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Greece Bailout Agreement Adds To GLD Selling Pressure

Summary Greece had finally yielded to Creditor’s demand for austerity against the wishes of its people and this removes the Grexit risk. Fed is now more likely to rise rates as global growth is now more secured to get against financial stability as advocated by the BIS. Gold prices will continue to slump as a result. Greek Bailout Agreement This article is motivated by the breaking news that Greece had reached an agreement with its creditors after a 17 hour marathon negotiation session. It was a make or break moment for Greece and Greece folded to the EU austerity demands despite a clear ‘No’ referendum result on July 5. As the screen shot from European Council President Donald Tusk’s Twitter account shows, there was unanimous approval for the third Greek bailout. Source : Twitter In the end, pensions will be cut and taxes will rise for Greece to stay within the Eurozone and pay its debt on time. Austerity will continue to bite against of the Greek population wishes but at least we can see the light at the end of the tunnel. It is possible that Greek banks will open by the end of the month as the European Central Bank (ECB) is likely to increase its funding support and deposit flight would be reduced greatly. Implication For Gold Prices However the key question for this article would be what does it mean for the price of gold? My previous position for the price of gold is that the premium for USD in the rush for safety will outweigh the premium for gold over Grexit financial stability concerns. This has largely played out which I would highlight in the gold price chart towards the end of the article. Today we have a different situation where the threat of Grexit has largely been taken off the table. This would be even more bearish for the price of gold. The obvious point is that there will be less concern over financial stability. Hence there is now less need for the financial markets to hold gold. The second and less obvious pull factor away from gold would be that it would clear the path for the Fed to rise rates earlier. This could now be done as early as the FOMC meeting on 17 September 2015. We can have more clues from the July 29 FOMC statement and the minutes which will be published on August 19. It is clear that the US economy had been consistent progress especially in the second quarter of 2015. The Fed is approaching its mandate of maximum employment with unemployment at 5.3% and the target unemployment range is from 5.0% to 5.2%. This range has been revised lower consistently and wages have gone up as a result. Quit rates have gone up as well as employees quit jobs to find jobs that fits them better. This is a result of higher confidence in the jobs market which translated to better consumer confidence. The Fed is confident of hitting its 2% inflation target in the medium term over the next 2 years and this period would be the time for them to raise rates and get ahead of the curve. BIS Support For Rate Hike & Growth Implication On the international front, there has been difference in opinion between the Bank of International Settlements (BIS) and the International Monetary Fund (IMF). The BIS advocated that the Fed rise rates as soon as possible so as not to punish savers unnecessarily and to create bubbles in other parts of the financial markets. In addition, the higher rates would also give the Fed the tools it need to deal with the next crisis. This is the quote for the relevant Handelsblatt interview which the BIS expressed its views Do you think that central banks should raise the interest rate earlier and faster in order to preserve financial stability? Would that be your advice for the Fed? Mr. Caruana: We think there are risks and costs if central banks raise interest rates too late. They become apparent only once you fully factor financial stability considerations into monetary policy. But at present the debate is not paying much attention to this. Rather, it focuses on the costs of raising interest rates too early. Mr Jamie Caruana is the General Manager of the BIS. This article was published recently on July 10 and it is in response to the IMF opinion that the Fed should push its rate hike to year 2016. IMF Managing Director Christine Lagarde advocated that the Fed push its rate hike to year 2016 so as not to undermine the fragile recovery. Conclusion The Greek bailout agreement takes the risk away that a rate hike would hurt the European recovery as a whole. This would also mean that higher growth would also necessitate higher interest rates to tame inflation going forward. If institutional savers are constrained by artificial low interest rates, they would be tempted to push up other asset values such as real estate or the equity market. This is the financial stability risk which the BIS was referring to. It is not saying that the Greek bailout would lessen financial stability risk and hence there is lesser need for a rate hike. (click to enlarge) As we can see from the SPDR Gold Trust ETF (NYSEARCA: GLD ) chart above, gold prices have been bearish for the past month as the Grexit crisis intensified as predicted by my previous articles. This is likely to continue in the near future as the chances of a Fed rate hike in September 2015 goes up. Hence we should continue to avoid gold in the short run. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The Chinese Government Just Rigged The Market In Your Favor

Summary The Chinese government has taken unprecedented measures to support its A-shares market. Both intuition and history indicate that these measures will likely be successful. Buy A-shares now, or on any dip. The Chinese stock market crash has been making headlines recently, with much of the focus being on the government’s unsuccessful and seemingly desperate efforts to engineer a reversal. From cutting interest rates and reserve ratios, to suspending new IPOs and directing various government entities to purchase shares, nothing seemed to work. Eventually, the People’s Bank of China began providing “unlimited liquidity” to state-owned China Securities Finance Corp in order to fund stock purchases. History has taught us that when central banks print money in order to buy publicly traded assets, the prices of those assets go up relative to the currency being printed. So this on its own was a very big deal. While it was becoming increasingly clear that the Chinese government really , really wants their mainland stock market to go up, their next move was so heavy-handed, and so fundamentally alters the risk-reward calculus for owning Chinese stocks, that it all but guarantees a profit for anyone buying A-shares (NYSEARCA: ASHR ). China makes it illegal to sell stocks On July 8, 2015, the China Securities Regulatory Commission (CSRC) announced that directors, supervisors, senior management personnel, and anyone with more than 5% of the stock outstanding in a company, are not allowed to sell their shares for the next 6 months . This is in addition to having already directed state-owned pension funds, insurance companies, securities firms and other institutions to buy and hold shares. Private companies are not allowed to sell equity because IPOs are frozen. Public companies have been instructed not to sell and are required to submit reports on measures they will take to support their share price. The 21 largest Chinese brokerages have pledged to buy stock and not sell any of it until the Shanghai Composite goes above 4500. China Investment Corporation, the country’s sovereign wealth fund, has begun purchasing Chinese ETFs. You get the picture. All of these people and entities are forbidden from selling. You’re kidding me If this sounds incredible, keep in mind that the Chinese government has immense power over its people and is not shy about exercising its authority in ways that the West might consider uncouth. This is the same government that filters internet search results and imprisons non-violent political dissidents. Recognizing that the sell-off in A-shares was caused by the fear of losing money, the Chinese government has decided to counter this fear with the greater fear of being imprisoned, tortured and sent to a forced labor camp . The Ministry of Public Security has already launched investigations into “malicious shortselling” of Ping An ( OTCPK:PIAIF ) and PetroChina (NYSE: PTR ) stock on July 8th. So who can sell? Individual investors, who hold 25.03% of A-shares by market cap , can sell unless they fall under the CSRC’s definition of an insider as mentioned above. Professional institutions make up only 14.22% of the A-shares market cap, and only some of them, including qualified foreign institutional investors, can sell. Judging from the CSRC data below, I estimate that less than 10% of professional institutions would be able to sell without being charged with a crime. The rest of the market cap is owned by general institutions, which cannot sell . We can thereby deduce that less than 35% of the A-shares market cap is held by entities which are not prohibited from selling. We then need to halve this number because more than half of all stocks on the Shanghai and Shenzhen exchanges have been halted . Thus, less than 17.5% of the A-shares market cap is now available to be sold. Supply and Demand To sum it up, the supply of A-shares available to be sold has been dramatically reduced by government edict and the demand for A-shares has been dramatically increased by government purchasing. Anyone who has taken an introductory course in microeconomics knows that a decrease in supply or an increase in demand, much less a simultaneous occurrence of both, will cause the price of the good in question to go up. Which is why on July 9, 2015, the Shanghai Composite had its biggest daily gain since 2009. If only a minority of people can sell, and the government is printing money to buy everything in sight, then the supply of stock certificates not held by the government will decrease, and thereby command progressively greater prices. In other words, China is now the mother of all “low float rockets,” a colloquialism often used in the momentum investing community. Chinese stock exchanges impose a 10% limit on daily price increases, and only three trading days have elapsed since the government first announced its ban on selling. This means that there is still plenty of upside remaining as the government continues to push share prices to levels that reflect their narrative of an intact bull market. Valuation It is worth noting that valuation metrics on the Shanghai Composite appear cheap, and are nowhere near previous highs: (click to enlarge) Legendary investor Jim Rogers began buying the dip as early as June 26th . Goldman Sachs, Fidelity, and many others have recently turned bullish. Investment Thesis However, valuation is not at all important to my investment thesis, which is instead based on two very simple premises: 1) The Chinese government wants Chinese stock prices to rise and 2) The Chinese government is capable of causing Chinese stock prices to rise. If you believe these two statements are true, then by necessity, the Chinese stock market must go up. There are a myriad of reasons for why the Chinese government wants to rescue its stock market: avoiding financial contagion , transforming into a consumer-driven economy , and keeping their citizens from revolting , to name a few. Their actions, however, are what speak volumes about how serious and committed they are to this cause. I believe that they are willing to do whatever it takes to make their stock market go up, and there are rumors that they are readying an even larger fund for direct stock purchases . The second premise, the question of capability, is even more intuitive. The Chinese government has unequivocal authority to regulate assets domiciled in China and traded on Chinese exchanges. Shares in Chinese companies only have value within the context of Chinese corporate law, and because the law is written by the government, and the higher levels of government are not accountable to voters, there is nothing to stop the government from doing whatever they want. Wealthy Chinese shareholders aren’t going to risk imprisonment just to make a few extra yuan. Even if they were stupid enough to try placing a sell order, brokerages are simply refusing to execute those orders . Historical Precedent The media has been a harsh critic of this market intervention, just as they were harshly critical of previous market interventions such as the Federal Reserve’s Quantitative Easing (QE) program and the Hong Kong Monetary Authority’s famous short squeeze of the Hang Seng Index. It’s true that market interventions such as these reduce liquidity and thereby increase fragility and systemic risk. The global asset bubble is something that keeps me awake at night. But regardless of whatever long-term consequences may arise as a result of such market interventions, no one can deny that when central banks print money to buy assets, those assets do rally. (click to enlarge) The closest historical analogue to China’s ban on selling occurred when Japan’s Ministry of Finance instructed its banks not to sell stocks on August 18, 1992. The Nikkei responded by rallying 32% over the next three weeks in a straight, almost uninterrupted line. The chart above is not exhaustive, history is littered with examples of successful market interventions. Some countries such as Taiwan have funds permanently designated for supporting stock prices. Momentum Once investor confidence is restored, rising prices will lead to more rising prices, which will catalyze a second leg to this rally and possibly even reflate the bubble. China does not yet have much of a stock market investing culture, and only 13% of household wealth is invested into its stock market versus about 50% for U.S. households. If Chinese households decide to hop on for the ride, they have ample dry powder to do so. Human beings are genetically predisposed to move in herds, and if it happened before, it can happen again. Risk Factors The government could change their mind and give up on trying to support share prices, which I truly believe will not happen, but anything is possible. It’s also possible that they could lose control of the market, especially if large shareholders figure out a way to sell their holdings without being detected. In order to combat this possibility, the government is asking brokerages to provide the names and national ID numbers of its account holders . The largest risk for foreign retail investors such as the readers of this article, is probably ETF tracking risk. It’s possible that due to half of the A-shares market being halted, ETFs such as ASHR will have trouble tracking their underlying indices. In other words, when Chinese stocks decline, the U.S. traded ETFs that track them could decline by a much greater amount. The opposite is also true. Last Friday, the ChiNext index on the Shenzhen stock exchange rose by 4.11%, but (NYSEARCA: CNXT ), the ETF that aims to track it, rose by 23.32%. A nice surprise for the traders who went long the day before. Disclosure: I am/we are long ASHR. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I am long ASHR in client accounts through my investment management company, Honey Badger Capital Management.

Pinnacle West Capital Looks Very Attractive On Solid Growth Fundamentals

Summary Given PNW’s stock trading at a discount with strong fundamentals, I believe it is a good opportunity for investors to take a position. Strong earnings growth supports dividend growth. Key credit metrics are strong with scope for further improvement. Strong case to take position at the current level. I believe the key drivers for Pinnacle West Capital Corporation’s (NYSE: PNW ) earnings include: (1) solid base growth outlook, (2) around $1.4bn of capex spend/annum, (3) improving industry fundamentals (mainly housing recovery in Arizona), (4) a rate case filing in 2016 for 2017 rates ($60-70m revenue increase), and (5) an attractive valuation. Strong growth outlook More than 90% of PNW’s revenues come from a regulated retail rate base and transmission business (a stable growth business). The rate base growth opportunity for PNW is better than most of the regulated utilities companies (4-6%). The company has guided a rate base growth of 6-7% CAGR from 2014 to 2018. Where is the expected growth to come from? The company has a large spending plan of $3.7bn for 2015-2017, which is higher than its previous $2.7bn spend from 2012-2014. Interestingly, most of the spending will be in transmission and distribution. Investors should know that the increased spending plan should result in compounded annual rate-base growth of above 6%. I believe the company will use most its earnings (around 50%) and raise debt to fund capex and not require any equity issuance that will support the upside for stock. On the margin side, I expect higher margins for PNW given its well-disciplined cost management. Though revenues have grown by 9% in the last four years, operations and maintenance costs (O&M) have grown only by 4%. Moreover, the company estimates flat O&M in a growing phase in the next four years. The company has also guided an EPS growth of 4-6% CAGR from 2014 to 2018. Source: PNW investor presentation Better than industry dividend growth with scope for improvement PNW’s management raised dividend growth guidance last year from 4% off a 2013 base of $2.27 to 5% off a 2014 base of $2.38. The increase in dividend signals that the management is expecting a high EPS growth. I believe this is a positive move from PNW given its high capex spend plan for the next 3 years. The current one-year forward (FY15) dividend yield for PNW is around 4.3%, which is well above the industry average of 4%. I estimate that the dividend payout ratio will stay at the low 60s (similar to the utilities industry) even with 5% annual growth in dividend as the capex spend will take out most of its earnings. Source: PNW investor presentation Key credit metrics remain strong PNW has a solid capital structure with 46% debt/capital. I expect this ratio to increase slightly given higher rate of capex spend (capex guided at 13% CAGR from 2014 to 2017). PNW had an FFO/interest expense ratio of 5.8 in 2014, which is well above the 4-5 times of a typical utility. I expect the ratio to be in a range of 4.5-5 times during the next five years as a result of higher capex spend and interest expenses. The company has around $300m of debt maturing in 2015, $250m in 2016 and $125m in 2017. It has no debt maturities in 2018. In the current debt markets, I do not expect any trouble issuing new debt. I am positive on the company’s approach in using debt and free cash flow to fund future capex/acquisitions and not resorting to equity issuance. Source: PNW investor presentation Increase in solar penetration is not worrisome for PNW but benefiting APS’s power portfolio, a wholly owned subsidiary of PNW, includes 1,200MWs of renewable energy, most of which is solar fueled by Arizona’s abundant sunshine. In the most recent numbers from the Solar Electric Power Association, APS ranked fourth nationally in overall solar capacity, and fifth in solar capacity per customer. APS plans to install 10MWs of solar panels on roughly 1,500 customer homes. The growth in solar is a natural and productive development for Arizona given its significant natural resource base. The permits for new solar projects have remained healthy since 2014 and grown significantly since 2015 for APS. The drop in solar costs has attracted customer interest in adding solar systems leading to significant growth for APS’s renewable energy segment. APS will likely continue to have investment opportunities in both utility scale and distributed solar with the next rate case (the opportunity for the company to pursue additional investments). Source: PNW investor presentation Attractive Valuation With a solid growth outlook (EPS growth of 4-6% from 2014-2018), strong capex plans and continued O&M cost management, PNW will only see upside if the economy starts to get better. I see PNW stock as very attractive relative to peers as it is currently trading at a discount of around 4%. I believe the stock should trade above its peers in the near term, as the probability of the company’s achievement of growth targets is high. I recommend investors to take a position in PNW at the current level to earn at least 16% return (12% share appreciation + 4% dividend yield) in one year. Bear case Base case Bull case 2016 EPS $4.00 2016 EPS $4.10 2016 EPS $4.20 P/E Multiple 15.0x P/E Multiple 15.0x P/E Multiple 15.0x Discount 10.0% Premium 10.0% Premium 20.0% Value $54.00 Value $67.65 Value $75.60 Current price $60.32 Current price $60.32 Current price $60.32 Upside -10.5% Upside 12.2% Upside 25.3% Source: Google Finance Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.