InvestMacro Forex News

By Mitchell Clark, B.Comm.

The stock market typically reacts quite positively when a company beats Wall Street consensus. But in a considerable number of cases, a company’s share price after-earnings bounce isn’t really warranted, considering the run-up in anticipation.

Many stocks go up in value after beating expectations, but many numbers this quarter actually reveal a contraction in business conditions.

Western Digital Corporation (WDC) is the Irvine, California-based maker of hard drives and solid-state hybrid drives for desktops and personal computers (PCs). The company beat the Street on earnings, but the company’s numbers actually represented a decline from the comparable quarter last year.

The company said that in its most recent quarter (fiscal 2014 first quarter), sales dropped six percent to $3.8 billion; earnings fell to $495 million, or $2.05 per share, compared to $519 million, or $2.06 per share, in the same period a year ago; and adjusted earnings came in at $2.12, while Wall Street was looking for a consensus of $2.05.

Naturally, the position moved higher on the stock market. The company did experience an improved gross margin, but it wasn’t a good quarter. The stock is up about 70% so far this year to an all-time record high.

There are countless other stories similar to Western’s, and investors have to be very careful with this so-called outperformance by Wall Street standards. Business conditions are not improving for a lot of companies. Earnings are slightly improving, but only through continued pressure on costs and a slight improvement in pricing.

Of course, the monetary backdrop continues to be very supportive for stocks as we know. The S&P 500 Index has broken out of what looked like the perfect head-and-shoulders pattern. It’s still an ominous-looking chart, but the breakout pattern is significant. It’s as if the index is returning to its modern era mean. The S&P 500’s 35-year chart is featured below:

Chart courtesy of www.StockCharts.com

Investment risk is always high with equities, but there are very few alternative investment classes with interest rates sitting so low, especially for those investors who rely on dividend income.

Given the monetary situation and the expectation that the Federal Reserve will continue to be highly supportive to equities, this is very much a market that can still tick higher. But there is absolutely no need to chase stocks, or play the momentum gain, especially with companies that aren’t actually growing.

Wall Street’s expectations for a company are both useful and irrelevant at the same time. Stocks didn’t advance this year on the expectation of better growth rates of revenues and earnings; the marketplace just went all-in with the Federal Reserve’s grand attempt at reflation.

For investors, I like existing winners that pay growing dividends in an era of very slow real corporate growth. Companies like NIKE, Inc. (NKE), Johnson & Johnson (JNJ), PepsiCo, Inc. (PEP), Canadian National Railway Company (CNI), E. I. du Pont de Nemours and Company (DD), and Colgate-Palmolive Company (CL) are just a few examples of growing dividend payers with excellent long-term track records of wealth creation. (See “Equity Market Super Stock Adding Up to Solid Returns.”)

And energy is not to be excluded as a great income provider. It’s one of the economic bright spots with staying power for the rest of this decade.

If a company beats the Street, that’s great. But when it beats the Street without actually growing comparatively, it’s not worth chasing.

This article My Six Favorite Growing Dividend Payers is originally publish at Profitconfidential

EURUSD is bullish for the last few weeks but now also sideways around 1.3800 area which is nothing else than just another corrective pause within larger uptrend. We suspect it’s wave (iv) that is part of incomplete five wave rally in wave 3 from 1.3470. As such, sooner or later pair should accelerate to a new high, which be a fifth wave of 3 that may reach levels around 1.3860/1.3900 later this week. Meanwhile we also need to keep an eye on 1.3700 level where our impulsive bullish count would become invalid as wave (iv) must not trade into the territory of a wave (i).

EURUSD 4h Elliott Wave Analysis

Written by www.ew-forecast.com | Try Ew-Forecast.com’s Services Free For 7 Days at http://www.ew-forecast.com/service * No Credit Card Required.

By WallStreetDaily.com

We’re long overdue for a correction. At least, that’s the latest cry emanating from the bears as they try to dissuade us from investing.

Total hogwash!

I’ll concede that it’s been a while since the S&P 500 Index suffered a 10% setback – 521 trading days, to be exact. But we’re nowhere near record territory.

Heck, we’ve witnessed two streaks without a correction in the last 25 years that were twice as long as the current one, according to Bespoke Investment Group. From March 2003 to October 2007 (1,153 trading days) and from October 1990 to October 1997 (1,767 trading days).

That means, for us to set a new record, the current bull market would need to continue uninterrupted until October 2018!

So, again, we’re certainly not long overdue for a correction.

That’s the good news. Now for the possibly troubling news – and, of course, what it means for our investing strategy…

Third-Quarter Earnings Update

The only way the market is going to keep chugging higher is if companies keep increasing earnings at a healthy clip. As I shared at the beginning of the month, analysts certainly expect that to happen, with record profits projected for 2014.

I’m sorry, but after looking at the latest earnings seasons stats, I have my doubts that conditions will be that rosy.

Sure, the headline numbers convey strength.

With nearly half the companies in the S&P 500 Index reporting results, 75% beat earnings expectations. That’s above the average for the last four quarters of 70% and the average for the last four years of 73%, according to FactSet.

Here’s the rub, though…

The rate at which companies are beating expectations is hardly impressive.

Earnings came in a mere 0.8% above expectations. That compares to an average surprise of 3.7% over the last four quarters and 6.5% over the last four years.

Either analysts suddenly got really good at predicting earnings (fat chance!) or business conditions aren’t as strong as executives originally expected.

Beyond that troubling development, there’s also an unsustainable discrepancy between earnings and sales growth rates.

So far this quarter, actual earnings are on track to increase 2.3% in the third quarter. Yet third-quarter sales are only on pace to grow 2%.

We don’t need to be math whizzes to realize that companies can’t keep growing profits faster than sales indefinitely. Or, put another way, cost cutting isn’t a permanent profit-boosting strategy.

At some point in the very near future, we need meaningful increases in demand to propel profits higher.

Run to Strength, Not Cash

Forget running for cover into cash like most of the bears want us to do. Instead, we need to keep an eye on the surprise margin for earnings and sales growth rates in the coming quarters.

We should also focus on investing in the pockets of strength in the market. And there’s no better example than the technology sector.

• The earnings and revenue “beat rates” for the tech sector are much higher than the market’s right now – at 87% and 66%, respectively.

• Unlike the broader market, tech companies continue to report better-than-expected earnings by a wide margin, too. The average earnings surprise is 11.4% above expectations.

• If we exclude the undue influence of Apple (AAPL), the sector’s earnings growth rate is the fastest in the market, at 11.2%. If we include Apple, the sector ranks second (7.2%), behind consumer discretionary (8.2%).

Most importantly, tech companies remain reasonably priced…

The S&P 500 trades at 14.7 times forward earnings, which is a 14% premium to its five-year average. Tech stocks only trade at 14.1 times forward earnings, which is only a 3.7% premium to the sector’s five-year average.

Bottom line: The smartest bet right now is to bet on tech stocks – not a correction.

Ahead of the tape,

Louis Basenese

The post An Uncomfortable Truth About Earnings appeared first on Wall Street Daily.

Article By WallStreetDaily.com

Original Article: An Uncomfortable Truth About Earnings

By www.CentralBankNews.info     India’s central bank raised its policy rate by another 25 basis points to 7.75 percent to “curb mounting inflationary pressures and manage inflation expectations in a situation of weak growth,” while it cut the marginal standing facility (MSF) rate by 25 basis points to 8.75 percent to “infuse liquidity into the system to normalise liquidity conditions.”
    It is the second consecutive rate rise by the Reserve Bank of India (RBI), which raised its policy rate by 25 basis points in September, thus reversing cuts earlier this year and leaving the policy rate 25 points below its level at the start of 2013.
    “It is important to break the spiral of rising price pressures in order to curb the erosion of financial saving and strengthen the foundations of growth,” the RBI said, quoting Raghuram Rajan who took over as governor in early September.
    The RBI cut its MSF rate, or the overnight borrowing rate, in September by 75 basis points as part of its move to unwind exceptional tightening measures taken in July.
    “With the reduction of the MSF rate and the increase in the repo rate in this review, the process of realigning the interest rate corridor to normal monetary policy operations is now complete,” Rajan said.

    The MSF rate was raised by 200 basis points in July as part of the central bank’s defense of the rupee which plunged as capital started to flow out of India and other major emerging markets in expectation that the U.S. Federal Reserve would start to reduce its asset purchases.
    At today’s second quarter policy review, the RBI kept the cash reserve ratio (CRR) steady at 4.0 percent but also increased the liquidity provided through 7-day and 14-day repos from 0.25 percent of  Net Demand and Time Liability (NDTL) of the banking system to 0.5 percent. The bank also adjusted the reverse repo and bank rates to 6.75 percent and 8.75 percent, respectively.
    Looking ahead, the RBI said it would “closely monitor inflation risk while being mindful of the evolving growth dynamics.”
    The decision by the RBI was widely expected given the continuing rise in inflation.
    Inflation, as measured by wholesale prices – India’s preferred gauge – rose to 6.46 percent in September, the fourth month in a row of rising prices, from 6.1 percent in August, well above the RBI’s medium-term objective of annual inflation of 3.0 percent and the short-term goal of 5.0 percent WPI inflation by March 2014.
    Rajan said the pass-through of rupee depreciation into prices of manufactured products is partly offsetting the disinflationary effects of low growth and while food prices may ease with the harvest “overall WPI inflation is expected to remain higher than current levels through most of the remaining part of the year, warranting an appropriate policy response.”
    In its policy report, the RBI said a study of professional forecasters expect the average WPI inflation to rise to 6 percent from an earlier expectation of 5.3 percent.
    Although the depreciation in the rupee is impacting inflation, the rupee has recently stabilized as capital flows have resumed following the Fed’s decision to postpone the tapering of asset purchases.
    Since early September the rupee has rebounded and been stable in the last month, rising to 61.51 to the dollar today from 68.15 on September 4, a rise of almost 10 percent. But compared with the end of last year, the rupee has still lost almost 11 percent, putting upward pressure on inflation.

    But industrial activity in India has weakened, reflecting the ongoing downturn in both consumption and investment demand. Stronger export and signs of a revival in some services, along with an expected pick-up in agriculture, could support higher growth in the second half of financial year 2013/14 from the first half, raising real GDP growth to 5.0 percent for the year as a whole from 4.4 percent in Q1, Rajan said, adding that a revival of large stalled projects may also buoy investment and activity.
     India’s Gross Domestic Product expanded by 4.4 percent in the second quarter of the year, down from 4.8 percent in the first quarter and continuing a trend since the first quarter of 2010 of declining growth rates.

    www.CentralBankNews.info

USDJPY is facing the resistance of the downward trend line on 4-hour chart. A clear break above the trend line resistance will indicate that the downtrend from 99.00 had completed at 96.94 already, then another rise towards 100.00 could be seen. On the downside, as long as the trend line resistance holds, the rise from 96.94 could be treated as consolidation of the downtrend from 99.00, one more fall to test 96.57 support is still possible after consolidation, and a breakdown below this level will signal resumption of the longer term downtrend from 100.60.

Provided by ForexCycle.com

By www.CentralBankNews.info     Angola’s central bank held its policy rate steady at 9.75 percent, citing a drop in September’s inflation rate, an increase in credit to the economy and depreciation in the kwanza’s exchange rate.
    The National Bank of Angola (BNA) has cut its policy rate twice this year by a total of 50 basis points as inflation has continued to decline.
    In September Angola’s inflation rate eased to 8.93 percent from 8.97 percent and last week the BNA’s deputy governor said he was convinced the country would meet the goal of inflation at 9 percent at the end of the year.
    The BNA”s goal for many years was to get inflation below 10 percent and this was achieved in August last year and inflation has continued to decline slowly since then.
    In its statement, the BNA said the interest rates on credit in local currency fell in September to an average of 14.09 percent from 14.95 percent the previous month while credit extended has risen by 5.7 percent since the beginning of the year to an outstanding stock of 2.816 trillion kwanza.

    The LUIBOR overnight rate also continued to fall to 5.52 percent, the BNA said.
    The kwanza’s average exchange rate against the U.S. dollar was 97.39 at the end of last month, a depreciation of 1.54 percent from the end of August.

    www.CentralBankNews.info

By MoneyMorning.com.au

It looks like being another bumper day for stocks as Australia & New Zealand Banking Group [ASX: ANZ] reveals its full year results.

What have we been telling you for the past year? Buy stocks. Hopefully you already have and so today you can focus on day two of ‘Retirement Week’ rather than worrying about whether to buy into this rally.

Yesterday we left you in no doubt about your options for saving for retirement.

If you missed yesterday’s Money Morning we’ll give you the five-second version of our thoughts on risk-taking: You don’t really have a choice. You have to take risks.

Although as Nick Hubble showed subscribers of his Money for Life Letter this month, there is one way to kick risk to the kerb.

But for the most part you can’t avoid taking risks. That’s why we say you should acknowledge it, plan for it, and then do something about it. Here’s how…

For two years we’ve recommended a fairly simple approach to risk taking and investing.

In fact it’s so simple some have said it’s simplistic (childish even) and obvious. Saying that, whenever we’ve asked those people how they approach risk taking and investing we get little more than a few ‘ums’ and ‘ahs’.

It seems our approach is so obvious either they hadn’t thought of it or if they had, they haven’t done anything about it. We don’t know what kind of investor that makes them – not very good investors, we guess.

But that’s fine. We make no apology for keeping things simple. To be honest, we’d say our approach is so simple you could teach it to your kids or grandkids.

And as far as investing goes, handing down your investment knowledge to the next generation is a key part of building and preserving family wealth. We know our retirement expert Vern Gowdie would agree with that.

Don’t be a Lazy Investor

You may have seen us discuss this strategy before. But there’s no harm in going over a bit of old ground. Besides, sometimes it takes more than once to get the message across.

So perhaps today’s issue of Money Morning will jog your memory.

As you know by now, we don’t like diversified investments. We see diversification as a cop-out. It’s the opposite of making a committed decision.

So instead of diversifying investments, we like to compartmentalise our investments. What do we mean by that? And how is it different to diversification?

Well, diversification is lazy investing. It involves sticking our money in a broad range of investments and then not paying much attention to how those investments perform.

The way we approach investing is different. Compartmentalising your investments involves making a decision about where you’ll invest. In short, it’s not a scattergun approach. It’s a well thought out and executed approach.

Let’s show you an example of how we do it…

Long Term Investing Doesn’t Mean Buy-and-Hold

Our first step is to split our liquid and investable assets into two blocks. We call one block ‘Safe Money’ and the other block ‘Punting Money’.

Remember, this is how we do it. You may come up with a different way to compartmentalise your money and assets into a way that suits you. This isn’t to say ‘this is how you have to do it’, it’s about getting you to think more about how you manage your money.

In the ‘Safe Money’ block we include our long-term investments. Right now this includes cash, gold and silver bullion, and dividend paying stocks. Now, just because this is ‘Safe Money’ doesn’t mean it’s ‘buy and hold’ money.

If a stock you’ve bought doesn’t appear to be living up to expectations, sell it. There’s nothing wrong with that. Things change. Revenue and profit growth can slow. Businesses can ‘go bad’.

In the ‘Punting Money’ block we include speculative investments. That includes small-cap growth, small-cap income, and blue-chip growth stocks.

From time to time we assess the weighting of each asset and investment in the portfolio. So when we have cash flow to invest we look at the outlook and decide whether we want to add more to the ‘Safe Money’ pot or the ‘Punting Money’ pot.

See, we told you this is simple.

Once we’ve decided in which ‘pot’ to put the money we then decide which specific investment. For example, if we had to allocate capital today we wouldn’t hesitate to allocate part of it into speculative small-cap stocks.

The important thing to remember is that this is active portfolio management.

It involves taking an interest in financial markets and asset prices. It doesn’t mean you have to become an expert, but you do have to show at least a minor interest in investing.

Wishing Won’t Get You Far

Active investing (which doesn’t necessarily mean trading, it just means taking an interest in your investments) is the side effect of a volatile and unpredictable market.

If the market was predictable and with low risk it’s arguable you wouldn’t need to be an active investor. You could just buy an asset and then forget about it.

But as long as interest rates stay at record low levels and investors remain uncertain about the outlook for the local and global economy, it will be essential for you to actively manage your investment portfolio.

This is the only way to make sure you have enough savings to see you into retirement. If you have a positive outlook you can direct cash flow into strong dividend paying stocks or speculative stocks to take advantage of a rising market.

On the other hand, if you’re cautious about the short to medium term outlook for stock prices you could increase your cash exposure.

We wish investing didn’t have to be so involved. It would be great if you could just set money aside knowing that it will be enough to fund your retirement. But wishing won’t get you far in this market…or in retirement. You’ve got to be decisive and active.

By following this simple approach (or coming up with your own) you can do everything in your power to save for retirement without putting an excessive amount of your capital at risk.

Cheers,
Kris+

From the Port Phillip Publishing Library

Special Report: UNAVOIDABLE: Australia’s First Recession in 22 Years

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By MoneyMorning.com.au

It’s a hot topic in the mainstream media right now.

Hardly a day goes by without SMSFs being implicated in the Sydney & Melbourne property bubble.

It’s also an issue causing some of my Gowdie Family Wealth members concern as well. Here is an email I received from George T.

‘Hi Vern,

‘Like you I have three daughters, two of whom are trying to get into their own homes. As is the norm these days, they are looking to borrow $300,000 to $400,000. Even with deposits of their own savings of $100,000 plus, in Melbourne, this puts them in the ‘first home-buyers’ end of the market.

‘Last year as executor for a deceased estate, the residential property I had to sell was purchased by a SMSF. Today I read about the concerns of some authority (forget who) suggesting that this SMSF market is well and truly into the property market utilizing the gearing strategy opened up by the government a few years ago.

‘So, apart from the issues as to whether SMSF’s should be allowed to ‘gear’, the issue concerning me is that the young new generation, trying to get their first home, have a fresh, access to funds, new competitor, in their market.

‘Apart from the potential social issues (between the haves and the have not’s) and the dangers that this new market player is adding financial fuel to the housing pricing bubble, my personal question is: What is the right advice to give to my two daughter’s? Enter this potentially overheated market or stay renting, stay cashed up and stay saving??

‘Life was not meant to be easy. I would very much appreciate your thoughts and input.

‘Kind Regards,

‘George T‘

Before addressing George’s concerns, here’s a general overview of borrowing to invest within a SMSF… 

Borrowing to Invest Within SMSFs

Until late 2007, legislation prohibited SMSFs from borrowing to invest. The borrowing rules were amended in 2007, and again in 2010. This opened up a whole new world to a myriad of SMSF advisers/consultants/planners/property developers/financiers etc. to eagerly market this opportunity to investors.

Not surprisingly the take up rate has been phenomenal.

However, for those not familiar with the machinations of borrowing within a SMSF, it’s not quite the free-for-all it has been portrayed to be.

Borrowing is restricted to limited recourse borrowing arrangements (LRBA).

The LRBA together with available funds within the SMSF are used to buy a single asset that is held in a separate trust.

Should the loan default, the provisions of the Superannuation Industry (Supervision) Act 1993 (SIS Act) are intended to protect the assets of the superannuation fund, and member entitlements.

The LRBA limits lender’s rights to the asset held in the separate trust. The lender cannot seek recourse against any of the other assets within the SMSF.

Any losses are quarantined to the asset the borrowed funds were used to purchase. This safeguards the remainder of the SMSF assets (if there are any).

SMSFs are also restricted to using LRBAs to purchase a ‘single acquirable asset’. If the SMSF wishes to acquire more than one property, then separate LRBAs and trusts need to be established for each additional property. Again, losses are contained within the individual trust.

In 2009, the Government launched the Cooper Review into the Australian superannuation industry.

One of the findings of the Cooper Review was ‘the amount of borrowing within SMSFs is excessive and poses a potential risk to retirement savings.‘ This finding was four years ago. Borrowing levels have only increased since then.

Another finding of the Cooper Review was:

‘The 2007 relaxation of the borrowing provisions and the consumer protection measures that have recently been announced should be reviewed by Government in two years’ time to ensure that borrowing has not become, and does not look like becoming, a significant focus of superannuation funds.‘

The Government’s response to the finding was:

‘gearing can magnify investment losses and reduce liquidity [and] given the significant role SMSFs play in Australia’s superannuation system, it is important that there is appropriate oversight of SMSF service providers; that fund investments are consistent with the purpose of superannuation; and that fraudulent activity is curbed.’

The ATO has also voiced its concerns about the level of gearing in SMSFs.

In November 2012, the ATO issued a Taxpayer Alert TA 2012/7 ‘Self-managed superannuation funds arrangements to acquire property which contravene superannuation law’. The alert was a warning to SMSF trustees and advisers to exercise care when investing in property. This was a shot across the bow.

There is approximately $440 Billion in SMSFs. Of this, around 15% ($66 Billion) is invested in direct property.

No surprise property is the major asset class borrowed funds have been used to purchase.

Given the recent press from the Reserve Bank of Australia, my guess is the new government will look to eventually tighten the SMSF borrowing rules. Possibly:

– increase the amount of equity the SMSF has in the property purchase
– an SMSF must have $200,000 before it can be established
– trustees to sit a multiple choice test to ensure they are aware of their responsibilities

Squashing property speculation and naïve investor exploitation from SMSFs would, in my opinion, be a step in the right direction.

OK, so what about this bubble?

From an outsider’s perspective, the Australian property market is in a bubble. In a recent interview, Jeremy Grantham said:

‘America is a very, very optimistic-biased society, as I believe, incidentally, Australia is, for whatever that means. We’re the two great optimistic societies. You can have a conversation about a housing bubble in England, and they’ll say, ‘oh, is that right? Let me see the data.’ If you have one in Australia, you have World War III! They hate you. They hate you for years! The idea that you could suggest that they were having a housing bubble.‘

Here’s what Quartz had to say in August 2013 about Grantham’s ability to spot a bubble:

‘Jeremy Grantham, the 74-year-old chief investment strategist of Boston-based investment fund Grantham Mayo van Otterloo (GMO), has made his career forecasting market bubbles- with remarkable success. When writing an article on the slowing pace of global growth last week-for which Grantham’s ideas provide significant fodder-my colleagues and I were spellbound by one statistic: of the 36 major bubbles GMO says it tracks, 33 have completely popped, or returned to their prior trends.‘

One of the three bubbles yet to pop (according to GMO) is the Australian property market. Rarely does someone have a 100% forecasting record, so Grantham could be wrong on this one.

However all markets have certain mathematical metrics – yield, price to earnings, etc. When these metrics move well away from the average and the collective thinking is ‘it’s different this time’ or ‘it’s different in Australia’, then this sends up a red flag to experienced bubble watchers.

The following graph is from macrobusiness.com.au and shows the real (after inflation) price movement of the Australian housing market since 1880.

Click to enlarge

Note the kick up in prices began in earnest after 1980. No coincidence that this also corresponds with the beginning of our love affair with debt.

If we step back a bit further and view the house price graph with the knowledge of the following graph on US long-term interest rates, we can see the 1950 spike in prices was influenced by the extremely low rates that applied at the time.

Some constraints on house prices at that time that do not exist today, were:

1. Higher deposit required
2. One income household

After the initial spike in 1950, house prices moved slightly upward over the next thirty years. During this period interest rates rose from their post-Second World War lows to over 16%.

The higher servicing costs acted as a handbrake on house prices. Another factor during the 1970s was government-capped home loan interest rates at 13%, irrespective of how high the cash rate went to.

A measure designed to relieve pressure on households that had borrowed at the lower rates in the 1960′s.

Rates peaked in 1980 and as rates fell (money became cheaper), debt levels grew.
Admittedly this is the US interest rate experience. However, our rates trended in the same direction (give or take a percent or two) over these periods.

The point I’m making is that cheap money has filtered into asset prices. The current low interest rates + SMSFs borrowing + Chinese buyers are the reasons being cited for a fire being lit under the property values in Sydney and Melbourne.

As mentioned above there are mathematical metrics that apply to all markets, and Australian property isn’t immune to the laws of math.

From an investment point of view, if price rises aren’t matched by equally strong rental increases then the yield on the property decreases. For example, a property valued at $800,000 with a weekly rent of $800 per week (say $40,000 per annum) is yielding 5% before expenses (rates, insurances etc).

If the property price increases to $1 million and the rent remains at $800 per week, then the yield is 4% ($40,000/$1 million).

When you deduct expenses (of 1-2%) from the gross rent, the net income is getting a little skinny. Now this is OK while interest rates are low, but what happens if interest rates rise (as they inevitably will from their historic lows)?

If we look at the US property market pre-2007, a whole lot of new buyers (sub-prime borrowers and home equity withdrawals) were introduced to the concept of owning a house or three.

Sure this surge in demand drove prices up and those who ‘missed’ out lamented the fact they were left behind. No different to the current argument about SMSFs and foreign buyers crowding out the Australian market.

Why did sub-prime implode? The sweetheart low interest period expired and borrowers faced with the higher rates folded.

There certainly appears to be heat in the major property markets at present. However unless there is a corresponding increase in rents (and this is unlikely with unemployment tipped to rise) prices will hit the outer edge of their mathematical metrics.

So, to sum up, the short answer to George’s question at the top of this essay is that I would advise my daughters to continue saving, exercising patience, avoiding the hype, and do the math on renting versus buying if interest rates tick up 2+% or more.

Vern Gowdie+
Chairman, Gowdie Family Wealth

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(VIDEO) What Is the Debt Situation in Europe and the U.S.?

By Elliott Wave International

In this video clip from Steve Hochberg’s “Don’t Get Caught Holding the Bag” presentation, recorded at the San Francisco MoneyShow, Elliott Wave International’s Chief Market Analyst addresses a popular question we get at EWI. Enjoy this insight from Hochberg, then take a few minutes to learn how you can get Elliott Wave International’s newest free report: How to Protect Your Money When the U.S. Debt Bill Comes Due.

How to Protect Your Money When the U.S. Debt Bill Comes Due Read this new FREE report from Robert Prechter The Federal Reserve has been inflating the supply of dollars at a stunning 33% annual rate over the past five years. You don’t want to be unprepared when that bill comes due! Read this free report from Robert Prechter, market forecaster and a leading opponent of the Federal Reserve, and learn how you can protect yourself. As a result, you will understand today’s biggest risks to stocks, commodities, precious metals and the economy — risks that most mainstream sources cannot see because they’re blinded by decades of inflationary Fed policy. Download your FREE report by Robert Prechter now — for a limited time >>

Source: Kevin Michael Grace of The Gold Report (10/28/13)

http://www.theaureport.com/pub/na/jordan-roy-byrne-when-stalking-juniors-follow-the-leaders

The bear market in precious metals equities will end soon, says Jordan Roy-Byrne, editor and publisher of The Daily Gold Premium, perhaps even by the end of the year. But the rising tide will not lift all juniors equally. In this interview with The Gold Report, Roy-Byrne explains why bottom-fishing is a bad idea and why the savvy investor must find companies that will not just survive but thrive when the bears become bulls.

The Gold Report: The managing director of the International Monetary Fund, Christine Lagarde, worries about the world sliding back into recession. What are the chances of that?

Jordan Roy-Byrne: We tend to have recessions every four or five years, on average. In the last 30 or 40 years, however, recessions have been less frequent than the average, due to extremely expansionary monetary policy. But another recession is almost a certainty in the next couple of years. I expect it will be milder than the 2008 recession. Typically, after such a severe recession or financial crisis the next recession is quite mild in comparison.

TGR: We seem to have permanent quantitative easing in the U.S. Do you think there’s a point when the country will hit a debt wall?

JRB: I don’t know if the U.S. will ever hit a debt wall. We have the world’s reserve currency, and that’s not going to change any time soon. We have the ability to print a lot of money, and there’s always going to be demand for our bonds. If that demand wanes, I think we will see central banks increase their buying. They will buy every bond if they have to in order to prevent interest rates from rising.

Looking out over the next five years, I see similarities to the 1940s after World War II when there was essentially huge quantitative easing and interest rate price fixing. This was done to lower the debt-to-GDP ratio. There were a couple of recessions, but when the economy grew, it grew very strongly. There was quite a bit of inflation, that was the negative consequence, but the debt-to-GDP ratio did begin to decline.

The problem with debt is not the nominal amount. The problem is when the economy doesn’t grow fast enough to service the debt. One way to deal with that problem is to keep interest rates extremely low so there is very high nominal growth. The drawback to this is inflation. Commodity prices in the mid-to-late 1940s escalated substantially. I think we could see similarities in the next five years.

TGR: We’ve seen for some time an inverse relationship between precious metal stocks and equities in general. Do you think this will continue? Must equities fall before gold and silver stocks rise?

JRB: I do think this relationship will continue. Historically, gold stocks have performed fantastically at times when equities are in a bear market. The two best examples are 1972–1974 and 2000–2003. Because the gold bugs have lost a lot of money and don’t have the firepower to drive the market higher right now, outside money is going to have to come in. I think once conventional investments weaken, which I expect to happen in the next three to six months, asset managers will look to precious metals. For example, there were quite a few generalists and international fund managers at the recent Denver Gold Forum.

TGR: How long will this bear market in precious metal stocks last?

JRB: It could already be over. Gold and gold stocks have been in a bear market for two years and two months but silver, silver stocks and juniors peaked in April 2011 and have been in a bear market for 2.5 years. History shows that bear markets in the gold stocks tend to average 65%, while the two worst were 72%. At the June low the NYSE Arca Gold BUGS Index (HUI) was down 67%. That tells us the market is likely very close to a low or has already bottomed.

The market is retesting its summer low. Some stocks have already bottomed. Some will make double bottoms, and the worst will make new lows. That’s just how a bottom is—disjointed. The major bottoms in 2000 and 2008 occurred in October–November, so we are right on schedule.

TGR: How strong will the recovery be?

JRB: The recovery will be fantastic because that’s what always happens in this sector. Looking at recoveries from major bottoms starting from 1960, the average recovery for large gold stocks was 58% over the first four months and 75% over the first seven months. My guess is that the next recovery will be stronger than average, but the problem is we don’t know when it will start. It could be late November or even January. It could have started already. In the summer rally, Market Vectors Junior Gold Miners ETF (GDXJ) rebounded 59% from its low in only two months. Odds are, many stocks could be up 40–50% before most realize a bottom is in.

TGR: Could you talk about relative strength analysis and its importance to the valuation of precious metal stocks?

JRB: Relative strength analysis is a type of technical analysis that compares one security or market to another. We use this analysis to spot market leaders and market laggards. We want to own the leaders and avoid the laggards, obviously. You don’t necessarily want to chase the strongest stocks. There’s an art to it. My view is you want to identify what the strongest stocks are when the sector is correcting, and you want to buy them when they are correcting.

For example, the market has been correcting for the last several weeks, and this may continue for another week or two. So, if you happen to like a stock that has performed really well and you haven’t bought it yet, maybe in the next week or two that stock will come down another 5%, 10% or 15%, and that gives you the opportunity to buy it.

TGR: You’ve written that buying a weak stock on the dip is not a good idea. In a time of bottoming stocks, however, there is a great temptation to go bottom fishing. How do investors distinguish between stocks that are truly undervalued and those that have fallen for good reason?

JRB: Mining companies—95% of them, anyway—are not like blue chip stocks. A lot of these companies that have declined 80% can end up declining 99%. Relative strength analysis should be used in conjunction with fundamental analysis. For example, you may really like a company, but if it’s badly underperforming the sector, that is a warning sign.

A recent example is Pretium Resources Inc. (PVG:TSX; PVG:NYSE). It was very strong during the summer rebound, but at the end of August some huge and consistent selling came in and it continued into September. It was one of the weakest stocks in September, ahead of its major decline. The warning signs were there.

TGR: Let’s look at the four big mining locations in North America: Nevada, Mexico, Ontario and Quebec. We’ll begin with Mexico. Which companies do you like there and why?

JRB: Some of the absolutely best companies are located in Mexico, and that should tell you something about Mexico as a jurisdiction. Two of the best are First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) and Argonaut Gold Inc. (AR:TSX). First Majestic put its Del Toro mine into production this year. It is ramping up steadily and will be the company’s largest mine. First Majestic continues to have a stronger growth outlook than all of its smaller former peers, which is quite amazing considering how strongly the company has grown already. One might expect its size to limit its growth. That’s not the case.

As far as relative strength goes, First Majestic has held up very well during this downturn compared to the majority of silver stocks. Typically, when silver rallies, First Majestic shares perform well. In the recent summer rally, shares went from $9 to $16. Again, this is quite amazing, considering that First Majestic is a billion-dollar company, not some tiny junior.

TGR: And Argonaut?

JRB: Argonaut has two growing mines in Mexico, La Colorada and El Castillo, and two strong development projects, San Antonio in Mexico and the recently acquired Magino project in Ontario. There could be permitting issues with San Antonio. It’s not going to be a slam dunk, but if Argonaut can get that mine into production before the end of 2014, it will have a growth profile basically unmatched by anyone in the industry. In addition, Argonaut has ongoing cash flow, a very strong cash position of around $140 million ($140M) and one of the best management teams in the industry.

TGR: Do you consider Argonaut to be an undervalued stock that’s likely to show a significant gain with the end of the bear market?

JRB: Yes. Argonaut’s relative strength has been very strong for the most part over the last year or two. In early July, its shares went from about $5 to more than $8, and I think we’re going to see a similar move when the bear market ends in the next few months.

Argonaut has the management, the capital and the projects to be a serious growth-oriented producer over the next three or four years. That’s why I call it a long-term gift.

TGR: What do you like in Nevada?

JRB: Nevada’s a great jurisdiction, both politically and geologically. Drill costs tend to be lower and deposits are easier to work with because so many projects are open pittable and heap leachable. There are two Nevada companies I like. The first is Corvus Gold Inc. (KOR:TSX). This is one of my absolute favorites right now. The company has a large gold deposit called North Bullfrog very close to Barrick Gold Corp.’s (ABX:TSX; ABX:NYSE) old Bullfrog mine.

Corvus’ main resource at North Bullfrog is moderately economic at current prices, but the real kicker is that it has been getting higher-grade intercepts at Sierra Blanca and especially Yellowjacket, and the metallurgy on the latter is very good. Corvus will be coming out with a new resource estimate by the end of 2013 or early 2014 and a preliminary economic assessment will follow. Yellowjacket is going to be part of a starter pit, and I believe the economics at these gold prices are going to be very favorable.

TGR: What is Corvus’ relative strength?

JRB: Its relative strength could be indicating that it has something very significant on its hands and that Yellowjacket is going to be worth quite a bit. Corvus is one of only three stocks in this sector trading above a rising 400-day moving average. It’s difficult to buy a stock that’s already gone up so much, but I think Corvus is going to perform very well in 2014. I think it has a good shot to be acquired.

TGR: What is your second Nevada pick?

JRB: As far as production stories go, Klondex Mines Ltd. (KDX:TSX; KLNDF:OTCBB) is one I’ve started following recently. With regard to relative strength, it has been one of the strongest stocks over the last six to nine months. If you like the fundamentals, you want to try to buy it on weakness. Klondex’s Fire Creek project looks to have outstanding potential. Grades have been spectacular; the company has a sizeable resource and it has been doing some bulk sampling, which I believe has gone pretty well.

When Klondex goes into commercial production, it is going to be able to produce a sizeable amount of gold at a low cost with very low capital expenses. It’s going to be highly economic, but it won’t be easy, and there will have to be some financings along the way. This is an underground, narrow-vein mine, but the new CEO, Paul Huet, is experienced with these types of deposits and is the man for the job. It’s a perfect fit.

TGR: What do you like in Ontario and Quebec?

JRB: Balmoral Resources Ltd. (BAR:TSX.V; BAMLF:OTCQX), which just announced a financing that will take its cash position to $11M. The company has made a high-grade discovery at its Martiniere project, which is located about 40 kilometers away from Detour Gold Corp.’s (DGC:TSX) mine. Balmoral should have a maiden resource estimate out in early 2014. This is going to be a high-grade property, and, like Corvus, it’s another potential acquisition.

The stock has been beaten down, but it did rally 100% during the summer. That tells me that there is a lot of leverage if you buy shares near a low. CEO Darin Wagner has done it before—built up an exploration company and sold it for nearly $0.5 billion. It looks as if he’s going to be able to do it again. The question comes down to what price will Balmoral sell out. Obviously it wants to wait for a market recovery, so it can prove up more value and get a better price. At the same time, potential acquirers (of not just Balmoral) want to wait for improved market sentiment. No one is taking any risks right now, though those that do could be rewarded.

TGR: Any other companies anywhere you’d like to mention?

JRB: Bear Creek Mining Corp. (BCM:TSX.V) in Peru. The company’s Corani deposit has gotten environmental approval, and it’s going to be a mine. The economics are tremendous. It can make money at $20/ounce ($20/oz) silver, and it can make a ton of money at $25/oz. This is a stock that has shown very good relative strength over the last 12 months. That says that long-term selling has dried up.

The only issue for Bear Creek is financing. The company can’t escape doing an equity component if it intends to finance the entire project, and that would be just too dilutive at these prices. So it is going to look at starting with a smaller operation, getting that going and then working its way up because this will eventually become a huge mine.

TGR: What about Bear Creek’s Santa Ana project?

JRB: That was taken away by the previous administration in Peru. Bear Creek has been going through the courts to try to get it back. There was a story in Reuters that quoted the mining minister of Peru saying he was looking for an amicable solution. The market is essentially giving Bear Creek zero for this project, but it looks as if the company could get some value out of it in the coming months. I think investors should keep their eyes on the Santa Ana situation. Who knows? This could be a reason why Bear Creek shares are showing good relative strength.

TGR: Bear Creek’s share price has yo-yoed from $1.60 to more than $2.50 twice since August.

JRB: It’s a very volatile stock. There’s not a huge amount of liquidity in it because something in the vicinity of 50–60% is held by a small number of hands. Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) and Tocqueville are big holders. It’s a stock you want to buy on weakness rather than on strength.

TGR: We’ve discussed companies in Mexico and Peru. A couple of people I’ve interviewed in the last month have said that they are not happy with the talk of a new Mexican royalty regime. What do you make of this?

JRB: First, nothing has gone through. Second, the mining lobby in Mexico is very powerful, so I would be surprised if it does go through at that level. We’re talking about a 7% tax. If we get back into a bull market for precious metals, I don’t think 7% is really going to matter. I’m not an expert on this issue, but maybe we’ll see a 3% or 4% tax go through. It’s just a random guess.

Based on the charts of how companies operating in Mexico are performing, this potential tax is not an issue. However, if these companies in Mexico start to underperform the sector it could be because of the new tax regime.

TGR: Peru was regarded as toxic just a few years ago, but its reputation has improved a fair bit. I’m told that each company operating in Peru has to be considered individually based on its ability to come to a modus vivendi with the government and local communities. Do you agree?

JRB: I think that’s accurate. Let’s step back and remember that Peru is one of the world’s leading producers of commodities. Peru is economically dependent on the mining industry. Bear Creek is a wonderful example of what you said. At Corani, Bear Creek has done fabulous work with the local community, which will see lots of jobs when it goes into production. But Santa Ana was taken away from the company because of local strife. The two projects are in completely different areas. It’s a case-by-case situation. Investors have to look at where the project is located and the attitudes of the local community. Bear Creek’s situation underscores this perfectly.

TGR: Maynard Keynes said famously that the market can remain irrational longer than an investor can remain solvent. Many investors in gold and silver companies are close to their limits in this regard. What advice do you have for them?

JRB: Well, everyone’s personal financial situation is different. Everyone has different goals and tolerance of risk and time objectives. Therefore, it’s difficult to give blanket advice, but if investors are in companies that have been market laggards, companies that don’t have much potential, they have got to sell them. They should do research and get into companies with the potential to be market leaders, companies that will not just survive but thrive when we do get a recovery.

TGR: Jordan, thank you for your time and your insights.

Jordan Roy-Byrne is a Chartered Market Technician, a member of the Market Technicians Association and a former official contributor to the CME Group, the largest futures exchange in the world. He is the editor of The Daily Gold Premium, and his work has been featured in CNBC, Barron’s, the Financial Times,Alphaville, Yahoo Finance, Business Insider, 321Gold, Gold-Eagle, FinancialSense, GoldSeek and Kitco.

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DISCLOSURE:

1) Kevin Michael Grace conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Gold Report: Argonaut Gold Inc., Klondex Mines Ltd. and Balmoral Resources Ltd. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Jordan Roy-Byrne: I or my family own shares of the following companies mentioned in this interview: Argonaut Gold Inc., Bear Creek Mining Corp. and Corvus Gold Inc. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Argonaut Gold Inc., Corvus Gold Inc., Bear Creek Mining Corp., First Majestic Silver Corp. and Balmoral Resources Ltd. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

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