PGM Capital – Blog
25May/150

Are Investment Gurus preparing for Hyperinflation

By Eric Panneflek

Dear PGM Capital Blog readers,

In this weekend blog article we want to discuss with you the investment strategies of some world class investment gurus that might indicate that they are preparing themselves for a coming hyperinflation cycle.

DEFINITION INVESTMENT GURU:
An Investing Guru is someone who is considered an experts in their professional field of trade and Investing.

Only a handful of people in this world can qualify as investment Gurus. We have carefully identified a number of investment Gurus based on their long-term track record.

To qualify for our Guru Hall of Fame, an investor needs to meet at least three criteria:

  1. Long-term outstanding performance;
  2. More than US$1 billion under management;
  3. Low portfolio turnover.

Some of world's well known investment gurus are: George Soros, Carl Icahn, John Paulson, Marc Faber, Jim Rodgers and the legendary Warren Buffett.

HYPERINFLATION:
In economics, hyperinflation occurs when a country experiences very high and usually accelerating rates of inflation, rapidly eroding the real value of the local currency, and causing the population to minimize their holdings of the local money.

There are a number of theories on the causes of high and/or hyper inflation. But nearly all hyperinflations have been caused by government budget deficits financed by money creation. After an analysis of 29 hyperinflations (following Cagan's definition) Bernholz concludes that at least 25 of them have been caused in this way.

A sharp decrease in real tax revenue coupled with a strong need to maintain the status quo, together with an inability or unwillingness to borrow, can lead a country into hyperinflation.

Hyperinflation effectively wipes out the purchasing power of private and public savings, distorts the economy in favor of the hoarding of real assets, causes the monetary base, whether specie or hard currency, to flee the country, and makes the afflicted area anathema to investment. But one of the most important characteristics of hyperinflation is the accelerating substitution of the inflating money by stable money, gold and silver.

BEST KNOWN EXAMPLE OF HYPERINFLATION:
The hyperinflation in the Weimar Republic, which is one of world's best known hyperinflationwas a three-year period of hyperinflation in the Weimar Republic (modern-day Germany) between June 1921 and January 1924.

In this period the value of the 'Reichs-Mark" depreciated from 90 Reichs-Mark in 1921, to 210,500,000,000 Reichs-Marks, by the end of November 1923.

In the same period the price of gold measured in Reichs-Mark appreciated from approx. 10 Reichs-Mark per Troy ounce to 1 Trillion Reichs-Mark by the end of 1923, as can be seen from below chart.

PGM CAPITAL COMMENTS:
In order to understand inflation we must think of the way ripples spread out when you drop a pebble in a pond. Inflation, moves in concentric circles from a small core of people to an ever widening group of affected individuals. The rich and powerful are in the inner circle and see the inflation first. This gives them time to prepare.

Inflation moves in concentric circles

The working and middle class are in the outer circles and see the inflation last.
They are the victims of lost purchasing power.

Due to the above it is important for us to analyse and understand the investment strategies of the rich and investment gurus.

Warren Buffett:
Here's what Buffett's been doing, which can be a sign that he's getting ready for high rates of inflation:

  • He bought the Burlington Northern Santa Fe railroad in 2009. It consists of hard assets in the form of rights of way and it makes money by moving hard assets such as ore and grains.
    BNSF-Railway
  • He purchased large offshore assets in China and other places to produce non-dollar profits that can be retained offshore tax-free
  • He have add 4 million shares of Canada Oil and Natural gas producer, Suncor (TSX: SU) to his portfolio in February of this year.
  • He also owns financial stocks, particularly in banks and insurance companies. These companies are highly leveraged borrowers. These debts will be wiped out by inflation in due time.

Warren Buffett can now move his Suncor oil in his Burlington Northern Railroad, while generating non-U.S. dollar denominated profits and keeping them abroad tax free at the same time that his Financial investments see their debts disappear thanks to high rates of inflation.

George Soros:

 

Soros has been silently building positions in mining companies rather than the underlying commodity itself. Presumably, this is because mining firms stand to benefit even more if metal prices rally because of the inherent leverage in the business.

Carl Icahn:


Carl Icahn, the billionaire investor whose investment portfolio got stung by the drop in crude oil prices, has added 6.6 million shares of Chesapeake stock (NYSE: CHK) to his portfolio.

Besides Chesapeake Energy, he is also a major share holder in energy stocks like Transocean (NYSE: RIG) and CVR Energy (NYSE: CVI).

John Paulson:


John Paulson is the President and Portfolio Manager of Paulson & Co. The guru became a guru by short-selling subprime mortgages in 2007, but is most known for his stance on gold.

He currently holds 10,234,854 shares of Spider Gold Trust (NYSE:GLD), which makes him the biggest holder in this ETF.

print-logo-spdr

SPDR Gold Trust, which holds 1,239 tonnes of Gold, is one of the top ten largest holders of gold in the world.

Conclusion:
The conclusion we can draw from the above is that these investment gurus took their time to build hyperinflation-proof portfolio.

So, when the push comes to shove their assets will explode in value and their debts are eliminated.

If this strategy works for these investment gurus, it'll work for you too.

Invest in hard assets - precious metals, rental real estate, collectibles, etc - and keep some of your money abroad.

These gurus are preparing for hyperinflation and you should too.

Last but not least, 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

17May/150

Highlights in the week of May, 11, 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 week of May 11, 2015:

  • USA April retail sales flat.
  • Adecoagro S.A., Q1-2015, financial results.

USA APRIL RETAIL SALES DISAPPOINTS:
The U.S.A. Commerce Department said on Wednesday, May 13th, that the country's retail sales were unchanged in the month of April as can be seen from below chart.

Americans cut back on their purchases at autos dealers, furniture outlets, building supply stores, gas stations, supermarkets and department stores last month. Offsetting those declines were increases in spending at restaurants, clothiers, health-related stores and online retailers.

ADECOAGRO Q1-2015, FINANCIAL RESULTS:

Company Profile:
Adecoagro S.A. (NYSE:AGRO) is an agricultural company in South America. The company makes money by producing and selling products such as cattle, dairy goods, sugar, ethanol, and farming crops. Adecoagro has operations in Argentina, Brazil, and Uruguay.

As of December 31, 2014, it owned a total of 257,036 hectares comprising:

  • 20 farms in Argentina,
  • 11 farms in Brazil,
  • 1 farm in Uruguay
  • 3 rice processing facilities in Argentina
  • 2 dairy facilities with approximately 6,551 milking cows in Argentina.
  • 10 grain and rice conditioning and storage plants in Argentina.

As of March 31, 2015, the company owned 3 sugar and ethanol mills in Brazil with a sugarcane crushing capacity of 10.2 million tons; and had a cogeneration capacity of 232 MW.

Adecoagro S.A. was founded in 2002 and is based in Luxembourg.

On Thursday, May 14, the company reported its Q1-2015 financial results with the following highlights:

  • Adecoagro recorded Adjusted EBITDA of $35.8 million in Q1-2015, representing a 3.1% increase compared to Q1-2014.
  • Adjusted EBITDA margin during Q1-2015 reached 32.8%, compared to 36.7% in Q1-2014.
  • Net Income in Q1-2015 was US$13.8 million, US$11.2 million higher than in Q1-2014.

Source:

PGM CAPITAL COMMENTS:

Disappointed USA April Retail Sales:
It shouldn’t be a surprise that the latest batch of US numbers are somewhere between disappointing and catastrophic.

  • First-quarter GDP was flat and is about to be revised negative.
  • Retail sales were flat in April, the first month of the second quarter, with business inventories and import prices pointing in the same grind-to-a-halt direction.

The US is now looking at zero growth for the entire first half of 2015. Six years into a recovery, with record low interest rates and a recent doubling of government debt, that’s a bit of a dilemma. Especially given the Fed’s threat to raise interest rates in the next few months.

As can be seen from below chart, the dollar is reacting to this prospect exactly as one would expect, by falling like a stone, after it has hit a 12 year high, by mid March this year.

US-Dollar Index 5-day chart

Gold, in the meanwhile, is acting like the reciprocal of the dollar, adding US$30 an ounce since Wednesday May 13th, to end the week at US$ 1223.65 an ounce, as can be seen from below chart.

Adecoagro Q1-2015 financial results:
As can be seen from below table, the legendary Investor, George Soros at the end of 2014, owned approx. 21.5 percent of the company's stock

AdecoAgro Top Institutional Holders:
Holder Shares % Out Value* Reported
Ospraie Management, LLC 10,650,214 8.84 85,308,214 Dec 31, 2014
Jennison Associates LLC 8,099,503 6.72 82,776,920 Mar 31, 2015
Brandes Investment Partners L.P. 6,751,054 5.60 68,995,771 Mar 31, 2015
Wellington Management Company, LLP 4,711,480 3.91 37,738,954 Dec 31, 2014
PGGM Investments 4,500,000 3.73 45,990,000 Mar 31, 2015
Soros Fund Management LLC 25,915,076 21.50 207,579,758 Dec 31, 2014
Tradewinds Global Investors, LLC 2,606,674 2.16 26,640,208 Mar 31, 2015
Global Thematic Partners, Llc 2,102,426 1.74 21,486,793 Mar 31, 2015
EMS Capital LP 1,835,491 1.52 14,702,282 Dec 31, 2014
Bienville Capital Management, LLC 1,640,475 1.36 16,765,654 Mar 31, 2015

Source:

As can be seen from below table -updated May 5, 2015- currently, AGRO is one of the top 10 holdings for George Soros investment portfolio.

Ticker Shares Value ($1000)
SPY 5,341,000 1,102,543
BABA 4,444,604 369,969
YPF 11,650,176 319,797
AGRO 25,915,076 264,852
DOW 4,629,386 222,118
ENDP 2,217,176 198,881
EBAY 3,327,467 191,928
ZTS 4,106,735 190,101
CY 13,216,666 186,487
LVLT 3,454,781 186,005

Source:

Below 2-year chart, shows that the shares of the company has appreciated in the last 2 years with approx. 40 percent, for which the biggest increased has happened Year-To-Date.

Based on the company's business model, and the fact that legendary investor and Guru, is the biggest share holder in the company, we have a BUY rating on the stock of the company.

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

10May/150

Highlights in the week of May 4, 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 week of May 4, 2015:

  • China overtook USA as world biggest Economy.
  • Q1-2015 earnings report of Archer Daniels Midland Company (ADM).

CHINA NOW WORLD NO1, WORLD ECONOMY (P.P.P):
According with data from the International Monetary Fund (IMF), as can be seen in below table, the Chinese economy in December 2014,  was US$17.6 trillion, slightly higher than the US$17.4 trillion of the USA.

So for the first time since 1872, when it overtook the UK, the US has been knocked off the top spot.

The IMF calculated these figures by using purchasing power parity (PPP) which enables you to compare how much you can buy for your money in different countries. As money goes further in China than in the US, the figure for China is adjusted upwards.

Q1-2015 RESULTS OF ARCHER DANIELS MIDLAND:

Company profile:
The Archer Daniels Midland Company (ADM) is an American global food-processing and commodities-trading corporation, headquartered in Chicago, Illinois.

History:
In 1902, George A. Archer and John W. Daniels began a linseed crushing business in Minneapolis, Minnesota. In 1923, Archer-Daniels Linseed Company acquired Midland Linseed Products Company, and the Archer Daniels Midland Company was formed.

Currently, 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.

The company also provides agricultural storage and transportation services and is also a leading supplier of Biodiesel, ethanol, special fats and feed and fertiliser.

It was named the world's-most-admired food-production company by Fortune magazine for three consecutive years: 2009, 2010 and 2011.

Q1-2015 Earnings report:
On Tuesday May 5, the company reported adjusted earnings per share of US$0.77, up from US$0.55 in the same period last year. Adjusted segment operating profit was US$883 million, up 12 percent from US$789 million in the year-ago period. Net earnings for the quarter were US$493 million, or US$0.77 per share, and segment operating profit was US$855 million.

ADM Reports Q1-2015 earnings report

On Thursday, May 7, the Board of Directors declared a cash dividend of 28.0 cents per share on the company’s common stock payable June 11, 2015, to Stockholders of record May 21, 2015.

PGM CAPITAL COMMENTS:

China now world's biggest economy:
For the first time in more than 140 years, the US has lost the title of the world's largest economy.

Just 15 years ago, the U.S. A produced nearly three times as much as the Chinese

China now accounts for 16.5% of the global economy when measured in real PPP (Purchasing Power Parity) terms, compared with 16.3% for the U.S.A.

It is worth mentioning, that in their updated GDP (P.P.P.) ranking of world's  economies, the CIA  also shows that China in 2014, became world's biggest Economy as can be seen from below table.

We believe that the year 2015, might be THE YEAR for China.

With the upcoming rebalancing of the IMF SDR basket this year, for which we believe that the Chinese Yuan, will be included in this prestigious IMF reserve currency basket, we believe that this will have an upwards pressure on the value of the Yuan against the other mayor world currencies.

This will increase the purchasing power of the Chinese people, which will have positive effect on most Chinese companies, specially their 3 mayor Oil Companies.

Archer Daniels Midland:
Below chart shows the all-time chart of the stock of company.

It is also worth mentioning that the company has increased its quarterly dividend in the past 10 years from US$ 0.085 a share in Q1-2005 to US$ 0.28 in Q1-2015, which is an increase of over 220% in 10 years.

Archer-Daniels-Midland Company Dividend Date & History

Based on the above, the company business model, its, P/E ratio of 14, P/B of 1.64 and a strong balance sheet we have a BUY rating on the stock of the company.

Last but not least, take into considerations that markets can stay irrational longer than you can stay solvent and before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that stocks of commodities producers as well as markets of emerging economies can be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek