One of the biggest worries for investors is the anemic economic growth globally. This has made it extremely difficult to generate corporate earnings going forward. As investors, we are constantly looking for signs that a firm has the ability to increase corporate earnings substantially for the near future.
Ultimately, for corporate earnings to move upward, revenues need to increase as well. With the lack of economic growth internationally, this is becoming a serious problem.
As an example of the extent of weak economic growth internationally, McDonalds Corporation (NYSE/MCD) posted a drop of 0.6% for comparable same-store sales in April. (Source: “McDonald’s global comparable sales decreased 0.6% in April,” McDonalds Corporation web site, May 8 2013, accessed May 13, 2013.)
The company saw its comparable same-store sales in Europe decrease by 2.4%, and the Asia-Pacific, Middle East, and African (APMEA) regions reported a 2.9% drop in same-store sales. Most analysts were expecting a drop of only one percent in Europe and a 1.4% drop for the APMEA region.
A positive note showing the disparity in economic growth was that same-store sales for the U.S. increased 0.7%, versus expectations of a slight decline. As weak as the U.S. is regarding economic growth, much of the rest of the world is in worse shape.
One worry for investors looking at the potential for corporate earnings growth is that much of the sales push by McDonalds has been in lower-priced items. This means that, while revenues might be running at a similar pace, margins will drop.
The chart for McDonalds is featured below:
Chart courtesy of www.StockCharts.com
McDonalds’ stock has performed quite well over … Read More
The massive sell-off in the price of gold bullion has certainly shaken up some investors. However, it seems there are others whose investment strategy has been to wait for a pullback in gold to continue accumulating the precious metal.
Recent data has shown that China imported gold bullion from Hong Kong at a record-high level in March. Net imports into China of gold from Hong Kong were 130,038 kg, compared to 60,947 kg of the yellow metal in February, according to Bloomberg. (Source: “China’s Gold Purchases From Hong Kong Expand to Record,” Bloomberg, May 7 2013, last accessed May 8, 2013.)
While these imports happened prior to the sell-off in the price of gold bullion in April, China has clearly been using an investment strategy to continually accumulate the precious metal whenever it can. With the price of gold in April dropping 14% in just two days—the biggest sell-off in 30 years—this led to an increase in demand for jewelry and coins in China.
Essentially, gold transactions have increased as many more participants use the metal for trading purposes as an investment strategy. Exports of gold from China into Hong Kong were 93,481 kg, a huge jump from February’s exports of the yellow metal of 36,159 kg. Profiting from the volatility, trading in gold continues to skyrocket globally.
The volume of gold bullion on the Shanghai exchange hit a record high on April 22 of 43,272 kg. As more traders use gold in their investment strategy, transactions continue to increase substantially. Following the sell-off in gold bullion prices on April 15 and 16, the China Gold Association reported that retail … Read More
With the introduction of monetary stimulus by many central banks around the world, a common question asked is: what’s a unique investment opportunity in a market sector that is not immediately obvious to the average investor?
If the global stimulus really begins to work, it should result in higher demand for commodities. If this occurs, an interesting market sector that might be an above-average long-term investment opportunity is the shipping industry.
Information just released shows that Greek shipping firms have recently ordered the most iron ore carriers since 2008. Greek shippers own a large number of vessels internationally. (Source: Sheridan, R., “Greeks Bet Ship Rout Ending With Most Orders Since 2008: Freight,” Bloomberg, April 30, 2013.)
While the average earnings per day for a Capesize ship (a type of cargo ship used to transport raw commodities) is only $4,900—a massive drop from the peak in 2008 of $229,000—many analysts are expecting this current level to be a bottom and are expecting earnings to increase to $17,500 per day next year.
Clearly, the Greek shipping market sector sees an investment opportunity over the next few years. From the time of ordering to delivery, the process of obtaining a carrier takes approximately two years. However, because of the economic slowdown, the costs of construction and secondhand sale prices have dropped precipitously.
As an example, a new ship that used to cost approximately $100 million to build in 2008, now costs only $47.0 million. Prices are even lower on the secondhand market sector for large ships, and some shipping firms see this time as an investment opportunity and are using the low prices … Read More
One of the most confusing topics of late is the low level of the inflation rate even though monetary stimulus has been quite aggressive worldwide. The most recent data point came from Japan, in which consumer prices dropped by 0.5% in March versus the same time in 2012.
The Bank of Japan is just now beginning a new monetary stimulus plan in the hopes of moving the inflation rate back into positive territory, with the target at two percent. However, some analysts question the possibility of reaching the target inflation rate over the next couple years, even with this monetary stimulus plan. (Source: Fujioka, T., et al., “Bank of Japan Sees Inflation Nearing Target in 2015: Economy,” Bloomberg, April 26, 2013.)
This aggressive monetary stimulus package has driven the yen weaker, benefiting export-oriented companies; however, while the general inflation rate is low, prices for imports such as energy will continue to rise as the currency declines. Additionally, the monetary stimulus program to drive up the inflation rate will have an impact on property prices and will raise rent levels.
However, monetary stimulus is not enough to gain traction and increase the inflation rate. Japan needs structural reforms to its business sector to encourage expansion and growth. Psychologically, the average Japanese citizen has been used to price declines for many years—this mentality will be hard to change. As an example, the latest report showed that TV prices fell by 19% from last year. (Source: Ibid.)
In America, we’ve had monetary stimulus for quite a while, yet the inflation rate is still quite low, below the targeted level. In March, the consumer … Read More
As is quite evident from the past couple months, investing in gold can be rather volatile. Clearly, the huge sell-off in the price of gold bullion over the past couple of weeks has shocked some people; an interesting result has been the reaction from the retail public, as many are now buying gold bullion in record amounts.
Last week, the United States Mint actually ran out of the smallest American Eagle gold coin, and sales to India were 20% higher than the previous record, according to Standard Chartered PLC. Clearly, physical demand remains strong for gold bullion. (Source: Roy, D., et al., “Gold Rout for Central Banks Buying Most Since 1964: Commodities,” Bloomberg, April 25, 2013.)
Here is a key question for those who are considering investing in gold: what are your goals? Is a person investing in gold to diversify his or her assets or to trade and generate profits?
Having gold bullion as part of one’s portfolio can make sense as long as it’s understood that volatility will continue to be present. Since larger investors have added gold bullion as another asset to trade, determining the price of gold bullion has become increasingly difficult.
A chart for gold bullion is featured below:
Chart courtesy of www.StockCharts.com
The recent drop in gold bullion erased an estimated $560 billion in the value of central banks’ holdings, and it was one of the largest drops in 30 years. The huge spike in volume and the massive move indicate several large stops were triggered, causing the holders to liquidate their positions.
The question now: is the selling in gold bullion completed? Since … Read More
One of the most worrying signs from the latest batch of economic data is that the global recession might be reappearing. Central banks around the world have been attempting to fuel their economies through massive stimulus, yet these efforts appear to be failing.
Increasingly, the earnings outlook for a number of companies continues to be quite poor for the remainder of the year. This is giving me pause for thought, because these poor outlooks raise the chances that another global recession will occur.
Last week’s data from the Conference Board Leading Economic Index for the U.S. indicated a drop in March. This was the first drop in seven months—certainly a negative move away from the chance of averting another global recession.
More importantly, the Conference Board’s outlook for the next three to six months dropped 0.1% in March, below the median forecast by a survey conducted by Bloomberg. (Source: Smialek, J., et al., “Leading Index’s Drop Points to Slower U.S. Growth: Economy,” Bloomberg, April 18, 2013.)
Manufacturing also declined, as indicated by the Federal Reserve Bank of Philadelphia reporting that its factory index dropped to 1.3 in April from 2.0 in March. (Source: “March’s Coincident Indexes Show Increased Economic Activity in 47 States,” Federal Reserve Bank of Philadelphia web site, last accessed April 23, 2013.) This was a significant reversal from the median forecast, in which expectations were for the index to rise to 3.0.
How does this affect the earnings outlook for corporations? Many companies have been expecting that the global recession could be averted, as each company’s revenue and earnings outlook last fall was fairly positive for 2013. … Read More
One of the most dangerous periods for an investor is when they become too complacent. As the combined view of all investors, market sentiment ends up becoming overly bullish, running far ahead of the fundamentals. This has now occurred in several sectors, but one that investors should be aware of is in bank stocks, especially in Europe.
Bank stocks around the world have risen tremendously, pushed higher by a wave of positive market sentiment. The general consensus is that following the financial crisis over the last few years, the worst is over. I would caution investors that there are still significant hurdles for many global bank stocks.
Recently, the Bank of England stated that many investors are underestimating potential risks. As we all know, the global economy is still weak, yet share prices have soared, including bank stocks. Market sentiment has shifted from massively bearish to extremely positive over the past couple of years.
As the minutes of the Bank of England’s last meeting note, the committee recommended that bank stocks in the U.K. raise an additional $38.0 billion for potential pitfalls related to the euro area as well as their real estate exposure. (Source: Moshinsky, B., “BOE Says Investors May Be Taking ‘Too Rosy’ a View of Stresses,” Bloomberg, April 5, 2013.)
Investors have piled into bank stocks with positive market sentiment on the belief that the worst is over, especially in Europe. Many bank stocks within Europe are closely intertwined with other nations on that continent. As we’ve just seen from the recent Cyprus fiasco, there are still significant pitfalls ahead.
Market sentiment is clearly being pushed upward … Read More
Central banks around the world have opened the floodgates with massive levels of quantitative easing in an effort to try to stimulate their respective economies. Turning on the quantitative easing tap is easy; putting the genie back in the bottle will be extremely difficult for central banks globally.
I am not alone in sharing this opinion, as the governor of Denmark’s central bank, Lars Rohde, has voiced similar concerns. In a recent interview, Rohde stated, “The risk is we stay in this climate too long and that the carpet bombing of liquidity spurs inflation… How do we exit this without killing whatever nascent recovery there might be at that time?” (Source: Levring, P. and Schwartzkopff, F., “Liquidity Carpet Bombs Fueling Asset Bubbles, Rohde Says,” Bloomberg, April 8, 2013.)
While central banks around the world are using quantitative easing in an effort to revive the global economy, the long-term consequences, as I’ve mentioned before, could prove to be extremely costly. I certainly welcome the honesty that Denmark’s central bank’s governor is displaying in voicing his concerns about how all of this quantitative easing might have serious long-term risks.
With Japan just now unveiling a massive new quantitative easing program in addition to the Federal Reserve’s asset purchase program, the floodgates continue to be wide open. However, central banks around the world have embarked on an aggressive quantitative easing policy since the great recession began, yet little has changed in terms of global unemployment.
Many nations around the world still suffer from extremely high levels of unemployment. It appears that quantitative easing did have an impact in certain asset prices, namely stocks … Read More
Following the global recession, many countries still lack resurgence in their economic growth levels. Many central banks around the world have used their primary tool, aggressive quantitative easing, to try and revive economic growth.
One issue with quantitative easing is that it can drive a currency downward in value. This can have some positive effects in improving economic growth by making that nation’s goods cheaper and driving exports; although it can hurt economic growth, as the price of imports rise, driving up inflation.
This is a tough goal to achieve, in trying to increase economic growth through a very blunt tool, that of quantitative easing. Whereas some initiatives have laser-like precision, quantitative easing is not one of them.
One nation that has recently embarked on a very aggressive quantitative easing program, and will continue to do so, is Japan. In November, Japan elected a new Prime Minister, Shinzo Abe, who called for a very large quantitative easing program to jump-start economic growth. Since the election of Abe in Japan, the yen has fallen by approximately 15% against the U.S. dollar.
This has certainly helped Japanese car makers. Recently, the CEO of Ford Motor Company (NYSE/F), Alan Mulally, voiced his concerns that the Japanese yen’s decrease is increasing the level of competitiveness for Japanese car makers. According to the American Automotive Policy Council, Japanese car makers have a currency advantage worth approximately $5,700 per vehicle. (Source: Philip, S., “Ford CEO Says He’s Concerned About Effect of Weaker Yen,” Bloomberg Businessweek, March 26, 2013.)
The natural question is: if quantitative easing does help economic growth, why doesn’t every nation just do this? … Read More
One of the most difficult things to do is to try and determine the future level of economic growth. There are so many variables that go into the level of economic growth that no model can accurately predict the exact level.
What we can do is look for signs of economic growth, or a lack thereof, and create an investment strategy based on these indications. Looking backward won’t help; we need to look forward.
One method that can help is to see what the professional investors are doing, as they are on the cutting edge when it comes to creating a profitable investment strategy.
Last week saw two distinctly different moves by professional traders. The first was that hedge funds made a massive trade against copper. With global inventories piling up, professionals have an investment strategy that will benefit from the price of copper if it drops.
Clearly, the professional traders don’t believe there will be enough economic growth to absorb such a high level of inventory, which is currently at a nine-year high globally. (Source: Richter, J., “Hedge Funds Most Bearish Ever on Copper, Favor Gold: Commodities,” Bloomberg, March 25, 2013.)
Hedge funds increased their short positions in copper by a massive 53% last week, according to the Commodity Futures Trading Commission. Copper is closely associated with economic growth, since so many industries use copper. As economic growth expands, the use of copper does as well.
The build-up in copper supply is worrisome, as this means that either builders are holding back on ordering more copper, unsure of how strong economic growth will be in the second half, or … Read More
The recent pullback in gold bullion has certainly hurt gold mining stocks. While one can develop a sound investment strategy, if the price of the stock continues moving downward, it makes it extremely difficult to step in and buy.
Gold mining stocks have seen a serious sell-off over the last few months. So what about gold mining stocks as a long-term investment strategy?
To begin with, looking at the commodity from an investment strategy point of view, gold has pulled back and has bounced off a key support level. Obviously, whatever direction the price of gold moves, the majority of gold mining stocks will move in tandem.
No one can predict the price of a commodity for certain. However, we do know that there remains strong demand for physical gold and that central banks around the world continue to have easy monetary policies.
While that is a sound investment strategy, it does not guarantee that gold will see an increase. The market could continue declining, as more sellers of paper gold emerge.
Assuming that gold prices will increase, gold mining stocks are beginning to look attractive, because they’ve declined to such a level that many are trading at a discount to book value. This means that if the company were to be bought and sold in pieces, the sum of the parts is worth more than the current stock price.
This type of investment strategy, looking for value, is one approach that an investor can take when trying to determine which gold mining stocks might be suitable for their portfolio. Momentum is not bullish for gold mining stocks at the … Read More
While I do like gold, I’m somewhat perplexed over the metal’s near-term stock chart. The chart shows indecision and indicates a potential downside break at $1,550, with gold potentially falling out of its current sideways channel.
And it also appears that the professional money has mixed feelings about gold. Famed investor George Soros cut his gold holdings, but Paulson & Co. made no changes. (Source: Rooney, B., “Soros dumps gold as prices sink,” CNN, February 16, 2013, last accessed March 12, 2013.)
Despite gold’s reputation as a safe haven to stash your money, there is a lack of buying interest across the board, as the sentiment toward gold is rapidly declining; hedge funds are selling.
So, is a major downward move on the chart coming?
In my view, gold is at a crossroads. It could continue to trade in its sideways channel, where you can simply buy on weakness down to $1,550 an ounce and sell on rallies.
While I agree the near-term risk is high and could see prices move downward toward $1,500 an ounce, any major declines in gold prices should be viewed as a potential opportunity to accumulate gold as a contrarian investment, especially if the eurozone mess intensifies and an asset bubble surfaces in China (which is also seeing a dangerous rise in inflation to 3.2%). The problem in China is that the new government’s strategy to drive consumer spending to spur economic growth will only add to the inflationary pressures and overall market risk that are already present.
I also sense that the market is underestimating the major debt and growth situation in Italy and … Read More
The recent pullback in gold has certainly unnerved long-term investors. It has also seen a dramatic shift in market sentiment. However, recent data shows that this shift in market sentiment has primarily come from shorter-term institutional funds.
When considering gold as an investment, one must consider the timeframe as well as the underlying participants in the market. Market sentiment for every asset class oscillates from overly optimistic to overly pessimistic. The goal for the long-term investor is to use this volatility to accumulate during overly pessimistic times and take profits during overly optimistic times.
According to Barclays PLC (NYSE/BCS), gold-based exchange-traded funds (ETFs) are set to record the weakest month on record. Barclays notes that during the period of February 20–25, the net outflow of gold from exchange-traded products (ETPs) totaled 10 metric tons per day. The vast majority of gold redemptions stem from the SPDR Gold Shares (NYSEArca/GLD) ETF, with a decline of 58 metric tons for the month of February. (Source: Saefong, M., “Gold ETP flows set for weakest month on record: Barclays,” MarketWatch, March 1, 2013.)
While physical gold continues to remain in demand (as we’ve seen central banks around the world, including Russia and China, continuing to accumulate), market sentiment for paper gold has recently become negative.
The net level of institutions investing in long-term gold at the Comex is the lowest since December 2008, and new funds are going to short the gold market. This is becoming a classic battle between the bulls and bears regarding market sentiment for the gold market.
Physical gold is a slower, more long-term market than paper gold. Institutions favor … Read More
At the end of 2008, the financial crisis in America was so severe that the Federal Reserve began a historically significant and unprecedented monetary policy program, which has continued to this day, dramatically altering the financial and economic landscape.
Considering the extent and breadth of this huge monetary policy program by the Federal Reserve, two questions linger: why hasn’t the economy recovered as many economists had expected, and what is the downside?
Monetary policy is an extremely complicated initiative, with the end result not easily quantified or predictable. One of the most common complaints has been the lack of income from savers due to the lowered interest rates.
There is some validity that a massive amount of income has been foregone from savers because of these lower rates, due to easy monetary policy by the Federal Reserve and other central banks around the world.
According to The Economist, personal interest income has declined at an annual rate of $432 billion since 2008, more than four percent disposable income. This was interest income that was not generated and, ultimately, not spent in the economy. (Source: “Savers’ Lament,” The Economist, December 1, 2012, last accessed January 7, 2013.)
However, the situation is far more complex, as there are two sides to every coin. The lowered interest rates due to easy monetary policy by the Federal Reserve have also decreased the costs of borrowing.
The Bank of England conducted a study showing that between 2008 and 2012, the lowered interest rates ended up costing savers 70 billion pounds in lost income, but households saved 100 billion pounds in interest expense. (Source: The Economist, … Read More
The results of PNC Wealth Management’s annual Christmas Price Index were recently released, and it’s not looking good for consumers. If you want to financially re-create “The Twelve Days of Christmas,” in which a rich lover goes to town on a shopping spree, you’ll have to shell out a little bit more this year.
According to the 29th annual survey, it will cost $25,431.18 to purchase one set of each of the gifts given in the song. That represents a 4.8% increase from last year, a 3.5% increase in 2011, and a 9.2% increase in 2010. This year also represents a 101% increase over the $12,623.10 price tag from the original 1984 survey results.
Now granted, the Christmas Price Index is not a serious economic indicator, and the average consumer is not going to throw down cash for eight maids-a-milking, five golden rings, or a partridge in a pear tree…but it does go to show the disconnect between the inflation rate and what consumers are really paying.
Considering the modest economic growth we’ve had, the increase is a little unexpected. The Christmas Price Index would have been even higher in 2012, except that minimum wage hasn’t increased.
At 4.8%, the 2012 Christmas index significantly outpaced the government-tracked Consumer Price Index (CPI), which rose 2.2% in October from the year-earlier period. (Source: News release, “Consumer Price Index – October 2012,” Bureau of Labor Statistics, last accessed November 30, 2012.)
Digging a little deeper, month-over-month, the shelter index increased 0.3%, its largest increase since March 2008; the food index increased 0.2% in October, with the index for food-at-home rising 0.3%, its largest … Read More
No one said austerity measures would be an easy pill to swallow. But, after decades of overspending, they’re become an unwanted necessity. And the fed-up workers of Europe are uniting!
Protests broke out Wednesday across Europe in a coordinated day of action over ongoing austerity policies. While some of the largest and most violent protests took place in Spain, Portugal, Greece and Italy also took to the streets.
Over the last three years, Spain, Portugal and Greece have all slashed spending on pensions, public sector wages, hospitals, and schools in an effort to get public finances back on track.
It hasn’t kicked in yet. In Portugal and Greece—both rescued with European funds and under strict austerity programs—the economic downturn increased in the third quarter. Portuguese unemployment jumped to a record 15.8%. In Spain and Greece, one in four of the workforce is jobless. (Source: Tisera, F., and Alvarena, D., “Anti-austerity marches turn violent across southern Europe,” Reuters, November 14, 2012.)
In an effort to stem the economic slide of the U.S. housing collapse that first surfaced in 2005, the Federal Reserve initiated quantitative easing in November 2008. To date, the Federal Reserve has printed off close to $3.0 trillion. That number climbs by an additional $85.0 billion each month. It was supposed to increase lending, create more jobs, kick start housing, and lower the unemployment rate.
What has really happened? After three rounds of austerity measures, unemployment is rising, company profits are falling, financial markets are fragile, and the housing sector is still in disarray. What has it done? It’s created a weak dollar and an anemic economy…. Read More