Month: August 2013

By MoneyMorning.com.au

(Ed Note: Vern Gowdie’s new publication, Gowdie Family Wealth, will be launching early next week. Watch this space for more info.)

‘Do not fear to be eccentric in opinion, for every opinion now accepted was once eccentric.’ – British philosopher & mathematician Bertrand Russell.

Questioning convention can be both challenging and lonely. Going with the flow of popular thinking is far easier.

The problem with popular thinking is it doesn’t require you to think at all. You just nod and agree with the thinking of the day.

The ability to shape popular thinking is why the investment industry spends so much time and money on its pet project – how to attract more funds to manage.

The basic marketing strategy revolves around enough experts repeating the same message (couched with a slight difference to avoid absolute repetition) until it becomes popular thinking – hey presto they have created a truism.

Two examples of this messaging are:

1. In the long term shares always go up(…unless of course you are a Japanese share investor circa 1990)
2. Cash is trash (…unless of course you were cashed up prior to the GFC)

The industry designs these marketing messages (one positive and one negative) to generate interest in the industry’s products.

Don’t Underestimate Safety

The message can come in a variety of forms. One such message was in the Weekend Australian (August 10-11 edition) under an article titled ‘Where to go, now cash doesn’t cut it‘.

From the headline it’s not hard to guess which theme was at play; ‘Cash is Trash’.

Here is an extract from the article (emphasis added): ‘Mr Bell [from Goldman Sachs Asset Management] makes it clear the picture is a bleak one for investors who are still sitting on big cash positions …‘

My question is, ‘Why is the picture bleak?’

The mainstream response would be, ‘Well interest rates are falling (and expected to fall even further) and your after tax rate of return is barely keeping pace with inflation.’

OK, I accept money in the bank is slowly having its buying power eroded. But on the scale of bleakness, what is worse?

1. Slow erosion (maybe 1% per annum) of buying power as you wait for an opportunity to buy assets at significantly discounted prices OR
2. Rapid erosion of your buying power due to the very real possibility of a market correction wiping 50% or more off your capital.

The fact the article didn’t canvass these possibilities goes to the heart of the industry’s unshakeable belief in the share market being everyone’s best friend…albeit with the occasional bad mood.

The article went on to say:

‘Mr. Bell runs the Goldman Sachs Income Plus Wholesale Fund… Its one-year performance number is what catches the attention: 10.1 per cent for the year to May 31, of which 6.6 per cent was capital growth and 3.5 per cent was “distribution return” or dividends.‘

This is indeed an excellent result for the 12 month period ended 31 May 2013. However when you look at the performance of the fund since inception (May 1998), its 15 year annual return has averaged 6.5% (sourced from Goldman Sachs website).

Based on the established math principle of ‘reversion to the mean’, it’s not unreasonable to expect the strong performance of the past 12 months to be counterbalanced by a corresponding period of lower returns. This is simply the ‘yin and yang’ of markets.

In fairness to Mr Bell he didn’t write the article and while I don’t know him personally, the fact he works for the blue-chip Goldman Sachs means he has excellent credentials.

The point I’m making is the use of one-year figures can distort the bigger picture and create confusion in the minds of the average investor searching for direction.

I could equally quote the one-year cash rate of 2008/09 (GFC year) to trumpet the merits of cash against other asset classes. This too would be an unfair comparison.

The reason for my portfolio position being in cash and term deposits has very little to do with ‘bleak returns’ and everything to do with capital security. Biding your time waiting for assets to fall to much lower levels is a genuine investment strategy.

The investment industry may believe the market levitation act being performed by central bankers (using ZIRP and the printing presses), but I don’t. Therefore it means employing a different investment strategy – one that is at odds with popular thinking.

Another ‘truism’ that’s generally accepted by the public is the concept of risk/reward. The popular thinking is that if you accept a higher risk somehow this will equate to a higher return. Wrong.

Stay Cashed Up for the Coming Bargains

One of the highest risks you can take is to buy into an over-priced market – ask anyone who invested in the NASDAQ in early 2000 (the height of the tech boom). Thirteen years later they are still down 20% in value.

The best risk/reward equation is low risk/high reward.

Money in the bank at present is a no risk (to capital value)/low reward proposition.

Share markets, in my opinion, are a high risk/low reward proposition.

The current P/E of the S&P 500 (based on Shiller P/E 10 model) is 23.8x.
This is 50% above its 130-year mean of 16.5x.

Click to enlarge

The periods when the share market offers low risk/high reward are when the P/E falls below the mean (and even better if it’s sub 10x).

Since the GFC the global share market (led by the US) has been manipulated more than a ‘Punch and Judy’ show.

The market cannot stand on its own two feet without the central banks pulling on the strings of ZIRP and QE to Infinity.

When these strings snap (and they will) the P/E mean of 16.5x on the Shiller P/E model will be nothing more than a whistle stop.

As the Great Credit Contraction continues to squeeze the global economy, I fully expect the cash rate to fall even further – perhaps into the mid-1′s. Sure this is bleak, but not nearly as bleak as the outlook for the global economy that forced the RBA to plumb to these lows.

This global contraction process will eventually expose the central bank puppeteers, and markets will respond accordingly. When this happens, cashed up investors will find that a dollar in the bank has a whole lot more buying power.

This view isn’t popular in the mainstream, but I hope it has been thought provoking for you.

Vern Gowdie
Editor, Gowdie Family Wealth

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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

By MoneyMorning.com.au

If you’re new to Money Morning we’d forgive you for thinking we’re a conservative no-risk investor.

After all, we’ve spent a bunch of time advising you to make sure you’ve got plenty of cash and that you own good quality dividend-paying shares.

So we get it if you think we avoid risk at all costs.

But nothing could be further from the truth…

We encourage every investor to have a sound base to their investments.

Building a house is a good analogy. Everyone knows that it’s important to build a house on solid foundations. There’s no point installing fancy fixtures and fittings and kitting the place out nicely if you’ve scrimped on the foundations and the main structure.

The first gust of wind (as we’ve had in Melbourne over the weekend) will see the house collapse in a heap.

Likewise in investing, if you put all your money in high-risk investments without building a sound structure, the first gust of financial wind (as we’ve had in the world economy for the past five years) will see your portfolio collapse in a heap.

But by the same token, if you think investing is all about keeping things safe and not taking risks – just like Warren Buffett doesn’t take risks – then you’re making a huge mistake…and you’ve got little understanding of how Buffett makes money…

Invest Risky: Just Like Buffett

To show you what we mean, take this report from Investmentnews.com:

‘Berkshire Hathaway Inc. (BRK/A) said second-quarter profit climbed 46 percent on Chairman Warren Buffett’s derivative bets and gains at the company’s railroad…

‘Buffett’s derivative bets on stock market gains boosted earnings by $390 million in the second quarter…‘

Sure, Buffett and his investment firm Berkshire Hathaway [NYSE: BRK/A] make a lot of money from railways, banks, consumer products, and other businesses.

But his investment strategy isn’t just about buying American Express [NYSE: AXP] and Coca Cola [NYSE: KO] shares and then collecting a tasty dividend.

Some of Berkshire Hathaway’s biggest gains in recent years have come from derivatives…especially the derivatives contracts entered into by Berkshire’s insurance companies.

But as the report from Investmentnews.com explains, nearly 10% of the gains came from potentially risky derivatives bets. That hardly fits in with the well-managed image of ‘uncle’ Warren, the sensible old-time investor who enjoys cheeseburgers and Cherry Coke.

And we’re not knocking Buffett for making these bets. In fact, we believe all investors should have a higher risk component to their portfolio. Buffett’s investment strategy involves placing big derivatives bets. We prefer small-cap stocks…

Risky Bets (in Moderation) Help Boost Your Returns

Now, it’s important to note that there isn’t a direct comparison between Buffett’s punt (selling put options to earn a premium) and our preference of using small-cap stocks.

Each has a different risk and reward profile. We won’t go into the details on selling put options. If we did these notes would have to be about five times as long as normal.

All we’ll say is that most investors who like to think of themselves as Buffett disciples assume they should only buy the safest and bluest of the blue-chip companies.

That’s true to some degree. But it doesn’t paint the correct picture on how Buffett helps boost Berkshire Hathaway’s profits.

If you really want to improve your investment returns and build a lasting investment portfolio, you’ve got to add a level of risk to your portfolio. As we say, our preference is small-cap stocks.

We like small-caps for the simple reason that unlike some derivative investments, with a small-cap stock you’re still investing in the business. You’re not taking an interest in the performance of an underlying stock (such as with CFDs). And the calculation of your returns doesn’t depend on complex mathematical formulas (such as with exchange traded options).

With small-cap stocks you simply buy into a company and perhaps a sector that has the potential to achieve out-sized returns compared to blue-chip stocks. It’s a strategy we’ve used over the past year to bet on the dividend rally.

The Best Sector for the Rest of This Year

We selected a small number of stocks we believe can deliver capital growth, pay a dividend, and grow that dividend. It’s the ‘Holy Trinity’ of investing if you like.

Our bet is those small-cap income stocks can grow their businesses and dividends faster than blue-chip income stocks. So far things are going to plan, but the bigger payoff won’t happen overnight. In some cases it could take a couple of years or more before the stock and dividend growth really take off.

For more immediate gains, we’re setting our sights elsewhere. We’re looking at the most unloved of Aussie stock sectors – the resource sector.

It’s a risky strategy because no one likes resource stocks today. But that’s exactly the reason we’re backing the sector. We’re not saying a new resource bull run is about to happen. We’re simply saying that investors have priced the resource sector as though no one will ever dig a single gram of ore from the ground.

That’s just crazy. And some brave investors appear to agree; we’ve already seen a small bounce. But if we’re right, even bigger gains are on the way.

In short, watch Aussie resource stocks for the rest of this year. It could be the Aussie market’s best performing sector.

Cheers,
Kris+

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From the Port Phillip Publishing Library

Special Report: Make the Chinese Pay For Your Retirement
 

Daily Reckoning: Good News is Bad News for the Stock Market

Money Morning: Technology and The Future of Money and Banking

Pursuit of Happiness: The Next Big Leap for Transportation Technology

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

USDJPY failed to break above the resistance of the downward trend line on 4-hour chart, and pulled back from 98.64, suggesting that the pair remains in downtrend from 101.53. Further decline would likely be seen, and next target would be at 96.00 area. Key resistance is located at the trend line, only a clear break above the trend line resistance could signal completion of the downtrend.

Provided by ForexCycle.com

Article by Investazor.com

Euro with the US dollar is the most traded and liquid currency pair at this moment. Its evolution depends on series of factors like economic releases, investments, hedging, speculations and that is why it is important to take into consideration as many aspects as you can, to assure a higher probability for trading.

Last week the Euro Area, especially Germany, reported very good economic indicators. United States started with some good retails sales in the beginning of the week but the Philly Fed and the UoM Economic Sentiment have been a big disappointment in the second part. This last two releases have should have been the fuel for a rally above 1.34.

The price of EURUSD didn’t get to touch the resistance level because of the unemployment claims that came at 320K, value touched in 2007. Good news from the US labor market takes Fed a step closer to ending the Quantitative Easing program, and this good news is actually bad news for investments in the capital market especially for the US capital market.

Chart: EURUSD, H4

The price action of this pair usually tells a trader which of the currencies is bought and which is sold. During the past weeks the main trend was up, meaning that the Euro was mainly bought, while the dollar was sold. After the price hit 1.3400, it was rejected and got back to 1.32. The price pattern that seems to be emerging looks like a Head and Shoulders. It would be confirmed only if EURUSD will get back to 1.32 this week. The second scenario would be a consolidation above 1.33 followed by a break above the key resistance.

To sum up, we have the EURUSD very sensible to the US economic news, especially coming from the labor market and the price action is drawing a Head and Shoulders. For next week we can expect a fall back to 1.3200 if the good news will be published for US economy and a break through 1.3400 if the data will continue to be under estimates.

The post Good News means Bad News, EURUSD Forecast appeared first on investazor.com.

By Investment U

Evil incarnate: that’s what the anti-science movement has called Monsanto’s (NYSE: MON) efforts to lift farmers out of poverty and feed an ever expanding global population. Their genetically engineered seeds have been blamed for causing autism, cancer, allergies and a host of other issues including super weeds and super bugs.

MON has been the convenient worldwide whipping boy for many but, while the anti-folks have been raising cane, MON has been creating rice seeds fortified with vitamin A that saves lives in Asia. They have developed a pest-resistant cotton that has improved living conditions for farmers in India and drought resistant seeds to improve production on African farms.

Despite worldwide negative press, MON is projecting record worldwide seed volume this year and continued strength in its herbicide divisions. They are expected to see earnings jump 23% in 2013 and another 16% in 2014.

The CEO says the facts about food are so dire – his word, “dire” – that increased yields from genetically engineered seeds are an absolute essential. The earth will have 9.5 billion people by 2050 and almost a full 1 billion of them will suffer from hunger and malnutrition. That’s more than 10% of the world. When the real facts about the world’s food situation finally make it to the mainstream press, the current arguments about bioengineering will appear quaint, at best.

Food, fertilizer, farm land and seeds have been one of my central themes for years. It is a slam dunk and MON is at the center of what will be an ever-increasing, essential business for decades to come.

The CEO of MON has set a goal of doubling crop yields in the next 20 years. The world had better hope they are successful.

The last time I did a segment about MON I got a lot of very mean-spirited emails. So, if you email me with your criticisms of this segment and MON, please include your ideas that will serve as alternatives to MON’s solutions for feeding the world.

You must look at MON.

A Different Housing Play

The recent jump in housing has resulted in big gains in housing prices in some of the hardest hit areas: California and Florida. There have also been nice returns in plays associated with housing, like Home Depot.

But a lesser-known play may hold the best returns yet in this recovery and it is in an area that tends to lag a move in residential housing by about a year, commercial real estate. And it’s still cheap.

HD Supply (Nasdaq: HDS) was the commercial construction supply division of Home Depot and was spun off in 2007. It provides everything required by the commercial construction side of real estate and also has a focus on infrastructure needs.

Despite a rough start after the spin-off, private equity capital firms still own 60% of the stock, which speaks well of its potential. If the big money hasn’t cut and run, there have to be better things coming.

Analysts see this company gaining in market share and running as high as $42 per share from its current $23 and change. Its EPS estimates sit at about $0.72 a share in 2014 from a virtual zero last year with flat revenues but they are expected to increase by 10% next year.

HDS is cutting costs, paying down debt, investing $640 million in an overhaul of its technology, increasing the number of salespeople, expanding its e-commerce base and its inventory.

This is a faster growth story than HD or Lowes and has a lower valuation.

The real estate boom is for real and commercial hasn’t even started moving yet. Take a look at HDS.

The “Slap in the Face” Award: Quitting America

Here’s a real beauty! The number of people renouncing their U.S. citizenship surged to a record high in last quarter: 1,130 names appeared on the IRS’s list of deunifications. That’s almost twice the previous record and more than all of 2012.

The reason: tougher foreign tax laws and enforcement

Those who give up their citizenship because of taxes are even subject to an exit tax before they can give up their citizenship.

The U.S. is rare in that it taxes all money made in and out of the country, even if you are living abroad.

The tougher enforcement is the result of banks like UBS who assisted U.S. citizens in beating the foreign tax. I guess it’s ok to beat the foreign tax but not to help anyone do it.

One of the unforeseen results is that some foreign banks are refusing American customers. They don’t want to risk becoming ensnared in the same trouble UBS had with the U.S. government.

But, the real insanity of this situation is a case involving an expat living in Canada who owed an additional foreign tax of $250. The total legal and accounting bill to collect it: $40,000. And we paid it.

Isn’t that a slap in the face?

Article By Investment U

Original Article: Feeding the World… and Making Big Profits

Article by Investazor.com

In our previous article on scalping we pointed out some important thing to be pay attention to when choosing you broker. Now, we strongly believe that it is very important for beginners to know which currencies are best suited for this trading strategy.

As we already know, scalping strategies involve short term transactions due to bring profit. It can be defined as being a highly specialized trading method which requires, despite from strong technical and fundamental analysis knowledge, favorable technical setup, in order to bring important profit and satisfaction to the scalper.

As the technique is oriented towards a specific kind of movements in the market, it is mandatory for the scalper to know which currency pairs are best suited to scalping strategies. Generally speaking, it is desirable to be traded the smallest spread currencies, that also have the lowest costs. More precisely, it is recommended to be oriented towards the most traded currencies, those that have the highest liquidity in the market.

Moreover, this kind of currency pairs is not prone to very sharp movements and give the less surprises in the market. We will categorize 3 types of currency pairs best suited to scalping, in order to also exemplify to which currencies scalpers must pay more attention.

Please be informed that the examples we are going to give to you are relevant only for this period of time, because the market is in a continue evolution and changes appear all the time. The generic type of currencies is the one that counts, while the particular examples can easily change in time.

Majors

The so called Majors are the currencies formed by the most powerful and dominant economic currencies in the world. Their major characteristics are liquidity and responsiveness to market shocks.

Nowadays, in this category we can include EURUSD, USDCHF, GBPUDS and USDJPY. These are the major pairs traded by the majority of the banks all over the world and also by all important institutions and traders, being the most followed by scalping fans. What is important regarding this category of currencies for scalpers is that they move slowly in the markets and that they bear the biggest amounts of trading in terms of volume.

Being some kind of stable currency pairs, scalpers can take advantage of it in order to accumulate conservative repeated profits.

Carry pairs

Carry pairs are the currency pairs formed by a country whose currency has high interest rate and one that has low interest rate. Their major characteristic is that they are traded all over the world and that they are very volatile. It will be easy to understand that these are not stable pairs, but their evolution and changes directly depend on the evolution of the interest rate.

For the moment, the most important examples for the category are: USDJPY, EURUSD, AUDJPY, NZDJPY, AUDUSD and EURAUD.

We often found the information that EURJPY pair is also included in the carry pairs category. We are to believe that the case is no longer applicable given the fact that the difference between the interest rates is becoming smaller and smaller: 0, 5% for EUR and for JPY tends to 0%.

It is important to point out that it is not advisable for beginners to scalp with carry pairs because at times spreads widen very quickly and even stop-loss order are not enough to avoid loss.

Experienced scalpers are also advised to trade them using typical trend following strategies as to exploit breakouts and other sharp movements.

Exotic currencies

Exotic currencies are those formed by at least one exotic country’s currency. Their important characteristic is that they are rarer, less liquid and less well-known forex pairs than the other two previous categories of currency pairs.

We can enumerate the pairs: USDSEK, USDZAR, USDTRI, NOKUSD and BRLUSD or the Russian ruble.

It is mostly recommendable for experienced scalpers to trade this category, because of the unpredictable gaps that appear frequently.

But beginner traders that have strong knowledge of money management strategies can find them perfect to scalp.

Previous << How to Choose The Right Broker For Scalping ?  <<

The post What Are The Most Profitable Currencies for Scalping appeared first on investazor.com.

By Profit Confidential

Talk about inflation today and you’ll be ridiculed. Deflation is the topic of discussion among mainstream economists and Federal Reserve members these days. They say prices in the U.S. economy are not rising fast enough.

I completely disagree with them.

My analysis shows we are experiencing rapid inflation right now; but the way the government calculates its numbers masks the true story of inflation.

To understand what’s at stake, we need to go back to Economics 101.

What we are now seeing in the U.S. economy is monetary inflation. This happens when the money supply increases. The increase in money supply eventually causes currency devaluation, which results in higher prices for goods and services as buying power declines—this is classic inflation. (Throughout history, monetary inflation has eventually become price inflation.)

Consider the chart of the M2 Money Supply reproduced below. M2 is considered to be a broader measure of the money supply—it includes savings accounts, deposits, and non-institutional money market funds, in addition to the currency already in circulation.

Chart courtesy of www.StockCharts.com

As you can see, the chart shows an uninterrupted line upwards. In 2000, the M2 Money Supply was around $4.5 trillion. Now it hovers close to $11.0 trillion.

Wait, there’s more! The Federal Reserve continues to create $85.0 billion a month in new money, pushing the money supply even higher. And “tapering” quantitative easing doesn’t mean the Federal Reserve will stop printing fiat currency; it just means they will slow the pace of printing.

The damage has already been done. While inflation may not be a concern to people today, going forward it could be a huge problem. Look at the fast rebound in gold bullion prices following the recent price correction; look at the jump in the yield on 10-year U.S. Treasuries—these are indicators of inflation ahead. An already strained U.S. consumer who needs to buy goods and services to run his or her household can vouch for this today.

For those who are saving for retirement, this will be devastating. If you have a major portion of your savings in fixed income, you will face losses unless you hold those bonds to maturity; but if you do, you’ll miss out on rising interest rates.

Retirees got a bum rap the past five years as interest rates collapsed and the return on their savings also fell sharply. Now Part II of the Great Retirement Heist starts as inflation eats away at the buying power of that nest egg.

The cure to this problem? Keep a portion of your savings in investment vehicles that rise in price as inflation rises. Can you say: “depressed senior gold producer stocks?”

Michael’s Personal Notes:

The corporate earnings growth of companies in key stock indices for the second quarter has been very weak—and it looks like yesterday the stock market finally started to take note (the Dow Jones Industrial Average was down 225 points yesterday). To boost per-share earnings, companies in key stock indices have resorted to stock buy-back programs, something investors are finally starting to catch onto.

This shouldn’t be a surprise to readers of Profit Confidential, as I have been writing and scrutinizing this phenomenon for some months now.

This is how it works. Say a company called ABC Inc. has 10 million outstanding shares and earns $1.0 million in profit for the year. Its corporate earnings per share would be $0.10.

Now, let’s suppose the company ABC goes out and buys back two million of its own shares in the open market. With everything else remaining constant, its corporate earnings per share will increase to $0.125 per share, a jump of 25%. The company didn’t make more money; it just reduced the number of its outstanding shares, which boosted per-share corporate earnings.

And the companies involved in these stock buy-back programs are big and well-known, listed on key stock indices.

3M Company (NYSE/MMM) reported second-quarter corporate earnings of $1.71 per share—three percent higher than during the same period a year ago. During the same quarter, the company repurchased $1.2 billion worth of its own shares. It doesn’t end there. 3M said it has boosted its stock buy-back program. The company originally said it would buy anywhere between $2.0 billion and $3.0 billion of it shares on the open market. It now plans to buy between $3.5 billion and $4.0 billion worth of its own shares. (Source: 3M Company, July 25, 2013.)

The Home Depot Inc. (NYSE/HD), the world’s largest home improvement retailer, bought $2.1 billion of its own shares and said it plans to buy an additional $4.4 billion worth of its own shares for the rest of its current fiscal year. (Source: Home Depot, May 21, 2013.)

These two companies aren’t the only ones buying back their shares. The list includes big-cap companies on key stock indices, such as International Business Machines Corporation (NYSE/IBM), General Electric Company (NYSE/GE), Pfizer Inc. (NYSE/PFE), and Halliburton Company (NYSE/HAL)…and the list is growing.

The problem with stock buy-back programs is that they can’t go on forever. Either a company runs out of money to buy its stock or reduces the amount of stock in circulation to the point where it starts to hamper liquidity. In other words, the masking of corporate earnings growth cannot go on much longer.

In the first quarter of this year, only half the companies in the S&P 500 met their sales expectations. It will likely be the same once the remainder of the S&P 500 companies finishes reporting their second-quarter corporate earnings.

Yesterday, the stock market finally heeded some of the warning signs I have been writing about for months: slowing corporate earnings and revenue growth; corporate insiders dumping stocks at an alarming pace; bullishness amongst stock advisors at multi-month highs; bond funds buying stocks; margin debt on the NYSE at a record high; and now interest rates rising sharply (you can see all the reasons this market will collapse in my Dire Warning for Stock Market Investors video.)

What He Said:

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

Article by profitconfidential.com

By Profit Confidential

The corporate earnings growth of companies in key stock indices for the second quarter has been very weak—and it looks like yesterday the stock market finally started to take note (the Dow Jones Industrial Average was down 225 points yesterday). To boost per-share earnings, companies in key stock indices have resorted to stock buy-back programs, something investors are finally starting to catch onto.

This shouldn’t be a surprise to readers of Profit Confidential, as I have been writing and scrutinizing this phenomenon for some months now.

This is how it works. Say a company called ABC Inc. has 10 million outstanding shares and earns $1.0 million in profit for the year. Its corporate earnings per share would be $0.10.

Now, let’s suppose the company ABC goes out and buys back two million of its own shares in the open market. With everything else remaining constant, its corporate earnings per share will increase to $0.125 per share, a jump of 25%. The company didn’t make more money; it just reduced the number of its outstanding shares, which boosted per-share corporate earnings.

And the companies involved in these stock buy-back programs are big and well-known, listed on key stock indices.

3M Company (NYSE/MMM) reported second-quarter corporate earnings of $1.71 per share—three percent higher than during the same period a year ago. During the same quarter, the company repurchased $1.2 billion worth of its own shares. It doesn’t end there. 3M said it has boosted its stock buy-back program. The company originally said it would buy anywhere between $2.0 billion and $3.0 billion of it shares on the open market. It now plans to buy between $3.5 billion and $4.0 billion worth of its own shares. (Source: 3M Company, July 25, 2013.)

The Home Depot Inc. (NYSE/HD), the world’s largest home improvement retailer, bought $2.1 billion of its own shares and said it plans to buy an additional $4.4 billion worth of its own shares for the rest of its current fiscal year. (Source: Home Depot, May 21, 2013.)

These two companies aren’t the only ones buying back their shares. The list includes big-cap companies on key stock indices, such as International Business Machines Corporation (NYSE/IBM), General Electric Company (NYSE/GE), Pfizer Inc. (NYSE/PFE), and Halliburton Company (NYSE/HAL)…and the list is growing.

The problem with stock buy-back programs is that they can’t go on forever. Either a company runs out of money to buy its stock or reduces the amount of stock in circulation to the point where it starts to hamper liquidity. In other words, the masking of corporate earnings growth cannot go on much longer.

In the first quarter of this year, only half the companies in the S&P 500 met their sales expectations. It will likely be the same once the remainder of the S&P 500 companies finishes reporting their second-quarter corporate earnings.

Yesterday, the stock market finally heeded some of the warning signs I have been writing about for months: slowing corporate earnings and revenue growth; corporate insiders dumping stocks at an alarming pace; bullishness amongst stock advisors at multi-month highs; bond funds buying stocks; margin debt on the NYSE at a record high; and now interest rates rising sharply (you can see all the reasons this market will collapse in my Dire Warning for Stock Market Investors video.)

What He Said:

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

Article by profitconfidential.com

By Profit Confidential

If there ever was an example illustrating why good timing is important in the investment business, it’s Tesla Motors, Inc. (TSLA).

For quite some time, the company wasn’t doing anything on the stock market until it garnered operational momentum combined with buoyant market conditions. Making the case for investing in the company now is difficult after its massive run up, but if the stock were to experience a major correction, the company would likely be worth a new speculative position. (Note that this is just an observation; not a recommendation.)

With Tesla currently boasting market capitalization of approximately $17.0 billion, co-founder Elon Musk is the business world’s new golden boy.

Tesla’s “Model S” is a beautiful piece of machinery, and it is silent on the road. Next year, the company will release its “Model X” hatchback, which offers an optional dual motor, all-wheel drive powertrain that is expected to accelerate from 0 to 60 miles per hour in under five seconds. The Model X has gullwing doors like the classic Mercedes-Benz coupe. Based on the pictures, it is brilliant design work.

The stock’s current overvaluation is typical of innovating companies on the cusp of major sales and earnings growth. Tesla is riding its own wave of enthusiasm as the only player in the marketplace selling an electric luxury sedan. BMW AG (BMW.DE) is right around the corner with its electric offerings; the company also has a hydrogen-powered 7 series sedan.

On the stock market, Tesla perfectly illustrates how useful it is to regularly check the market’s new 52-week highs. It’s an easy metric to help identify momentum trades. The company’s stock chart is featured below:

Chart courtesy of www.StockCharts.com

If the stars are aligning for Tesla, they should do so over the coming years in Europe, where the electric-vehicle infrastructure is much more prevalent. The company already has 13 stores in Western Europe and will soon open another 14.

Tesla will need to come back to capital markets for additional financial. The company has approximately $578 million in long-term debt, but $746 million in cash and equivalents.

The way Tesla is developing as an enterprise is bang on. The company is not only selling cars to the public, but it’s selling its electric powertrains to other manufacturers. Currently, Tesla is helping Mercedes-Benz develop an electric “B-Class” vehicle. The company is now the powertrain supplier (which includes a battery pack, charging system, invertor, motor, gearbox, and software) for the electric version of Toyota’s “RAV4.”

In its latest quarter (ended June 30, 2013), Tesla delivered 5,150 Model S cars. Combined with sales to Mercedes-Benz and Toyota, the company’s total revenues in its latest quarter were $405.1 million.

As you might expect, the company is in full expansion mode. It recently increased its weekly production rate to 500 vehicles per week from 400. Model S deliveries in Europe began just this month, and Tesla recently purchased 31 acres of land in Fremont, CA, for future expansion.

Tesla is going to have problems going forward, and it’s likely they’ll be with the supply chain. The company’s expenses are skyrocketing as it opens new stores and develops new models. It now has 41 stores and galleries open globally. This year, the company plans to open its first store in Beijing, China.

It’s great to see the wealth curve that innovation creates. Wall Street research ratings on Tesla are all over the map, which is no surprise. It’s very difficult to value a company that’s already an institutional favorite. On a major pullback, Tesla would be worth considering. What Musk is creating is entrepreneurship at its finest.

Article by profitconfidential.com