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.
Dear PGM Capital Blog readers.
In this weekend blog article we'll elaborate on the approaching inevitable reversal of the capital markets in the West.
The stock markets in the West, specially those of the USA are dangerously stretched in terms of valuation and sentiment, and they do not accurately reflect the country's economic situation and fundamentals such as earnings and sales growth.
It is important to care if a stock market is overvalued or that it doesn't correlate with the Economic reality of a country, because those who sell near the top before the market drops preserve not just their initial capital, but their winnings from the over five-year bull market. Those who fail to sell, risk losing not just their gains, but quite possibly a material chunk of their initial capital.
Another reason to care is that those who correctly bet on a market's reversal will profit handsomely, just as those who bought at the bottom of a decline profit.
That few manage the apparently simple task of making three accurate predictions in a row (and being confident enough in the technique to leave all the chips on the table), is powerful evidence that no such technique works consistently enough to last even three trades.
The following three basic tools can be useful in prognosing of a trend reversal in the capital markets:
- FUNDAMENTAL ANALYSIS:
Fundamental analysis involves analyzing the characteristics of a company, such as; earnings, sales, lifecycle of product mix, valuations, financial conditions, in order to estimate the value of its shares.
- TECHNICAL ANALYSIS:
Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity or trend reversals.
Cycles do not presume to predict the causes of trend reversals; they only reflect that such reversals often follow patterns over time. There are many cycles of varying durations such as:
- DOW to GOLD cycle:
The DOW to Gold ratio tells you how many ounces of gold it would take to buy the Dow on any given month. Previous cycle lows have been 1.94 ounces in February of 1933 and 1.29 ounces in January of 1980 as can be seen from below chart.
- Housing Market cycle:
As can be seen from below chart, housing prices seem to move in 18-year cycle.
- The Exter pyramide,
developed by John Exter says, that in times of crisis, depending upon the level of crisis, money moves down the triangle. Small business (In today's world probably derivatives) and real estate are the first to get hit.Money flows to commodities then from it to bonds and T-bills. And when bonds and T-bills start to become risky, it finally ends up in Gold.
- The Kondratieff cycles:
More than eighty years ago, a prominent Russian economist, Prof. Nikolai D. Kondratiev described and theoretically substantiated the existence of grand
(45-60 years) cycles of economic development.
The internal dynamic of the cycles (named K-cycles after him) and the principle of fluctuations is based on the mechanism of accumulation, concentration, dispersion, and devaluation of capital as a key factor of the development of the market (capitalist) economy.
- DOW to GOLD cycle:
CENTRAL BANKS INTERVENTION:
In the past six years of unprecedented central banks intervention, the belief that we’re in a “New Normal” that’s immune to downturns has taken hold—mostly because every downturn has been reversed by some additional central bank monetary intervention.
Central banks intervention seems to have generated a new cycle: five years of a roaring bull market that reaches bubble heights and then crashes over the following two years.
If the New Normal is truly permanent, then cycles and technical/fundamental analyses have been mooted: they no longer work because the central banks can push stocks higher essentially forever.
PGM CAPITAL COMMENTS:
Below Economic data published last week shows that the USA Economy isn't in a good shape, as the country's policy maker wants us to believe:
- Manufacturing PMI Posts the Biggest Miss on Record:
Flash Manufacturing PMI posted the biggest estimate miss on record. The index unexpectedly declined to 56.3 in July, down from 57.3 in June (revised down from 57.5), while it had anticipated to rising further to 57.5.The most concerning part of all of this is the fact that new exports have weakened while manufacturing production has fallen as input costs have surged and the employment component has tumbled to a 10-month low.
See below chart below chart for details.
- New Home Sales Collapse by 20% from May to December 2012 Levels:
New Home Sales plunged by -8.1% to 406K in June while it had anticipated to decline around -5%. What is more interesting here is that May's figures have been revised down by more than 10%, from 18.6% to 8.3%.
See below chart for details.
Two important questions most investors will ask themselves are:
- Are these misses in the USA Economic figures due to the tapering of the FED Bond purchasing?
- Is there some reason to believe that the stock markets can loft ever higher, other than central bank intervention?
The one fundamental metric that matters is profits. Let’s look at corporate profits and the S&P 500 (SPX):
It appears the stock market is responding to central bank intervention to the degree that the interventions have enabled corporate profits to soar. How has intervention boosted profits? One easy way is that by lowering the cost of credit to near zero, corporations have booked the savings in interest payments as profits.
The question of the New Normal boils down to: Can corporate profits continue soaring? Or perhaps more to the point: Can central bank intervention keep pushing profits higher? Since interest rates are already near 0%, the answer seems to be that the fruits of Quantitative Easing and Zero Interest Rate Policy have already been picked, and there is little more profit to be gained from these policies.
Below chart shows that corporate profits have rolled over in the first quarter of 2014:
And there is a number of other reasons to suspect the New Normal market is stretched. As can be seen from below chart, bearish sentiment is low, and bullish sentiment is at multiyear highs, which are both good contrarian indicators.
Other conventional metrics of market activity such as corporate buybacks, mergers and acquisitions, issuance of junk bonds, margin debt, etc. are also at extremes.
A continuance of the New Normal requires these extremes to become even more extreme, with no blowback (unintended consequences) or snapback.
Some analysts also see the emerge of inflation as a precursor to a market correction.
Two basic drivers of inflation are the fact that wages are rising and that bank credit since mid 2012, has started to grow again as can be seen from below chart.
It will be interested to hear the comments of USA policy makers on the above mentioned fundamental Economic data of the country.
Will they try to blame these soft data to the June weather as well?
Will the FED Chairlady Mrs. Yellen, label them as noise as well?
The last extreme to consider is volatility, which has slipped to multiyear lows on complacency born of a belief that central banks can enforce the New Normal of ever-rising markets at will.
The Big Questions are:
- Is the New Normal enforceable even as markets reach extremes?
- Is the faith in the central banks’ power to bend markets to their will just the latest manifestation of hubris?
No one knows at the moment. But there are numerous persuasive reasons to be skeptical of the New Normal and the utmost faith it places in the notion that markets are in a permanent state of low volatility and rising profits and therefore can only loft higher.
Last but not least is the question whether the "New Normal" isn't enforceable and the rule of physics - that everything that rises artificially will come plunging down - is applicable to the USA Stock Market
History shows us that all market crashes have happened in the months of September and October. Due to this can we expect this great reversal or even massive crash of the markets to happen this fall?
Keep in mind that regarding capital markets past history is no guarantee for future performance and that the market can remain longer irrational than you can remain solvent!
Dear PGM Capital Blog readers,
In this weekend's blog edition, we want to discuss with you the signs based on which we may conclude, that the precious metal bear market that started in April of 2013, may be coming to an end.
After the massive decline of the gold and silver price in 2013, which led prices to as low as respectively US$1,180.00 an ounce for Gold and US$ 18.68 an ounce for silver, a number of indicators might suggest that the bear market for precious metals might be ending.
In this article we'll analyse the following key points and their effect on the price of Gold and other precious metals.
As can be seen from below chart, the price of Gold dropped to US$1,180.00 an ounce for a few minutes on 28 June 2013 but has been trending up ever since, reaching as high as US$1,433.00 an oz, in August of 2013.
Another selling wave followed and gold dipped to US$1,182.00 an oz, on 31 December 2013, but again, bears failed to break through and gold took off toward US$1,392.00 on 17 March 2014. Since then, gold has been easing some of its gains by dropping to as low as US$1,240.00 in June of this year and to as high as US$1,332.00 on July 1st of this year. On Monday July 14, someone dumped US$ 1.37 billion in Gold futures, causing it to have its biggest drop for the year, but on Thursday July 17, geopolitical tension regarding Malaysian flight MH17, that crashed when flying over Ukraine, pushed the price as high as US$ 1,324.46 an ounce as can be seen from below chart
Global tensions (Ukraine, Iraq, Russia, Libya, Syria) showed how gold remains a safe haven asset. Recently, there was a massive number of stops that were triggered on panic buying on June 19, and July 17 2014, when respectively Iraq asked the USA for air support against insurgents and when Malaysia Airline flight MH17, was shot down over Ukraine with 295 people on board.
For centuries Gold has been considered as the safe haven in time of political tensions.
INFLATION EXPECTATIONS ON THE RISE:
Inflation expectations in the USA are on the rise and the tensions in the oil rich Middle East, will put an upside pressure on Oil prices which will function as tail wind for inflation in the World.
Due to weather conditions, climate changes, life-stock & crops deceases and increase of the world population, food prices have risen the most this year, since 1990.
Although, both food and energy are excluded from the core inflation, indirectly they both have put an upwards pressure on the core CPI.
As can be seen from below chart the USA core CPI has risen in June, to its highest level in two years and above the 2 percent target of the FED.
PGM CAPITAL COMMENTS:
As can be read from the above analysis, the fundamentals for Gold are very strong.
From a technical point of view, as can be seen from below chart, Gold has failed to break down significantly from the tight coil pattern it created over a 2-month period.
A price US$1,280.00 an ounce will be an important level going forward for gold since it represents resistance from the coil, and is also where the 50-day moving average sits currently. If gold can surprise the bears to the upside and complete the failed breakdown things could get interesting.
What's even more interesting than gold though is what has happened in the mining stocks. The Market Vector Gold Miners ETF (NYSE: GDX) and Market Vector Junior Gold Miners (NYSE: GDXJ) experienced only two-day breakdowns from their coils.
These breakdowns occurred on high volume, but the buyers overwhelmed the sellers after merely two days as can be seen from the technical chart of the Market Vector Junior Gold Miners (GDXJ).
In a healthy gold market you want to see gold stocks outperforming the metal, and this failed breakdown in gold at the end of May is starting to look like it is forming a launchpad for a continued move higher in gold and gold stocks.
Regarding silver, when looking at the Silver data of "The Commitments of Traders "(COT) of the US Commodity Futures Trading Commission (CFTC), we see that Non-Commercial Longs increased by 24% in the first week of July; however, shorts tumbled by almost 60% in two weeks only while the Net Long/Short ratio, increased by 4000% from a near-zero figure to a 40,299 contract.
See below chart for details.
Looking back at its history, it seems silver might be preparing for another bull move, like the one of 2010-2011.
In 2010, Silver Longs reached a record high in October 2010 when the price of silver was at US$21.40 an ounce. Silver advanced significantly in the following months, reaching a record high at 47.90 (weekly close) on the week of April 29 – 2011.
Please keep in mind, that past performance of a security or commodity is no guarantee for its future performance and like John Maynard Keynes said:
'The market can stay irrational longer than you can stay solvent."
Last but not least, before following any investing advice, always consider your investment horizon and risk tolerance and financial situation and be aware that prices of commodities, precious metals and the stock of their miners can be very volatile.
Keep also in mind that prices don't move in a straight line and that sharp corrections may happen in the short term.