Tag Archives: china

Perception Vs. Reality And Emotion Vs. Reason

If I were to tell you that: The price of oil would decline beneath $30 dollar a barrel before Iran had economic sanctions lifted from $90 per barrel a year ago, increasing global disposable income by over $3 trillion dollars Monetary authorities would all maintain easy monetary policies with the supply of capital far outstripping demand for capital The Fed funds rate was 0.375% and was on hold for now Bank earnings, liquidity and capital ratios continue to improve The dollar remained strong and capital flows accelerated from abroad helping to push 10 year bond yields below 2.0% That there would be 3 million new jobs created in the U.S in 2015 alone with growth in wages of 2.6% year on year GNP would continue to expand between 2-2.5% led by the consumer without inflationary pressures and profits, x-energy and materials, would continue to increase China expanded by over 6.8% in 2015 despite major headwinds policy changes and would expand by over 6.0% in 2016 M & A would reach new heights and remains strong Private equity valuations and the number of new issues cooled There is a change occurring in national elections everywhere away from the establishment (look at Taiwan) Japan and the Eurozone would maintain excessive monetary ease India would continue to grow around 7% Bearish sentiment was at a multi-month high and the market was selling at 15 times earnings then; and finally, Change was happening everywhere for the better. Then, would you predict a rising stock market, excluding energy and material stocks, or a falling one? There is a major disconnect between perception and reality in the marketplace today as emotions are overcoming reason. Whose view of the global economy would you consider most relevant and on the mark: Jimmy Dimon, Chairman of JP Morgan Chase, or a market pundit/news commentator? I suggest that you read for yourself the transcripts of earnings conference calls, as the media has been taking many comments out of context. We participate in at least three conference calls a day during earnings season to gain a true perspective of what is happening in the real world. This is a period of excessive volatility. It creates tremendous opportunities to capitalize on inefficiencies in the marketplace. Each long investment in our portfolio has superior management and is going through positive change which will lead to more revenue and volume growth; enhanced global competitiveness; higher returns on revenues and capital; increased free cash flow to be used for reinvestment in growth and enhancing shareholder value; and finally, each one has a current yield over 3%. But, change does not happen overnight so you need patience and liquidity to let it unfold. For example, I owned GE for 18 months, purchased at $19 per share, before the marketplace woke up and began to re-evaluate the stock. It took Nelson Peltz’s filing to turn the light bulb on for investors. His cost is $27. We are still in the early stages of GE’s transformation. As I say, this is a market of stocks, not a stock market. Unfortunately, electronic/technical/systematic trading takes no prisoners and can override fundamentals over the short-term. Stop thinking as a trader and start thinking as an investor! Don’t buy for next quarter’s earnings but focus instead on the next few years’ volume and revenue growth, competitive position, the mix of business, operating margins and returns, cash flow, especially free cash flow, and valuations. We want multiple ways to win on each investment while protecting our downside too. We are global investors with a global perspective. Let’s take a look at the key data points by region that occurred last week: The United States takes center stage as the largest economy in the world. It appears that fourth quarter GNP growth slowed significantly from the third quarter and follows a similar pattern that has existed for several years with one strong quarter followed by a weaker one with overall growth remaining in the 2-2.5% range without inflation and led by the consumer. Jimmy Dimon, Chairman of JPM mentioned on the 4th quarter earnings call last week that he sees continued strong growth by U.S. consumers; GNP growth between 2 and 3%; continued good business demand for loans; continued strong M & A as his book is full; continued improvement in credit quality; maximum write-downs for energy loans at $750 million with oil prices around $30 per barrel and max write down exposure to the materials sector of $200 million out of a total loan portfolio of $837 billion and total assets on $2.4 trillion; continued growth in deposits and decent growth overseas. JPM has little exposure to China, which he mentioned is slowing but still showing above average economic growth. It’s quite amazing that JPM recorded record earnings despite a relatively flat yield curve. The heads of Citi (NYSE: C ), PNC , WFC and USB echoed his comments. I was on each call. Growth in the United States continues to be led by the consumer (over 68% of GNP) as the production sectors, including energy and materials, remain comparatively weak. Data points to reinforce this view include: University of Michigan consumer confidence index rose to a 7 month high of 83.3; the gauge of expectations six months out increased to 85.7; retail sales fell 0.1% in December and rose only 2.1% over the prior year (lower gasoline sales penalized this number); manufacturers sales and shipments fell 2.8% compared to a year ago while inventories rose 1.6% therefore the inventory/sales number rose to 1.32; producer prices fell 0.2% in December but rose 0.1% excluding food and energy; consumer comfort index rose to a 3-month high of 44.2; import prices fell 1.2% in December and 8.2% over the last year and finally the Beige Book was reported last Wednesday which supported an improving labor market, “slight to moderate growth” in consumer spending, weakness in manufacturing penalized by a strong dollar, additional problems in the energy patch and finally, little sign of wage pressures and minimal price pressures. I believe that the U.S economy will expand in the low end of 2-2.5% this year, inflation will run under 1.5% and the Fed will raise rates two times or less in 2016. Policy will remain accommodative. Watch the national elections as the status quo is out and change is in the air for D.C., too. Chinese Premier Li Keqiang confirmed that China’s economy grew close to 7.0% in 2015 which is still quite amazing considering all the changes going on to stem past excesses and shift emphasis to consumption/services (40% of the economy) from production/exports (60% of the economy). China finished with over $3 trillion in foreign reserves and is still generating $50-$55 billion in trade surpluses per year. China’s consumer and economy has also benefitted greatly from lower energy prices. Change is hard but I applaud their government who has a five-year plan to build a stronger and sounder foundation for the future. The Asian infrastructure bank was launched this week. I expect China to grow at 6-6.5% in 2016. China is on the path towards joining the established global economic leaders with policies to back it up. Did you happen to notice what Haier was willing to pay for GE’s appliance business to become a true global competitor? Ten times trailing EBITDA vs. 7 times, which Electrolux had previously offered. Export growth in the Eurozone and Japan are suffering from changes in global trade patterns and weakness in demand. Both the ECB and BOJ are maintaining incredibly easy monetary policies but there is a limit to what that can accomplish. There is a pressing need for more regulatory and financial reform to stimulate growth in both areas. Did you notice that Germany ran a record budget surplus of $13.14 billion? The government has earmarked $6.5 billion to cover migration related costs. Regulatory, budgetary and financial change is in the air to support and stimulate growth. Here comes Iran on the global energy markets. Iran complied with the terms of its international agreement to curb nuclear development. Therefore sanctions were lifted on Saturday and $50 billion in frozen cash was released. Iran can begin trading with the rest of the world including selling oil. I believe that much of the recent decline in oil below $30 per barrel factored in Iran selling an incremental 1-1.5 million barrels per day on the marketplace by mid-year 2016. Global production currently exceeds global demand by 1.5 million barrels per day and storage is already full to the brims. It has not helped to have unusually warm weather in parts of the world curbing demand growth. Industrial commodity prices have continued to weaken, too, in concert with oil, despite reductions in production, capacity and inventory levels. If the world continues to grow even at 2.5-3%, industrial commodity prices will begin to rise as inventory levels are drawn down. I expect dividend cuts even at the strongest companies but that is a positive at this point, not a negative. Expect many bankruptcies in the energy/industrial commodity and materials markets. The financially strong companies as well as private equity funds will buy these hard assets at 3 to 5 times EBIDTA offering great value and returns on their investment even at these depressed prices as the debt gets extinguished. The reality is that the outlook for global growth is not all that bleak although it may not reach historical rates of gain. On one hand, the global consumer is the huge beneficiary of lower energy prices and low inflation but on the other hand, those countries/companies that are resource- or production-based will suffer. While price determines value, I like to invest where the wind is at your back which is the U.S. where consumption is nearly 70% of GNP compared to a much lower level in Europe, China, Japan, and most emerging markets. It is very difficult to see a recession in any of the major industrialized countries but growth will stay sub-par until there are regulatory and financial changes to stimulate growth as the most of the gains from monetary ease are behind us and depreciating one’s currency is never the answer. Don’t let the pundits fool you. A strong dollar is good for many reasons. Right now the stock markets are being controlled/manipulated by the electronic/systematic technical traders rather than investors. Fear is everywhere and capitulation may have already occurred. It does not help to hear Larry Fink, head of BlackRock, say that the market can decline near term but will increase even more later in the year. That is talk of a trader rather than an investor and argues for passive management over active management. The bottom line is that I see value everywhere and no recession. If you believe the economy will slow for an extended period of time and won’t pick up much as we move through 2016, then buy the global pharmaceuticals and consumer staple stocks. But if you see growth, albeit slow, for an extended period of time, then look at industrials, too, and eventually, some financially strong commodity companies. Banks as a group are just cheap under any scenario. It is amazing that JPM had record earnings with such a flat yield curve and that is very telling. It goes for the other major banks, too. Volatility, confusion and fear create opportunity. We love it! There is more to say but that is enough for today. Look at the facts and take out all of the emotion before making any decisions. Invest, don’t trade. So remember to review the facts; step back and reflect; consider proper asset allocation; maintain excess liquidity and control risk; do in-depth independent research on each investment and…Invest Accordingly!

Why Invest In Dividend Aristocrat ETFs Now?

There is hardly a market scenario where dividend investing fails to soothe jittery investors’ nerves. Though many thought that the bull market for dividend investing will end with the start of the Fed policy tightening and the resultant rise in bond yields, in reality, the popularity of dividend investing has shot up in recent times. This was because of the sharp rise in global growth issues, which is why equity markets are running a high risk of volatility and bond yields remained in check despite the Fed liftoff. The demand for safe havens and value investing has lit up. Investors hungry for yields are running to high-yielding options in the quest for regular current income, which can make up for capital losses. Agreed, benchmark yield-beating options will be in focus given the ongoing Fed policy tightening. But in the present volatile market, dividend aristocrats – which are more stable, mature and profitable companies consistently raising dividends or going for high payouts – may serve up investors’ objective more efficiently. Why Dividend Aristocrats Are Superior Bets Now? These dividend aristocrat companies are generally apt for value investing. Since volatility is expected to pull the string ahead, what could be a better option than superior dividend investing for capital appreciation and some smart yields? In a market crash, these dividend aristocrats stand out and even navigate through volatility. As per the latest study carried out by Reality Shares, companies that initiated or hiked their dividends have beaten those that kept their dividends same, paid no dividend at all, or cut or scrapped dividends in the 1999-2015 time frame. This can be corroborated by the gains during the above-mentioned period, as dividend initiators and growers earned 5.4% return, the highest among the dividend players. All dividend payers took the second spot with 4.29% gains, followed by 1.92% gains enjoyed by dividend distributors with the same dividends. However, no-dividend payers or dividend cutters and scrappers recorded losses of 0.8% and 5.99% respectively, as per the document. Below, we highlight four dividend aristocrat ETFs which may give a relatively stable performance in the coming months amid further Fed rate hike bets, developed market woes and China’s hard-landing fears, and the occasional global market rout. Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ) VIG follows the Dividend Achievers Select Index, which is composed of common stocks of high-quality companies that have a record of increasing dividends for at least 10 years. The $18.2 billion fund is currently home to 179 securities. The ETF is heavy on Industrials (22.4%) and Consumer Goods (21.6%). With an expense ratio of 0.10%, this is one of the cheapest funds in this space. It yields 2.46% annually, and was down 6.7% in the last one year (as of January 11, 2016). VIG has a Zacks ETF Rank #2 (Buy). SPDR Dividend ETF (NYSEARCA: SDY ) This fund provides exposure to the 101 U.S. stocks that have been consistently increasing their dividend every year for at least 25 years. It follows the S&P High Yield Dividend Aristocrats Index, and has amassed $12 billion in AUM. Volume is solid, exchanging more than 765,000 shares in hand, while the expense ratio comes in at 0.35%. The product is widely diversified across components, as each security accounts for less than 2.46% of total assets. Financials is the top sector, taking up one-fourth of the portfolio, while Industrials (14.7%), Consumer Staples (13.9%), and Utilities (12%) round off the next three spots. The fund was down nearly 10.4% in the last one year (as of January 11, 2016). SDY yields 2.80% and has a Zacks ETF Rank of 3 (Hold). Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) This $2.9 billion fund tracks the Dow Jones U.S. Dividend 100 Index, which measures the performance of high dividend-yielding U.S. stocks that have a record of consistently paying dividends. The 106-stock fund charges a meager 7 bps in fees. Consumer Staples is the fund’s focus sector with about 23% exposure, followed by IT (19.3%). SCHD yields 3.13% annually (as of January 11, 2016) and lost 7.1% in the last one year. It also has a Zacks ETF Rank #3. WisdomTree U.S. Dividend Growth ETF (NASDAQ: DGRW ) This fund tracks the WisdomTree U.S. Dividend Growth Index and offers diversified exposure to U.S. dividend-paying stocks with both growth and quality characteristics. It has gathered $594.5 million in its asset base. The ETF charges 28 bps in fees per year from investors. DGRW holds 300 securities in its basket, with each holding less than 4.16% share. From a sector look, it provides double-digit allocation to Consumer Discretionary (20.11%), IT (19.48%), Industrials (19.23%), Consumer Staples (18.59%) and Healthcare (14.95%). The fund has shed 6.1% in the year-to-date time frame and has a Zacks ETF Rank of 3. Original Post

RBS: Sell All Of It, Everything Except High-Quality Bonds

Original post By Stuart Burns We like to think of ourselves as optimists at MetalMiner. If given the option, we prefer the glass half full than the glass half empty, so an article in the London Telegraph and many other newspapers this week reporting RBS Bank’s latest client note makes depressing reading, but unfortunately worthy of discussion. The note advises clients to “Sell everything except high-quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,” RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that major stock markets could fall by a fifth and oil may plummet to $16 a barrel. It All Must Go! Nor is RBS playing a new tune; since November, it has been warning the oil price and stock markets are headed lower, sure enough the oil price has continued to fall, dropping to a 12-year low of $30.41 for Brent and $30.43 for West Texas Intermediate this week. Click to enlarge Source: Telegraph Newspaper The markets are clearly spooked and by a number of factors. China’s stock market is being kept alive only on the oxygen of government support via state enterprises buying shares. Oil consumption has stalled due to slow growth and warm weather, and oil supply continues to grow as Iran gears up to enter the market. This year, the biggest factor seems to be the fear of a devaluation of the Chinese yuan, a move Beijing is seeking to reassure the markets is not on the cards. But, guess what? No one believes them. Fears over China, therefore, are multiplying and RBS says, “China has set off a major correction and it is going to snowball. Equities and credit have become very dangerous, “and the bank’s Andrew Roberts, research chief for European economics and rates, expects Wall Street and European stocks to fall by 10% to 20% this year. Larry Summers, the former US Treasury Secretary, in more measured terms, agrees saying it would be a mistake to dismiss the current financial squall as froth. What Does This Mean for Metals? Metals prices have taken their cue from energy and have been weak since the start of the month, but if RBS is right, they could see support in the months ahead. Prices have, in part, been weak due to a stronger dollar, but RBS suggests the Federal Reserve won’t raise rates again at the March meeting and by the summer may be looking at a rate reduction. Either way, if rates don’t rise as the market had been expecting and had priced into the dollar, we could see dollar weakness in 2016 removing one of the factors depressing metal prices. It’s true, global growth is muted, global trade is down and loans are contracting, all in an environment of record debt, not a great backdrop for companies to invest and create growth. Yet, there are some bright spots. Growth in Europe is looking more positive as austerity has largely come to an end. Money supply in Germany is up 10% and growth in the US has remained solid if unspectacular. What to Do? Would you follow RBS’s advice if you were its client? Would you get out of everything? Bank of America runs a Bull & Bear Index that tracks global equity prices and is supposed to give warning of contrarian buy signals. We have all heard of the saying “the night is darkest just before the dawn.” Well, BOA’s index is supposed to peak over the horizon and see if dawn is approaching. Click to enlarge Source: Bank of America As you can see, 88% of global indexes are now trading below their 200-day and 50-day moving averages. The index is therefore at an ultra-negative level of 1.3, but BOA is not suggesting we take our cue and rush out to buy shares. Even though the index has a good track record, the bank says we need certain “catalysts” to be in place, not least a stabilization of the Chinese yuan and oil prices, better Purchasing Managers’ Index data and a halt to the rising dollar before it would say, with any confidence, RBS has got it wrong and the BOA index has it right. As so often before, then, it is down to China. We watch and wait, and hope events unfold more positively in the weeks and months ahead than they have started to so far this year.