InvestMacro Forex News

By www.CentralBankNews.info     Sri Lanka’s central bank held its benchmark repurchase rate steady at 7.0 percent, as expected, and said there was room for market rates to fall further and the reduction in lending rates so far had been inadequate to reflect the central bank’s policy stance and low inflation.
    The Central Bank of Sri Lanka, which has cut rates by 75 basis points since December last year, said inflation is expected to remain in single digits during the rest of this year and in mid-single digits in 2014 and this would be “conducive for sustained economic growth and improved domestic and international investor confidence.”
    Global developments have been reasonably encouraging, the central bank said, and the “positive developments in advanced economies, if continued, would augur well for domestic economic growth as a result of a stronger performance of the external sector.”
    However, the bank added that the “wide fluctuations of currencies of trading partners and competitors in the international market would need to be closely monitored in order to address any adverse effects on Sri Lanka’s external balance in the period ahead.”
    Exports from Sri Lanka showed some turnaround in June, recording a positive year-on-year growth after a decline seen in the past 15 months, while imports also rose in June so the trade deficit rose.
    But inflows to commercial banks and to the stock market along with foreign direct investment inflows showed that foreign investor confidence had remained “unchanged despite the volatility caused by global markets reacting to the prospects of the tapering of quantitative easing by advanced economies,” the central bank said.
    Inflation in Sri Lanka eased further in July to 6.1 percent from 6.8 percent in June and core inflation fell to 3.1 percent from 4.3 percent, continuing the declining trend seen since March after headline inflation approached 10 percent in the second half of 2012 and first few months of this year.
    Sri Lanka’s Gross Domestic Product rose by an annual 6 percent in the first quarter, down from 6.3 percent in the fourth quarter.

    www.CentralBankNews.info

By MoneyMorning.com.au

As you should know by now, we’ve got a fairly simple view on gold.

Don’t fuss around with it.

Don’t dwell over when you should buy it.

Just buy it and be done with it.

But that doesn’t mean we aren’t interested in gold and the gold market. From time to time something catches our eye.

That happened yesterday. It reminded us of a way to help tell the end of the gold bear market…and Warren Buffett’s role in determining it…

Yesterday the World Gold Council released its quarterly Gold Demand Trends report.

Given the absolutely brutal performance of gold in recent months, we were keen to flick through it soon after it arrived in our inbox.

To be honest, for most of the past three years we’ve barely paid any attention to this quarterly report. But this time we thought it was worth at least a few minutes of our time.

And we’re glad we did because we were stunned by what we read…

Selling Paper Gold to Buy Real Gold

We’ve cut the following table from the report and circled the key numbers. What it shows you is that total gold bar and coin demand hit 507.6 tonnes during the quarter.

By contrast the demand from gold exchange-traded funds (ETFs) was -402.2 tonnes. In other words, the ETFs were net sellers of gold:

Source: World Gold Council

The fact that ETFs were net sellers doesn’t surprise us. Especially when we read the latest news about famed hedge fund manager John Paulson selling half his fund’s holding in the main US gold ETF.

What really stunned us was the size of the physical bar and coin demand. We knew from personal experience that there was a long line the last time we bought gold bullion about three months ago. So the figures make sense. But it still surprised us.

But that table only tells part of the story. It only gives you the numbers. It doesn’t interpret the numbers into useful information. For that you need to speak to a respected gold analyst.

That’s why we asked our old pal Greg Canavan, editor of Sound Money, Sound Investments, to chime in with his take on the numbers. Here’s what he told us:

‘In an ETF, you can only get access to the actual physical gold if you’re an “authorised participant”, which are generally the banks. As a small investor, an ETF only gives you “exposure” to gold. That isn’t the same as owning gold…especially if you find out the “authorised participants” have drained all the gold from the ETF and you can only redeem your gold “investment” in equivalent US dollars. Those stats show an increasing realisation that the recent gold price plunge was more about selling in the paper gold market, rather than the physical gold market.

‘Also, it shows how much actual demand there was for physical when the price fell. The bullion banks (authorised participants) are the main intermediaries in the global physical gold market. The fact they’re taking lots of gold out of the ETF’s means there is strong demand for it elsewhere. ETF’s don’t lose physical metal just because the price falls. That’s not how they work. The silver ETF, for example, has hardly shed any silver even though silver’s price performance has been much worse.

‘So I’d say this confirms that investors prefer real, limited supply physical gold, not abundant paper gold.‘

So, gold has taken a drubbing. Paper gold investors are selling out. But real gold investors are buying in. That’s the important thing. If you’re interested in buying gold at a good price, is now the time?

Gold v Stocks

For the answer to that question we had to turn to another of our old pals, Dan Denning. (We’re happy to admit that we don’t know a quarter of what these guys know about gold, and so we tap their brains for info.)

Some time ago we remembered Dan telling us that he had a different way to most people of judging when it was a good time to buy gold. He doesn’t just look at the gold price, he looks at gold’s relative price.

In this case, the price relative to stocks…and one stock in particular – Berkshire Hathaway [NYSE: BRK/B].

Berkshire Hathaway is of course billionaire investor Warren Buffett’s listed investment vehicle. Buffett is the man who famously says that gold is about as pointless an investment as you can get.

We don’t agree. But that’s by the by. The point is whether gold is now at a price that makes it worth buying when compared to stocks (Berkshire Hathaway).

As Dan sees it, it is. Dan’s view was that gold would find support when it was trading at 14-times the price of Berkshire Hathaway ‘B’ shares (currently USD$116.57 per share), but only after gold had over-corrected through that level.

It’s now at 11.9-times Berkshire ‘B’ shares as you can see on the chart below:

Source: StockCharts.com

Of course, this isn’t just about the gold price falling. It’s about stocks hitting an all-time high too.

As far as Dan is concerned, as he told us yesterday, ‘Move complete, rally to commence.‘

The hedge fund guys are selling big chunks of their gold ETF positions, and yet the physical gold demand has almost doubled compared to the previous year.

If you’ve put off buying gold for fear it could fall further, everything we’ve covered today could be reason enough to tempt you into the market.

Then again, as we mentioned at the top of this letter, we try not to think about gold too much…we just buy it whenever we feel like it.

Cheers,
Kris+

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From the Port Phillip Publishing Library

Special Report: The Sixth Revolution

Daily Reckoning: Silver, The Devil’s Metal

Money Morning: Two Points to Consider from the Commonwealth Bank…

Pursuit of Happiness: The Next Big Leap for Transportation Technology

Australian Small-Cap Investigator:
How to Make Big Money from Small-Cap Stocks

By MoneyMorning.com.au

[Ed Note:The following is an edited extract from a book Vern Gowdie wrote to his three daughters. The book’s title is A Parent’s Gift of Knowledge.]

The Australian share market has two major indices: 

• The All Ordinaries Index 
• The ASX 200 index 

The All Ordinaries reflects the share price movements of a larger number of shares.

The ASX 200 index reflects the movement of the top 200 companies in Australia.

The way an index works is relatively simple. The following is an example only and the values I have attributed to each company bear no resemblance to reality.

In the above example, if BHP (17%) and CBA (14%) share prices move up or down, the movement influences 31% of the index.

Sometimes when they give the share market news on TV you’ll hear things like, ‘the mining stocks helped lift the index today,’ or ‘banking shares drove the market lower.’ The sheer size of these stocks and their weighting in the index casts a huge shadow over the movement of the share index.

In my opinion the best and most economical way to invest (as opposed to speculate) in the Australian share market is to buy into an index ETF. An index ETF gives investors exposure to a broad range of stocks.

Why invest in the index (Beta investing) and not individual shares (Alpha investing)? With individual shares (buying shares in Telstra, NAB, Woolworths etc.) there are stock-specific risks and rewards. Telstra is a classic example of this.

Telecommunication usage (mobile phones, wireless internet etc.) has grown exponentially over the past decade, yet Telstra’s share price has fallen nearly 50% over the past fourteen years.

The combination of the bursting in the tech bubble euphoria and Government interference to reduce Telstra’s monopoly in the telecommunications sector created uncertainty over the company’s future profitability. And so investors re-priced Telstra’s business.

The banking sector has performed strongly over the past decade. However NAB has been relatively weak due to some poor management decisions. In Jan 2000 the NAB share price was $21.80 and is currently around $30. This is a compound growth return of 2.5% per annum.

Yet BHP, CBA and a handful of other quality companies have performed exceptionally well over the past decade. BHP was around $8 in 2000 and is currently at $37. This is an outstanding 362% return over 13 years. Not bad compared to Telstra losing 50% in value.

Individual shares can be rewarding but picking the right one is difficult and requires painstaking research. For instance, will BHP continue its stellar run for the next ten years or will Telstra be the stand out performer?

History shows this process of consistently anticipating the direction of companies is difficult over the longer term.

Therefore it’s my conclusion that over the longer term you’re better off tracking the index.

The ASX 200 index over the past thirteen years has returned approximately 65%. This isn’t particularly great when compared to BHP or CBA, but significantly better than how Telstra shareholders fared. Investing in the index reduces your reliance on an individual company to perform (alpha) and enables you to participate in the general movement of the market (beta).

The question for stock pickers is, ‘What will be the outstanding companies over the next decade?’ Foresight is a much harder task and it’s for this reason that sticking with the index enables you to participate in the general market movement.

Investing in an index still requires you to do your homework to determine whether the market is over-priced or not. Anyone who invested in the index in late 2007 at 6,700 points has lost 25% of their investment.

In 2007 the market had been in the ascendency for four straight years (2003 to 2007). Common sense and history dictated this trajectory couldn’t possibly last yet the majority of people were lured in by the fact that it had run for that long and believed it would continue.

Using past performance as a future guide is a very poor substitute for detailed analysis. This was another hard lesson to learn for market participants.

When it comes to markets, common sense isn’t so common when greed clouds your judgment.

Vern Gowdie
Editor, Gowdie Family Wealth

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From the Archives…

Should You Still Buy Stocks Here? Yes, but…
09-08-2013 – Kris Sayce

The Secret to China’s $7 Billi on Milk Market
08-08-2013 – Nick Hubble

RBA (Retirees Below Average)
07-08-2013 – Vern Gowdie

Have Australian Stocks Broken Free from China?
06-08-2013 – Kris Sayce

When Should You Sell Your ‘Loser’ Stocks?
05-08-2013 – Kris Sayce

By The Sizemore Letter

It’s that time again.  Warren Buffett’s Berkshire Hathaway (BRK-A) released its quarterly 13F filing today, which details stock by stock what Buffett and his managers have been buying and selling.

At the top of the list?  A 17.8-million-share position in Suncor Energy (SU), Canada’s biggest oil and gas producer.  Suncor is a major producer in the Alberta oil sands, and this purchase is consistent with Buffett’s overall belief in a North American industrial renaissance.

Next is Dish Network (DISH), the satellite television provider. Berkshire Hathaway added 547,312 shares of Dish, worth about $24 million.  The relatively small size of the acquisition indicates it was probably made by one of Buffett’s lieutenants and not the Sage himself.  Still, given that Buffett’s two managers—Todd Combs and Ted Weschler—are front runners to take control of Berkshire Hathaway’s portfolio once Buffett eventually retires, the move is worth noting.

Dish is an odd addition for Berkshire Hathaway given that archrival DirecTV (DTV) is already in the portfolio and has been for a few years now.  It’s even stranger when you consider the high drama surrounding Dish and its CEO Charlie Ergen and its failed bid to purchase Sprint (S) and Clearwire for their spectrum assets.

Ergen had grand ambitions of using Sprint’s bandwidth to create something of a wireless empire that would have included paid TV, phone service, and wireless internet…which sounds great, except that he would have been entering an already crowded market in all three services.  And in any event, he got outbid.

Buffett is not known for endorsing great jumps into the unknown. Dish seems an odd addition to a generally conservative, staid portfolio.  It’s highly-indebted, not particularly cheap, and operates in an industry in the middle of a transformation with a very uncertain outcome.  I’m left scratching my head on this one.

In addition to Dish and Suncor, Buffett massively increased his position in General Motors (GM), adding about 60% to a position now worth $1.4 billion.  Like Suncor, this move is more in line with Buffett’s belief in America’s industrial future.  It’s also an established player in an old-line industry trading for a reasonable price.  Classic Buffett.

And what did Buffett sell?

He cut his positions in packaged foods companies Kraft Foods (KRFT) and Mondelez (MDLZ) to nearly zero.

Until his next letter to shareholders comes out, we’re left to speculate as to why Buffett unloaded these two.  My guess is simply that he wanted to free up cash for another big purchase.

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By The Sizemore Letter

Watch Jeff and I duke it out over Wal-Mart’s (WMT) earnings release.

From Jeff Reeves at The Slant:

Charles Sizemore, editor of the Sizemore Investment Letter, is a good friend and a great investor. But friends often disagree — as Charles and I do on Walmart (WMT) stock and Walmart earnings.

Me, I see Walmart as a retailer in trouble. As I wrote in advance of Walmart earnings, the excuses about a cold, wet spring and income tax checks don’t mask the underlying problem of weak consumer spending at home and big investment abroad that has yet to pay off substantially for shareholders.

Walmart earnings on Thursday validated these headwinds as sales missed, the outlook was slashed and the stock fell. And in the near- to medium-term, I see continued trouble for Walmart stock.

But Charles has a different take, and a long view that places Walmart stock at the top of the market when it comes to returning capital to shareholders via dividends and buybacks. Consider for a moment that its dividend has exploded from 22 cents a quarter in 2007 to an amazing 47 cents a quarter currently — a 113% increase in just five years!

And bigger picture, Charles says the risk posed by Walmart earnings declines and sales trouble isn’t necessarily a risk that just applies Walmart but the U.S. economy generally. He notes that Walmart makes up 10% of non-auto retail sales in the U.S. and that any downturn here is in fact a reflection of the macro picture — not poor management.

As such, that shouldn’t mean underperformance since broadly the market will be feeling pressure as a result. Retail stocks from Target (TGT) to Macy’s (M) to Gap (GPS) will feel the pain, as will other stocks that rely on consumers.

I admit Charles has a good point to be made about the long-term potential, and he admits that there’s no reason to run out tomorrow and buy Walmart given the short-term headwinds.

So maybe we are both right. Or both wrong.

Time will tell!

Note from Charles: Target even trumps Wal-Mart in terms of shareholder friendliness.  Both retailers have been monster dividend raisers and share repurchasers in recent years.

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