Month: November 2013

Source: Kevin Michael Grace of The Gold Report (11/6/13)

http://www.theaureport.com/pub/na/leonard-melman-put-your-trust-in-precious-metals-not-governments

Continued fiscal stimulus, high debt levels and loss of confidence in governments will lead to the return of big inflation and a consequent big run-up in precious and other metals, says Leonard Melman, author of The Melman Report. In this interview with The Gold Report, Melman examines six companies he believes are well positioned to generate stock-price multiples when the bull market returns.

The Gold Report: You’ve expressed astonishment at the record highs of world stock exchanges. Given the sluggish world economy, can we expect this trend to end, or have equities become completely disconnected from economic reality?

Leonard Melman: Equities have become somewhat disconnected from economic reality. We’ve heard comments from the European Central Bank, the U.S. Treasury and the Bank of Japan calling for more inflation because dramatic action is needed to improve the world economy. How does that coincide with the bull markets in equities?

TGR: Is there a connection between these bull markets and quantitative easing (QE)?

LM: People now believe that central banks like the Federal Reserve are the only means of stimulating economic activity. Therefore, because QE is likely to continue, investors are buying stocks. I cannot think of any other logical reason for these bull markets. Companies are not rapidly increasing sales. They’re not rapidly developing new markets. They’re not hiring massive numbers of new workers. It’s a stagnant economy, and yet the Dow is up almost 20% this year.

TGR: You said during your presentation at the Cambridge House conference in Spokane that without visible inflation, a strong metals rally might be difficult. John Williams of ShadowStats.com argues that the U.S. is already undergoing highly visible inflation and that the official inflation measurement is so politically perverted as to be practically useless. What’s your view?

LM: I do agree with Williams that there is some underreporting of inflation. If inflation were reported accurately, all the automatic increases in benefit payments that would then ensue, such as higher Medicare payments, higher payments to doctors, and most important, higher Social Security checks, could bankrupt the government.

That said, I don’t think we have anything like the inflation of the late 1970s and early 1980s. Back then, every two weeks you’d walk into a restaurant, and they’d have a new menu with higher prices. Interest rates were horribly high. Gasoline prices have actually been in decline now for quite a few months. There isn’t the scary, visible price inflation we saw 30 years ago. Inflation of maybe 10, 12, 15% or more will generate the psychological background necessary for rampaging gold and silver bull markets.

TGR: You argued at Cambridge House that perceived U.S. political and economic stability is good for gold and silver. To what extent can the U.S. government continue to persuade investors that all is well, and thus keep gold and silver down?

LM: That is the absolute crux of the problem. Most people have tremendous faith in their government to solve problems. But I feel, I hate to say, that a major breakdown is truly beginning to develop. If it does, then we have the potential for massive disillusionment leading to panic. And when people panic, they turn to gold and silver because they begin to lose faith in their currencies.

TGR: A recent New York Times article lauded inflation as good for people. What is your take on it?

LM: Inflation, of course, accompanies virtually every historic gold bull market. There are some who say that more inflation means perhaps just 2 or 3% instead of 1%, but once you open that spigot, it is very hard to turn it off.

We’re seeing that in the budgetary debates. The U.S. is still running a $900 billion ($900B) per year deficit. How on earth is it going to cut out $900B in programs and still keep the government operating? It can’t.

TGR: How long can the debt problem be managed?

LM: For 150 years, the U.S. had a currency of gold. And so the reputations of the U.S. dollar and the U.S. government were unchallenged. If something was good, it was as sound as a dollar. The dollar itself was as good as gold. However, the dollar is no longer backed by gold, and this has resulted in runaway debt.

TGR: What about the role of government in the mining sector?

LM: Government has the capacity not only to do good, but also to do immense amounts of harm. An ocean of overregulation is having a terrible effect on mining. Some of the juniors I know are just in agony, especially now, when metals prices are weak. How in the world can they raise enough money to finance all the regulations, reports, applications and filing fees they have to pay in addition to important exploration work?

I’ll give you some examples of how government regulations affect mining. In Mexico, Congress is seriously considering a 7.5% mining royalty. Grupo México (GMEXICOB:MXN) and Goldcorp Inc. (G:TSX; GG:NYSE) have said that if this tax is enacted, they will pull many of their operations from Mexico and will not invest new money. In Quebec, the leftist Parti Québécois government has made prospecting so difficult that one oil company manager actually said that people are more likely to invest in Africa and Iraq than Quebec.

TGR: Several mining analysts interviewed recently by The Gold Report have argued that it’s time for investors to dump all but the strongest stocks in their portfolios. Do you agree?

LM: I do. There are two kinds of juniors that still retain investment consideration. The first has an adequate treasury to see it through the next year or two without having to raise money, if it takes that long to restore a major bull market.

The second kind, even better, has a producing property and is bringing in cash, which allows it to explore and develop other properties, thus enabling expansion without ruinous share dilution. I have seen a great number of offerings in the last few months on the order of 10 million (10M) shares at $0.03/share just to raise $300,000 ($300K). This keeps the office going for three more months before the company has to go to the market again and maybe offer 15M shares at $0.02/share just to raise another $300K. It’s ludicrous.

TGR: After these companies pay their brokerage fees, they’re not keeping much of this money, are they?

LM: Exactly. Juniors are no longer cutting fat; they’re down to the sinew and bones. Juniors once prospered by finding a project, immediately developing it and releasing a string of news releases. If these were exciting, share prices would rise. Juniors would use that capital to accelerate exploration and development, go quickly through to a preliminary economic assessment (PEA) and a feasibility study and then bring the property into production. That’s how companies like Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and Newmont Mining Corp. (NEM:NYSE) got their starts.

We just don’t see much of that anymore. The Australian Stock Exchange and the TSX Venture Exchange have a whole host of companies that are dead in the water, and these exchanges may be at risk themselves because they need income (registration and filing fees) from active companies to remain in business.

TGR: You said at the Cambridge House conference that present stock price levels offer major opportunity and upside breakouts.

LM: Let me explain that comment. When you consider the worth of all other investments versus precious metals, it’s on the order of 99.4% to 0.6%. If even 3% of that 99.4% switched to precious metals, the leverage could be absolutely enormous: Multiples of 5, 10 or even 15 times present quotes could occur quite rapidly. That, I think, is the kind of potential that could exist at the early stages of a major bullish turn in the metals.

TGR: Which silver companies could benefit from that kind of turn?

LM: Silver Bull Resources Inc. (SVB:TSX; SVBL:NYSE.MKT) has a very interesting project. Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.MKT) has a good combination of production and developing projects. El Tigre Silver Corp. (ELS:TSX.V; EGRTF:OTCQX; 5RT:FSE) has a very nice potential tailings reclamation project.

Canasil Resources Inc. (CLZ:TSX.V) is developing its Salamandra silver-copper-zinc-lead project via a joint venture with MAG Silver Corp. (MAG:TSX; MVG:NYSE). This allows Canasil to stay in the game without having to dilute its shares. I recently talked to Canasil’s president, Bahman Yamini, and he thinks Salamandra could become a true company builder.

TGR: Silver Bull, on Oct. 1, released a PEA for its Sierra Mojada project.

LM: I had the pleasure of visiting that project earlier this year. It’s an amazing silver and zinc project, two completely distinct ore bodies, in many places one lying right on top of the other. I think there is excellent potential there. The company could definitely use a little assistance from higher metals prices, but it’s the kind of project I like. It has adequate financing. The upward potential appears to be sizable.

TGR: Sierra Mojada’s preproduction capital expense (capex) is $297.2M. Is that manageable?

LM: Without being a mining engineer, I think the figure, given the size of the deposit, is probably quite reasonable. I think Silver Bull is one of those companies that may have trouble raising sufficient capital in today’s troubled market to go into production, but it’s the kind of deposit that will be very attractive down the road when capital markets loosen, and the mining field becomes exciting once again.

TGR: Great Panther released its Q3/13 production figures last month, which showed really significant increases.

LM: Guanajuato is another project I’ve had the opportunity to visit. I was quite impressed with the management and with the geologists, both for current production and for exploration of expanding reserves. At least Great Panther is getting money in. It is financing its own exploration. The potential to increase production, I believe, is very real.

Guanajuato is one of the most fascinating cities in all of Mexico. It sits at 6,600 feet above sea level. There are ancient roads that run under the downtown area. Great Panther’s mine and Endeavour Silver Corp.’s (EDR:TSX; EXK: NYSE; EJD:FSE) mine are right in the metropolitan area of Guanajuato. They get enormous kudos from the community for the economic wealth they are bringing to the region.

TGR: Canasil has nine properties in Mexico. That’s quite a few.

LM: Yamini stressed that to me. His hope is that if Salamandra can bring in sufficient revenue, the company can use that to develop some of the others. I’ve visited Durango several times. There are almost continuous ore discoveries along the silver belt that runs right through the center of Mexico, the Sierra Madre.

TGR: What do you make of El Tigre’s business plan of first generating cash flow by building a processing facility to recover silver and gold from the tailings pile at the original mine?

LM: I think it’s terrific. The only problem El Tigre has had, like everybody else, is raising capital, but it recently finalized an offering of $700K. Stuart Ross, the company president, anticipates that unless there are some unforeseen difficulties, it will be in production within about a year. From roughly 1900 to about 1935, El Tigre mined silver ore that averaged about 40 ounces (40 oz) per ton and previous operators apparently regarded anything under 15 oz/ton as just waste. So those wastes, frequently used as production backfills, may actually contain an average of 7 or 8 oz/ton.

More to the point, if El Tigre can explore the area thoroughly, is it illogical to believe there’s a possibility that it could uncover more 40 oz/ton resources? You can just imagine the boon that would be, even at $20/oz silver.

TGR: All the companies we’ve discussed so far are in Mexico. According to the Oct. 31 Financial Post, “Shares in several Canadian miners with Mexican operations are swooning after Mexico’s Senate on Tuesday gave its general approval of tax reforms hard sought by President Enrique Peña Nieto.”

LM: I saw that. Some politicians still believe mining is nothing but a bird to be plucked, but mining production is often a goose that lays golden eggs, and such taxation measures could kill it. These politicians don’t understand mining, which, to my mind, is the greatest creator of genuine wealth that exists on this earth. Take a place in Mexico like La Preciosa in Durango state. It once was a flat piece of territory that generated nothing. Then mining companies came, spent a great deal of capital and generated huge numbers of jobs and growing prosperity.

You would think governments would love that. Instead, they just try to milk every penny of taxation they can. It’s short-sighted and destructive. I’ve seen it in other countries: Chile, Bolivia, Guyana.

TGR: Would Mexico’s new mining regime threaten Silver Bull, Great Panther, El Tigre and Canasil?

LM: I don’t think it will have a very strong effect on them because most of the burden will fall on companies making very sizable profits. The companies we have talked about are not in that category and won’t be for several years at least. It’s the long range that I don’t like. Short term, I don’t think there’s a real negative impact.

TGR: Which companies do you like in gold?

LM: I visited Balmoral Resources Ltd. (BAR:TSX.V; BAMLF:OTCQX), on the Ontario-Quebec border. Balmoral is on the Quebec side of the same Detour trend that, on the Ontario side, has Detour Gold Corp.’s (DGC:TSX) huge mine. Balmoral is run by the same people who succeeded so well with West Timmins Mining, which was bought out in 2009 by Lake Shore Gold Corp. (LSG:TSX). The management team is experienced, competent and thorough. I think that is another company of interest for investors looking just down the road.

TGR: Balmoral just raised $6M, correct?

LM: Yes, and the three or four east-west trends that follow along Ontario-Quebec border have seen enormous metals production through the decades. It’s an area of elephants.

TGR: What other companies are you following in Canada?

LM: There is Commerce Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX) and its parent company Zimtu Capital Corp. (ZC:TSX.V). Commerce’s big rare earth project, Ashram, is in northern Quebec. This is an area without too much infrastructure. Virtually everything has to be flown in, and because of the resulting high expenses, the company has begun to feel the pinch financially. Ashram itself appears to have real merit, just like Commerce’s Blue River tantalum-niobium project in British Columbia.

I like Commerce, and I think the world of the people who run it. This is a company that could use a real break in the junior sector, so that it can to get its shares back up to where it can raise money efficiently.

TGR: Not that long ago, rare earths and other critical metals were all the rage among investors. How do you rate them now?

LM: There is a great deal of uncertainty. After the Chinese announced they were going to start withholding supply to the West, rare earth stocks shot to the moon, and investors made a great deal of money. Then many of those shares came back down, virtually as fast as they went up. I’m a little leery of the group because three problems exist. The first is that refining rare earths is a very difficult process. Second, there is some difficulty in developing identifiable markets. The third problem is nanotechnology. As the size of end products keeps shrinking, so the quantity of metal needed for each electronic device is also shrinking.

TGR: Of the six companies we’ve discussed, is there one that strikes you as a particularly good bargain given its present stock price?

LM: I believe El Tigre is in a unique position. It has substantial assets of potentially exceptionally high quality, but because of the general market environment, its shares have been beaten down to $0.18. I believe if we get any kind of boost in the market, this is the kind of company that could see an enormous leveraged run develop quite quickly. I’m not giving any direct buy recommendation, but I do believe this could be a company of particular interest to investors.

TGR: When can we expect a resurgence in precious metals?

LM: I remember very clearly one of the worst bear markets in stock market history. It was from 1971 to 1974. The Dow dropped from about 1,070 to 570 by June 1974, when it then hit bottom. It bounced back to about 700 during the fall and then fell again to about 600 in very late 1974. The key point is that the second selloff terminated above the first. Then the bull market began. This is a technical pattern called a spread double-bottom.

Picture gold now. It fell from a high of $1,935/oz in August 2011 to $1,175/oz in June 2013. It then rallied to more than $1,400/oz and now it has fallen again. The low of the second decline so far has been $1,260/oz. So we have a technical pattern that’s identical in basic form to that giant reversal in the Dow I mentioned above. I believe if we can exceed $1,400/oz, technically we will have completed a major spread-double-bottom pattern that could be the prelude to a major precious metals bull move.

There is also one other technical point. A lot of important market move retracements are about 50%. The present golden bull market started in 2001 with gold at about $260/oz. It ran up to $1,935/oz before this retracement. That’s a gain of $1,675/oz. Half of that would be about $840. If you subtract $840 from $1,935, you get about $1,100, which also indicates we could be in a zone where there would be a natural rebound. There are no guarantees in technical analysis—I should note I’m a member of the Canadian Society of Technical Analysts—but we do have indications that are well worth watching.

TGR: Leonard, thank you for your time and your insights.

Leonard Melman, publisher of The Melman Report, has been writing about precious and base metals for more than two decades as monthly columnist for California-based ICMJ’s Prospecting and Mining Journal and Vancouver’s Resource World Magazine. He focuses on how political and financial considerations impact the world of mining and the prices of the metals.

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

DISCLOSURE:

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

2) The following companies mentioned in the interview are sponsors of The Gold Report: Silver Bull Resources Inc., Great Panther Silver Ltd., MAG Silver Corp., Balmoral Resources Ltd., Commerce Resources Corp. and Zimtu Capital Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

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

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

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

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

Streetwise – The Gold Report is Copyright © 2013 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

101 Second St., Suite 110

Petaluma, CA 94952

Tel.: (707) 981-8999

Fax: (707) 981-8998

Email: [email protected]

By www.CentralBankNews.info     Georgia’s central bank held its policy rate steady at 3.75 percent, saying that the impact of easier monetary policy in the last few years has not yet been fully reflected in the real economy so it would leave its rates unchanged.
    The National Bank of Georgia (NBG) has cut rates 150 basis points this year, most recently in August, for a total reduction of 425 basis points since it began easing in July 2011. At its previous meeting in September, the bank also said it the full impact of its rate cuts were not yet fully reflected in the economy.
    The NBG also repeated that inflation is expected to remain low and first return to the bank’s 6.0 percent target by the end of 2014.
    Georgia’s inflation rate was a positive 0.2 percent in October, reversing three consecutive months of deflation due to higher prices for seasonal products.
    Economic activity improved in the third quarter but the output gap remains negative, keeping prices in check, the bank said, adding that the output gap is expected to close gradually in the fourth quarter, which should help bring inflation closer to the bank’s target.
    Georgia’s Gross Domestic Product rose by an annual 1.5 percent in the second quarter, down from 2.4 percent in the first quarter.

    www.CentralBankNews.info

By www.CentralBankNews.info     Poland’s central bank held its reference steady at 2.50 percent but pushed back any rate rise by another six months, saying it would maintain rates “at least until the end of the first half of 2014” as the latest forecast confirms low inflationary pressure and an expected moderate economic recovery.
     At its previous meeting in September, the National Bank of Poland (NBP) said it would maintain its interest rate at “least until the end of 2013.” It has cut the rate by 175 basis points this year, most recently in July when it said the cycle of easing had ended.
    But last month NBP Governor Marek Belka said the bank could keep rates steady for longer than expected as the latest data showed that the economic recovery was slow without any inflation pressures. Financial market were also expecting the first interest rate increases in the second half of next year.
    While the Polish economy is gradually accelerating and is expected to continue to recover in coming quarters, inflationary pressures will remain subdued, the NBP said.
    In the latest forecast by the Economic Institute, which is used by the bank’s council to decide on interest rates, inflation is forecast in a range of 0.9-1.0 percent this year, compared with the July forecast of 0.6-1.1 percent. In 2014, inflation is forecast at 1.1-2.2 percent compared with July’s 0.4-2.0 percent, and in 2015 inflation is forecast at 1.1-2.6 percent compared with 0.7-2.4 percent.

     In September, Poland’s headline inflation rate eased to 1.0 percent from August’s 1.1 percent, markedly below the central bank’s target of 2.5 percent, and core measures also declined.
    Poland’s economy is starting to improve, with data from industry, construction and retail in the third quarter confirming “low, yet accelerating economic growth. At the same time, improving leading indicators point to gradual recovery continuing into quarters to come,” the bank said.
    But unemployment is still elevated, contributing to slow wage growth, and growth in lending to the private sector remains limited, the bank said.
    The latest forecast calls for a 50-pecent probability of annual Gross Domestic Product growth of 1.0-1.5 percent this year, compared with 0.5-1.7 percent forecast in July, 2.0-3.9 percent in 2014, compared with 1.2-3.5 percent, and growth of 2.1-4.5 percent in 2015 as against 1.6-4.2 percent.
    Poland’s economy expanded by 1.9 percent in 2012 and in the second quarter GDP rose by 0.4 percent from the first quarter for annual growth of 0.8 percent, up from 0.5 percent.

    www.CentralBankNews.info

By www.CentralBankNews.info     Iceland’s central bank maintained its benchmark seven-day collateralised lending rate at 6.0 percent and repeated that changes in the rate were directly tied to the results of the upcoming wage negotiations and it “is still the case that as spare capacity disappears from the economy, it is necessary that slack in monetary policy should disappear as well.”
    The Central Bank of Iceland, which has held rates steady this year after raising them by 125 basis points last year, revised upwards its forecast for 2013 output growth to 2.3 percent from its August forecast of 1.9 percent while the 2014 forecast was trimmed to 2.6 percent from 2.8 percent and 2015 growth was forecast at 2.8 percent instead of 2.9 percent.
     “The recovery of the labour market continues with increased strength, with total hours rising more this year than in any year since 2007,” the central bank said, adding it expects the unemployment rate to fall to about 4 percent in the fourth quarter of 2014 and below that by the fourth quarter of 2016.
    Iceland’s unemployment rate rose to 6.1 percent in September from 4.9 percent in August, but the bank said that the seasonally adjusted unemployment rate was 4.5 percent in the third quarter, down by 0.5 to 1.0 percentage points for the year and the employment rate had risen by 2 percentage points in the same period while total hours worked rose by 5.6 percent, more than forecast in August.

    Iceland’s Gross Domestic Product contracted by 6.5 percent in the second quarter from the first but compared with the same quarter last year, it expanded by 4.2 percent.
   In addition to the uncertainty surrounding the upcoming wage talks, the central bank said Iceland’s terms of trade – or the ratio of export prices to import prices – have continued to deteriorate, eroding the current account surplus and putting pressure on the krona’s exchange rate.
    “Looking ahead, there is uncertainty about how foreign debt deleveraging, the settlement of the failed banks’ estates, and capital account liberalisation will affect the exchange rate,” the bank said.
    Iceland was hard hit by the global financial crises in 2007 and its three largest banks collapsed in 2008 under the weight of $85 billion of debt, forcing an International Monetary Fund bailout. Currency controls were imposed in November 2008 to protect the Icelandic krona after it plunged in mid-2008.
    Prior to the financial crises, the krona traded at around 60 to the U.S. dollar and in May this year the central bank took a more active role by intervening in the foreign exchange market to steady the exchange rate.  Since the start of this year, the krone has strengthened slightly, trading at 121.6 to the U.S. dollar today compared with 128.6 at the end of 2012.
    Iceland’s government wants to ease currency and capital controls but is also aware that $8 billion of funds that are trapped in the country may suddenly flow out, leading to another plunge in the krona and raised the cost of foreign debt. Iceland has asked foreign creditors to write off some $3.6 billion of almost $6 billion that is owed to offshore creditors of the failed banks.
    Iceland’s inflation rate fell to 3.6 percent in October from 3.9 percent and the central bank forecasts gradual disinflation in coming quarters, with inflation lower than previously forecast, but in the main the outlook is broadly in line with its August forecast, with inflation expected to subside to the bank’s 2.5 percent target by end-2015 and to average almost 2.0 percent over the forecast horizon.
    However, the central bank also stressed that inflation would depend on the exchange rate and wage developments.
   “At present, however, the upcoming wage negotiations are the most important source of uncertainty,” the bank said, assuming that wage increases would be above its inflation target.
    “If wage increases are in line with the forecast, it will probably be necessary to raise the Bank’s nominal interest rates, other things being equal, particularly if the margin of spare capacity in the economy continues to narrow,” the bank said.
    “If wages rise in excess of the forecast, it is even more likely that the bank will raise interest rates,” it said, adding that if wage rises are in line with the inflation target, inflation would fall and interest rates would be lower than necessary.

    www.CentralBankNews.info

By The Sizemore Letter

Harley-Davidson (HOG) is a true American icon.  Its motorcycles are so distinctive that the company actually tried to trademark the “Harley sound,” that familiar rumble of the bikes’ exhaust, back in the mid-1990s.

It’s also a well-managed company and one of those true rarities: a successful turnaround story. This is a company that was facing bankruptcy in the early 1980s yet managed to rebuild itself into the pride of American manufacturing … and the subject of countless case studies in MBA programs worldwide.

Harley’s management was able to pull off that coup by leveraging that intangible quality that is so hard to imitate: brand cachet. For a particular breed of leather-wearing motorcycle enthusiast, there is simply nothing on par with a Harley.

But all of that said, I wouldn’t touch the stock … at least not at today’s prices.

At first glance, Harley would appear only modestly overpriced. It trades for 20 times trailing earnings and 2.5 times sales. This compares to 19 times earnings and 1.6 times sales for the S&P 500.

Figure 1: Harley-Davidson Revenues

A modest premium is appropriate for an iconic company with Harley’s branding power (and not to mention its high return on equity of 26.1%), right?

Well, maybe. But Daimler (DDAIF) — a company that knows a thing or two about vehicle branding — trades for just 10 times trailing earnings and 0.60 times sales. Yes, I realize it’s not an apples-to-apples comparison and that Harley runs a higher-margin operation in a business with fewer direct competitors. All else equal, Harley should trade at a slight premium to a larger automaker like Daimler. [Daimler, incidentally, is currently the leader in InvestorPlace’s Best Stocks of 2013 contest with year-to-date returns of over 50%.]

But all else is not equal. Harley has a serious growth problem, and it’s not one that will go away with a recovering economy.

Harley’s revenues are still below their pre-crisis highs (see Figure 1), and unit sales paint an even bleaker picture. Harley sold 349,196 bikes in 2006, and sales dropped to just 247,625 in 2012. That’s a unit decrease of nearly 30%.

To be fair, revenues and unit sales have enjoyed a nice bounce since the pits of the financial crisis. But Harley will never get its old mojo back for one critical reason that is completely outside of its control: demographics.

Down the road from my house in Dallas, there is greasy drive-in burger joint called Keller’s … a place I’ve been known to frequent a little more often than my doctor might recommend. On any given weekend, you might see a dozen or more bikers parked in the lot, showing off their chrome-laden Harleys. And nearly all of them are over the age of 45. Most are over 50.

This isn’t a coincidence. Harley-Davidson is a brand whose sales depend disproportionately — almost exclusively, in fact — on middle-aged Caucasian males. Riders younger than 40 generally lack the time, interest or the bankroll to buy a Harley. But by the time they get into their 60s or older, the noise and joint pain have begun to make riding lose its allure. You might still ride in your 60s, but you’re doing it less frequently and you probably aren’t buying a new bike.

Figure 2: American Men Aged 45-49 by Year

The sweet spot is the mid-40s to early 50s. And with the Baby Boomers — the largest and wealthiest generation in history — now largely aged out of this key demographic bracket, Harley has a serious problem. Generation X — my generation — is not nearly large enough to pick up the slack, and Generation Y (aka “the Millennials” or “Echo Boomers”) are decades away from being in the demographic sweet spot for Harley, and this assumes they take to riding like their dads did. The number of American men aged 40-49 is set to decline through the early 2020s and won’t reach its old 2010 peak until 2035 (see Figure 2).

CNN Money reported on this as far back as 2010, and demographic strategist Harry Dent — my old boss — has used Harley as a case study for decades.

Harley-Davidson’s management is not stupid. They understand the issues they face, and they have gone so far as to address it with a dedicated page on their Investor Relations site: Harley-Davidson Demographics.

Stop and think about that for a minute.  Have you ever seen a company dedicate prime website real estate to the demographics of their customer base before?  I haven’t.  But then, few companies face the severe demographic issues that Harley does.

The company has aggressively expanded its marketing efforts to attract younger men, non-Caucasian men, and women, to modest success. Per the demographic site, management writes:

“In 2012, U.S. sales of new Harley-Davidson motorcycles to our ‘outreach’ customers — young adults 18-34, women, African-Americans and Hispanics – grew overall at more than twice the rate as sales to our traditional U.S. customer base of Caucasian men, ages 35-plus.”

But realistically, there is no replacing white Baby Boomer men. And this means a very rough decade ahead for Harley-Davidson.

Stocks in gently declining industries are not necessarily bad investments, as tobacco stock investors have no doubt noticed.

Under the right set of circumstances — strong financial health, large barriers to entry, good dividend growth and share buybacks — stocks in no-growth industries can make better investments than those in high-growth industries.

But for this to be the case, the stock has to be priced appropriately. Big Tobacco has had a great decade-long run because it started out cheap and paid a monster dividend. Harley-Davidson, in contrast, trades at a slight premium to the market and yields only 1.3%.

Harley-Davidson might be a good buy … eventually. But given the demographic headwinds it faces, it’s not cheap enough for serious consideration at this time.  An intrepid investor might even consider it as a short.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long DDAIF. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar, but also which stocks will deliver the highest returns. This series starts Nov. 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.

This article first appeared on Sizemore Insights as Harley-Davidson’s Downfall: Baby Boomer Demographics

Join the Sizemore Investment Letter – Premium Edition

By George Leong, B.Comm.

Stocks are at a crux now. While investor sentiment continues to be bullish, we are clearly seeing some hesitation on the charts, especially with the Dow Jones Industrial Average. The Dow Industrial, a barometer of companies that form the backbone of American business, is stalling and cannot seem to retrace back to its key 200-day moving average (MA). The failure may mean little, but it could also signal a sell-off.

In the past, I have mainly discussed the S&P 500 and its multiyear tops, which are still in place on my technical analysis. (Read “Why the S&P 500 Could Hit 1,800 Before the Year’s End.”)

The Dow Jones Industrial Average has been the weakest among the S&P 500, NASDAQ, and Russell 2000 this year and in the recent months.

The Dow Jones Transportation Average is trending higher, which helps to support the Dow Industrial at this current level. Yet when I look at the chart of the Dow Industrial, I’m concerned an upcoming correction could be in the works. Of course, this may not happen, but the potential is there.

Let me explain why the Dow Industrial could be vulnerable.

Take a look at the chart of the Dow Industrial below. I’m not sure about you, but it sends chills down my spine when I see it.

First notice the sideways channel that has been in place since mid-year. Note the tops and bottoms as reflected by the shaded gray circles.

In early August, the Dow Industrial topped. This was followed by a bottom in late August.

We saw another top in mid-September, followed by a bottom in early October.

Now notice the current top and the bearish double-top formation I drew in the chart below (as shown by the blue lines). If recent history is any indication—and this is where technical analysis comes into play—the Dow Industrial could be set for a sell-off down to the support at around 14,750, representing an adjustment of about 5.24%. While not that major, it would be a buying opportunity.

Chart courtesy of www.StockCharts.com

A downward break of the Dow Industrial to below its 50-day MA would be bearish.

Also notice the weakening relative strength and upcoming reversal in the moving average convergence/divergence (MACD) to the sell side, as was the case on two previous occasions since early August.

Now, I’m not saying you should run for the exits (that is, unless the Dow Industrial breaks below the bottom support line at around 14,750), but there looks to be a decent buying opportunity surfacing that could drive the Dow Industrial index down just over five percent.

Have some cash ready.

This article Vulnerable Key Stock Index May Be Signaling Upcoming Buying Opportunity is originally published at Profitconfidential

By Michael Lombardi, MBA

In the first 10 months of the year, key stock indices like the S&P 500 have gone up more than 20%. Others like the Dow Jones Industrial Average have lagged a little, but the returns are exuberant nonetheless.

But as this was all happening, we saw the formations of very troubling trends in the fundamentals that drive key stock indices higher. Companies on key stock indices started to show corporate earnings that were nothing but an illusion. They fiddled with their corporate earnings via massive stock buyback programs and cost-cutting to make them look better.

And as we now near the end of 2013, companies in key stock indices continue to do more of what they have been doing for a while: using “financial engineering” to make their corporate earnings look better. But the real gauge of how companies are doing—if you can’t trust their earnings—lies in their sales.

So far, 366 of the S&P 500 companies have reported their corporate earnings for the third quarter of this year, and only 53% of them have reported sales above the expectations. (Source: FactSet, November 1, 2013.)

Consider General Electric Company (NYSE/GE), one of the major companies in the S&P 500. In the third quarter of 2013, revenues for the company declined 2.3% from the same period a year ago. (Source: Investor Relations, General Electric Company, October 18, 2013.) But the company is buying back its shares!

The board of International Business Machines Corporation (NYSE/IBM), another big component of the S&P 500, authorized an additional $15.0 billion for the company’s stock buyback program. The company’s existing share buyback program already had $5.6 billion in it. (Source: Investor Relations, International Business Machines Corporation, October 29, 2013.) What share buybacks do is increase the corporate earnings per share. The higher the amount of share buyback, the higher the corporate earnings per share look.

The fourth quarter has just begun, but we have already started to hear from companies on the key stock indices. They are outright worried. As of November 1, 79 companies on the S&P 500 have issued guidance about their corporate earnings; more than 83% of them expect their corporate earnings growth to be negative! (Source: FactSet, November 1, 2013.)

As I continue to say in these pages, the days of stock market irrationality are numbered and eventually, reality will strike key stock indices. My take is that the longer the stock market rally continues, the bigger the fall is going be. Stock prices have skyrocketed and investors have taken on too much leverage. A little market correction can lead to a much bigger sell-off. Be very careful with the stock market!

This article Days of Stock Market Irrationality Numbered is originally published at Profitconfidential

By Mitchell Clark, B.Comm.

If volatility is the name of the game with stocks right now, consistency of performance is a very attractive asset.

Over the last several years, few companies have been able to deliver consistently rising financial metrics like Starbucks Corporation (SBUX).

The company’s sales, earnings, and dividends continue to increase, even in a market that’s saturated and mature. And most consistently of all, the company’s share price has been ticking solidly higher ever since the market low in 2009. Just take a look at Starbucks’ five-year stock chart featured below.

The stock is fully priced and has a lot of high expectation, but the company continues to deliver in terms of growth.

Chart courtesy of www.StockCharts.com

In its fourth (and most recent) fiscal quarter (ended September 29, 2013), Starbucks’ global sales rose 13% to $3.8 billion, with comparable store sales increasing seven percent and a five-percent increase in traffic.

The company’s earnings per share leapt 37% to $0.63, or $481 million.

Cash and short-term investments grew by more than 50% (some of which was due to a new debt offering). Shareholders’ equity grew by 20% in the latest quarter. Company management boosted its cash dividend 24% comparatively to $0.26 per share.

Today, double-digit growth is a very tough thing to come by, but Starbucks is still doing it.

Of note is the company’s continued strong growth in the Americas. China is also a fast-growing market and is highly profitable, but U.S. market sales and margins continue to be robust (sales grew eight percent last quarter in the U.S. market alone).

The company’s cash flow is considerably higher in its first fiscal quarter of the year due to the holiday season. It is therefore highly likely that Starbucks’ next quarter will once again show excellent top- and bottom-line growth, also increasing the probability that the company’s share price will continue to tick higher.

Wall Street is typically pretty good with Starbucks’ earnings estimates. If the company beats on earnings per share, it’s usually not too far over consensus.

The most impressive part of this story from an investors’ perspective is the consistency with which the company delivers on growth. According to management, stronger sales are due to new volume growth and new product introductions.

This fiscal year, Starbucks expects global sales to grow 10% or better, with continued margin improvement in all geographic regions except China and Japan.

If investor sentiment remains positive near-term, it’s likely that Starbucks’ share price will continue to tick higher. At the beginning of this year, Starbucks was trading for $55.00 a share. It was $45.00 a share the year before that, and $33.00 a share the year before that.

The one thing this company hasn’t effected in quite some time is a share split. I wouldn’t be surprised at all to see one soon.

Company management recently increased its dividend payout ratio to 45% from 35% on the back of 10.8 million repurchased shares in fiscal 2013.

In terms of business execution and stock market performance, it’s probable that Starbucks will continue to be a winner. The stock is expensively priced, but it’s likely to remain so, with such strong expectations for big earnings growth. (See “Proven Wealth Creator Delivers Again; Earnings, Sales Growth Surge” for another stock that’s delivering consistent growth.)

This article Solid Growth Stock Expected to Keep Ticking Higher into 2014 is originally published at Profitconfidential

by George Leong, B.Comm.

There’s happiness at the gas pumps. The price of gasoline has been on the decline with the average price in the U.S. down to $3.29 per gallon as of October 28, a year-over-year decrease of $0.27 per gallon. In fact, we could see even lower gas prices on the horizon as oil prices fall.

In this new energy environment in America, the country is becoming more self-efficient in producing oil from its ground thanks to the growing adaptation of fracking technology in North Dakota and Montana to squeeze oil out of the rocks in the ground.

The explosion of oil production from the Bakken region in North Dakota has been superlative and has everyone, including myself, thinking there will be a time when the country will not have to buy oil from the Organization of the Petroleum Exporting Countries (OPEC). In my view, it’s just a matter of time.

And if you add in the rise in oil from the Canadian tar sands, the move to independence in oil demand will become even more realistic. According to IHS, the amount of oil being moved via rail cars could rise to about 700,000 barrels a day by the end of 2015. (Source: Domm, P., “Canadian oil rides south even without Keystone pipeline,” CNBC, November 4, 2013.) The hotly debated Keystone XL pipeline, if it’s ever built, could move 830,000 barrels of oil per day from Canada.

Clearly, the numbers are there, and unless a crisis in the Middle East surfaces, we could see oil prices continue to decline as domestic and Canadian oil flow rises.

The days of high oil prices may be a thing of the past. The price of West Texas Intermediate (WTI) oil is below $100.00 per barrel and could be headed lower, as shown on the chart below.

WTI oil prices are in a downtrend, as reflected by the downward channel in the following chart. Also notice the downward relative strength index and sell signal exhibited by the moving average convergence/divergence (MACD), as my technical analysis indicates.

            Chart courtesy of www.StockCharts.com

The futures market also supports my contention that oil prices are heading lower. The futures market expects oil prices to break below $90.00 per barrel by January 2015 and down to a high $70.00 level by 2021. Of course, if domestic and Canadian production continues to rise and the country stalls, there could be an earlier move in oil prices to the low $90.00 range.

With this in mind, I would be considering buying oil stocks with a presence in North Dakota and Montana, including Continental Resources, Inc. (NYSE/CLR) and Whiting Petroleum Corporation (NYSE/WLL).

This article Days of High Oil Prices a Thing of the Past? was originally published at Investment Contrarians

by Sasha Cekerevac, BA

When it comes to the recent batch of corporate earnings releases, some investors might be cheering. But if you look a bit closer at the results, you will notice the underlying fundamentals aren’t as strong as they first appear.

One thing to remember: in the equities market, it’s all about expectations. A company might report corporate earnings of $100 million, but if analysts in the equities market were expecting $150 million, the results would actually be disappointing.

The reason for this is that the equities market is a discounting mechanism for future corporate earnings. Analysts and investors estimate what the next 12–24 months might bring in terms of corporate earnings and accordingly adjust their valuations for various stocks in the equities market.

What’s interesting to note in this corporate earnings season so far is that the spread between actual and estimated corporate earnings is declining. This means companies are having difficulty exceeding expectations.

So far, 244 of the S&P 500 companies have reported corporate earnings, and while 75% have beaten corporate earnings estimates, on average, they have only exceeded these expectations by 0.8%. The four-year average is 6.5%. (Source: FactSet, October 25, 2013.)

And if you listen to executives at various companies within the equities market, you will notice another common theme: companies are having difficulty finding and generating revenue growth.

Of the S&P 500 firms in the equities market that have reported corporate earnings so far, only 52% have exceeded revenue estimates—far below the four-year average of 59%.

This is why they are issuing dividends and buying back shares; they can’t figure out a better way to invest the firm’s money (which is really yours as a shareholder) and drive revenue.

Simply put, much of the initial push up in corporate earnings that drove the equities market was due to cost-cutting and a significant amount of share buybacks.

But cost-cutting can only go so far; we all know that. And while there is nothing wrong with share buybacks, especially when stocks are selling at a discount, with the current level of the equities market, companies are actually paying a premium for their shares at this point, which will not be beneficial to shareholders in the long run.

Doesn’t really sound like a bullish scenario over the next year, does it?

Over the long term, investing in the equities market is all about re-allocation of your portfolio; that means buying stocks in sectors when expectations are low and selling stocks in sectors when expectations have gotten too high.

With the equities market at all-time highs, many sectors are now pricing in very high expectations for corporate earnings growth over the next year. I think this leaves little room to the upside, but potentially large risks to the downside.

            Chart courtesy of www.StockCharts.com

This chart shows the equities market represented by the S&P 500 (black line) versus the Market Vectors Gold Miners (NYSEArca/GDX) exchange-traded fund (ETF).

As you can see, they have moved in opposite directions over the past couple years. While the broad equities market has soared to new highs, mining stocks are near their lows.

It’s pretty obvious that expectations are significantly higher for the overall equities market versus mining stocks. But this is where I believe a long-term investor can take advantage of such a divergence in expectations.

It is true that mining stocks in general have suffered from the drop in commodity prices, which have hit their corporate earnings. As a result, mining stocks are now pricing in very low expectation levels. This means that any marginal improvement in corporate earnings would dramatically shift investors’ outlook for the future and result in higher stock price levels for this sector.

For the long-term investor, you don’t want to be part of the herd. You want to buy when others are selling, and sell when others are buying. For me, as a long-term investor, I think mining stocks look attractive.

This article Declining Sector Set to Outperform Stock Market was originally published at Investment Contrarians