Month: October 2013

Source: Brian Sylvester of The Gold Report (10/30/13)

http://www.theaureport.com/pub/na/gissen-and-berols-gold-stock-tricks-and-treats

No matter how elaborate an investor’s Halloween costume is, the gold space isn’t handing out much in the way of treats this year. While Encompass Fund Managers Malcolm Gissen and Marshall Berol don’t agree on the timeline for gold’s recovery, they have faith that it will come. In the meantime, their focus is on companies that are in production, generate cash flow and have top-notch management teams. They also dig into their treat bag for names in the energy sector and other metals in this interview with The Gold Report.

The Gold Report: It’s almost Halloween and we remain in the clutches of a tricky market for junior resource equities. What are your perspectives on how long it’s going to take before investors see another treat-filled year like 2010?

Malcolm Gissen: The last couple of years have been frightening for investors, in both gold commodities and gold stocks. Gold prices have been rising the last few weeks, allowing some people hope, but I don’t expect an appreciable change in the gold price and the appeal of gold mining companies until 2015.

Marshall Berol: I’m more optimistic than Malcolm. I think the market will change, possibly in as little as five months. The underlying fundamentals that have driven gold up over the last dozen years are still in place: the money printing presses, supply and demand for bullion, bars and coins. Costs are going up, so is the need for higher prices.

I would like to see the market refocus on fundamentals and get away from tracking the hour-to-hour and day-to-day activities of the financial players. What they are doing in the futures markets is driving the price of gold and other commodities up and down incessantly. The dollar is up; the dollar is down. Oil is up, oil is down. Stock prices react to whatever news is coming out of Washington, Europe or Japan. At some point, investors will realize that gold’s underlying fundamentals have not changed and that there are reasons to buy it.

MG: We started investing heavily in gold in the accounts of clients of our RIA firm, Malcolm H. Gissen & Associates, in 2002, when gold was under $300 per ounce ($330/oz). We built allocations to precious metals of 15ñ18% by 2004. When Marshall and I launched the Encompass Fund in mid-2006, gold companies was the largest asset class. We believed that gold was deeply undervalued and with India and China, cultures that value gold and use it as a currency substitute, developing a middle and upper class, demand for gold would increase exponentially. We also knew that many investors would come to realize that the gold price would go up because of inflation and currency devaluationóthe historical reasons people buy gold.

That attitude has changed over the last two-and-a-half years. Fundamentals no longer seem to play a role in attracting investors to buy gold or gold stocks. Marshall thinks it would be nice for people to go back to looking at fundamentals; I’m not sure that will happen. The information explosionógossip, rumors and trying to guess what hedge funds and private equity investors are doingóplays an increasingly larger role in decision-making.

One factor that would cause gold to rise would be the realization that the U.S. government is printing money to deal with its tremendous debt. This is not sound policy. This should scare people, but it doesn’t seem to at this time.

The Federal Reserve is doing everything it can to keep interest rates low, which is good for corporations and good for the economy, but it is doing that by buying bonds and mortgages. Eventually, we will have to pay the piper. At that point, hard assets like gold and silver will look a lot more attractive. Until we get to that point, I’m concerned that gold will not break out of the range it has been trading in for the last couple of years.

TGR: Change will require the onset of fear.

MG: Fear is definitely one strong motivator. Unlike Halloween, where children (and many adults!) love going to haunted houses to be frightened, people do not seek fear in their investments. Rather, they avoid fear, often at all costs. If fear returns in the markets, Marshall and I think that gold is likely to be a place where investors will move their money.

Another new development affecting gold and silver prices in the long run could be supply constraints. The world’s largest mining companies have realized that they must be more sensitive to escalating costs of building and operating mines, especially with gold and silver at present prices. They can’t rely on $1,600ñ1,900/oz gold prices to pay for $3ñ7 billion ($3ñ7B) expansion and construction projects and remain profitable. With gold in the $1,000ñ1,300/oz range, some companies are not profitable.

I just attended an excellent presentation by Juan Carlos Artigas, head of investment research at the World Gold Council. While arguing that all investors should have a 3ñ10% allocation to gold because it is an asset with low correlation to almost all other assets, he pointed out that all-in costs for some gold producers were in the $1,200/oz range. As a result, CEOs are less willing to build large projects. We also have seen much less merger and acquisition activity among the majors. I believe that will, over the next few years, threaten the gold and silver supply.

If gold supplies are threatened, it could raise gold prices. I can’t say whether that will happen in six months or three years, but I believe that we’re headed in that direction.

TGR: Do you expect the trend of up-and-down gold prices with no real pattern and with little consensus to continue until there is a decided move upward?

MB: Although we disagree on timing, we agree that gold will continue trading in the $1,200ñ1,450/oz range until it breaks out to the upside.

MG: I think there’s a floor in the $1,100ñ1,200/oz range. When gold goes below a certain level, companies will stop producing, there will not be enough gold to meet demand and we’ll see higher prices.

Industry executives tell us that if gold should ever get to $1,000 or $900/oz, they expect many of their colleagues to go on care and maintenance, because they can’t make any money at that price. They’ll go to a skeletal crew and cut back on production.

MB: It’s happening. Goldcorp Inc. (G:TSX; GG:NYSE) reported it is delaying work in Argentina due to rising costs and other factors. Its all-in sustaining cost is likely to be $1,050ñ1,100/oz for 2013. At that levelóand this is one of the largest gold miners in the worldómanagement teams cannot continue to produce and lose money.

TGR: Let’s look at silver. New York’s CPM Group expects silver prices to consolidate for another three years, at an average of $18/oz. Do you support that forecast?

MG: I don’t, for a couple of reasons. First, it’s very difficult to make forecasts for a specific timeframe. I cannot predict what will happen in three years. It is difficult enough trying to forecast where prices will be in three or six months! Second, because silver has so many more industrial uses than gold, I don’t see silver prices declining by an additional 15% after the sharp decline of the past year. I also do not believe that silver prices will break out until factorsósimilar to what I mentioned for goldóchange.

MB: Silver’s current price is $21ñ22/oz, so CPM’s forecast implies that the price will decline over the next three years. I don’t agree. About half of silver usage is industrialóelectronics and medical, for exampleóall of which are increasing.

Silver tracks the price of gold investment-wise, but I think it could do better than gold percentage-wise over three years. Historically, silver has been more volatile than gold. It goes up or down to a greater percentage than gold.

TGR: Malcolm, we’re just a couple of weeks beyond the federal government shutdown in the U.S. What are your thoughts on the long-term health of the American economy and the American political system?

MG: I’m going to stay away from the politics, because my politics and Marshall’s politics are almost diametrically opposite.

I believe the U.S. economy is much healthier than a lot of Americans realize. Our entrepreneurial spirit is extraordinary; the number of young people starting companies has never been greater.

Sometimes government can get in the way. We need more reasonable, workable regulation than we have now. If we do that, the sky is the limit for the U.S. economy. I don’t think that will change for many years; I’m very bullish on our economy.

TGR: In 25 years, will the U.S. greenback still be the world’s reserve currency?

MG: I think it will. Twenty-five years would be too soon for the American dollar to lose its position as the world’s basic currency, just as English is the dominant language used around the world.

MB: You also have to ask yourself what the reserve currency would change to. The euro isn’t in any position to become a reserve currency. Nor will it be the yen, the ruble or the peso. It may one day be the Chinese currency, but not that soon.

That brings us back to gold. It would not replace the dollar, but central banks are adding gold to their reserves to lessen the impact of the dollar on the percentages held in their reserves.

TGR: Did you make changes to your Encompass Fund (ENCPX:NASDAQ) due to the government shutdown?

MG: We made no changes in either client accounts or in the Encompass Fund. However, we did debate whether to move more to cash in the eventuality of a default on the U.S. debt and the negative impact that would have on the market. We concluded Congress would likely go right to the wire, when the more moderate Republicans would prevail and strike a deal.

MB: The client accounts are managed to each client’s individual goals and objectives. The objective of the Encompass Fund is long-term capital appreciation. We are not a trading fund. The turnover rate for the Encompass Fund runs around 25%. We don’t focus on day-to-day, week-to-week or even month-to-month news developments. We look for industries and companies that will do well over time.

TGR: What are your clients telling you these days?

MG: I think clients like less risk and less volatility, and we have moved in that direction over the last 12ñ15 months. We have invested client accounts in more large-cap, domestic stocks. We like the energy, healthcare and technology sectors. We also have added Real Estate Investment Trusts.

We’ve done the same thing in the Encompass Fund. It was more heavily invested in resource companies, particularly metals. Over the last six months, we’ve kept the best of the resource companies, but energy is now the largest component represented in the Encompass Fund.

TGR: Your website describes the Encompass Fund as a “go anywhere fund.” Geographically, where has the fund gone in the last year that it had not gone previously?

MB: It’s more a factor of where we’ve pulled back than where we’ve gone for the first time. The fund has a number of resource sector investments in Canada, the U.S., Mexico, South America, Africa and a couple of companies in Europe. We are more wary of jurisdictions that have experienced geopolitical problems, such as Argentina, Bolivia, Ecuador, areas where the governments appear less friendly toward resource operations.

TGR: Marshall, you’ve invested in resource companies based, in part, on your relationships with company management. How has the downturn in the junior resource space changed those relationships?

MB: It hasn’t changed the relationships as much as it has focused us even more on company management.

At the end of 2008, we assessed where all of the companies in the Encompass Fund were relative to their projects, finances and management. We reduced or eliminated a number of the companies that were not making the progress we had hoped for and added to those we thought were stronger. That worked out extremely well for the following couple of years, as the markets improved and some of the companies did likewise.

We did the same thing earlier this year, focusing even more on the management teams. In this very difficult environment, strong, knowledgeable managements with successful track records for bringing projects along and raising money are extremely important.

TGR: But you must have to say no to people when they come to you for more financing.

MB: Yes, almost every day. This year in particular, companies have needed to raise funds just to keep the lights on, much less advance their projects.

We are being far more selective in what we believe justifies funding. Primarily, that translates to companies that are in production and need funding to increase production, or are very, very near production.

TGR: Do the relationships just dry up when you have to turn down funding requests?

MB: I hope not. It’s a business decision. Companies are in a position where they need to ask. We’re in a position where we can and will say no if it doesn’t fit our portfolio objectives. I would hope that the management teams understand our position and our responsibility to our investors.

TGR: What is your current investment thesis for junior mining companies? What do companies you invest in today have to have?

MB: It’s very good if they’re in production or very near production. That means they’re generating revenue and cash flow of some kind and are advancing their projects.

Management and the state of the balance sheet are also factors. Companies with significant cash on their balance sheets are a lot more attractive.

With rare exceptions, it is difficult for us to justify investing in very early-stage companies in this environment.

TGR: This year investors have gotten more tricks than treats in the gold space. What are those rare treats that you’re following?

MB: We found a number of treats among the energy companies. We’ve been invested in Magnum Hunter Resources Corp. (MHR:NYSE.MKT) for some time. It’s expanding its operations in the U.S., primarily in oil, some in gas.

TGR: It was up almost 9% on Oct. 24.

MB: Yes. Many of the smaller companies are volatile. Magnum Hunter has doubled in price over the last couple of months. Thus, it’s more difficult to buy at these levels. A short while ago, we trimmed the position simply for portfolio management purposes; we still like the company.

We also find industrial metals, such as vanadium and antimony, attractive.

TGR: Which vanadium or antimony plays do you like?

MB: U.S. Antimony Corp. (UAMY:OTCBB) is expanding production in Mexico: mining, milling and processing. A number of strategic metals are currently sourced primarily out of China, and there are a lot of reasons why the users and governments around the world want to move away from China being basically a sole source supplier.

We have an interest in American Vanadium Corp. (AVC:TSX.V). While its project in Nevada is still a ways off, it also has a relationship with a German manufacturer of fuel cells used for energy storage for solar and wind power. That’s a very attractive business opportunity for American Vanadium to produce revenues in the short term while it moves ahead on starting production at its vanadium project.

TGR: Is that an offtake deal?

MB: It will be partially an offtake deal when it gets into production. Right now, American Vanadium is a sales agent for these vanadium-based batteries used to store energy produced by the solar and wind industries.

TGR: Returning to gold, which small-cap gold companies in the Encompass Fund portfolio would you like to talk about?

MB: Relative to a good management team able to move the company ahead and raise funds, I would mention Brazil Resources Inc. (BRI:TSX.V; BRIZF:OTCQX). It isn’t yet in production, but it recently announced acquisition of another Brazilian gold company. Marketwise, it has done better as a nonproducing junior company stock than many of its peers.

TGR: Earlier you talked about avoiding places like Argentina, Bolivia and Ecuador. Brazil is right in that neighborhood. Why are you comfortable investing in Brazil?

MB: The Brazilian government seems to be more reasonable, and it is a far larger and broader based economy than elsewhere in South America. Argentina, for example, nationalized a Spanish oil company and changed the tax laws, and the monetary situation is challenging.

TGR: Keeping with our trick-or-treat theme, which gold companies were tricky in 2013?

MB: There were a few whose stock prices suffered dramatically and that may be in positions to treat investors well in 2014.

One is Northern Dynasty Minerals Ltd. (NDM:TSX; NAK:NYSE.MKT). Its Pebble project in Alaska is very large and has a lot of gold and other metals. However, it is controversial from an environmental standpoint. Until mid-September, Northern Dynasty had Anglo American Plc (AAUK:NASDAQ) as its 50/50 partner. Then, Anglo American announced that it was withdrawing from the partnership and discontinuing its involvement, after having spent $541 million ($541M) of a projected $1.5B investment to develop the Pebble project. That took the Northern Dynasty price down dramatically, and it has basically stayed there.

Northern Dynasty says the advantage is that it now owns 100% of Pebble. Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) owns 18% of Northern Dynasty. Nobody knows what will happen there.

TGR: Does CEO Ron Thiesssen need another partner to make a go of it?

MB: Yes, although Northern Dynasty claims to have the financial capacity to move forward with permitting and the project.

But investors were tricked, to use our Halloween analogy, because they thought Anglo would be putting another $1B into Pebble. Anglo’s announcement changed the project and the perception of Northern Dynasty. If these concerns can be straightened out, a year from now Northern Dynasty stock should be a real treat for those who invested at this level.

Another situation where the market got tricked is Pretium Resources Inc. (PVG:TSX; PVG:NYSE). Pretium has a major gold project in British Columbia. Its Valley of the Kings project is very high grade and very large. It was forecast to be in production in 2016. Earlier this month Strathcona Mineral Services Ltd., one of the two independent consulting firms working on a bulk sample project to delineate the gold resource, resigned. The stock took a hit.

Within the past week, Pretium released more details about why the firm withdrew. That raised even more questions about the nature of the project and how viable it is. The stock took another hit. The market felt tricked by an unexpected event driving the stock price down considerably.

If the consulting firm’s withdrawal and the reasons for it turn out to be a tempest in a teapot, Pretium stock will become a real treat for investors over the next few months and into 2014.

TGR: Do you consider Strathcona’s resignation an entry point to the stock?

MB: Not necessarily an entry point, but it creates what could be an excellent opportunity to get into the stock at half the price it was a month ago.

TGR: Snowden, another geological consulting firm, continues to oversee the bulk sample. Is having Snowden alone sign off on the bulk sample enough?

MB: It will be enough for some people, not for others. That is the conundrum in assessing Pretium and determining a good entry point price.

Some people will say there’s too much smoke and don’t want to get near it. Others will assess the situation as it develops and as the bulk sample results come outóPretium has announced results from about one-quarter of the 10,000-ton bulk studyóand will decide they want to invest.

TGR: Any other names you’d like to mention?

MB: We like Primero Mining Corp. (PPP:NYSE; P:TSX), which is making good progress at its San Dimas mine and Cerro del Gallo project in Mexico. It is producing cash flow, is growing and expanding and has a very accomplished, experienced management team. Despite recent questions about Mexico instituting a new tax and royalty structure, Mexico remains an attractive mining jurisdiction.

I recently visited Comstock Mining Inc. (LODE:NYSE.MKT). It has put together a major land package in the Comstock Lode area south of Virginia City, Nevada. It has been in production for about one year, and projects doubling its production to 40,000 oz gold equivalent in 2014, from 20,000 oz gold equivalent in 2013. The key for Comstock will be continued production expansion, which should lead to a lower cost of production per ounce and increased cash flow and operating margins. Increased exploration, which is ongoing, is likely to increase production and cash flow over time.

TGR: What tricks should investors avoid in today’s economic environment?

MB: Unfortunately, tricks are most noticeable with hindsight. I think the trick to success is to avoid assuming that when gold or silver prices rise that it will raise all the boats. While we remain optimistic on the price of gold and silver, just having an inexpensive stock doesn’t mean it will go up if the price of gold goes up. You have to dig deeper and look at the management, the projects, the location and the finances.

TGR: Indeed. That trick is a real treat. Thanks for your time and insights.

Malcolm Gissen founded Malcolm H. Gissen & Associates Inc., an investment advisory services firm, in 1985. His management experience has focused primarily on investments in publicly traded companies. He holds a Bachelor of Science degree from Case Western Reserve University and a Juris Doctor (J.D.) degree from the University of Wisconsin.

Since 2000, Marshall Berol has been the chief investment officer of Malcolm H. Gissen & Associates Inc. In addition, for more than 20 years, he has owned the investment firm BL/SH Financial. His investment management experience has focused primarily on investments in publicly traded companies. Berol did his undergraduate work at the University of California at Berkeley, and has a Juris Doctor (J.D.) degree from the University of San Francisco School of Law. Prior to entering the financial services industry, Berol was a partner in a San Francisco law firm.

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DISCLOSURE:

1) Brian Sylvester 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: Brazil Resources Inc., Pretium Resources Inc., Primero Mining Corp. and Comstock Mining Inc. Goldcorp Inc. is not associated with The Gold Report. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Malcolm Gissen: I or my family own shares of the following companies mentioned in this interview: Magnum Hunter Resources Corp., U.S. Antimony Corp., American Vanadium Corp., Brazil Resources Inc., Primero Mining Corp., Comstock Mining Inc. and Encompass Fund. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

4) Marshall Berol: I or my family own shares of the following companies mentioned in this interview: U.S. Antimony Corp., American Vanadium Corp., Brazil Resources Inc., Comstock Mining Inc. and Encompass Fund. 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.

5) Encompass Fund (co-managed by Mr. Gissen and Mr. Berol) is invested in Magnum Hunter Resources Corp., U.S. Antimony Corp., American Vanadium Corp., Brazil Resources Inc. and Comstock Mining Inc.

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London Gold Market Report
from Adrian Ash
BullionVault
Thurs 31 Oct 09:25 EST

WHOLESALE prices of gold and silver extended yesterday’s sharp falls in London trade Thursday morning, as world stockmarkets also fell following the US Federal Reserve’s latest policy statement.

Changing neither the US Dollar’s zero interest rate or $85 billion of monthly asset purchases, “Fiscal policy is restraining economic growth…Inflation has been running below the Committee’s longer-run objective,” the central bank said Wednesday.

 Deciding “to await more evidence that progress will be sustained before adjusting the pace of purchases,” the US central bank – which had flagged September as the likely start of ‘QE tapering‘ in June – said again that “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.”

 By lunchtime in London today, gold stood almost 3% below Monday’s 5-week highs, hitting the lowest price since last Tuesday at $1323 per ounce.

 Silver briefly dipped below $22 per ounce after breaking above $23 on Wednesday for the first time in 6 weeks.

 The rising Dollar knocked the Euro currency back to its lowest level in 2 weeks at $1.3625.

 Crude oil led commodities lower with a 0.5% drop. US government bonds rose in price, nudging the 10-year yield back down to 2.50%.

 “Clearly,” says today’s precious metals comment from German bank Commerzbank, “some market players expect the Federal Reserve to scale back its bond purchases in the near future.

 “[But] the Fed made virtually no changes to its statement that would justify this expectation.”

 Looking ahead, “The Fed will likely not do anything at its year-end meeting given that there are key budget and debt ceiling dates just a few weeks after that,” says Edward Meir at brokers INTL FCStone.

 “We think gold may be under pressure for the balance of the week, but the [precious metals] complex should regroup and push higher going into year-end.”

 Meantime, says ANZ Bank’s daily note, “Gold along with other markets, was positioned for a dovish Fed. With this event risk now behind us, the market will go back into data-watch mode.”

 Looking at gold market dynamics, “The slowing of physical demand and decline in Shanghai premiums will mean prices have to fall further,” says ANZ, “before sparking any strong end-user demand.”

 Shanghai gold ended Thursday equal to $1337.29 – some $1.50 above London spot gold per ounce – after dropping Tuesday to a discount to the world’s pricing benchmark for the first time in 2013.

 Declining trade volumes on the Tokyo gold futures exchange saw foreign traders account for a record-large 42% of the market in September, the Tocom said last week.

 Today the Bank of Japan stuck with its 0.1% interest rate and $700 billion per year of quantitative easing.

 “The recovery and the economy are distorted,” said a letter to clients this week from the $23 billion hedge fund Elliott Management.

 That makes the situation “uniquely positive for gold,” says the fund, run by prominent Republican backer Paul Singer, also saying Eurozone politicians have done nothing to fix the currency union’s “unsustainable structure”.

 Studying charts of the gold price, “If a picture can tell a thousand words, this does it quite succinctly,” says MacNeil Curry, head of global technical strategy at Bank of America Merrill Lynch, pointing to a monthly log chart of Dollar gold since 1980.

 Curry’s uptrend – which joins the rising price of gold’s lows of the early 2000s – is extended to 2013, but comes beneath and does not touch the market price since 2005.

 “There has been no damage to [gold’s] long-term uptrend which began back at the turn of the century,” says the BAML technician.

 Shorter-term, “I would certainly look for a move upwards of at least $100 from current levels.”

 Latest data from US regulator the CFTC – now 2 weeks behind with its Commitment of Traders report after the US government shutdown ended – meantime show speculators in New York gold futures cutting their net betting on higher prices by 25% in the week-ending Tues 15 Oct.

 Gold fell over 5% that week to hit a 3-month low of $1252 per ounce.

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 fully allocated bullion already vaulted in your choice of London, New York, Singapore, Toronto or Zurich 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 Michael Lombardi, MBA

I harp on about this over and over again: economic growth is when the average consumer is optimistic about their future; they are spending money, they know they will have a job tomorrow, and they are saving. In the U.S., we are seeing the opposite of all this.

In fact, consumer confidence in the U.S. continues to plummet; the Conference Board Consumer Confidence Index, an indicator of consumer spending, plunged more than 11% in October from September. (Source: Conference Board, October 29, 2013.)

But the misery doesn’t just end there for consumers in the U.S. economy. They are struggling to even buy the most basic of needs—food.

According to a recent study by the United States Department of Agriculture (USDA), in 2012, 17.6 million households in the U.S. economy were “food insecure”—they had difficulty bringing food to the table due to a shortage of resources. (Source: United States Department of Agriculture, September 2013.)

And as a result of so many Americans having trouble putting food on the table, it is costing taxpayers significantly. According to the U.S. Senate Budget Committee, over the last five years, the U.S. government has spent $3.7 trillion on 80 different poverty and welfare programs. The amount of money spent on these programs was five-times greater than combined spending on NASA, education, and all federal transportation projects over the time period. (Source: U.S. Senate Budget Committee, October 23, 2013.)

When I look at all these statistics showing how Americans are suffering, talk of economic growth or economic recovery just doesn’t sit well with me. I tend to focus on facts, rather than the noise. The noise says there is “economic growth” in the U.S. economy; while the numbers say the complete opposite.

But have no fear, dear reader. The stock market continues to tell us all is well. Today’s stock market is about the biggest bear trap I’ve ever seen.

Michael’s Personal Notes:

If you are a stock market investor, you’ve probably come to the same realization I have: the stock market is behaving irrationally. These days, the fundamentals don’t really matter. What’s even more frustrating is that when you do talk about the fundamentals behind the market’s continued advance missing, you are ridiculed.

Soft revenues at public companies are just one area of concern. As of October 25, 244 companies on the S&P 500 have reported their third-quarter corporate earnings; only 52% of them registered revenues above the expectation, which means companies are selling less than they expected—not a good sign. Third-quarter corporate earnings growth is now expected to be just 2.3%. A month ago, the same number stood at an even three percent. (Source: FactSet, October 25, 2013.)

We are seeing some of the well-known bears of the stock market turning bullish. “Dr. Doom” is suggesting investing in stocks, and others like David Rosenberg, who has been bearish for years, are turning bullish.

Is this the peak optimism?

As it stands, investors believe the stock market is a safe place to be again. The charts of key stock indices only show an upward trajectory.

Chart courtesy of www.StockCharts.com

What will happen once the euphoria comes crashing down again? After all, irrationality cannot go on forever.

The most recent and best example of a stock market crash we have is from the financial crisis of 2008. We saw key stock indices come down like a rock. That stock market crash wiped out consumer confidence. Those who were retiring and saving each dollar for their golden days (by investing in stocks) saw their retirement dreams disappear.

But it wasn’t just consumers and retirees who got hit hard by the stock market crash of 2008; it also created problems with corporate America as business confidence also plummeted, thus the Great Recession.

I understand I am one of the last standing financial gurus who remain skeptical on the stock market. I am not saying we have reached a top, as it’s very hard to predict when irrationality is exuberant, but we are heading there. There are so many fundamental factors working against the 2013 stock market rise—and they are all being put aside in favor of market exuberance over a Federal Reserve that prints billions of new U.S. dollars each passing month. I feel the best investment strategy is to be cautious and to focus on capital preservation.

This article Trouble Putting Food on Table for 17.6 Million American Households? is originally publish at Profitconfidential

By George Leong, B.Comm.

These are some scary times for holders and chasers of some of the high-volume brand-name momentum stocks, especially in the Internet services area. (Just in time for Halloween…)

While I always like to trade and follow the trend, I’m concerned with some of the superlative moves in the stock market and the resulting excessive and non-realistic valuations in the Internet area.

While I don’t want to wreck the celebratory mood on Wall Street, I highly recommend investors take a step back and really look at some of the euphoric buying we have been seeing specifically with the Internet stocks. It reminds me a bit of what happened in late 1999 and early 2000, prior to the market implosion.

We are clearly witnessing some unjustified buying in Internet stocks as overzealous traders seek profits. The problem is that the pro traders generally are a step ahead and know when to exit.

You don’t want to be caught in a massive stampede to the exits. I’m not saying it will materialize, but it’s something you have to keep in mind.

In my previous article, I discussed the upcoming initial public offering (IPO) for Twitter as it begins its road show this week, drumming up business for what will likely be its overpriced IPO and the frenzy to follow. (Read “How Small Investors Can Still Get a Piece of Twitter.”)

The current valuations I’m seeing with numerous Internet stocks in the social media space is outlandish and would make Warren Buffett shake his head. Buffet may admit to not understanding technology and the Internet, but he clearly knows a thing or two about valuations.

Facebook, Inc. (NASDAQ/FB), for instance, has been burning up on the charts since declining to the $18.00 level in November 2012. The momentum traders have driven the stock up 146% over the past 52 weeks versus a comparative 24.62% advance by the S&P 500. Even when you look at the stock’s expected beta of 2.10, the rise in Facebook’s price is unwarranted.

Trading at nearly 50 times (X) its estimated 2014 earnings and 20X trailing sales, the valuation of Facebook is ridiculous. In comparison, Google Inc., (NASDAQ/GOOG) trades at 19.5X earnings and 5.9X trailing sales, respectively. I have always said Facebook was overpriced, but the stock market clearly feels the company will deliver exceptional results in the future.

Also on the high end is Internet service review site Yelp, Inc. (NYSE/YELP), which trades at an astounding 255X its estimated 2014 earnings. What a crazy valuation! To make matters worse, the company’s price-to-earnings-growth (PEG) ratio is negative 34, which means the company is estimated to see lower earnings growth. In my view, negative PEG ratios are red flags.

The bottom line: there are numerous other overvalued Internet social media and tech stocks that are vulnerable to excessive selling, especially if the market bias reverses. The use of put options or aggressive shorts on some of these overpriced stocks could pay off in some circumstances.

This article How Investors Can Profit from These Frightful Valuations is originally publish at Profitconfidential

By Mitchell Clark, B.Comm.

As evidence of the continued growth in three-dimensional (3D) printing machines, 3D Systems Corporation (DDD) out of Rock Hill, South Carolina reported very good financial results in its latest quarter.

Investors went into the quarter with high expectations, and in spite of some difficulty in translating revenue to the bottom line, 3D Systems looks well-positioned for more capital gains on the stock market.

According to 3D Systems, its third-quarter sales grew 50% to a record $135.7 million: 3D printer sales and related products jumped 76% to $59.8 million; print material sales grew 30% to $33.2 million; and services sales grew 38% to $42.7 million. Earnings for the company grew to $17.7 million, or $0.17 per diluted share, compared to $13.5 million, or $0.16 per diluted share.

The company continues to invest heavily in new research and development. Third-quarter shareholders’ equity almost doubled while the company’s cash balance soared on newly issued shares.

According to management, the company’s 3D printer unit demand tripled since last year. The company increased its full-year sales forecast to between $500 and $530 million, but lowered its non-GAAP earnings-per-share guidance to between $0.93 and $1.03, due to increased spending on research and development as well as new marketing initiatives. The company’s previous adjusted earnings-per-share forecast was between $1.05 and $1.20.

Naturally, real economic growth comes at a price. 3D Systems is expensively priced on the stock market and should remain this way as institutional investors continue to accumulate shares. 3D Systems’ five-year stock chart is featured below:

Chart courtesy of www.StockCharts.com

As is often the case, you get what you pay for when investing. While equity valuations for the new batch of 3D printing companies are overdone, the marketplace can keep it that way for a considerable period with such little choice among real growth stocks.

I think every speculative investor should dedicate some effort to following a stock or two related to this new industry. Previously, we looked at The ExOne Company (XONE), which is a new listing with a lot of potential going forward. (See “This New Trend in Printing a Boon for Tech Investors?”)

3D Systems is already trading at its median Wall Street price target. The company’s 2014 forward price-to-earnings ratio is currently around 45.

Quite likely, a growing company like this will come back to the equity market to raise more money for further expansion. Taking a position in a business like this is a high-risk trade; but then again, it’s very difficult these days to find such strong financial metrics.

I like a company that’s investing heavily in research and development and marketing initiatives. New technology doesn’t sell itself.

3D Systems ranked second in Fortune magazine’s 2013 list of fastest-growing companies. The company is making small acquisitions, getting new ideas and talent related to its core business.

In spite of trading right at its record price high on the stock market, this position is likely to keep ticking higher, with continued strong interest from institutional investors.

This article Top-Line Growth to Keep This Tech Company Ticking Higher is originally publish at Profitconfidential

by Mohammad Zulfiqar, BA

One of the questions being asked by investors these days is “where’s the inflation?” After the financial crisis and the fall of Lehman Brothers, the Federal Reserve and the U.S. government stepped in to help the financial system. As a result, they promised to print money, and thus quantitative easing was born. Banks received billions of dollars in bailout money.

With this, there was a significant amount of speculation that the increased money supply in the U.S. economy would lead to a period of out-of-control inflation, or hyperinflation.

Fast-forwarding to now, it’s been more than five years since the collapse of Lehman Brothers, but out-of-control inflation has yet to occur. Were those who said there will be hyperinflation wrong? What’s the inflation situation right now?

In August, the Bureau of Labor Statistics reported that the prices in the U.S. economy increased by 0.1%. From January to August, prices increased in the U.S. economy by only one percent. (Source: “Consumer Price Index – All Urban Consumers,” Bureau of Labor Statistics web site, last accessed October 29, 2013.)

Other indicators of inflation ahead signal it’s going to remain dismal as well. For example, I look at the producer price index (PPI) as one of the key indicators of inflation.

In September, the PPI showed that producers in the U.S. economy experienced a deflation of 0.1%. Since the beginning of the year, the inflation in producer prices has only increased by 1.1%. (Source: “Producer Price Index-Commodities,” Bureau of Labor Statistics web site, last accessed October 29, 2013.)

With all this in mind, I stand little different from those who say there will be hyperinflation in the U.S. economy. My take: I say we will experience high inflation in the U.S. economy, but before that we may experience a period of deflation.

Why will there be deflation?

Inflation occurs where there’s an increased amount of money supply; which the current U.S. economy possesses. The Federal Reserve is printing $85.0 billion a month, with many rounds of quantitative easing having already occurred; the balance sheet of the Federal Reserve is nearing the $4.0-trillion mark.

There’s just one thing missing: the money has to be used. Currently, it seems that it is just sitting in vaults.

Take the velocity of money—the frequency at which one dollar is used. As it stands, the velocity of M2 money stock in the U.S. economy—this is the money in circulation, plus various savings and checking accounts—stands at 1.577. This number stands at the lowest level ever recorded. (Source: “Velocity of M2 Money Stock (M2V),” Federal Reserve Bank of St. Louis web site, last accessed October 29, 2013.)

Once the velocity of the money starts to pick up, then the inflation will march ahead.

When this will occur, only time will tell. If all the pieces of the puzzle come together, then it’s clear that bonds will not be the greatest investments; they will provide investors with losses, because inflation is a bond’s worst enemy. Investors who are heavy on bonds in their portfolio need to consider this phenomenon and act accordingly.

This article Coming Hyperinflation a Real Threat to the U.S. Economy? was originally published at Daily Gains Letter

by Sasha Cekerevac, BA

As someone who’s been involved in this business for many years, one thing that never surprises me is that people make the same mistakes over and over again.

Taking a look at different sectors, it’s quite interesting to see how market sentiment has gotten so poor in one area but is so exuberant in another. The funny part is that corporate earnings appear to have nothing to do with the current level of market sentiment.

Investors who have been in the markets for a while will remember the “dot-com” bubble of the late 90s. During that time period, market sentiment for any stocks that had “.com” in the name was through the roof in optimism. Sure, the stocks had no corporate earnings or real path to generating corporate earnings, but the web sites had plenty of viewers.

It’s too bad that views on a web site don’t translate into corporate earnings or cash.

We all know what happened next: reality eventually hit market sentiment, and these high-tech flyers crashed hard.

Ah, but this time is different, you might say.

It is true that many of the high-tech companies are extremely strong fundamentally, generating high levels of corporate earnings, including firms like Google Inc. (NASDAQ/GOOG). However, it appears we are reaching a level of market sentiment frenzy in technology stocks that I haven’t seen since the late 90s.

The latest example is a report that the company Snapchat, Inc. has just secured an additional round of financing that values the company at $3.6 billion! (Source: “Snapchat Is Mulling Another Huge Round at a $3.5 Billion Valuation,” AllThingsD.com, October 25, 2013.)

You might ask, what’s wrong with a $3.6 billion valuation for a company?

Valuing a private company can be difficult, especially one that is growing revenue and corporate earnings. However, there’s one slight problem with trying to value Snapchat: it has neither revenue nor corporate earnings! (That’s not a misprint.)

While the firm is private and we don’t know for sure, sources say the company essentially has no source of revenue. That’s right; the company with absolutely no revenue and certainly no corporate earnings is being valued at $3.6 billion. Yet companies that actually make products and sell them are seeing market sentiment decline and their stocks languish.

Perhaps I’m a bit old-fashioned, but I like investing in companies that actually generate revenue and even corporate earnings. But my point is not to be negative on Snapchat; I certainly wish the company all the best. I’m simply trying to point out that market sentiment has gotten skewed, as investors have moved away from looking at fundamentally strong companies that actually generate corporate earnings to simply gambling and hoping that the next high-tech company can quickly give them a profit.

Just as we saw over a decade ago, this type of short-term thinking does not work. To see the stock price collapse in companies with no corporate earnings won’t surprise me. However, at some point over the next decade, we will see fundamentals emerge and the focus will once again be on companies with strong corporate earnings. Of that I am certain; timing it is a whole other matter.

With the market at multiyear highs and more firms reporting trouble generating corporate earnings growth, I really don’t believe the answer is to start looking for firms that have no potential for generating real revenue or corporate earnings.

As a long-term investor, these types of stories worry me, as they indicate that market sentiment is beginning to become frothy. Calling a market top is always dangerous, as the market can continue being irrational for some time. Don’t forget, the bubble in the dot-com stocks lasted for several years.

I would look to begin raising cash by getting out of the highflyers that have outperformed this year. I would also look at the market laggards. One sector that has been hammered over the past year has been mining stocks. I think over the next decade, it’s far more likely that mining stocks will still be around as compared to some company that makes an application for teenagers to take pictures of themselves.

This article Why Investors Are Piling into This $3.5-Billion Tech Stock with No Revenue… was originally published at Investment Contrarians

by George Leong, B.Comm.

Well, it looks like the Federal Reserve has more ammunition for its bond buying program to continue.

Not only is there a lack of jobs across America, as I discussed in my previous article, but now it looks like the confidence level of consumers is fragile.

According to the Conference Board, the Consumer Confidence Index reading fell to a six-month low of 71.2 in October, down from a revised 80.2 in September and short of the Briefing.com estimate of 72.0. This is bad as far as consumer spending as we approach the key Black Friday holiday shopping season, when the retail sector looks to beef up its sales.

The reality is consumer spending is at risk given the economy and jobs market remains fragile. Knowing they can lose their job will make consumers think hard before buying non-essential goods and services (which is why I pointed out in my last article that looking at defensive stocks, such as utilities and consumer staples, makes sense). You may want to avoid retail stocks for now, but the luxury stocks still look good, given the rich continue to get richer and are less affected by what happens in the economy.

The soft consumer confidence reading, along with the weak jobs market and the decline in pending home sales, will help to make sure the Federal Reserve doesn’t start to rein in its bond purchases until sometime in early 2014.

Of course, that’s great if you are investing in stocks, but it is not good for the long-term economic health of the country. The Federal Reserve is to blame.

The Federal Reserve will end up spending more on quantitative easing in 2014 than previously thought. This will add to the debt on the balance sheet of the Federal Reserve, and pump more easy money into the economy that will eventually have to be paid back. This is where the problem lies. The debt levels accumulated during this massive period of quantitative easing by the Federal Reserve will need to be paid, but it will also likely be based on much higher interest rates as the Federal Reserve will eventually have to raise rates.

The end result is the higher interest rates will add to the carrying cost of the debt of consumers, which in turn, eats away at the discretionary income available to spend. This means a potential decline in consumer spending, and this will negatively impact gross domestic product (GDP) growth.

Given this, we could see a pullback in the revenues of U.S. companies, which technically should also result in weakness in the U.S. stock market. As a pre-emptive strike, you should look at cutting your exposure to U.S. stocks and taking the profits.

As many of you know, I have been warning of this build-up in debt. The Federal Reserve needs to pare down its bond buying. In spite of lackluster jobs numbers, there needs to be some tough love given now so that we can avoid shifting the country’s mass financial problems onto the shoulders of future generations.

This article Consumer Confidence Falls to Six-Month Low was originally published at Investment Contrarians

By HY Markets Forex Blog

European stocks opened lower on Thursday after the Federal Open Market Committee (FOMC) decided to leave its $85bn-a-month asset-purchasing program unchanged for now.

The Euro Stoxx 50 declined 0.29% lower at 3,031.75 at the time of writing, while the German DAX edged 0.29% lower at 8,983.97 points.

At the same time, the French CAC 40 index lost 0.42%, standing at 4,255.96 and the UK FTSE 100 dropped 0.33% at 6,755.32 points.

Meanwhile, Germany’s Federal Statistical Office (Destatis) posted its economic data showing that Germany’s retail sales advanced 0.2% in September, following the rise of 0.4% in the previous month.

The Statistical Office of the European Union (Eurostat) is expected to report this month’s Consumer Price Index (CPI) later in the day. Eurostat will report the unemployment rate for the Eurozone with forecasts of an unchanged reading in September, compared to the reading in August.

The Italian Statistical Office (Istat) is expected to release the unemployment rate for September, with a forecast of a rise from the previous month’s reading of 12.2% to 12.3%.

European Shares – Tapering Postpone

Following analysts’ predictions, the US Federal Reserve has decided to keep its $85 billion monthly bond-buying program.

“The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” Fed policymakers said.

The Federal Open Market Committee (FOMC) decided to keep the federal fund rate unchanged at 0% to 0.25%. The key rate will remain unchanged until the unemployment rate drops to 6.5% and inflation passes the 2.5% mark, the Fed policymakers confirmed.

European Shares – Market Movers

German’s pharmaceutical company, Bayer’s net income surged 42.1% to €733 million from July to September from the previous record of €516 seen in the same quarter last year.

Germany’s airliner Lufthansa posted its worst quarter in the third quarter as it showed the company’s net profit dropped from €697 million to €247 million on a year-on-year basis. While the French banking company BNP Paribas’s net income came in at €9.287 billion in the third quarter, declining by 4.2% compared to the same period last year. 

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By HY Markets Forex Blog

The Finance chief of the social media giants, Facebook revealed the company’s shares declined after a survey revealed a drop in teenage users and the young users prefer Twitter.

Facebook stocks advanced 18% to $57.98 following its upbeat financial reports but later dropped back to $48.44, below the day’s closing price of $49.01.

Investors’ worries over the Finance chief David Ebersman comments, who confirmed the Facebook, noted a drop in its daily use among their teenage users.

“Our best analysis of youth engagement in the US reveals that usage of Facebook among US teens overall was stable,” David said “We did see a decrease in daily users specifically among younger teens,” he added.

The statement came in after the financial firm Piper Jaffray carried an out a survey and revealed the social network rival Twitter had overtaken Facebook.

Facebook Shares Performance

Facebook has been dropped from being young users top social network choice from 44% of young users down to 23%.

Facebook shares saw a huge advance in its third-quarter figures, surpassing analysts’ expectations. The social media company’s revenue climbed by 60% to $2.02 billion, driven by the company’s mobile as market.

Facebook revealed it gained $425m in the third quarter, compared to its loss of $59m seen during the same period in the previous year.

Adjusted earnings were seen at $621m in the last quarter, exceeding analysts’ expectations.

Facebook CEO Mark Zuckerberg said “The strong results we achieved this quarter show that we’re prepared for the next phase of our company, as we work to bring the next five billion people online and into the knowledge economy.”

The advertising revenue for the social media giants came in at $1.8bn, edging 66% higher from a year ago, as facebook mobile ads accounts for 49% of the company’s ad revenue.

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