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 August 4, 2014.
- Q2-2014 earnings report of Archer Daniel Midland Company.
- Nestle announced CHF 8 billion share buy-back program.
- Rio Tinto reports H1-2014 earnings report.
ARCHER DANIELS MIDLAND Q2-2014 UP 67.4 PERCENT:
Archer Daniels Midland Company (NYSE: ADM) is an American global food-processing and commodities-trading corporation, headquartered in Decatur, Illinois, USA.
The company operates more than 270 plants and 420 crop procurement facilities worldwide, where cereal grains and oilseeds are processed into products used in food, beverage, nutraceutical, industrial, and animal feed markets worldwide.
On Wednesday, August 6th, the company reported - adjusted for certain items - a profit of 77 cents per share, up 67.4%, from 46 cents posted in the year-ago comparable quarter.
Based on these blockbuster results the shares of this agri-business giant surged with 4.74% in the week to close at an all time high of US$49.04 a share on Friday, August 8, 2014 as can be seen from below chart.
- Adjusted EPS of US$0.77 excludes approximately US$73 million in pretax LIFO income.
- Oilseeds Processing increased US$18 million.
- Corn Processing increased US$69 million on strong ethanol demand and steady sweetener volumes.
- Agricultural Services increased US$122 million, driven by strong U.S. exports and significantly improved results from international merchandising.
- The net debt position of the company declined to US$3.6 billion, compared to US$5.5 billion in the same period last year.
- The company repurchased 7.2 million shares during the quarter, bringing year-to-date buybacks to 11.5 million shares for about US$500 million.
- Board of Directors today declared a cash dividend of 24.0 cents per share on the company’s common stock payable September 11, 2014, to Stockholders of record August 21, 2014.
NESTLE CHF 8 BILLION SHARE-BUY BACK PROGRAM:
Nestlé S.A. (SIX: NESN) is a Swiss multinational headquartered in Vevey, Switzerland, is measured by revenues, the world's largest food company.
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. Twenty-nine of Nestlé’s brands have annual sales of over 1 billion CHF (approx. 1.1 billion US-Dollars).
In the first half of 2014, the Group delivered organic growth of 4.7%, composed of 2.9% real internal growth and 1.8% in pricing. Total sales were CHF 43 billion. The strong Swiss Franc continued to have a substantial negative impact (-8.8%) and after divestitures, net of acquisitions(-0.7%), reported total sales were down by 4.8%.
- The Group’s trading operating profit was CHF 6.4 billion. The reported trading operating profit margin was 15.0% (-10 basis points), +30 basis points in constant currencies.
- The cost of goods sold increased by 20 basis points, reflecting input cost pressures, especially in dairy.
- Total marketing and administrative costs decreased by 30 basis points, reflecting efficiencies. At the same time they continued to strengthen the support for their brands, increasing consumer facing marketing spend in constant currencies.
- Net profit was down to CHF 4.6 billion, reported earnings per share were CHF 1.45, both impacted by the strong Swiss Franc. Underlying earnings per share in constant currencies were up 3.6%.
- Operating cash flow was CHF 4.3 billion. Working capital remains an area of focus and they have continued to lower it as a percentage of sales.
- They plan to launch a new share buy-back programme of CHF 8 billion that will start this year and continue into 2015. The buy-back is subject to market conditions and strategic opportunities.
RIO TINTO H1-2014, EARNINGS UP 21 PERCENT:
The Rio Tinto Group is a British-Australian multinational metals and mining corporation with headquarters in London, United Kingdom, and a management office in Melbourne, Australia.
The company, which is the world’s second biggest mining company, has operations on six continents but is mainly concentrated in Australia and Canada.
On Thursday, August 7th, the company reported its H1-2014 earnings report with the following highlights:
- Increased underlying earnings by 21 percent to US$5.1 billion. Underlying earnings per share rose to 276.8 US$ cents.
- Achieved US$3.2 billion of sustainable operating cash cost improvements since 2012, exceeding the US$3 billion reduction target six months ahead of schedule.
- Shipped record iron ore volumes, set production records for iron ore and thermal coal and delivered a strong operational performance in copper.
- Increased cash flows from operations by eight percent to US$8.7 billion.
- Reduced capital expenditure to US$3.6 billion in the first half.
- Decreased net debt by US$1.9 billion in the first half to US$16.1 billion on 30 June 2014.
- Achieved EBITDA of US$1.1 billion in Aluminum, up 26 percent on 2013 first half, despite London Metal Exchange (LME) aluminum prices averaging nine per cent lower.
- Increased interim dividend by 15 percent to 96 US cents per share, payable on September 11, to shareholders on record on August 15, 2014
PGM CAPITAL COMMENTS:
The above mentioned earnings report of the world's major food producers and second biggest miners, proves the fact that the world is approaching a (food) commodity based (hyper) inflation cycle.
The announced hike of their respective dividends combined with massive share-buy back programs gives un indication, that the management of those companies believe that the current price of their stocks is too low.
Based on their fundamentals and financial conditions we have a BUY rating on the stocks of all the above mentioned companies and are expecting "Archer Daniels Midland" to announce a stock split in the coming 6- 12 months.
Last but not least, before following any investing advice, always consider your investment horizon and risk tolerance and financial situation and be aware that stock prices don't move in a straight line and that sharp corrections may happen in the short term.
Until next week.
Dear PGM Capital Blog readers,
In this midweek’s blog edition, we want to highlight some of the most important events for the week of August 4 and August 8, 2014.
- Stock-market Correction
- Must see internet links
- Technical market outlook
We are witnessing a stock-market correction that started around July 24, 2014, which typically coincides with the cyclical historic moves in the markets. We also warned of a coming correction and possibly a crash at a later stage before. Below you can find the seasonal cycles chart for the Dow Jones and S&P 500.
In above charts we can see that from more then 30 years historic data the US equity markets top out in the summer (July - August) and then is followed by a correction in the late summer and autumn months.
To get some global perspective on this we added the seasonal DAX chart below.
In the seasonal DAX chart we can see the summer correction in an even more dramatic way starting at the end of July and finding its bottom in the beginning of October.
Below we can see the performance of some important global equity markets since July 23, 2014:
- Dow Jones -3.85%
- S&P 500 -3.36%
- DAX -5.78%
- FTSE 100 -1.70%
- Nikkei 225 -0.05%
- Hang Seng +2.82%
- Bovespa -2.12%
Due to the fact that the valuations of the equity markets of emerging economies are very low, it is logical that the current correction is much stronger in "western" markets then in emerging markets. On a year to date basis most equity markets are slightly negative.
Certainly global macro events will always have an effect on traditional market outlooks, but on the background of these overvalued equity markets and the outlook of quantitative easing to end in October with a possible interest rate hike by the end of the end year or the beginning of 2015, smart investors are getting increasingly cautious, but there will always be investors that look at this as a buying opportunity and there is a high chance that we might see a retest of previous equity market highs before the equity markets will go in a longer term bear market.
Must see internet links
Please take your time to read/watch the following links that we have posted below.
- These are three big risks to the market
- George Soros sells all shares of Citigroup, Bank of America and JP Morgan
- Soros and Paulson Are Buying and Holding Massive Gold Positions
- Global bonds rally as investors seek safety
- World Events Mean Deflation First, Then Inflation
Technical market outlook
This week we will take a look at the equity market and we will use the Dow Jones to represent the "western" equity markets. We already mentioned that we are in a equity market correction and there is a high probability that this correction will take 2-3 months (see above seasonal charts). Now we will try to answer the more important question what might be the target for the bottom and what might be the technical trigger for a more severe correction or even the start of a stock-market crash.
For this analysis we will take a look at three technical timelines, the monthly, weekly and daily chart and will use moving averages, trends and important support levels.
First we start with the most long term chart, the Monthly Dow Jones chart. Click to zoom.
The monthly chart is usually used to predict multi-year trends. In the monthly chart we can see that due to a very aggressive bull market in recent years there is quite a lot of room to correct to the downside without any important bearish technical signs to be triggered, but this also shows technical signs that the Dow Jones is becoming overbought in the long-term.
If we look at the chart we can see the grey trend lines (channel), which represent the trend quite nicely so the upper trend line will be resistance and the lower trend line will be strong support. The first moving average that is important for us is the blue 20 SMA (Simple Moving Average), this is the first potential support that the Dow can hit in this correction. Right now the 20 SMA stands at around 15620, but it will move higher every month and it will be around 16000 in October 2014. This dynamic support level will catch up with the actual prices quite soon and the last time that the Dow Jones went below the 20 SMA was 2 years ago and the possibility that the Dow get below the 20 SMA levels can be considered high.
What will be more crucial is to see if the Dow Jones will close the month below the 20 SMA or if we see a sharp rebound and a close above the 20 SMA again.
Next up are the very important previous lows and these are called static support levels. The first static support is at 15340 and then another one at 14720. A very important key support level is at 14200, which marks the high before the dramatic financial crisis in 2007/08.
Then we have two more important Moving Averages the 50 SMA (green) and the 200 SMA (red), these are the long term moving averages and are rarely broken. Usually when these two levels (50 SMA & 200 SMA) are broken we can assume that the Dow Jones is in a bear market or a crash event is underway or has happened.
Here the short summary for support levels for the Dow Jones on the monthly chart:
- 20 SMA @ 15620 (Dynamic)
- Previous low (Feb 2014) @ 15340
- Previous low (Oct 2013) @ 14720
- Support trend line @ 14600 (Dynamic)
- High before financial crisis (Oct 2007) @ 14200
Now lets take a look at the Weekly Dow Jones chart to determine mid-term support levels. Click to zoom.
The weekly chart is usually the most important chart to predict multi-month trends, which most investors and traders use for their long-term horizon.
Looking at the weekly chart, the picture for the Dow Jones changes a little and shows that support levels are getting closer and the technical conclusion can also be slightly different. In the weekly chart the Dow Jones already closed below the 20 SMA and is looking towards the 50 SMA which was last broken in December 2012, but a strong rally has followed that event and therefor the 50 SMA is already an important support level to look at.
The current channel (grey trend lines) on the weekly chart is in tact since August 2011 and will be a strong support level to look at.
Here the short summary for the support levels for the Dow Jones on the weekly chart:
- 50 SMA @ 16160 (Dynamic)
- Previous low followed by an OKR (Outside Key Reversal) @ 16015
- Support trend line @ 15660 (Dynamic)
- Previous low followed by a bullish hammer @ 15340
Now we look at the Daily Dow Jones chart to determine the support levels in the weeks ahead. Click to zoom.
The daily chart is used to predict multi-week trends and is also the most important technical chart for technical analysis. Looking at the daily chart, we immediately see that the overall picture looks more critical. The Dow Jones has already broken the 20 SMA and 50 SMA and is very close to the important 200 SMA. The Dow Jones is also getting close to the support trend line that was set by previous lows.
There is important support around 16300 from the support trend line and the 200 SMA and if these levels will not hold and the Dow Jones closes below these levels, we might see further downside to 16000 and potentially to 15400.
Below the summary for the support levels for the Dow Jones on the daily chart:
- 200 SMA @ 16330 (Dynamic)
- Support trend line @ 16290 (Dynamic)
- Previous low @ 16005
- Previous low @ 15340
- Previous low @ 14720
It will be very interesting to watch the daily chart in the coming days/weeks and we can expect more corrective downside movement until the end of September 2014. We are expecting a correction in the 15500 (±200) region. If the correction will be stronger or the Dow Jones is not able to get in any higher highs (above 17130) in the next 6 months, best case scenario we can assume the bull-market is running out of steam or worst case scenario that we are entering a bear-market (with a possible stock-market crash).
If the Dow Jones will respect the support levels around and below 15500 and we see a strong rally coming out of this correction towards the end of the year with possible new highs, its safe to assume that the equity bull-market will continue a little longer and this correction was only a cyclical event.
We advice to be cautious to enter the US and European equity markets at the moment and wait for clear signs and confirmation that this might only be a mid-term correction. At the moment there is better value in other asset classes. For more information on investment opportunities in these critical times, please don't hesitate to contact us and feel free to make an appointment.
We will have a close eye on these developments and keep you informed at important developments or changes of this outlook.
Last but not least, before following any investing advice, be aware that above outlook is of pure technical nature and does not respect any global macro events that will disturb this outlook. Please always consider your investment horizon and risk tolerance and financial situation.