Growth Opportunites for 2012
2011 November 17 by Mike
Growth for 2012 and beyond is Emerging Markets and particularly, CHINA ! With the developed world fighting hard to stave off recesson, the only real economic growth is in the emerging markets.
With global stocks trading with a correlation of .89 , its been very difficult to have a portfolio that is not affected by the European banking crisis. Chinese stocks are off 25% this year , setting up (what I believe) is a great buying opportunity.
I met with the number one investment guy at TD Bank last month. His name is Satish Rai, and he is responsible for over $10 Billion in assets. His belief is that China can continue to grow at 3 times the US growth rate. So, if expectations are for GDP growth at 2% next year, then China’s GDP would be approximately 6%. So, yes, a slower developed world does translate into slower growth in the emerging markets , however, 6% growth is still solid growth. In additon, Mr. Rai believes (as do I) that we are only half way through our bull market in commodities. He illustrated that 30% corrections in commodity prices are “normal” for a correction in a bull market. As most of you are aware, we have seen this type of correction in GOLD, SILVER, COPPER and OIL.
So why are commodities a great buy at these lower prices ?
Quite simply…….CHINA. For Canadians, commodities are the best way to invest in the China growth story. China accounts for the bulk of the commodity growth in the world : From the article listed below, China (from 2002- 2005) accounted for 48% of the increased demand for aluminum, 51% for Copper, 110% for lead, 87% fro Nickel, 54% for Steel, and 30% (and climbing) for Oil.
It is estimated, for example, by the International Energy Agency (in their report released last week “World Energy Outlook”, that global energy demand will increase by one-third from 2010 – 2035, with China and India accounting for 50% of this growth:
“The dynamics of energy markets are increasingly determined by countries outside the OECD (developed nations). Non-OECD (emerging markets) account for 90% of population growth, 70% of the increase in economic output and 90% of energy demand growth over the period of 2010 – 2035. ”
Bottom line: The outlook for commodities is excellent. Investors should use these weaker prices to add to their commodity exposure. Buy FOOD, OIL and PRECIOUS metals in particular.
Kind regards,
Mike
P.S. China is the key to the commodities market article:
http://www.moneyweek.com/investments/commodities/china-is-the-key-to-the-commodities-market
Please adjust the link in your browser to read:
2011 October 28 by Mike
A technical issue continues to create a problem for some of our readers, so please use the above link to read any and all blogs on the website.
Sorry for an inconvenience.
Best regards,
Mike McGann
European Update
2011 October 28 by Mike
Yesterday, stocks rallied around the globe as the European leaders put a rescue package into place for Greece (and some reserves for future losses). I think you can appreciate that the European banking system is on life support and that yesterday’s rescue package only bought Greece more time.
Tye Bousada ,a portfolio manager from Edgepoint Investment Group, has provided me with a timely summary :
Hi Team,
You’re probably going to get a few questions about Europe today. Below is what they announced followed by some big questions that still need answers. Bottom line: it’s not over. Things will most likely continue to be slower for longer than people hope or expect. As such, the best way to approach the next five years is to buy businesses that can grow irrespective of what happens in the economy (within a band of reason) and not pay for that growth.
1. Decision: Greece will pay back only 50% of its debt to European banks.
Questions:
Banks were forced to “voluntarily” accept a 50% payout on their Greek bonds. The obvious question is, why won’t this happen on Italian bonds, Spanish bonds?…You get the idea. If I’m Italy, Spain, Portugal or Ireland, why won’t I want the ability to simply cancel half of my debt? Why Greece and not me? If I’m Italy, why won’t I, like Greece, refuse to make deep enough spending cuts and push the world to the brink until my debts are forgiven? It’s bad for the world but it’s better for me as Italy. Following is the Italians debating austerity measures in parliament yesterday. This is a real picture and not a joke. You can see how open the Italians are to actually spending less than they earn.
(picture illustrating the brawl occuring this week in the Italian legislature) .
2. Decision: Banks will recapitalize.
Questions:
Great news but who’s going to invest with them? We’ve heard that European banks need to raise around $150 billion. If they convince someone to give them money, these banks will then have to issue a huge number of shares. In terms of dilution, what does this mean for existing shareholders?
3. Decision: Rescue Fund boosted to $1.4 trillion.
Questions:
Great headline, but who’s going to subsidize the fund? The European plan is to open it up to investors in the hope that other countries will buy into it. There’s also hope the International Monetary Fund (IMF) will buy into it. Ask yourself: Since Canada is an IMF member, do you want this country using your money to buy Greek, Italian or Spanish debt in the future? Do you think some of the world’s poorer countries with income levels well below those in Italy, Spain and Portugal will want to lend them
money? What collateral is there for lending money to these countries with their terrible track records of managing their affairs? If there’s no collateral, can we buy insurance against a potential default? What if these indebted countries default on their obligations to this fund? Will the European Union just cancel that insurance like they did to banks insured on their Greek debt but persuaded to “volunteer” to accept losses and not collect on that insurance?
China is this new fund’s most likely investor. Why would China want to put its money into Europe? Well, last quarter, China’s export
growth as a percentage of its GDP was in fact negative (not a typo). For an economy largely based on exports, this is scary stuff. China must do whatever it can to ensure that people worldwide continue to buy their stuff. How long can China keep this going for?
Things aren’t over.
Tye
Tye Bousada, Partner
EdgePoint Investment Group Inc.
TM
Barrick Gold posts record profit !
2011 October 28 by Mike
Barrick Gold reported record profit yesterday…….up 45% !! Re-iterate a STRONG BUY ; See yesterday’s press release:
Barrick Gold profit soars 45% to record
Thursday, Oct. 27, 2011
Barrick Gold Corp. says its profits rose 45 per cent to a record $1.37-billion (U.S.) in the third quarter, helped by the strength of gold prices in the period.
The Toronto-based company says the results were equal to $1.37 per share, coming in above analyst expectations of $1.34 per share, according to Thomson Reuters.
The profits were an improvement from net income of $942-million, or 96 cents per share a year earlier.
When filtering out one-time gains, profits were $1.39-billion, or $1.39 per share, rising from $912-million or 93 cents a share.
Revenues increased to $4-billion, better than analyst targets of $3.89-billion, and up from $2.79-billion in the same period of 2010.
Gold production was also higher at 1.93 million ounces with a total cash cost of $453 an ounce.
“We remain on track to achieve our original full year operating targets,” said president and CEO Aaron Regent in a release.
“We are making good progress constructing our high return Pueblo Viejo and Pascua-Lama mines and are pleased with further positive exploration results at Goldrush and Red Hill, our new gold discoveries inNevada.”
On Wednesday, the world’s biggest gold miner increased its quarterly dividend by 25 per cent, fortified by strong earnings and a bullish outlook on the price of gold.
The payment will rise to 15 cents per share, up from 12 cents, for shareholders of record on Nov. 30. It will be paid on Dec. 15.
The increase by Barrick was followed by an announcement by Newmont Mining Corp., one of the world’s largest mining companies, that it would increase its dividend by 17 per cent to 35 cents per share.
Mr. Regent told an investor conference in September that Barrick would look to increase its dividends and share buybacks as it rode a wave of record gold prices.
He noted at the time the company was much stronger than it was even just three or four months ago and said that would play into any decision regarding dividend increases or buybacks.
Barrick is also working to develop the Donlin Gold project, which it holds jointly with NovaGold Resources (NG-T8.570.121.42%).
Costs estimates at that project recently jumped by more than 50 per cent to $7-billion, pushed higher by the addition of a $1-billion for a natural gas pipeline to feed a power plant that will produce electricity for the planned mine.
Barrick owns and operates gold mines inCanada,Peru, andAustraliaand has major projects in theDominican Republic,Nevada, and on the Argentina-Chile border
Stay Defensive until Europe is cleaned up
2011 October 17 by Mike
Stock markets rallied on news last week that Europe is making a plan to fix their massive debt problems. Excuse me for not getting excited, but haven’t we heard that one before ? Already this morning, Angela Merkel (German Chancellor) is saying that its not a one-time fix.
Europe is a MESS……a very big mess. The German and French banks own too much PIIGS (Portugal, Ireland, Italy, Greece and Spain) debt. If they were to price this sovereign debt in terms of the current market prices, a large number of German and French banks are technically bankrupt.
Sound familiar? Memories of Citibank, Fannie Mae, Freddie Mac, AIG, Washington Mutual, Lehman Brothers, Bear Stearns, etc. ……are all coming back. Same movie, but different location.
John Hussman does an excellent job in his article today, illustrating how little capital some of these European banks are holding:
http://www.hussmanfunds.com/wmc/wmc111017.htm
Over the next several weeks (until such time as we see a Greek default), stay defensive with your portfolio. Stock markets will continue to be volatile and will offer the patient investor some excellent buying opportunities. In the meantime, consider (once again) a short position in the Euro currency ( buy EUO – Proshares Ultrashort Euro); Gold and Silver bullion.
Kind regards,
Mike
Managing Volatile Markets
2011 August 30 by Brian
Volatile stock markets are always challenging, making it more difficult to achieve steady returns. However, volatile markets bring exceptional opportunities for those who are ready to take advantage.
When managing volatile markets its important to:
- Understand why volatility is occurring
- Manage your asset mix to reduce risk
- Outline areas of opportunity
Why is volatility occurring?
As I have pointed out for the last several years, we are in a “sideways” stock market (also known as a secular bear market…….whereby the market has virtually no change over the market cycle (average is 17.6 years)). These markets rally ahead on optimisitic news and outlooks and then fall right back on negative news and expectations. The Dow Jones Industrial Average ( DJIA) was 10,000 on April 1999 and was 10,000 in June 2010……virtually 11 years with no gain. Since the March 2009 bottom, the stock market has rallied nicely, but now is in the progress of consolidating those gains. Today the DJIA is 11, 515 …….my expectation is that the 10,000 level will be retested……..WHY?…… because the stock market is in the process of realizing that the US economy is still in recession and that lower corporate earnings will result. (last week Credit Suisse lowered their S&P 500 earnings outlook from $95 to $81 (lowered by some 15% ! ) .
Managing Asset Mix
As I just outlined above, investors that just bought and held their investments (and made no changes) made virtually no money over 11 years in the US stock market. Managing your mix between stocks and bonds and thus taking advantage of these volatile markets, is the only way for investors to have financial success. Just as we reduced risk in 2007 (before the 2008 stock market crash), we have been doing it again in 2011 by owning preferred shares, corporate bonds, emerging market debt, and precious metals.
Opportunities
Gold is in the process of consolidating its gains and has come under some pressure. Most likely gold will go lower yet (perhaps as low as the 1600 level) before moving higher. In the meantime, I highly recommend buying large cap gold stocks, such as Barrick Gold . These companies shares have greatly lagged the price movement in bullion, which will not last.
The Eurozone is in a real mess. With the European Central Bank (ECB) buying bonds from Greece, Ireland, Portugal, Italy and Spain, its forced to print Euro’s to pay for it. This should materially weaken the Euro and provide investors some nice gains. Investors should consider buying the ETF under the symbol EUO (proshares ultrashort Euro) to take advantage of this opportunity.
Patience. Waiting for the stock market to consolidate further will provide a great opportunity to buy quality companies at low prices. Focus in on the blue-chip high dividend paying companies.
One caveat: If the Federal Reserve decides to embark on another round of economic stimulus, then once again, commodity prices will move significantly higher. With President Obama warming up the re-election machine, I suspect this extra stimilus will be utilized in early 2012. If that is indeed the case, then buy into commodity investments on that news (Precious Metals, Agriculture and Energy) are on my priority list.
Kind regards,
Mike McGann
REDUCE EXPOSURE TO FINANCIAL STOCKS
2011 July 6 by Mike
Portugal Bonds were lowered to “Junk”status by Moody’s bond rating service today.
“Portugese bank shares fell sharply on fears they could be also downgraded shortly”.
Dow Jones newswire, July 6, 2011
Let’s cut to the chase. Europe is awash in debt. This debt has created a banking crisis because of the amount of this debt that is owned by the big German and French BANKS. All of these debt problems …………Portugal, Ireland, Italy, Greece, and Spain (PIIGS) ………are causing these government bonds to be downgraded ………and downgraded. Junk status is a reflection that the bonds are no longer “investment grade”, and as such, cannot be owned by many institutional investors (such as Pension funds ). When debt is downgraded, the bond holders want to be compensated for this new higher level of default risk …….thus, their yields go up (as their bond prices go down) to reflect this higher level of risk.
“At present, the yields on the 10-year Greek, Portugese and Irish bonds are yielding 16.1%, 11.1%, and 11.6%, respectively. We do not believe this is sustainable” ScotiaMcLeod Report on Canadian Banks Exposure to Sovereign Debt, June 28, 2011
Currently, the default risk for Greece is approximately 75%, as evidenced by the cost of the credit default swaps (that insure against loss of capital) on Greece’s government debt. The markets are telling us that Greece will default on their debt. If this is indeed the case, then the large German and French banks have to write down their Greek bonds , from a price of par (100 cents on the dollar) , to somewhere around 20 – 30 cents on the dollar (indicating a 70% – 80% loss on their investment). Due to the significant exposure to these bonds (French banks $40 Billion euros, German banks $25 Billion euros) , it would be very likely that several of these German and French banks would indeed be undercapitalized and would effectively be bankrupt and have to be nationalized.
Dennis Gartman (The Gartman Letter) put it precisely in his daily note last week (Thursday June 30, 2011 when commenting on the austerity measures being implemented by the Greek Government):
“ “In reality, the passing of the austerity legislation is but a means to buy time for the banks and governments in Europe to prepare themselves for the eventual break-up of the EUR and for the eventual default on the part of Greece on its huge and growing debts. All that has happened is that the banks and the governments have bought time in which they can off-load their exposure as best they are able, hoping to square up to the best of the abilities the damage that will eventually befall them and to mitigate damages as they can. The European banks are far, far behind the US banks in having raised capital and in writing down their losses, and PASOK’s carrying-of-the-day in the Parliament has given the banks another week, or month, or quarter as the case may be to take what actions they can before default comes…..and it will come.”
So, what does this mean to a Canadian investor? Lets face it, Canadian banks and insurance companies make up a significant chunk of the Canadian stock market. During the US banking crisis, created by the boom in Sub-prime mortgages, the Canadian banks stocks declined over 60%. When the dust settled, was the 60% drop justified ? NO , it wasn’t……as it turned out, we had a very low level of US subprime exposure.
THE POINT HERE is that reality matters last ………and FEAR matters first. If and when there is a default on Greek Government bonds, there will be significant fear that the rest of the PIIGS default as well. By definition , then, the big French banks and German banks will go under (or at least have a very significant fear of going under), which will trigger a massive sell off in their bank stocks. As the US banking crisis illustrated quite clearly, the international banking system was perceived to be “at significant risk”, causing a massive sell-off in banks and insurance companies around the globe.
Does this mean that a 60% decline of financial stocks is inevitable? NO, it doesn’t. However, it is highly likely that we see a significant impact on our financial shares. From a fundamental perspective, our Canadian banks have a trivial exposure (on average approximately $200 million), but that will not matter when a sell-off occurs. It only means that should a sell-off occur, it will be a great long-term opportunity to buy Canadian financials.
For this reason, I highly recommend investors reduce their exposure to all Financial stocks at this time.
Best regards,
Mike
When (my) Experts agree…..
2011 June 1 by Mike
I am not big on wide consensus views, however, when the experts that I read on a weekly basis are agreeing in principle, I take serious note. From the experts views, it is clearly a time to be very defensive with your portfolios:
John P. Hussman, Ph.D. :
“It’s clear that present conditions are among the most extreme in history. In fact, to capture instances other than today, 1987 and 2007, we have to broaden the criteria. The following are sufficient for purposes of discussion:
1) Overvalued: Shiller P/E over 18 (presently, the multiple is over 24)
2) Overbought: S&P 500 within 1% of its upper Bollinger band on a daily, weekly and monthly resolution (20 periods, upper band 2 standard deviations above the moving average), and S&P 500 at least 20% above its 52-week low.
3) Overbullish: Investors Intelligence bullish sentiment at least 45% and bearish sentiment less than 25% (presently, we have 54.3% bulls and 18.5% bears).
4) Rising yields: Yields on the 10-year Treasury and the Dow 30 Corporate Bond Average above their levels of 6 months earlier.
*May 2, 2011
Dennis Gartman- The Gartman Letter
“Share prices are weak and we fear they may become weaker…..what turns us bearish of equities…..or properly what turned us bearish? Of course the end of QE 2 is paramount, for the Fed’s been uncommonly aggressive in force feeding “capital” into the system via indirect purchases of Treasury securities for the past many months, but that is soon to end. Two, we are concerned about the huge supply sufficient to take up much of the newly minted “demand” offered by the Fed’s own actions. Thirdly we wonder just how much more American, Canadian, European and Asian companies can squeeze down their costs in order to push up their earnings. Sooner or later real demand and real earnings must kick-in, not simply better earnings because costs have been cut so dramatically. “
* May 2011
Bob Hoye – Institutional Advisors
“A powerful surge in speculation has been accomplished fairly close to the time window as anticipated by our Momentum Peak Forecaster. Once completed this would likely be followed by a selling panic. This is on and has further to go. The implications are profound as financial change forces business cycle change. In the commodity boom of 1973 our Forecaster gave the signal in that November and the fury ended 2.5 months later. The NBER determined that the recession started that November and it was the worst recession and bear market since the 1930s.
In the 1980 mania our Forecaster gave the signal in November 1979 and precious metals peaked in January 1980. Eventually the NBER determined that the recession started in that fateful January.
We have been considering that this time around, the recession would start with the signal at the end of December or when speculation completed. We will be conservative in concluding that it began in May.”
*May 5, 2011 , Pivotal Events
David Rosenberg- Chief Economist and Strategist, Gluskin Sheff
“What I’m Thinking: I think we have a tendency to have short memories. This time last year, if memory serves me correctly, we had a consensus view that the US economy was going to be smelling like roses and we had Ben Bernanke planning the Fed’s exit strategy and President Obama stating his policy objective over and over that the Bush tax cuts were only going to be extended for folks making less than $250,000. Lo and behold, by the summer and early fall, everybody was talking about the prospect of a double-dip recession and the stock markets took a nearly 20% dive. It was only when the S&P 500 was threateining to break below 1,000 in late August and the economy sputtered that Ben Bernanke cried “Uncle” and served up QE 2.
The outlook is fraught with risk and we are managing our portfolios in a very prudent manner to account for those risks.
I think the primary risk is how the (US) economy performs once the Fed’s monetary spigots are turned off. “
*Breakfast with Dave- May 18, 2011
Jeremy Grantham – GMO
So, we have four factors working against the Fed effect , which suggests that all of the normal Year 3 (presidential cycle) exceptional performance may have been delivered already. With these headwinds, I do not feel the same degree of confidence that I did, which was considerable, that the Fed could carry all before it until October 1 of this year. A third round of QE (quantitative easing) would very probably keep the speculative game going. But without a QE3, there seem to be too many unexpected special factors weighing against risk-taking in these overpriced times. I had recommended taking a little more risk that was justified by value alone in honour of Year 3, QE2, and the Fed in general. Risk now should be more reflective of an investment world that has stocks selling at 40% over fair value (about 920 on the S&P 500) and fixed-income, manipulated by the Fed, also badly overpriced. “
* Quarterly newsletter- Time to be Serious – May 2011
Other notable experts on this same page are Eric Sprott (Sprott Asset Management) and John Mauldin.
Here is a summary of the list of economic headwinds to the US economy:
1. The after-tax US profits for all companies taken from the National Accounts data shows vividly how profit growth is slowing and slowing sharply.
2. US home prices continue to fall and are showing no signs of recovery. Yesterday the S&P/Case-Shiller index dropped to the lowest level since 2003. Only one of the 20 cities that make up the 20-City Composite of metropolitan areas saw house prices rise.
3. QE 2 is ending this month. Quantitative Easing is the Fed’s way of stimulating the economy, to the tune of $75 Billion per month.
4. US Bank lending is still contracting. This is critical for the ability of business (both small and large) to borrow and grow. Without a solid growth track, its hard to envision US unemployment getting significantly better in the short-term.
5. The european debt situation is a disaster. Greece debt is being priced at a 70% default rate. Ireland and Portugal are not far behind.
Mike McGann
RIM’s PLAYBOOK
2011 April 15 by Mike
With 41 Million subscribers, RIM doesn’t have to appeal to everyone. If they can reach penetration levels of 15 – 20% of their existing client base, they will sell upwards of 8 million Playbooks (this translates to an additional $4 Billion in revenue). From all the negative reviews, the theme is the same: No email or calendar apps, and a lack of developed apps. This obviously is without the bluetooth bridge to the blackberry phone. When tethered (by bluetooth) the Playbook picks up all the applications on your blackberry phone…….email, calendar, messenger. RIM has already stated that they will have resident email and calendar apps available this summer, as well as the Android app that will allow Playbook users to run Android apps ( instant 150,000 Apps) .
I believe as an intial launch, RIM has rightly targeted its business (enterprise) clients…….like me. What is not fair, is the way Apple has been able to skate over their inability to assist the enterprise client:
- Ipad doesn’t support most corporate email plans
- Ipad doesn’t have the security that Blackberry supports (all data stays resident with the smartphone……..you can use the data on your Playbook, but the data is not transferred. This allows the corporation to be able to “wipe” the data (if necessary) on someone’s phone , and thus , not have to worry about any data on the Playbook.
- Ipad doesn’t use Adobe Flash…..and as a result, cannot properly read an abundance of websites. Adobe’s top 10,000 clients use Flash in their websites. ie. Try online banking with the Ipad………no go.
Apple has the consumer market and does an excellent job at it. RIM has the enterprise market, and the Playbook will dominate this market for the business client. The tech savvy “reviewers” are looking for that “do everything” type of tablet, instead of a tablet filling a specific niche. With Playbook’s ability to video conference, support HD video in and out, bluetooth tether to Blackberry smartphone (and thus no need for a separate internet contract) it is a very, very powerful device.
RIM’s problems are very short-term in nature. Ongoing software updates over the next quarter will “fix” the consumer issues on the table (email, calendar, apps) . 3G and 4G availability will allow the Playbook to be a standalone tablet for those consumers not owning a Blackberry. This isn’t a one or two quarter wonder, but a 3 to 5 year (and perhaps longer) transition of the tablets taking over the laptop market.
Investors should use this recent stock price weakness as an opportunity to buy RIM . Its arguably one of Canada’s best growth companies…….NO debt, $2.3 Billion in cash, and a wonderful new product to compliment their already first in class smartphone. At less than 8 times earnings, this stock is cheap.
Mike
The “END OF QE 2″
2011 April 14 by Mike
Quantitative Easing 2 is quickly coming to an end. Scheduled to end in June 2011, it is rumoured the Fed (US Federal Reserve) will actually opt to end early, in order to show a sign of confidence that the US economy can stand on its own two feet .
For those of you that are new to QE2, its simply a US stimulus program that prints new money to buy its own Treasury bonds every month (to the tune of $75 Billion per month). This program was designed to :
a. lower the US dollar
b. keep interest rates low (from buying their own bonds)
c. stimulate the economy through higher asset prices
Indirectly, the program created massive incentive to buy commodities, as investors, both large and small, look to hedge a declining US$ . From the objective of the Fed, it did a good job with its “intended” consequence, however, it also created some significant inflation (with energy and food prices in particular) which are the unintended consequences.
Withdrawing the Fed’s stimulus program can only (in my view) have negative effects on our stock markets (SHORT TERM VIEW):
a. The Fed is currently the largest buyer of US Treasuries. As such, Treasury yields will have to rise in order to incent new buyers
b. Higher interest rates will hurt bond prices , and will cause a strengthening of the US dollar and a negative reaction in commodity markets
c. Withdrawing the stimulus will slow down the US economy
A look back to April 2010 and you can quickly see the results of QE 1 ending (S&P 500 declined 16% , from April 23 to July 2) . The withdrawal of stimulus seem to have an immediate effect on the stock market and the economy (enough that the Fed chairman decided to implement QE 2).
With all of this information in mind, it makes good sense to be cautious over the next couple of quarters:
1. Protect your capital gains – take profits in some commodity areas and wait to buy back at lower prices
2. Prepare your portfolio for rising interest rates – consider switching domestic bonds for emerging market bonds
3. Expect more stock market volatility
4. Remember, our long-term outlook for commodities is very bullish, however, short-term profit taking is expected and healthy for the stock market. As we have witnessed in gold over the last decade, many times gold has sold off only to come back to make new highs.
As always, my team and I are here to assist you in managing your money. Don’t hesitate to contact us with any questions or concerns.
Best regards,
Mike
