once that’s done, it will be able to show it has a very good, very high-grade gold deposit, which shouldn’t require a large upfront capital expenditure. After it demonstrates the economics of the deposit through a prefeasibility study, it could be bought by a major.

TGR: How do you rate companies that have financed, but will need to go to the markets again?

CM: I would rate them between Maybe Ugly and Not-So-Bad. The true Maybe Ugly companies don’t have a defined resource and don’t have economics surrounding the resource. They’re just exploring and need cash.

Golden Queen Mining Co. Ltd. (GQM:TSX) is not like that because it has a defined feasibility study, and it has a permit to mine. It is actually building its very economic, heap-leach deposit in Mojave, Calif. It has $10M, which should get it maybe to the beginning of 2014. It is going to need to finance again, but when it does, it should be able to show that any return on incremental capital being committed by an equity investor will be high even at $1,300/oz gold. I think Golden Queen is OK.

Eastmain Resources Inc. (ER:TSX) also has the potential to move into the Not-So-Bad category. It has a very high-grade deposit in a good jurisdiction: Eau Claire in north-central Quebec. It will publish a resource within the next couple of months showing about 1+ million ounces of very high-grade, open-pittable gold. It also has mineral rights to a vast, prospective and never explored vein field adjacent to Eau Claire.

TGR: How do you rate the majors?

CM: Newmont Mining Corp. (NEM:NYSE) is in the Good category now. The company is cutting its cost structure and doesn’t need to finance. It has cash on its balance sheet. Newmont is in the process of completing construction on a new mine called Akyem in Ghana. It is also in the process of completing a pit layback on a copper-gold deposit in Indonesia called Batu Hijau, which should give it access to increased cash flow.

Barrick Gold Corp. (ABX:TSX; ABX:NYSE) is in the Not-So-Bad category. It has some of the best mines in the world, is the biggest producer and one of the lowest-cost producers. But Barrick has a lot of debt, and in this lower gold price environment, all its excess cash flow is going to service that debt.

Goldcorp Inc. (G:TSX; GG:NYSE) is in the Good category. It is building the Cerro Negro project in southern Argentina, the Éléonore project in northern Quebec (adjacent to Eastmain’s Eau Claire deposit) and an expansion to its Red Lake mine in Ontario. So Goldcorp is spending a lot right now, but it has a net-neutral balance sheet. Once these projects are completed by the middle of next year, they should generate a lot of cash. Goldcorp owns 10% of Eastmain, and if it were to finance Eastmain at reasonable valuations, I think that would be accretive for it.

Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) is in the Good category and shouldn’t have any issues with financing in the short term. It is building a heap-leach project called La India in Mexico, which should be brought on-line by the middle of 2014. The key issue is its LaRonde mine, which will be getting to some higher-grade ore hopefully by the beginning of next year. This will generate a lot of cash. Agnico has taken advantage of the downturn by financing some juniors. It has bought stakes in ATAC Resources Ltd. (ATC:TSX.V), Kootenay Silver Inc. (KTN:TSX.V), Probe Mines Limited (PRB:TSX.V) and Sulliden Gold Corp. (SUE:TSX; SDDDF:OTCQX; SUE:BVL).

I think AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE), Sibanye Gold Ltd. (SBGL:NYSE) and Harmony Gold Mining Cos. (HMY:NYSE; HRM:LSE) are really going to struggle, given their high costs and labor issues in South Africa.

TGR: What about some other of the larger companies?

CM: Newcrest Mining Ltd. (NM:TSX; NCM:ASX) is in the Not-So-Bad category now, and hopefully it can get into the Good category. In this lower gold price environment, it has really taken its medicine. It’s modified its mine plan at its biggest mine, Lihir, to maximize cash flow. It modified the mine plan at Telfer to some extent. Once its best mine, Cadia East, gets to full production capacity—it’s an underground block cave that has copper and gold—it will generate a great deal of cash. It has a little bit of debt now, and it will have to deal with that.

I’d put Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) in the Good category. It has financial flexibility. It is building three mines now: Ernesto/Pau-a-pique, Pilar and C1 Santa Luz. When they are finished, we’ll see how much cash flow they generate. Of its current stable, the most economic mines are El Peñón, Chapada and Mercedes, which make up around half of Yamana’s production. They are good, very low-cost mines. Their other mines are only OK, but they do generate good cash flow at $1,300/oz gold.

I think Kinross Gold Corp. (K:TSX; KGC:NYSE) is a little stuck. I’d put it in the Not-So-Bad category. It has deferred Tasiast, which was its big capital item, so I don’t think it’s going to need finance any time soon. Its balance sheet is OK, but its mines are not generally great, and some are relatively high cost. So at $1,300/oz, it’s not going to be generating a lot of free cash flow. If Kinross doesn’t build Tasiast, then it’s difficult to see where it goes from here.

TGR: If trillions of dollars keep being created to forestall deflation, what does this mean for gold in the long term?

CM: I don’t think anyone really knows the answer to that. To the degree that we had economic growth over the past 10 years, it’s been predicated on increased leverage. After the leverage bubble popped, consumers couldn’t borrow any more. The way we avoided deflation was through increased government borrowing and money printing. Eventually, it comes down to people questioning the value of the dollars in their pockets, and when people begin to doubt paper money, gold should be a very valuable alternative and do extremely well.

TGR: Chris, thanks so much.

Chris Mancini, CFA, is a research analyst at the Gabelli Gold Fund Inc., specializing in precious-metals mining companies. He has over 13 years of investment management experience, including research analyst positions at hedge funds Satellite Asset Management and R6 Capital Management. Mancini earned a bachelor’s degree in economics with honors from Boston College.

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DISCLOSURE:

1) Kevin Michael Grace conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Gold Report: Franco-Nevada Corp., Pretium Resources Inc., Comstock Mining Inc., Detour Gold Corp., Continental Gold Ltd., Goldcorp Inc., Probe Mines Limited and Sulliden Gold Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Chris Mancini: I or my family own shares of the following companies mentioned in this interview: Agnico-Eagle Ltd., Barrick Gold Corp., Comstock Mining Inc., Continental Gold Ltd., Eastmain Resources Inc., Franco-Nevada Corp., Fresnillo Plc, Golden Queen Mining Co., Goldcorp Inc., Newcrest Mining Ltd. and Randgold Resources Ltd. 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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