China
Why ECB’s President Mario Draghi Is Unrealistic
By George Leong for Investment Contrarians | Jun 10, 2013
There is much discussion on China and the impact of stalling on the global economy, yet the region that really needs to be monitored is Europe and the eurozone.
While China is still growing its economy at a seven- to eight-percent clip and is tops among the G8 countries in the global economy, Europe continues to look for any reason for optimism given its recession and the fact that six of the 17 eurozone countries are in a recession. Greece, for instance, reported a horrific unemployment rate of 26.8% in March, while to the West, the Spaniards are facing unemployment of 26.7%.
The Organization for Economic Cooperation and Development (OECD), in its semi-annual Economic Outlook, suggested the dire situation in Europe is a threat to the global economy. (Source: “Global economy advancing but pace of recovery varies, says OECD Economic Outlook,” OECD web site, May 29, 2013, accessed June 7, 2013.)
A look at the Dow Jones STOXX Europe 600 Index, featured in the chart below, shows the rally from the bottom in 2009; however, I personally wouldn’t be a buyer, and I advise you to look to Asia for your foreign exposure.
Chart courtesy of www.StockCharts.com
Then there’s Mario Draghi, the President of the European Central Bank (ECB), who at the central bank’s monthly press conference last Thursday, raised his gross domestic product (GDP) estimate for the eurozone to 1.4% for 2014, following a 0.6% contraction this year. (Source: Bishop, K., “ECB Holds Rates and Cuts Growth Forecast,” CNBC web site, June 6, 2013, accessed June 7, 2013.)
I really cannot understand how the ECB expects a turnaround to … Read More
China Showing Surprising Interest in the U.S. Stock Market, but Why the Food Sector?
By George Leong for Investment Contrarians | Jun 3, 2013
Over the past few years, we have seen an increase in takeover activity in North America’s stock markets by China-based companies. The takeover targets have largely been in the energy and resources areas, where China is in search of alternative sources of raw materials.
In 2009 and 2010, Chinese energy firms made about $48.0 billion in stock market acquisitions in North America, according to the International Energy Agency (IEA). China has major investments in the oil-rich Canadian tar sands in Alberta, and I expect to see more Chinese capital flowing into the North American stock market.
The biggest takeover in the stock market from a Chinese company to date was the $15.1-billion takeover of Canada-based Nexen Inc. (TSX/NXY) by CNOOC Limited (NYSE/CEO) in February 2013.
I was aware that the Chinese strategy to accumulate raw materials globally via the stock market would continue, but I was quite surprised to hear about the proposed takeover of the world’s largest pork producer, U.S.-based Smithfield Foods, Inc. (NYSE/SFD) by China’s largest pork producer, Shuanghui International Holdings Limited in a $7.1-billion deal. At issue is not the takeover price, since it was 31% above the closing price of the prior day, but it was more due to the surprise that China is interested in America’s food sector.
While it was obvious that the Chinese want oil and minerals investments in the stock market, the fact that China is moving into this country’s food sector might become an issue.
The Smithfield deal could represent the largest takeover of an American company in the stock market by a Chinese company and the second-largest after the Nexen … Read More
Mixed Landscape for Global Economy Warrants Caution
By George Leong for Investment Contrarians | May 31, 2013
The stock market is setting record after record and there appears to be nothing in its way. Yet as many of you know from reading these pages, while I continue to enjoy the rally, I am also preaching caution.
The Organization for Economic Cooperation and Development (OECD) came out with its semi-annual Economic Outlook report, and it has painted a mixed landscape for the global economy. The findings are really not a surprise, but they do seem to be things the stock market has ignored. I mean, why is the Nikkei up 70% over the past six months?
Sometime down the road, there needs to be some reasoning when looking at the current momentum in the stock market. I still think the stock market is moving too high too fast.
The OECD suggests the recession that has gripped Europe is a threat to the global economy. (Source: “Global economy advancing but pace of recovery varies, says OECD Economic Outlook,” Organization of Economic Cooperation and Development web site, May 29, 2013.)
The eurozone economy is estimated to contract 0.6% this year, followed by a 1.1% rebound in 2014, according to the OECD. My feeling is that the estimate for 2014 might be overly optimistic, as the region has a lot of work ahead of it and could be headed for another disappointment.
Gross domestic product (GDP) growth in the U.S. is estimated to rise 1.9% this year and 2.8% in 2014, according to the OECD. That’s fine, but it’s nowhere near the levels we need to drive significant jobs growth.
Crossing the Pacific, Japan’s economy is estimated to rise 1.6% this … Read More
Chinese Sovereign Fund Shifts Focus to U.S. Real Estate; How This Will Affect Home Prices
By Sasha Cekerevac for Investment Contrarians | May 29, 2013
One of the biggest fears for investors is to buy at the top of any market. This is a natural reaction because most of us were taught since childhood to do the opposite. For example, my parents always emphasized the importance of buying products when they’re on sale.
Some people view the significant rise in home prices with apprehension, believing that these prices have risen too far. While it is true that home prices have risen substantially, as long as interest rates remain low, there is potential for further capital appreciation.
Americans aren’t the only ones considering real estate as part of their investment strategy. Recent reports state that China is considering diversifying its foreign exchange reserves, totaling approximately US$3.4 trillion, into U.S. real estate. (Source: Yang, S., et al., “China said to study US property investments with reserves,” Bloomberg, May 27, 2013.)
With the Chinese investment strategy in the past based primarily on investing in U.S. government debt, considering how little this asset class is currently yielding, it does make sense for the Chinese to look at diversifying into other sectors. When looking at the potential for home prices to continue rising versus U.S. government debt, this diversification seems quite prudent.
The ramifications for American home prices could be substantial. It really depends on how China goes about allocating its investment strategy. There are already shortages in many real estate markets across the U.S., which is part of the reason home prices have moved up so quickly.
The Chinese sovereign wealth fund could look at taking stakes in companies that are already involved in real estate and that benefit … Read More
Is Bernanke Underestimating the Long-Term Impact of Easy Money?
By George Leong for Investment Contrarians | May 24, 2013
Don’t worry, folks, Federal Reserve Chairman Ben Bernanke is not going to take your money away anytime soon; the stock market is safe.
In his testimony to Congress on Wednesday, Bernanke made it clear that the central bank’s current aggressive $85.0 billion in monthly bond purchases will continue to move along.
The stock market surged upward on the news, which is exactly what I would have expected, given that the amazing run-up in stocks this year has largely been due to the flow of easy money into the U.S. economic system. So there’s no need to worry about the stock market and your assets—for now.
Bernanke emphasized the fragility of the jobs market and reinforced his view that it’s still too early to put an end to the stimulus. Allowing rates to creep higher would “carry a substantial risk of slowing or ending the economic recovery,” said Bernanke to Congress. (Source: Chairman Bernanke, B.S., “The Economic Outlook: Before the Joint Economic Committee, U.S. Congress, Washington, D.C.,” Board of Governors of the Federal Reserve System web site, May 22, 2013.)
The end result will see the stock market continue to rally higher to new record highs.
The chart below shows the upward move in the S&P 500 since 1980, shown by the green line, as the effective federal funds rate declines over time. Note the massive gap between the S&P 500 and the effective federal funds rate, shown by the purple oval on the chart.
Chart courtesy of www.StockCharts.com
The reality is that not only is the easy monetary policy flowing in America, it is also flowing across the global economy … Read More
Two Unconventional Precious Metals Investors Should Consider
By Sasha Cekerevac for Investment Contrarians | May 23, 2013
Many investors in the precious metals sector have been disappointed with the significant decline in prices this year. Precious metals mining stocks have fared even worse than the commodities, with massive drops in their share prices.
An area where many investors make a mistake is in portfolio diversification. I’ve mentioned this many times in the past, but it bears repeating: never place all your money in one company or asset class.
While the precious metals index has declined, not all of the components have had the same performance or even the same level of fundamental developments. While gold is down 18% this year, and silver has dropped by 26%, platinum is only down 5.3%, and palladium is up 4.7%.
As I’ve mentioned in a previous article, investors should clearly look at adding platinum and palladium to their well-diversified portfolios if they are interested in having some exposure to the precious metals sector. The reason is that demand for both platinum and palladium is set to increase from industrial use. Investors should diversify part of their portfolios away from the traditional precious metals of silver and gold and into both platinum and palladium if they still wanted exposure to this sector.
Note that I’m referring to exposure to the precious metals sector directly through the commodities themselves, not the mining stocks for platinum and palladium. This is because the vast majority of platinum mining stocks are located in South Africa, and much of the platinum supply comes from Russia. Mining stocks in these precious metals are facing increasing costs, significant labor problems including strikes, and potentially stricter regulations.
Precious metals mining … Read More
Consumers Spending Less; Just Ask Wal-Mart
By George Leong for Investment Contrarians | May 21, 2013
All of the talk about the negative impact of the sequestration on consumer spending appears to have some validity.
While the rich consumers are continuing to spend on luxury items, those who are making less money and are influenced by the fragile jobs market and flat income levels continue to worry, which could likely impact consumer spending going forward. The effects of this, along with the widening gaps between the rich and the poor and the middle class are affecting consumer spending by Americans. In fact, we are seeing a widening income gap in many countries around the world, so it’s not just an American phenomenon—its impact on consumer spending is global.
Wal-Mart Stores, Inc. (NYSE/WMT) is a good barometer on the state of consumer spending around the world, especially with the lower- to middle-class consumers.
The company reported its results last Thursday, and it seems like Wal-Mart is facing some hesitation in consumer spending.
In the fiscal first quarter, the company’s net sales grew a mere one percent year-over-year to $113.4 billion, which was below the Thomson Financial consensus estimate of $116.4 billion. The sales reading was also shy of the low range of the estimate of $114.6 billion.
The low-cost retailer blamed the decline in consumer spending on a delay in tax refunds, adverse weather, and the rise in payroll taxes. The key comparable U.S. store sales fell 1.4% for the 13 weeks ended April 26, 2013, which represents the first contraction in this key metric in many quarters.
My concern is that Wal-Mart is facing sales pressure at a time when money is cheap. What will happen … Read More
Changes to International Tariffs Giving This Stock a Boost
By Sasha Cekerevac for Investment Contrarians | May 17, 2013
When it comes to buying stocks for long-term investing, the short-term gyrations can be difficult for investors. It’s important from a long-term investing viewpoint to look out onto the horizon over many years, and search for short-term pullbacks and opportunities that might allow attractive entry points.
We are all aware of the troubled situation economically in Europe; however, there are still potential opportunities for buying stocks that could benefit from significant market changes when it comes to long-term investing.
One example is the automobile industry. While no one would suggest that Europe is a strong sector for growth in automobiles, don’t discount the carmakers when considering buying stocks. Volkswagen AG (OTC/VLKAY) is continuing to set the foundation for growth globally over the next decade.
The company’s Audi division is continuing to make inroads in many markets, including India, China, and the U.S. Additionally, a decrease in tariffs for many countries is now opening the door for European automobile makers to gain market share.
South Korea recently dropped the import duty on European vehicles from eight percent to only 3.2%, which has resulted in an increase of foreign automobiles making up 41% of the South Korean market versus 28% just two years ago. (Source: Kim, R., “BMWs Cheaper Than Hyundais in Korea as Tariffs Crumble,” Bloomberg, May 15, 2013, accessed May 15, 2013.)
The U.S. has also cut tariffs for imported cars substantially and will completely eliminate them by 2016. This will open the door for competition, and vehicles such as Audis, which are of premium quality, have the potential to gain market share.
Volkswagen is continuing its expansion in emerging … Read More
SEC Raises Requirement for Chinese Companies for U.S. Listings; Chinese Companies Looking Elsewhere
By George Leong for Investment Contrarians | May 15, 2013
Chinese initial public offerings (IPOs) could be hot again this year, but don’t look to America as the breeding grounds: the flow to the U.S. is dead.
The big market for Chinese IPOs will be at home in China where there could be as many as 349 IPOs this year, according to a calculation by Goldman Sachs. (Source: “IPO deep dive: The Sword of Damocles or Paper Tiger?,” Goldman Sachs web site, January 23, 2013, last accessed May 14, 2013.) Of course, we have seen only a trickle this year, so the Goldman estimate seems to be more fiction than fact.
In the U.S., there are no Chinese IPOs scheduled for the immediate future, a stark contrast to the 60 Chinese stocks that debuted on U.S. equities markets from 2008 to 2011.
The more recent numbers look even worse, and tell us a tale of misfortune for Chinese IPOs.
In 2012, there was one Chinese listing on U.S. equities markets, but we saw the delisting of several Chinese stocks that have been taken private. Since August 2011, 23 Chinese stocks have delisted from U.S. equities markets, according to Money Week magazine.
Based on what I have been reading, I doubt that there will be much activity this year or next for Chinese IPOs, unless the rules of engagement for financial reporting and auditing are made better and meet U.S. standards. The Securities and Exchange Commission (SEC) wants any Chinese company aiming for access to U.S. capital markets to use one of four approved U.S. Big Four auditors. That request is fine, but the problem lies in the SEC also wanting … Read More
China’s Economic Reporting: Fact or Fiction?
By George Leong for Investment Contrarians | May 10, 2013
There’s something fishy going on with China’s economic data—at least with those figures that are reported by the Chinese government. The reality in those numbers has always been questionable.
Are the economic data compiled and reported by the Chinese government agencies correct and reliable? Are we seeing a major scam developing out of the country?
While there has been lingering doubts on the reliability of Chinese data, no one has yet proven the Chinese are fudging the numbers.
But you know that this is a real possibility.
I’m a Chinese bull, but I must admit I’m always concerned when evaluating the financials of Chinese companies; the proven corruption in the past several years has made me think long and hard about what and whom to trust.
I have been burned by Chinese stocks, but so have many of you.
The potential issues with the Chinese economic numbers may also be true. Case in point: in the first quarter, China’s gross domestic product (GDP) growth was 7.7%, according to the National Bureau of Statistics. That percentage was down from 7.9% in the fourth quarter.
We have also been seeing a decline in manufacturing data, including the country’s internally produced Purchasing Managers’ Index and other external manufacturing reports.
The country’s industrial value-added output growth expanded at 9.5% in the first quarter, down from 11.6% in the first quarter in 2012, according to the National Bureau of Statistics. (Source: “China’s Q1 industrial output growth slows to 9.5 pct,” Global Times, April 15, 2013, last accessed May 9, 2013.)
Given all of this, it was quite a surprise to see China’s exports surge 14.7% … Read More
S&P 500 Companies: Short-Term Problems, Long-Term Opportunities?
By Sasha Cekerevac for Investment Contrarians | May 1, 2013
One of the common questions I get asked is: where are the long-term opportunities for growth? We all know that the American economy is growing extremely slowly, yet most people don’t realize how international many of the S&P 500 companies really are.
As an example, while we all think of Kentucky Fried Chicken (KFC) and Pizza Hut as American restaurants, the parent company, YUM! Brands, Inc. (NYSE/YUM), has a growth plan that is not based domestically and is instead focused on the Chinese economy.
Because S&P 500 companies are increasingly focusing on growth potential around the world, the one economy that has seen consistent increases in gross domestic product (GDP) has been the Chinese economy.
However, recent data are showing signs that the Chinese economy might be slowing down. According to the National Bureau of Statistics, industrial profits in March increased by 5.3% year-over-year, but it marks a drop from the 17.2% increase in industrial profits recorded during January and February. (Source: Orlik, T., et al., “Chinese Industrial Profit Growth Slows,” Wall Street Journal, April 28, 2013.)
Earlier this year, we received information that the Chinese economy did post a lower-than-expected GDP increase of 7.7%, down from 7.9% during the fourth quarter of 2012. The leadership in China is trying to engineer a slower Chinese economy to prevent bubbles.
So, what does this mean for S&P 500 companies?
Many S&P 500 stocks are looking toward the Chinese economy as the next great growth generator. YUM! Brands opened almost 2,000 restaurants in 2012, of which 889 were based in China. (Source: “YUM! Staying the Course: China and a Whole Lot More, … Read More
Why the Eurozone Recession Is Important for America
By George Leong for Investment Contrarians | May 1, 2013
George Soros knows a thing or two about making money from big bets. In 1992, Soros made a $10.00 short wager on the British pound and walked away with a billion dollars in profits.
Soros is now convinced Germany needs to rethink its strategy toward the sustainability of the eurozone and, in a draconian manner, believes the country should leave the euro.
Of course, should this happen, the 17-country eurozone would collapse, triggering a massive economic Armageddon and financial crisis in Europe that would ultimately generate chaos for the global economy.
Now, I doubt Germany or France—the two pillars integral to the eurozone—will exit the euro, but the reality is that the situation in the economic zone remains in a financial crisis with little hope of revival.
The problem is that the eurozone is firmly in a financial crisis and recession, trying to find its way out.
Greece, Portugal, Spain, and Italy are a drag on the ability of the eurozone to get out of its financial crisis. The unemployment rate in Greece and Spain is over 25% and worsening.
Italy just formed a new government, but there’s tons of work left for that debt-ridden country before it can exit its own financial crisis that has been building for years.
With all of this bad news, it’s not surprising to see people in the eurozone feeling the despair. According to the European Commission, economic morale in the eurozone remains weak after declining in March and April. (Source: Emmot, R., “Economic mood in euro zone sours again in April,” Reuters, April 29, 2013.)
And it appears that the solution will again … Read More
What McDonalds Has to Say About the Global Economy
By George Leong for Investment Contrarians | Apr 30, 2013
You can tell a lot about the pulse of the economy by examining the retail sales and restaurant sector. When people are working and making money, they tend to be more confident and want to spend, especially non-discretionary spending.
In the fast-food restaurant sector, the “Best of Breed” is McDonalds Corporation (NYSE/MCD).
The company has numerous rivals and the sector is extremely competitive, but there is no real and valid threat on the horizon for McDonalds that could affect it.
Characterized by its familiar “golden arches,” which are sometimes visible from miles away, the company is a true American icon, just like General Motors Company (NYSE/GM).
Yet McDonalds is also a decent indicator on how the United States and global economy are faring.
The current level and valuation of stocks suggest everything is going well and on target with the global economy.
But, sorry to break it to you: the path to sustained economic renewal is still filled with potholes.
As I’ve previously written in these pages, the global economy and performance of the stock markets have been built by the easy money injected into the global monetary system by the world’s central banks, including our friends at the Federal Reserve.
So when I begin to see slowing at some of the key multinational companies, I wonder about the condition of the global economy.
McDonalds is a decent barometer on the global economy and, based on what I’m seeing, I sense there’s some stalling in the global economy.
In the first-quarter earnings season, McDonalds reported a marginal one-percent rise in its consolidated revenues due to the slowing in Europe and … Read More
More Signs of Economic Weakness: Where to Place Your Money
By Sasha Cekerevac for Investment Contrarians | Apr 25, 2013
With the stock market at all-time highs, the momentum has been built on the belief that an economic recovery is close at hand and the world will avoid a global recession. However, new data show that perhaps this belief might be too optimistic.
Markit Economics has just released the Purchasing Managers’ Indexes (PMIs) for many nations and economic zones around the world. Frankly, the data are quite bleak, showing that an economic recovery is certainly not occurring anytime soon, and that a global recession is becoming a distinct possibility.
For April, the U.S. Flash Manufacturing PMI (early reading) came in at 52, versus expectations of 53.8, and last month’s data point of 54.6. Just a reminder: a PMI number above 50 is a sign of growth; below 50 is a sign of contraction. (Source: “Markit Flash U.S. Manufacturing PMI,” Markit Economics web site, April 23, 2013.)
While the U.S. manufacturing PMI data still show expansion, the decline was significant, as was the degree by which it missed expectations. This April PMI reading for the U.S. was the lowest in six months, and is an indication that the economic recovery in the manufacturing sector is starting to slow.
The PMI composite for the entire eurozone was a very poor 46.5 in April, down slightly from expectations of 46.8. While the reading was unchanged from March, it is worrisome that there were no improvements at all. There is no current economic recovery in Europe; in fact, this reading indicates that economic activity has declined for 19 of the last 20 months.
Is a global recession very far away? Obviously, predicting the future … Read More
Global Economy Still at Risk, Just Look at the Jobs Picture
By George Leong for Investment Contrarians | Apr 24, 2013
Consistent jobs growth remains an issue here in the U.S.
We also know that the lack of jobs is a worldwide problem that is only made worse by the world’s growing population and the stalling global economy.
The reasoning behind this worldwide jobs problem is simple.
Jobs are created when the economy expands, which drives the need for more workers. Of course, modern technology, industrial efficiencies, and the increased use of robots all combine to pressure jobs growth, and I expect this pressure to continue.
Just take a look at China. In that country’s vast manufacturing landscape, the key driver is the masses of unskilled workers who are required to toil at their workstations for 12 hours or more each day.
China’s companies can make use of robotics to help in many of the assembly areas, but it seems that these companies use human labor instead—perhaps because creating jobs for the masses is a goal of communist China.
According to the International Monetary Fund (IMF), China’s unemployment rate has managed to hold pretty steady at just over four percent since 2003. In 2012, the unemployment rate was 4.1%, the same as in 2010 and 2011, and the estimate for 2013. (Source: “China: Unemployment rate from 2003 to 2013,” Statista web site, last accessed April 23, 2013.)
But in the more industrialized countries, like the United States and countries in Europe, there has been a move toward modern industrial techniques and the use of robotics.
And while America struggles to create jobs growth, the situation is extremely dismal in Europe.
As I commented in these pages a few weeks back, the … Read More
Slow Global Demand and Higher Inventory Bearish for Oil
By George Leong for Investment Contrarians | Apr 22, 2013
Oil drives the world.
But the problem now is that the industry is building up an excess inventory in available oil while global demand is dwindling, as the global economy continues to struggle with the aftermath of the Great Recession in 2008. The result: lower oil prices.
Some argue oil prices will easily rally back, but I’m not convinced, based on both the fundamental and technical pictures.
On the chart, the near-term technical outlook for oil prices is bearish. Spot oil prices are below $90.00 a barrel for West Texas Intermediate (WTI) oil, and they’re edging lower to the mid-$80.00 range.
Spot oil prices have recorded 10 new lows and five new highs over the past three months, according to data from Barchart.com. Over the past year, spot oil made 21 new lows to go along with only eight new highs. It’s clear that the market bias is negative on oil prices.
Based on the spot high of $106.16, reached on May 1, 2012, the spot WTI oil price is down 18.3% as of Thursday, which is nearing the official definition of a bear market.
The chart of the WTI spot oil price below shows some indecision, according to my technical analysis.
Chart courtesy of www.StockCharts.com
The fundamental side is also helping to confirm a potential downward pressure on oil prices.
We all know that oil is one of the most volatile of the commodities, fluctuating with the prospects of the global economy and, of course, the happenings in the Middle East.
On the supply side, there is some calm in the Middle East, but the tensions in North Korea … Read More
Economic Growth Falters: Which Stocks to Buy or Avoid
By Sasha Cekerevac for Investment Contrarians | Apr 18, 2013
One of the most closely watched parts of the global financial system is the Chinese economy. I don’t need to tell you that the economic recovery in America and the rest of the world is quite sluggish. Many had hoped that China could help propel the global economy higher; however, there are now concerns that this might not occur.
Recent data on the Chinese economy are signs that economic growth is not accelerating. For the first three months of 2013, the Chinese economy posted growth of 7.7%, a lower rate than the fourth quarter of 2012, in which the Chinese economy grew at 7.9%. (Source: Yao, K., et al., “China growth risks in focus as first quarter data falls short,” Reuters, April 15, 2013, accessed April 16, 2013.)
The Chinese economy is a huge player within the international financial system. If the nation was to regain its economic growth rate of the past, this would have a substantial impact on many people and companies around the world.
The Chinese economy posted industrial production growth of 8.9% year-over-year, below expectations of 10% growth. Power generation was up only 2.1% year-over-year in March, and steel output declined 3.2%, both below expectations.
Don’t forget, China is a huge buyer of many raw materials, including copper and iron ore. This latest data is additional evidence that economic growth is not accelerating, and investors need to reallocate their portfolios in accordance with this information.
One slight positive note was that retail sales within the Chinese economy increased 12.6% year-over-year in March, above expectations of 12.5% and higher than the recorded 12.3% increase for February.
The … Read More
Major Shift in Chinese Economy Opens up Long-Term Investment Opportunities
By Sasha Cekerevac for Investment Contrarians | Apr 16, 2013
For many years, people from all over the world have been envious of the economic growth in the Chinese economy. Since leaders of that nation have transformed the Chinese economy from purely state-controlled to more capitalistic, China’s growth has been astounding.
Looking back, it is easy today to think of the Chinese economy in terms of the allocation of funds for long-term investing—hindsight is always 20/20. However, the trick is to look forward over the next decade and determine the most likely scenario for long-term investing possibilities.
A common complaint by outsiders regarding the Chinese economy has been the use of cheap wages to increase its competitiveness. It is true that the Chinese economy has benefited greatly from much lower wages than many other nations around the world. Additionally, the size of the working population is huge.
However, it appears that the demographics and costs are now beginning to shift against the Chinese economy, and those interested in long-term investing might be able to create a portfolio that will benefit from this change.
The Asian Development Bank (ADB) recently noted that wages adjusted for inflation have more than tripled over the past decade in the Chinese economy. Additionally, new labor laws have increased costs for businesses to hire and fire people. (Source: “China surging wages threaten economy’s competitiveness, ADB says,” Bloomberg, April 9, 2013.)
Additionally, ADB reports that wages are being pushed higher, as the pool of working-age people shrinks. Because the one child policy has been in place for so many years, China is entering a troubling demographic scenario, as there will be far less people available to work … Read More
Commodity Price Cycle Bringing These Two Metals to the Forefront
By Sasha Cekerevac for Investment Contrarians | Apr 8, 2013
The U.S. economy is certainly not running at 100% capacity, but one sector that is operating at levels not seen since before the financial crisis is the automotive industry. In March, automotive sales increased substantially to an annualized rate of 15.3 million vehicles per year, compared to 14.1 million vehicles this time last year. (Source: Bennett, J., “March U.S. New Car Sales Jump,” Wall Street Journal, April 2, 2013.)
American carmakers contributed with substantial increases, including General Motors Company (NYSE/GM), reporting a 6.4% year-over-year increase in March, and Ford Motor Company (NYSE/F), reporting a 5.7% year-over-year increase in March.
Two derivatives of the strong automotive sector are the precious metals platinum and palladium. Generally speaking, platinum is used more for diesel engines, while palladium is used more often in gasoline engines. The increase in gasoline engines should, on the margin, increase demand for palladium versus platinum. With European vehicle sales slow, this should reduce demand for diesel engines.
One mistake many new investors make is investing with an all-or-nothing mentality. For example, an investor might be bullish on all precious metals, irrespective of the fact that certain commodities might be better investments than others in the precious metals sector.
Recently, the Chairman and CEO of Stillwater Mining Company (NYSE/SWC), Francis McAllister, stated that he believes it is highly probable that palladium will increase in price relative to platinum. Currently, palladium trades at approximately 48% of the price of platinum, up from 30% in 2003. McAllister believes palladium will rise to 65% of the value of platinum. (Source: Hill, L., “Stillwater CEO Sees Palladium Outperforming Platinum,” Bloomberg, March 21, 2013, last … Read More
Why Japan’s Aggressive Money Tree Is Disastrous
By George Leong for Investment Contrarians | Apr 8, 2013
The world is going gangbusters, printing money to drive the economies and growth. Yet despite the bailouts in the eurozone and easy monetary policy in Europe, Asia, and the U.S., there’s a sense a financial crisis could surface down the road. China is facing a potential real estate crash that could implode, given the speculative buying and the rise in property values. The reality is that the world—not just America—is extremely busy printing money, especially due to record-low interest rates. The easy money is a pretty good short-term strategy, and it’s much needed—but what a potentially explosive national debt!
And there’s no guarantee all of this easy money will save the eurozone from a deeper recession. In America, the easy money has amounted to a massive national debt that will need to be increased and bankruptcy in many municipalities.
Japan just announced an extremely aggressive monetary policy last Thursday that could see the Bank of Japan pump up its money printing presses and double its government bond holdings within two years. (Source: Ranasinghe, D., “Bank of Japan Unveils Aggressive Monetary Policy,” CNBC, April 4, 2013.) This all sounds so familiar.
I hate to sound repetitive, but the easy money strategy could blow up as interest rates rise.
Japan is a great example of how low interest rates have done very little to help the economy. I’m not saying the United States is in a similar situation, but there’s an eerie resemblance.
The Japanese stock market may be the top-performing market in the world in 2013, but much of the upward push has been driven by government spending and the promise … Read More
What Investment Strategy Works with Weak Economic Growth?
By Sasha Cekerevac for Investment Contrarians | Mar 28, 2013
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
Dow Jones Hitting 15,000 a Real Possibility Thanks to the Fed?
By George Leong for Investment Contrarians | Mar 22, 2013
The Federal Reserve is intent on keeping this Fed-induced stock market rally intact for perhaps another few years.
At the Federal Reserve monthly meeting this past Wednesday, the Federal Reserve reconfirmed its program of maintaining near-zero interest rates and its $85.0 billion monthly bond-buying strategy. As I recently discussed, the environment of low rates will offer little choice for investors who have to weigh low-yielding fixed-income investments against stocks. In other words, the equities market will continue to be driven, at least in part, by the cheap money. This will be great for the people who have the funds, but it will be horrific for those with lower income and who may be dependent on income from their investments. But for the government it’s great news, especially when it’s carrying so much debt—well, the government can thank the Federal Reserve.
Faced with the uncertainties in the jobs market and job creation, the Federal Reserve suggested it would maintain its record-low interest rates until the country’s unemployment rate falls to 6.5%. The problem is that the Federal Reserve predicts this will not occur until sometime in 2015, so that’s another two years of easy money and the building up of massive national debt. Remember what I said about the sequestration cuts and how they are well below the interest paid on the debt? Imagine the payments when interest rates ratchet higher! It’s not going to be pretty. The Federal Reserve has created this situation, which could inevitably blow up.
In reality, achieving an unemployment rate of 6.5% may not happen until after 2015, based on current job generation. According to the … Read More
Demand for Steel Unexpectedly Jumps; and These Stocks Now Look Good
By Sasha Cekerevac for Investment Contrarians | Mar 19, 2013
When developing an investment strategy for a given market sector, you need to consider numerous variables. Increasingly, the variables are becoming far more complex due to the global nature of business these days.
One market sector that many analysts pay close attention to is the steel industry. Because steel is used in so many parts of an economy, signs of increasing or decreasing production can help give indications as to how strong or weak the global economy is operating.
Of all the countries in the world, China is a huge player in the steel market sector. When looking at an investment strategy that incorporates steel and iron ore, which is the main ingredient in the production of steel, trying to determine current and future output by China is crucial.
According to the Chinese National Bureau of Statistics, crude steel production increased 9.8% in February, breaking the previous record set in January. Both the real estate and automobile industries within China have regained momentum, resulting in an increase in investments in factories and other fixed assets by 21.2% during the first two months of 2013, versus the same time period in 2012. (Source: Yap, C.W., “China’s steel production climbs 9.8%,” Wall Street Journal, March 12, 2013.)
Additionally, those investors whose investment strategy incorporates the steel market sector based in America might see this as a cautionary sign: not only are the Chinese producing a huge amount of steel domestically, but exports of steel rose 25% from the year-ago period.
And remember, the steel market sector within China is a money-losing proposition. Most steel makers do not make a profit in China, … Read More
Is Your Portfolio Protected Against the Tensions in Asia?
By Sasha Cekerevac for Investment Contrarians | Mar 13, 2013
It’s clear that the global economy has been in a weak state for an extended period of time. However, investor confidence has rebounded over the past few months in anticipation that the global economy can regain past momentum.
Numerous problems remain across various sectors in the global economy, and they are preventing an increase in growth. Yet one risk that could severely impact investor confidence is the possibility of war in Asia.
Many people quickly dismiss the idea that yet another war could ignite. Investor confidence clearly doesn’t see this as a probability, considering how high the stock market is. However, as a prudent investor, one must evaluate every potentiality.
There are two areas of concern: North and South Korea, and China and Japan.
The situation between North and South Korea is quickly deteriorating. This past Monday, both nations staged war games, while increasing threats. South Korea has troops on high alert, while North Korea claims it has nullified the armistice.
North Korea is increasing its aggressive stance in the hopes that the world will back down and cave in to its demands. The nation has repeatedly warned that it will use nuclear weapons.
Tensions are also increasing between Japan and China, the catalyst being three tiny islands in the East China Sea.
Both nations claim territorial rights to the islands, with each nation increasing its aggressive stance. On January 10, two Japanese F-15s intercepted a Chinese plane flying in the vicinity of the islands, an action to which China retaliated by sending its own fighter jets.
Japan is now considering firing warning shots if any further Chinese aircraft encroach … Read More
Don’t Believe the Chart: Gold Still Looks Promising
By George Leong for Investment Contrarians | Mar 13, 2013
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
Contrarian Indicator Bullish for Gold
By Sasha Cekerevac for Investment Contrarians | Mar 6, 2013
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
Banking Sector Isn’t in a Downturn
By George Leong for Investment Contrarians | Mar 5, 2013
Bank stocks are providing excellent leadership this year. In fact, if it weren’t for the credit crisis that surfaced in 2008, financial institutions, such as banks, credit, and insurance companies may still be playing Russian roulette on their balance sheet as far as risk.
It now appears that bank stocks are cutting down on the amount of risk that they are willing to take on. The Goldman Sachs Group, Inc. (NYSE/GS) is now at a point where the potential loss that can occur from trading is at a seven-year low. The other major Wall Street banks are also seeing a reduction in their risk. (Source: LaCapra, L.T., “Goldman trims risk-taking to lowest level in 7 years,” Reuters, March 1, 2013.)
The major bank stocks all closed 2012 near their respective 52-week highs and have started 2013 with a bang, with the KBW Bank Index up 5.8%, slightly below the comparative return of the S&P 500 and the Dow, but above the NASDAQ. The attraction to the bank stocks has been driven by an improving banking industry that is assuming less risky businesses while shoring up their balance sheets and producing stronger units.
The chart of the Philadelphia Bank Index below shows the upward move of bank stocks from their 2011 bottom. Bank stocks staged a nice rally but retrenched in March to May 2012 on the European bank concerns, and Moody’s Investor Services downgraded the sector. The group has since staged a rally back above the 50- and 200-day moving averages (MAs). But there was some topping on the charts, followed by the recent selling, as indicated by the blue … Read More
The Answer to Chinese Pollution and Energy Shortage Problems
By Sasha Cekerevac for Investment Contrarians | Mar 4, 2013
When it comes to making contrarian investments, going against market sentiment might be difficult at first. But the key is to focus on long-term fundamentals with the thesis that corporate earnings will move substantially higher as long as fundamentals strengthen.
One sector that has had quite a bit of negative market sentiment for the past couple of years has been uranium and nuclear power. Following the Fukushima disaster in Japan, nuclear power was put on halt for many nations around the world.
This negative market sentiment was reflected in lower uranium prices and significant hits to corporate earnings for companies in this sector.
However, recent information shows that nuclear power is once again gaining favor, and market sentiment could begin to shift earlier than many people believe, with corporate earnings benefiting from higher demand.
China is by far the leader in construction of nuclear power plants. In 2010, Chinese nuclear power plants had 10 gigawatts of capacity; it is now estimated that officials want this capacity increased to 130–140 gigawatts by 2030. (Source: The Economist, January 19, 2013, last accessed February 28, 2013.)
Following the Japanese disaster, China halted further nuclear construction. However, in October 2012, the Chinese State Council once again approved a number of projects. With over 25 nuclear reactors under construction, China’s nuclear power program is by far the largest in development by any nation.
Corporate earnings in the nuclear power sector have suffered due to the negative market sentiment following the Japanese disaster. The loss of life was truly tragic.
The current Chinese administration realizes that with the massive amount of pollution occurring in metropolitan areas, … Read More
These Global Regions Tops for Growth Investors
By George Leong for Investment Contrarians | Feb 21, 2013
In my previous commentary, I discussed the ongoing financial mess in the eurozone and its negative impact on the gross domestic product (GDP) growth of the 17 countries in the region. Yet, with the eurozone in a recession that could last another few quarters, the negative impact on the global economy should also be considered when you are looking at foreign investing opportunities.
The current stalling in China could be linked directly, in part, to the situation in the eurozone, and I expect this will continue to be the case as long as the eurozone struggles.
At the same time, the areas most at risk from the eurozone crisis will be the emerging regions in Eastern Europe; they will be much more at risk than Asia simply due to the proximity of the markets.
Russia, the largest economy in Eastern Europe, is estimated by the World Bank to report GDP growth of 3.5% in 2012, down from GDP growth of 4.3% in 2011. (Source: “World Bank Keeps Russia’s GDP Forecast at 3.6% in 2013,” RIA Novosti, January 16, 2013.) However, the report is estimating that the country’s GDP growth will slowly rally to 3.9% in 2014 and 3.8% in 2015, which is still below the five-percent-plus readings from 2003 to 2007. (Source: “Data,” The World Bank web site, last accessed February 20, 2013.) Of course, the actual rate of the recovery will largely depend on whether the eurozone can recover from its mess.
Poland, the second-largest economy in Eastern Europe, is really struggling. The negative impact from the eurozone has wreaked havoc on the Polish economy and its GDP growth. … Read More
Profiting from the Global Growth of the Middle Class
By Sasha Cekerevac for Investment Contrarians | Feb 20, 2013
While much of the text in American newspapers talks about the declining level of the middle class domestically, investors might be missing the greatest growth of wealth in history.
As investors, our goal is to determine which firms will report strong and growing corporate earnings. With much of the world increasing its wealth at a rapid rate, companies with international revenue and corporate earnings should do well over the next several decades.
According to the Boston Consulting Group, there will be approximately one billion middle-class consumers in China and India by 2020. While it took Britain 150 years during the Industrial Revolution to double income per capita (America took 30 years), China and India are moving at a much faster pace. (Source: “The Emerging-World Consumer Is King,” The Economist, January 5, 2013, last accessed February 15, 2013.)
This explosion in the global middle class will mean a massive increase in consumer spending for items that most North Americans take for granted. For companies that are able to serve this consumer spending demand over the next few decades, corporate earnings should rise substantially.
Some companies that immediately come to mind include Unilever PLC (NYSE/UL) and Kraft Foods Group’s international division, Mondelez International, Inc. (NASDAQ/MDLZ).
An increase in consumer spending by this growing middle class will drive corporate earnings for firms that can provide everyday items of better quality as well as snacks and foods that are beyond the basics needed for life to function. For life to exist, no one needs to drink a can of Coke or eat an “Oreo” cookie. And the hunger for sugary treats is not limited … Read More
This Company’s Cashing in on Infrastructure Spending
By Sasha Cekerevac for Investment Contrarians | Feb 19, 2013
One of the most important aspects to consider when creating an investment strategy is to try and determine where demand might be in the future. Given the relatively weak global economy, this certainly adds complexity to long-term investing.
Austerity is the buzzword at the moment. Many governments are continually espousing the need for greater austerity. However, while austerity is the goal, there are still some areas where governments are increasing spending, creating an opportunity to develop an investment strategy. And this includes railways.
According to the consulting firm Roland Berger, the market globally for railway-related spending has been increasing at 3.2% per year throughout the recent global downturn, and they believe spending will increase at 2.7% per year until 2017. Roland Berger also predicts that metro rail systems will grow at a much faster rate, at an estimated six to eight percent per year. (Source: “Metro Systems: Going underground,” The Economist, January 5, 2013, last accessed February 14, 2013)
These types of projects appear quite favorable for those interested in long-term investing. With multiple countries increasing spending in their railway system, this should bode well for a diversified company with an investment strategy that can capitalize on these opportunities.
Countries interested in making significant increases on rail-based transportation include Brazil, India, many Middle Eastern nations, and China. Beijing now has the largest metro system in the world, at 442 km with just under six million daily users. The second-largest metro system is Shanghai at 423 km in length.
Long-term investing is about trends that last many years. While many firms say they are creating an investment strategy based on long-term … Read More
Huge Cuts Coming to This Market Sector, What This Means for Your Investments
By Sasha Cekerevac for Investment Contrarians | Feb 15, 2013
March 1 is a very big day for many people. Unless Obama and the Republicans make a deal prior to that date, billions of dollars in spending cuts will be enacted.
Of all the areas that will be hit, I think the defense market sector will bear the brunt of the cutbacks and the future viability of corporate earnings in this sector is certainly in doubt.
At this point, Pentagon officials are now planning for $46.0 billion in cuts for the remainder of 2013. The total amount to be cut in the military market sector is $1.2 trillion over the next decade. (Source: Nissenbaum, D., “Pentagon Readies Budget Ax,” The Wall Street Journal, February 11, 2013.)
The U.S. Department of Defense has already laid off approximately 46,000 part-time workers. We could see additional layoffs, as well as furloughs. There are thousands of other workers employed at private firms in the defense market sector that will be affected, as budget cuts will crimp corporate earnings.
Clearly, for the defense market sector, the future is cloudy at best. Corporate earnings for most companies throughout the defense market sector will have difficulty growing. When total revenues are declining, higher corporate earnings are extremely rare.
Unfortunately, this pain is actually needed for the long-term fiscal health of the country. While corporate earnings will be reduced and jobs will be lost in the defense market sector, continuing to spend such a massive amount of public funds in this area is irresponsible and clearly not warranted at this time.
Looking at 2011 data, the U.S. military spending was 41% of the total for the entire world. … Read More
What the New $9.00 Minimum Wage Has to Do with Gold
By George Leong for Investment Contrarians | Feb 15, 2013
Just like he did in 2011, President Barack Obama is taking another stab at increasing the federal minimum wage in order to help the lowest income earners in America. With the President’s proposal to raise the minimum wage to $9.00 an hour by 2015 from the current $7.25, in theory, the move upward shift should help, as it translates into roughly $3,640 extra annually. The proposal also links the level of the minimum wage to the inflation rate after 2015.
The rationale behind the President’s thinking makes sense, and I truly wish it could work; but my view is that the impact of higher jobs market wages on the lower level service and manufacturing jobs across America could likely drive prices on goods and services higher for the consumer, which means greater inflationary pressure. If this becomes the case, you will need to start investing in gold.
For instance, higher jobs market wages for service jobs, such as restaurants, will likely not be absorbed; rather, the higher wage costs will mean higher food costs at all levels from fast-food to high-end restaurants. The impact will be especially hard on the low income earners who, in general, may be more inclined to eat fast foods. The same goes for other goods and services, which means that while the lower income earners would earn more money with a rise in the minimum wage, they’ll end up paying more for goods and services.
But something needs to be done due to the widening income gap between the rich and the middle class and the poor in America. In America, the rich are getting … Read More
Why America’s Confidence Is Fragile
By George Leong for Investment Contrarians | Feb 13, 2013
The recession is over, and the U.S. economy is showing some encouraging signs of economic renewal.
Shoppers are hitting the malls and stores, helping to drive up retail sales. I’d stick with the top department stores, like Macys, Inc. (NYSE/M), or discounters, such as Wal-Mart Stores, Inc. (NYSE/WMT), which will continue to rebound.
The housing sector has been sizzling since the recession, with a superlative rise in housing starts, building permits, and home prices. Homebuilder stocks, including the developers of residential real estate, are sizzling on the charts—Toll Brothers, Inc. (NYSE/TOL) and Hovnanian Enterprises, Inc. (NYSE/HOV), especially.
Since the recession, the jobs market is showing some growth, with the unemployment rate holding just below eight percent. As the jobs market recovers, look to some of the staffing companies, such as Robert Half International Inc. (NYSE/RHI), Manpower Inc. (NYSE/MAN), and Kelly Services, Inc. (NASDAQ/KELYA), to deliver.
So, America appears to be headed in the right direction since the recession hit; but underneath all of the economic jargon and positive media headlines about the “Great Recovery” in America’s economic engine, there’s still a sense that many people are still trapped in economic despair, feeling the impact of the recession.
After scanning through “Diminished Lives and Futures: A Portrait of America in the Great-Recession Era,” I can see that uneasiness and worry remains a real issue in the minds of Americans. (Source: Szeltner, S., et al., Worktrends February 2013, Rutgers, The State University of New Jersey web site, last accessed February 12, 2013.)
Some of the key findings of the research were as follows:
• About 90% of the respondents remained worried about … Read More
Are You Picking the Right Investment for Higher Oil Prices?
By Sasha Cekerevac for Investment Contrarians | Feb 12, 2013
One of the most difficult aspects of investing is adjusting one’s economic forecast to the dynamic and ever-changing global economic environment. An investor cannot be so dogmatic that they are unable to shift their economic forecast as new data come out.
For much of the second half of last year, there were many fears that China was going to encounter a significant slowdown, and many analysts had been lowering their economic forecast for that nation. Recent data, however, show that perhaps the Chinese economy might be able to rebound, at least in the short term.
China recently reported that exports grew a better-than-expected 25.0% and imports rose a substantial 28.8% from the year-ago period in January. This was in addition to much higher credit issuance, and an inflation rate that was quite subdued at only two percent. (Source: “China trade tops forecasts in holiday distorted month,” Bloomberg BusinessWeek, February 8, 2013.)
There are some issues with the data: the 2012 Chinese New Year began on January 23 and, in 2013, the Chinese New Year began on February 10; this shift in holidays, which result in business closures, needs to be taken into account when making year-over-year comparisons. However, analysts calculating their economic forecast did take this into consideration, predicting exports of 17.5% and imports of 23.5%, according to the median estimates taken by Bloomberg News. (Source: Ibid.)
If the Chinese economy continues to outperform, not only will analysts increase their economic forecast for the remainder of the year, but certain sectors will also benefit, including oil prices.
International oil prices are set based on Brent crude, as opposed to American-produced … Read More
Mining Company Turns Shania Twain into Gold
By John Whitefoot for Investment Contrarians | Feb 7, 2013
Since hitting a low of $253.70 in July 1999, gold prices have surged over 650%, topping $1,921 per ounce in September 2011. Currently trading at more than $1,660 per ounce, gold has logged 13 consecutive years of positive returns. While some economists think gold’s historic run will come to an end, others are not so sure.
The overarching driver of the price of gold will continue to be the global financial crisis, ongoing tensions in the Middle East, weaker currencies, and the potential for faster inflation. As a result, some analysts believe gold will rise above $2,200 an ounce in 2013.
At the other end of the spectrum are those bears who think gold is in for a big correction. Greater-than-expected U.S. growth, a stronger U.S. dollar (in spite of the Fed’s printing presses running overtime), and the end of the crisis era could pull gold down to as low as $1,200 an ounce.
Try telling that to Russia, Brazil, Korea, China, Kazakhstan, Turkey…
To stave off the negative impact of the global crisis, the National Bank of Ukraine raised the percentage of gold in its reserves in 2012 to 7.7% from 4.4% a year ago, reaching 1.1 million troy ounces. (Source: Chanjaroen, C., “Russia, Kazakhstan Expand Gold Reserves as Central Banks Buy,” Bloomberg, January 28, 2013, last accessed February 6, 2013.)
Brazil doubled its gold holdings in two months, buying 17.2 metric tons in October and 14.7 metric tons in November. And in August and September, Iraq increased its gold reserves to 31.1 metric tons from 5.8 metric tons.
The Bank of Korea increased its gold reserves by 20% … Read More
China’s Hunger for Resources Could Make You Money
By George Leong for Investment Contrarians | Feb 6, 2013
China continues to grow at a rate far above the levels seen in the other industrialized countries. And to fuel its expected superlative growth over the next decade, which could be the country’s golden years in spite of what some critics are saying, the country will need raw materials, based on my stock analysis.
The country has always been a major importer of raw materials, including metals, oil, and forestry, but my stock analysis suggests China is aggressively pursuing exploration in oil and metals. China has also looked to add resource companies via takeovers around the world in such places as Canada, the United States, and Africa in order to have some control over resource reserves, according to my stock analysis.
A recent example of this was the Canadian government’s somewhat surprising approval of the $15.1 billion takeover of Canada-based Nexen Inc. (NYSE/NXY) by China state-owned CNOOC Limited (NYSE/CEO) to go through. The deal was initially thought to be axed by the Canadian regulators and government, citing the security concerns of a takeover of oil reserves by the Chinese government-controlled CNOOC. Canada has rejected takeover bids from Chinese companies in the past, citing the need to safeguard its mineral and energy resources, so this deal was a surprise. Based on my stock analysis, I suspect Canada may have felt pressured to approve the deal, as the country wants to open up more trading with China; a rejection of this deal by the Canadian government would not have looked good in the eyes of the Chinese government.
The reality is that there will be compromises as far as acquisitions of foreign … Read More
Cashing in on the Automakers with China Exposure
By George Leong for Investment Contrarians | Feb 5, 2013
The auto sector has been on a nice upward rally since trading at a bottom in July 2012, according to my stock analysis. Driven by low financing rates and rising domestic and foreign sales, we are seeing more carmakers taking the plunge and updating their older clunkers.
In January, auto sales were sizzling, with General Motors Company (NYSE/GM) and Ford Motor Company (NYSE/F) recording sales growth of 16% and 22%, respectively. Toyota Motor Corporation (NYSE/TM) also rallied, reporting sales growth of 27% year-over-year in January. (Source: Seetharaman, D. and Klayman, Ben, “GM, Ford post stronger-than-expected auto sales for January,” Fox Business, February 1, 2013.)
The numbers are estimated to be even better this year, so it would be an opportune time to accumulate some auto and auto-based stocks, based on my stock analysis. GM estimates that there will be between 15 million and 15.5 million autos sold this year. (Source: Ibid.)
Take a look at the stock chart for the S&P 500 Automobiles & Components Industry Group Index below. Notice the bullish ascending triangle followed by the breakout at the horizontal blue resistance line. But there is risk, as the index is currently facing support at the present level on weakening relative strength and a bearish moving average convergence/divergence, according to my technical analysis. Watch to see if the support level holds.
Chart courtesy of www.StockCharts.com
My stock analysis indicates that the auto sector has gone through major structural changes over the past few years since the bankruptcy of General Motors (GM) in June 2009. In the nearly four years since, my stock analysis shows that the auto sector has … Read More
Why You Should Have Money in Aerospace
By George Leong for Investment Contrarians | Feb 4, 2013
The “Boeing 787 Dreamliner” may be grounded for the time being, but the aerospace sector as a whole is delivering some excellent results.
We all know how significant the Chinese aerospace market is, given the superlative rise in air travel and tourism in and out of the country. I expect this to increase going forward.
The Boeing Company (NYSE/BA) estimates that China will require 5,000 aircrafts, valued at approximately $600 billion, over the next 20 years. The estimate may be conservative, especially if China can grow its income levels at a much higher pace. Boeing is looking at its new 787 Dreamliner as its big play on wide-body jet travel in spite of current issues.
Chief rival Embraer S.A. (NYSE/ERJ) estimates that the global demand will be around 28,000 new planes over the next two decades. According to Embraer, there will be over 32,550 planes in the sky by 2031, up from the current 15,500; the company also estimates that the Asia-Pacific region will account for 35% of all plane purchases. According to Embraer, the major airlines will operate in the U.S., China, intra-Western Europe, and India; and China will be the world’s largest domestic plane market in 20 years.
The findings by Embraer are not a surprise, as they will be driven by higher average disposable incomes in the emerging global markets and by the more popular desire for travel. My feeling is that strong wealth generation in the world’s largest emerging markets, including China and India, will help to drive the demand for commercial and defense planes along with stocks in the equities market.
Air traffic in China … Read More
Wake-Up Call for America: China’s Currency Growing Worldwide
By Sasha Cekerevac for Investment Contrarians | Jan 31, 2013
While many people are aware that the Chinese economy is now the second-largest in the world, China’s currency, the yuan or renminbi, is also moving upward in the world rankings in terms of global transactions.
According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the world’s global payment system, the yuan has moved up from 20th in the rankings in January 2012 to 14th position in December 2012. The Chinese yuan is now above the Danish kroner in terms of global payments. (Source: “RMB Tracker: January 2013,” Society for Worldwide Interbank Financial Telecommunication web site, January 24, 2013.)
That is a significant move and an indication that the Chinese economy is becoming more integrated worldwide.
Why does this matter to the average American?
For a long time, America’s economy has been the global leader and the U.S. dollar has been the global reserve currency. Every other nation was seen as secondary to America’s dominance. This is now starting to shift.
As the U.S. national debt level continues to grow, the strength of the Chinese economy is enabling considerable efforts to be made at developing globally interconnected markets that can survive and thrive without the U.S. dollar.
While the Chinese economy is certainly not perfect, it doesn’t have to be. With the rising level of U.S. national debt, the Chinese economy just needs to be relatively better than the U.S. economy, though not in absolute terms.
The point is that the rise of the Chinese economy over the past decade and the looser restrictions that the Chinese government is placing on the yuan mean that global businesses and investors have … Read More
Latest Economic Data Enough to Keep the Stock Market Moving Higher?
By Sasha Cekerevac for Investment Contrarians | Jan 30, 2013
One of the stock market’s most perplexing moves for both professional and retail investors is when the market, best represented by the S&P 500, moves in a direction that might be contrary to current conditions regarding economic growth.
This is one of the most difficult concepts to understand; that the S&P 500 does not represent current economic growth conditions, but what the market believes is highly probable for the future.
We have recently witnessed a substantial move upward in the S&P 500, yet only recently have we seen some positive signs that economic growth may be slightly improving. I stress “slightly,” because no one really expects economic growth for 2013 to be massive.
While jobs growth has been relatively weak, there have been some signs that suggest economic growth is resuming. However, with much of the data, there can be quite a lot of noise that can distort the underlying strength or weakness of economic growth.
One example of a data set that does point to renewed economic growth, though the fundamentals may not be quite as strong, is the recent HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI), compiled by Markit Economics. In January, the China Manufacturing PMI came in at 51.9—a two-year high, up from 51.5 in December. The January China Manufacturing Output Index was 52.2—a 22-month high, up from 51.9 in December. (Source: “HSBC Flash China Manufacturing PMI™: Operating conditions improve at the quickest pace in two years,” Markit Economics web site, January 24, 2013.)
Initially, this seems to signal that economic growth in China is starting to resume, which would be bullish for the S&P 500. … Read More
Why America’s Destined to See Jobs Move Overseas
By George Leong for Investment Contrarians | Jan 29, 2013
I was reading that Apple Inc. (NASDAQ/AAPL) would produce at least one of its computer products in the United States. This is great news for jobseekers, but Apple will continue to manufacture the remainder of its products outside of the U.S. in low-cost global manufacturing regions, such as China, Asia, Mexico, Eastern Europe, and Latin America. The reality is that companies have to control costs, especially given the slower revenue growth amid corporate America.
The jobs numbers are not good. There are 22 million or so Americans looking for work who are unemployed or underemployed, with about 12 million being fully unemployed. These are not good jobs numbers, as many of these people are taking minimum-wage jobs just to fight off the creditors and put food on the table. The poor jobs numbers climate is also hindering the eurozone.
Jobs growth is showing signs of wanting to edge higher with the unemployment rate holding at 7.8% in December, with 155,000 workers managing to find full-time work, which was slightly ahead of Briefing.com’s estimate of 150,000.
The official unemployment rate is 7.8%, but I wonder about the validity of the jobs numbers as far as an accurate reflection of the nation’s jobs situation. My thoughts are that the unofficial unemployment rate is much higher than the reported rate. The official jobs numbers don’t include the millions of Americans that have dropped out of the labor force, tired of pounding the pavement to get shut out of jobs or working at minimum-wage jobs.
As I have said in this newsletter before, the millions of jobs that have vanished from the U.S. landscape … Read More
This Isn’t Just an American Dilemma
By George Leong for Investment Contrarians | Jan 24, 2013
We have nearly eight percent of Americans pounding the pavement, but it is more likely double that if you count the workers actually unemployed or underemployed. But the problem of high unemployment is not only an ongoing issue in America; it’s a problem that is found in pockets all around the world, from the rust belt in Ohio to the massive manufacturing plants in China.
Japan, which used to have an unemployment rate of about one percent, is currently struggling to find jobs for its citizens. The country’s unemployment rate stood at 4.1% in November 2012, according to the Ministry of Internal Affairs & Communications. By comparison, Japan’s unemployment rate averaged a mere 2.7% from 1953 to 2012, which is why the current rate is a concern. (Source: “Japan Unemployment Rate,” Trading Economics web site, last accessed January 23, 2013.) Japan’s efforts to lower its unemployment rate continue to be hindered by the country’s stalled economic growth.
The unemployment problems are becoming a global issue. According to the International Labour Organization (ILO), the amount of unemployed in the world could set a record this year and could continue to rise higher until 2017. The report from the ILO estimates 202 million people will be searching for work this year, based on its Global Employment Trends report. (Source: Barnato, K., “World Unemployment to Hit Record High in 2013,” CNBC, January 22, 2013.)
Surging unemployment remains a thorn in Europe’s side, with a super-high unemployment rate encompassing the eurozone and the entire continent. In the eurozone, the unemployment rate was 11.8%, or about 18.8 million unemployed, in November, the highest number since … Read More
Buy Silver if Global Economy Strengthens
By George Leong for Investment Contrarians | Jan 23, 2013
In April 2011, when silver was trading at $50.00 an ounce, Bank of America Merrill Lynch was extremely bullish and suggested $80.00 was possible. (Source: “Prospect of silver hitting $80 shakes up stock, ETF markets,” International Business Times, May 1, 2011, last accessed January 22, 2013.) Of course, this hasn’t been the scenario, as the metal faces tough resistance at $35.00. Until there is a strong breakout here, I doubt the $40.00-level will be achievable.
While the majority of investors focus on gold, I feel silver could actually have more price upside, given its more speculative nature as more of a trading commodity.
In reality, the buying in the white metal is generally in line with the global economic growth, driving the demand for industrial goods that use silver as a raw material, pushing up income levels, and increasing the global demand for jewelry.
Here in the U.S., the economic recovery is faring well. The better-than-expected U.S. gross domestic product (GDP) growth, revised up to 2.7% for the third quarter, along with other encouraging economic data are also adding some optimism of economic renewal. China is offering some hope of a turnaround, but the stagnant condition in the eurozone and Europe remains an issue.
As I said, while gold is considered more of a pure-play hedge against risk, any sign of industrial recovery helps, as silver, unlike gold, is used in numerous industrial applications.
As you can see on the chart, silver is caught in a sideways channel, largely between $30.00 on the support side and $35.00 on the top of the channel. Silver is currently testing its 50-day moving … Read More
Why You Need to Look to the Emerging Markets for Growth
By George Leong for Investment Contrarians | Jan 22, 2013
The key to the global economy is a rise in consumer spending. My view is that the emerging markets will continue to be an excellent place to invest some capital, whether it’s the BRIC countries (Brazil, Russia, India, and China) or the Southeast Asian “Little Tigers,” comprising Hong Kong, Singapore, South Korea, and Taiwan. I’m bullish on this area of the world. My reasoning is that the newfound wealth and growing middle class in these markets will drive consumer spending and economic growth.
Famed technical analyst Louise Yamada is looking positively at the emerging markets and believes they can outperform the U.S. market. (Source: Macke, J., “Emerging Markets Set to Outperform the U.S. Says Yamada,” Yahoo! Finance web site, January 17, 2013.)
A good indicator of global consumer spending patterns is MasterCard Incorporated (NYSE/MA), since the company has a presence in over 210 countries. In a third-quarter press release, MasterCard reported that its worldwide purchase volume surged 12% in the third quarter on a local currency basis. In the press release, MasterCard President and CEO, Ajay Banga, also noted that emerging markets continue to provide opportunities for growth. (Source: “MasterCard Incorporated Reports Third-Quarter 2012 Financial Results,” MasterCard Incorporated web site, October 31, 2012, last accessed January 21, 2013.)
What is interesting is the emergence of credit in the emerging markets, where cash has long been king. In these growth regions, the per-capita income is rising, helping to drive consumer spending and economic growth.
Just take a look at the iShares MSCI Emerging Markets Index (NYSEArca/EEM) chart that shows the stock market rally since mid-November 2012.
Chart courtesy of www.StockCharts.com
The … Read More
Confusing Data from China; What’s Really Happening?
By Sasha Cekerevac for Investment Contrarians | Jan 21, 2013
Recently, we have heard and seen some data stating that the Chinese economy is beginning to rebound. Many analysts have started to raise their economic forecast for the Chinese economy in 2013.
One of the difficult aspects when calculating an economic forecast for the Chinese economy is that much of the official data from China are questionable.
While recent data have shown that the Chinese economy has begun re-accelerating during the fourth quarter 2012, new information raises some questions.
The China Beige Book (CBB) International states that, in its analysis of the fourth quarter, it sees a significant decline in corporate loans. As the CBB states, its editors were “shocked” that new loans accounted for less than 20% of the total lending. (Source: Harjani, A., “The China Beige Book Has Some ‘Shocking’ Data,” CNBC, January 16, 2013.)
The CBB interviews over 2,000 business executives across the country to come up with its survey results. Another worrying sign in the report for the Chinese economy that will certainly cloud any economic forecast is that the percentage of surveyed companies borrowing money continues to decline, even though interest rates have been cut by the People’s Bank of China.
While the Chinese economy is trying to become more consumer-oriented and domestic, exports still play a very large role. With the buildup in their inventory, manufacturing firms appear to be anticipating growth worldwide for 2013.
If this doesn’t occur, the Chinese economy could be vulnerable to a significant pullback. The difficulty in all of this analysis when trying to calculate an economic forecast is that so many variables and so much questionable data make … Read More
Why Apple Faces Strong Headwinds
By George Leong for Investment Contrarians | Jan 16, 2013
Have you seen the share price of Apple Inc. (NASDAQ/AAPL) lately? Since it traded at its record high of $705.07 on September 21, 2012, it has been a mess. Faced by rising competition, better products, and superior pricing, Apple has seen its price shaved by about 28.0% in what has been a trend reversal to the bearish side, according to my technical analysis. Apple is on the verge of breaking below $500.00, a move that was last encountered on February 16, 2012.
There are questions swirling around regarding the ability of CEO Timothy Cook to deliver the superlative revenue growth traders have been accustomed to in the past. The problem is with the rise of Samsung Electronics Co. Ltd. and Google Inc.’s (NASDAQ/GOOG) “Android”-based phones and tablets; the competitive environment has tightened, so Apple will need a “Plan B,” according to my stock analysis.
The slippage in Apple’s business is evident. Apple shipped 14.6% of the total smartphones shipped globally in the third quarter, versus 23.0% in first-quarter 2012, while Samsung’s shipments surged to 31.3% in the third quarter, according to International Data Corporation (IDC). (Source: “Apple Cuts Orders For iPhone Parts As Demand Slips,” Yahoo! Finance via Wall Street Journal,January 13, 2012.) The article also speculates that Apple is cutting its orders for parts used to build the “iPhone 5” due to lower demand.
Chart courtesy of www.StockCharts.com
In my view, Apple is in trouble, based on its global market share and declining revenue growth. According to analysts polled by Thomson Financial, Apple is estimated to grow its revenues by 22.2% in fiscal 2013, falling to a mere 15.1% … Read More
Why China’s Real Estate Makes Perfect Sense
By George Leong for Investment Contrarians | Jan 11, 2013
China is beginning to show renewed growth. The country is driving stimulus spending and easy monetary policy to get its economy back on track and drive consumers to spend.
And while there has been talk of an asset bubble in China’s housing market, my view is that the short-term risk is high, but there’s also excellent long-term growth potential in the Chinese housing market.
Investment in the country’s housing market surged 61.7% from January to November, according to the National Bureau of Statistics in China.
The conditions bode well for the country’s housing market. Consider that there are over 300 million middle-class consumers in China, and as a group, they are hungry for a lifestyle like we have in the West. Real estate investments are a key goal for the Chinese.
Standard & Poor’s analysts believe the housing market in China is stabilizing with buyers returning while home prices are stabilizing.
Moreover, in an ironic twist at a time when California’s housing market is struggling, the state’s California Public Employees’ Retirement System (CalPers), a pension fund, announced it would be investing about $530 million in two new China real estate funds managed by ARA Asset Management, which is positive longer-term.
To play China’s housing market, you can take the more conservative approach and buy the Guggenheim China Real Estate (NYSEArca/TAO) exchange-traded fund (ETF) with a year-to-date return of 58.8% as of December 30, 2012. The fund holds mainly large value-oriented Chinese real state stocks.
Chart courtesy of www.StockCharts.com
To take a more speculative and potentially higher return opportunity, an emerging small-cap Chinese real estate company that I like longer-term is … Read More
Why Gold’s Worth a Look on Dips
By George Leong for Investment Contrarians | Jan 10, 2013
Gold is currently in a holding pattern at below $1,700 an ounce, but one thing is for sure: in spite of what some pundits are saying, it’s not time to sell yet. In an interview on CNBC, Marc Faber, also known as “Dr. Doom,” suggested that gold could correct 10% or more to as low as $1,550 or $1,600. (Source: “‘Dr. Doom’ Faber Sees Possible 10% Gold Correction,” Yahoo! Finance via CNBC, January 8, 2012.) While I’m not as negative, I do believe gold could retest support between $1,600 and $1,625 in the near term. Failure to hold could see a sub-$1,600 price.
In my view, gold continues to be a place to park some capital, and for this reason, I feel the metal will likely continue to hold above $1,500 after 11 straight up years.
For instance, if we assume the global economy will weaken, especially in the eurozone, the impact on global gross domestic product (GDP) growth would be negative. Stock values would fall, so you would need a safe haven to park your capital, which many of you know is in gold.
There’s been plenty of talk around here regarding whether the precious metal is heading for $2,000. In my view, the current global risk will support and drive gold higher.
The chart shows sideways trading around the 50-day moving average (MA) with weakening technical indicators, based on my technical analysis. I view downside moves as an opportunity to accumulate the precious metal, given the current macro situation.
Chart courtesy of www.StockCharts.com
I continue to like gold going forward, given the massive financial distress and recession in … Read More
Fiscal “Y2Cliff” Sham Held Investors Hostage in 2012
By John Whitefoot for Investment Contrarians | Jan 4, 2013
On January 1, 2000, the world breathed a collective sigh of relief that the over-hyped Y2K fiasco dissipated without even a whimper after years of ballyhoo.
Some things never change.
As expected, at the last moment, Democrats and Republicans came together in joyous union and resolved the so-called fiscal cliff. Nervous investors around the world joined together with rapturous optimism and jumped back into the markets.
On January 1, 2013, the House approved the new deal by a 257 to 167 margin. The bill increases the income tax rate from 35.0% to 39.6% for individuals earning more than $400,000 a year and couples taking home more than $450,000 combined. Everyone else will continue to see income tax cuts.
None of this should be a surprise to anyone, since Obama, in his bid for re-election, said he would increase the tax rates on the wealthy, though his definition of “wealthy” has changed, climbing from earnings of $200,000 for individuals and $250,000 for families.
While both sides are unhappy about what they didn’t get, they should be unhappy about how they treated the global population.
For almost a year, inept politicians in Washington sat around, worrying about their chances for re-election; ignoring the impact the unresolved fiscal cliff was having on the international investing community and global economy.
But why put your hard-earned time and effort into resolving the fiscal cliff when you might not be re-elected? Maybe because it’s part of your job? You’d be forgiven for thinking it was otherwise. After all, during the eternal run up to the Presidential elections, the fiscal cliff wasn’t even a major talking point. … Read More
