PGM Capital – Blog
1Mar/150

Highlights of the Month of February 2015

By Eric Panneflek

Dear PGM Capital Blog readers,

In this weekend's blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the month February, 2015:

  • Earnings report of BHP Billiton and RIO Tinto
  • Oil prices rebound in February 2015.
  • USA Q4-2014 GDP Growth revised down to 2.2 percent.

EARNING REPORT BHP BILLITON & RIO TINTO:
Rio Tinto Group (RIO.AX) and BHP Billiton (BHP.AX) are both British-Australian multinational metals and mining corporation with their respective headquarters in London, United Kingdom, and Melbourne, Australia.

BHP Billiton and RIO Tinto with their respective market capitalization of 139 and 92 Billion US-Dollars are worlds biggest and second biggest mining company.

RIO TINTO financial results February 12, 2015.

Highlights:

  • Consolidated sales revenues of US$47.7 billion.
  • EBITDA margin at 39 percent, unchanged from 2013.
  • Achieved underlying earnings of US$9.3 billion, nine percent lower than 2013 despite the US$4.1 billion (post-tax) impact of lower prices.
  • Generated net cash from operating activities of US$14.3 billion,
  • Decreased net debt by US$5.6 billion in 2014 to US$12.5 billion on 31 December 2014.
  • Board of directors declared cash dividend of US$ 1.98,  - an increase of 12% - payable on April 9th 2015, for shareholders on record on March 6, 2015.

Source:

BHP Billiton financial results February 24, 2015.

  • Underlying EBITDA of US$14.5 billion, down 12%.
  • Underlying attributable profit of US$5.4 billion, down 31%.
  • Net operating cash flow of US$10.4 billion, down 12%.
  • Capital and exploration expenditure of US$6.4 billion, down 23%.
  • Free cash flow of US$4.1 billion, up 21%.
  • Net debt down to US$24.9 billion.
  • Board of directors declared a cash dividend of US$ 0.62,- an increase of 5% - payable on March 31st 2015, for shareholders on record on March 13, 2015.

Source: 

CRUDE OIL PRICES ROSE SHARPLY IN FEBRUARY:
After posting declines over the past seven months, crude-oil futures rebounded sharply in February, with Brent crude scoring its biggest monthly percentage climb in nearly six years, supported by an improving demand outlook and supply outages.

On its way to contract expiration, in March New York ultra-low sulfur diesel (ULSD) gained more than 7 percent in volatile trading, and the 36 percent February increase was the biggest percentage monthly rise in 15 years.

Brent crude LCOc1 rose US$2.53 to US$62.58 a barrel. February's 18 percent gain was the biggest monthly percentage rise since May 2009.

The premium of Brent crude to Nymex WTI crude remains wide at more than US$12 a barrel, its widest in more than a year.

The widening of the price gap in part reflects the fact that the U.S. oil output has continued to grow relentlessly despite the much weaker prices recently.

As can be seen from below chart WTI crude oil is stuck in a $10 trading range between $45 and $55 per barrel as it continues to cross above and below the heavily-watched $50 psychological level.

A decisive break above or below this trading range is necessary to confirm WTI crude oil’s next directional move.

USA Q4-2014 GDP GROWTH REVISED DOWN TO 2.2 PERCENT:
The Commerce Department said Friday, February 27, that the economy as measured by the gross domestic product grew at an annual rate of 2.2 percent in the October-December quarter, weaker than the 2.6 percent first estimated last month.

The USA Bureau of Economic Administration (BEA) revised the entire data series as follows:

  • Personal Consumption was 2.83% of the final GDP, down from 2.87%.
  • Fixed Investment was 0.71%, vs 0.37% before.
  • Net trade subtracted even more from growth, with Net Exports less Imports amounting to -1.16%, down from -1.02%.
  • Government offset the decline modestly, subtracting -0.32% from growth, compared to -0.40% in the first revision.

Below chart gives an impression of the USA GDP growth since Q1-2011 and a breakdown of the estimated and revised Q4-2014 GDP Growth.

PGM CAPITAL COMMENTS:

BHP Billiton & Rio Tinto earnings report:
The earnings report of both BHP Billiton as well as the one of Rio Tinto prove that we are currently living in an era of commodity demand slump. On the other hand it also proves that the vision and quality of management of both Rio Tinto as well as BHP Billiton, have made it possible for both companies to produce enough cash flow, which made it possible for both companies to increase their dividend to their share holders.

Based on the closing price of RIO Tinto and BHP Billiton of respectively; US$ 49.30 and US$ 52.52 a share, of Friday, February 27th, their shares currently have a dividend yield of respectively 4.90 % and 4.70%.

Based on both companies' fundamentals, balance sheet and dividend yield we currently have a BUY rating on the stocks of RIO TINTO and BHP BILLITON.

Crude Oil Price breaking 7 month losing streak in February:
Right now the oil market is totally focused on finding a bottom for oil prices. However, according to OPEC's Secretary-General Abdulla al-Badri we've already hit bottom.

opec-secretary-general-abdalla-salem-el-badri_18

OPEC Secretary General -Abdallah Salem el-Badri-

Not only that, but he sees a real possibility that oil prices could explode higher to upwards of US$200 per barrel in the future.

According to recent comments by the Secretary-General when he was in London, the oil market doesn't need to look for oil prices to bottom as the market has already bottomed. Instead, he offered quite bullish comments by saying,

"Now the prices are around $45-$55, and I think maybe they [have] reached the bottom and we [will] see some rebound very soon."

Another sign that oil prices might have bottomed is the fact that rig count in the U.S. is plunging.

The Secretary-General also said that, when it comes to future oil prices

"if you don't invest in oil and gas, you will see crude oil price of more than US$200.00 a barrel"

This is because oil production naturally declines and oil companies need to invest in new production to not only replace this decline in production from legacy oil fields but to add new production to meet growing demand. However, oil companies are reluctant to invest in new production as their cash flows decline.

Over time this could become a problem as oil fields around the world naturally decline by an average of about 5% per year as can be seen from below chart.

We believe that the current situation with oil prices which has hurt the stocks as well as those of Oil producing and Oil servicing companies, can be seen as a unique opportunity for long term investors, to add high quality stocks in this sector to their portfolio against bargain prices.

USA Q4-2014 GDP revised down:
The main reason for the revision: a substantial drop in growth contribution from private inventories, which instead of adding 0.82% to the bottom GDP line, only contributed 0.12% in Q4 following the first revision.

As can be seen from below chart the revised Q4-2014 GDP growth of 2.18%, was the lowest economic growth rate since the "polar vortex." of Q1-2014.

Regarding the fixed investment component of the GDP we are sure that this number will plunge in Q1-2015 as a result of the shale capex halt.

Below chart shows the slowing growth rate of the US economy year-over-year since 2010.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek

22Feb/150

Highlights of the Week of February 16, 2015

By Eric Panneflek

GREECE-WEATHER-ACROPOLIS-FEATURE

Dear PGM Capital Blog readers,

In this weekend's blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of February 16, 2015:

  • Nestlé Full Year 2014 results.
  • The Greek debt crisis.

NESTLÉ GLOBAL FULL YEAR 2014 RESULTS:

ABOUT NESTLÉ:
Nestlé S.A. (SIX: NESN) is a Swiss multinational food and beverage company headquartered in Vevey, Switzerland. It is the largest food company in the world measured by revenues.

Nestle-Logo

The company's products include; baby food, bottled water, breakfast cereals, coffee and tea, confectionery, dairy products, ice cream, frozen food, pet foods, and snacks.

nestleproducts

  • Twenty-nine of Nestlé’s brands have annual sales of over one billion Swiss Francs (CHF) (about US$1.1 billion).
  • Nestlé has 447 factories, operates in 194 countries, and employs around 333,000 people.

FULL YEAR 2014 FINANCIAL REPORT:
In 2014 Nestlé’s organic growth was 4.5%, composed of 2.3% real internal growth and 2.2% pricing. Sales were CHF 91.6 billion, down 0.6%, impacted by negative foreign exchange of -5.5%. Acquisitions, net of divestitures, added 0.4% to sales.

  • The Group’s trading operating profit was CHF 14.0 billion, representing a margin of 15.3%, up 10 basis points, and up 30 basis points in constant currencies.
  • The cost of goods sold fell by 30 basis points as a percentage of sales, driven by product mix and pricing actions and savings created by Nestlé Continuous Excellence which more than offset increases in raw material costs.
  • Distribution costs were up by 10 basis points.
  • Total marketing and administration expenses rose by 10 basis points as they increased consumer facing marketing support for their brands.
  • Net profit rose CHF 4.4 billion to CHF 14.5 billion. The increase also reflects the profit realised on the disposal of part of the stake in L’Oréal and the revaluation gain on the 50% of Galderma already held when the Group brought its ownership from 50% to 100%. Reported earnings per share were CHF 4.54, up 44.6%.
  • Board of directors declared a dividend of CHF 2.20  per share payable on April 22, 2015, to shareholders on record on April 22, 2015.

In below table Nestlé’s Full-year 2014, sales and trading operating profit margins are outlined:

Jan.-Dec.
2014
Sales
in CHF
millions
Jan.-Dec.2014
Organic Growth
(%)
Trading operating
profit margins
Jan.-Dec.2014
(%)
Change vsJan.-
Dec. 2013
By operating segment
  - Zone Americas 27'277 + 5.0 18.8 + 60bps
  - Zone Europe 15'175 + 1.5 15.3 + 30bps
  - Zone Asia, Oceania, Africa 18'272 + 2.6 18.7 - 20bps
Nestlé Waters 7'390 + 5.4 9.7 + 50bps
Nestlé Nutrition 9'614 + 7.7 20.8 + 80bps
Other Businesses 13'884 + 7.1 19.1 + 140bps
Total Group 91'612 + 4.5 15.3 + 10bps
By product
Powdered and liquid beverages 20'302 + 5.4 23.1 + 40bps
Water 6'875 + 5.3 10.3 + 30bps
Milk products and ice cream 16'743 + 3.4 16.1 + 90bps
Nutrition and Health Science 13'046 + 8.7 20.9 + 210bps
Prepared dishes and cooking aids 13'538 - 0.1 13.4 + 20bps
Confectionery 9'769 + 4.2 13.8 - 210bps
Petcare 11'339 + 5.6 19.8 + 60bps
Total Group 91'612 + 4.5 15.3 + 10bps

Source:

THE GREEK DEBT CRISIS:
The Greek government-debt crisis was directly caused locally in Greece by a combination of structural weaknesses of the Greek economy along with a decade long pre-existence of overly high structural deficits and debt-to-GDP levels on public accounts.

Greece has been living for decades far above its means, and has financed this by borrowing money on the Global Capital Markets.

As a consequence of this Greece Debt-to-GDP ratio has ballooned to 175%.

Below chart shows Greece debt to GDP ratio compared with the other Euro-zone countries since 1977.

Last Friday, February 20, the Euro-zone gave Greece a four-month extension to negotiate new bailout terms. Greece was hoping for six months but settled for four. The deal temporarily stemmed a run on the country's banks and calmed financial markets.

Under the agreement, Greece has to present a list of budget cuts and economic overhauls on Monday, February 23 that need to satisfy European officials. Once those measures have been implemented, Athens will receive more money to keep it afloat.

PGM CAPITAL COMMENTS:

Nestlé:
Below chart shows the 17-year chart of Nestlé, in which we can see that the company's stock has appreciated form US$ 10.85 a share in November 1996 to US$ 76.62 a share last Friday, February 20, 2015, which is an increase of approx. 606 percent in 17 years.

Nestle Chart

Based on the CHF 2.20 a share dividend declared by the board of directors last Thursday February 19th, the company's shares have a yield of 3.06%.

Based on the above, the company's fundamentals and balance sheet we have a BUY rating on the shares of the Nestlé.

The Greek Tragedy:
Greece has lived for over 40 years far above its means and is hopelessly insolvent and can never compete economically as long as it is tethered to the single European currency (the Euro).

The Greek Economy within the Euro can never compete with the northern Euro-zone countries like Germany and Holland, which means that Greece can never flourish economically within the European Union and the four month life-line it received this week won't change that.

Due to this it will be for the Germans and in some extent the Dutch to decide if they want to keep Greece and other weak southern European countries such as Spain, Portugal and Italy inside the Euro-zone to keep buying Germans & Dutch exports with Euros.

Due to this we believe that four months extension will go into history as a farce and that four months from now, this farce will be repeated and another deal will be cut. In the meantime, Greece will remain in what amounts to a depression and an entire generation of its young people will seek opportunities abroad.

In the meantime the BBC has reported that the wealthy Greek population is accumulating Gold as a protection against the chance of Greece leaving the Euro-zone and return to the Drachma, which will depreciate immediately against the Euro and other major world currencies.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Commodities, Precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek

14Feb/150

Investing & the Investor versus Trading & the Trader

By Eric Panneflek

Dear PGM Capital Blog readers,

In this weekend's blog edition we want to discuss with you the differences and similarities between Trading versus Investing and an Investor versus a Trader.

INVESTORS & INVESTING:
Investing and trading are two very different methods of attempting to profit in the financial markets. The goal of investing is to gradually build wealth over an extended period of time through the buying and holding of a portfolio of stocks, baskets of stocks, mutual funds, bonds and other investment instruments.

Investors often enhance their profits through compounding, or reinvesting any profits and dividends into additional shares of stock. Investments are often held for a period of years, or even decades, taking advantage of perks like interest, dividends and stock splits along the way.

While markets inevitably fluctuate, investors will go back to their fundamental research, don't let emotions get involved "ride out" the downtrends or even add to their portfolio with the expectation that prices will rebound and any losses will eventually be recovered.

Investor's Desktop

 

There are three types of investment styles that can be applied to securities, as well as sectors.

  • Value Investing:
    Value investing is an investment style that focuses on buying securities that are undervalued according to a fundamental analysis, and to hold these securities until they have reached their true value. Accordingly, value securities are presumed to be traded at discount to their true value.

  • Growth Investing:
    Growth investing consists of identifying securities that have exhibited faster-than-average earnings growth over the previous few years, compared to the market, and are furthermore expected to continue this earning growth in the coming future.

    • Growth investors seek to make capital gains from a higher share price, as opposed to for example receiving dividend payments for income.
    • Since the P/E ratio does not account for growth it is not a very appropriate measure for growth stocks. In order to account for growth, the P/E ratio can be modified into the Price/Earnings to Growth (PEG)
  • Income Investing:
    Income investing consists of identifying securities that pay relatively high and regular dividend payments to their shareholders. It is not sufficient to only look at dividend payments in 'dollar' terms, rather income investors look at:

TRADERS & TRADING:
Trading, on the other hand, involves the more frequent buying and selling of stock, commodities, currency pairs or other instruments, with the goal of generating returns that outperform buy-and-hold investing.

While investors may be content with an average 10 to 15% annual return over 8 to 10 years, traders might seek a 10% return each month. Trading profits are generated through buying at a lower price and selling at a higher price within a relatively short period of time.

The reverse is also true: trading profits are made by selling at a higher price and buying to cover at a lower price (known as "selling short") to profit in falling markets.

Traders often employ mathematically based technical analysis tools, such as moving averages and stochastic oscillators, to find high-probability trading setups.

Trader's Desktop

 

Traders generally fall into one of four categories:

  • Position Trader: Positions are held from months to years
  • Swing Trader: Positions are held from days to weeks
  • Day Trader: Positions are held throughout the day only with no overnight positions
  • Scalp Trader: Positions are held for seconds to minutes with no overnight positions

THE DIFFERENCE BETWEEN INVESTORS & TRADERS:
Where buy-and-hold investors wait out less profitable positions, traders must make profits (or take losses) within a specified period of time, and often use a protective stop loss order to automatically close out losing positions at a predetermined price level.

PGM CAPITAL COMMENTS:
Successful investing and trading starts with preparing yourself and your mindset for it by knowing what you want of your life, how you want to reach it and the price you want to pay for it.

This price is not measured in money but in time you need to invest in order to maintain your knowledge and mindset up to date.

If you want to be a successful investor you educate yourself in order to be able to understand financial and market news accordingly and control your greed and fear.

In his book "Think and Grow Rich" Napoleon Hill stated that most Investors give up 3 feet before reaching their goal.

3-Feet-From-GoldIf you want to become a successful trader you must be aware that trading platforms are open 23 hours a day,  six days a week.

INVESTING / INVESTOR:
Successful investing starts with determining your risk profile, choosing the right plan of action, investment style and advisor with knowledge and experience with the type of investment you want to do and the sector you wish to invest in.

Secondly it is important to understand the different routes in fundamental analysis to create a positive return on your investments within your investment horizon and risk profile.

Critical Success factors:

  • Knowing yourself and your Risk profile and Investment Knowledge
  • Control your Greed & Fear
  • Doing your homework and own research to be able to understand, the advice of your Investment advisor, financial news and the media.
  • Attending Investment seminars on a regular basis or subscribing to Investment magazines.

Investor doing Research

 

Difference between Investor and Trader:
Investors have a long term horizon, invest in the next thing of tomorrow invest proactively and normally don't use margin to invest and take their time to build their investment portfolio. Traders on the other hand are highly leveraged, have a short term horizon and follow market trends via mathematical techniques, models, algorithm and charts.

Over the long-term a well diversified value portfolio will overcome all market correction and will outperform saving, trading or real-estate investing.

Trader by being market followers can push markets as well as securities to extremes on both side. Due to this they create the volatility that Investors love.

Due to the fact that traders use high leverage in order to maximise profit, they also maximise their loses, if the market does behave in line with their trades.

In one of its articles a very prominent European Trading Bank, indicated that 90 percent of all traders lose it all with their first month of trading.

A Trader losing it all

Normally Investors buy when Traders are Selling and visa versa, which makes the below stated quote from Warren Buffett appropriate:

BE GREEDY WHEN OTHERS ARE FEARFUL AND FEARFUL WHEN OTHERS ARE GREEDY.

The two other quotes of Warren Buffett, world's most successful (value) investor might also be applicable:

PRICE IS WHAT YOU PAY, VALUE IS WHAT YOU GET.

IF YOU DON'T FEEL COMFORTABLE OWNING SOMETHING FOR 10 YEARS, THEN DON'T OWN IT FOR 10 MINUTES.

We of PGM Capital are an Investment Advisory Organisation, with the mindset of a Value Investor, and a BUY and Hold Strategy of 8 - 10 years, which uses Technical Analysis, to determine the optimum entry (and eventual exit) point.

Last but not least it is worth mentioning that the price of a security at the end will always reflect its real (intrinsic) value, according to fundamentals which are used by a value investors.

Until Next Time

Yours sincerely,