PGM Capital – Blog
24Jul/160

Why Investing in Royal Dutch Shell (part 2)

By Eric Panneflek

Dear PGM Capital Blog readers,

In this part 2 of our blog article, entitled "Why Investing in Royal Dutch Shell might be so lucrative",  we want to elaborate further on the company's fundamentals, for which we believe that it might be a good investment for those investors, who are seeking growth, with a high dividend yield at a low risk.

INTRODUCTION:
Anglo-Dutch, Royal Dutch Shell (RDSA.AS or RDSA.L or NYSE: RDS.A) offers a unique opportunity to invest in a company within a sector that is been beaten down in Q4-2105 and since January of this year is in an upswing.

Royal Dutch Shell has significant international exposure and a company that is committed to maintaining the single largest dividend payment in the MSCI World Index.

The company is in a position to grow it Free Cash Flow by dialing back capex without posing a threat to production. Furthermore, the company's stable 6.6% yield is increasingly attractive to investors faced with European & Japan interest rates dipping into negative territory and U.S. Treasury rates dipping to their lowest level in history.

The company has a solid balance sheet, and it has no serious near-term liquidity risks and due to its merger with BG is applying very successful the four financial levers in managing the current fall in oil prices as can be seen from below chart.

Source: Shell

As can be seen from below charts the company's stock remains down more than a third from its 2014 highs prior to the global oil market collapse, but it has bounced nearly 50% off of its January lows when oil dipped below US$30 per barrel.

PGM CAPITAL ANALYSIS & COMMENTS:
Based on the above mentioned fundamentals and below listed points, we have since January of this year a STRONG BUY rating on the stock of Royal Dutch Shell.

  • The company hasn't cut its dividend a single time in the past 70 years, for which its biggest advantage over its peers is its nearly 7 percent dividend yield.
    • However, despite the company giving no indication that it plans on cutting its dividend, the market seems to be pricing in a significant reduction in Shell's dividend based on the stock's yield prior to the downturn in the 4.75% to 5.5% range.
    • Skeptical investors have questioned the acquisition of BG Group and worried that the company has painted itself into a corner where it will have to choose between cutting the dividend and cutting production. However, management of the company is addressing those concerns by planning to sell US$30 billion in assets by the end of 2018 while maintaining current production levels.
  • There's no question its balance sheet has been stretched incredibly thin during the oil downturn.
  • The company compounded its budget woes with its US$53 billion acquisition of BG Group as well.
  • Following the addition of BG Group, Shell's management announced it expects about US$2 billion per year in cost synergies from the merger. In addition, in its annual report, the company projected US$3 billion in total cost savings in 2017.

As can be seen from below chart, regarding the estimated; Sales, Operating Profit, Net Income and margins, for 2016 up to 2020, we can conclude that the worst is over for the company.

The company will report earnings of the fiscal Quarter ending June 30, 2016, on coming Thursday, July 28 before market open, the general analyst consensus EPS forecast for the quarter is US$ 0.52 per share.

It is also worth mentioning that US Investment bank Goldman Sachs, in March of this year has placed Royal Dutch on their Conviction Buy List and sees a thirty one percent upside for the shares of the company.

Last but not least, before following any investing advice, always consider your investment horizon, risk tolerance and financial situation and be aware that commodities prices and the stock of their producers might be very volatile and that sharp corrections may happen in the short term.

Yours sincerely,

Suriname Times foto

Eric Panneflek

17Jul/160

Highlights of the week of July 11, 2016

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 July 11, 2016:

  • China Q2-2016 Economic Growth beats estimates.
  • Japan preparing for Helicopter Money.

CHINA Q2-2016 ECONOMIC GROWTH BEATS ESTIMATES:
On Friday, July 15, China world's second largest economy grew with 6.7 percent in the second quarter of this year, from a year earlier, steady from the first quarter, analysts had expected it to dip to 6.6 percent.

Highlights:

  • More than 7 million new jobs were created in the first half of the year.
  • Average household income grew by 6.5 percent in both quarters, the data showed.
  • Industrial output edged up slightly to 6.2 percent in June, compared with 6 percent in May. But the figure was down from the 6.8 percent recorded last June, as several heavy industries attempt to trim overcapacity.
  • In the first half of 2016, the output of coal dropped 9.7 percent and production of raw steel was down 1.1 percent.
  • Fixed-asset investment grew 9 percent year on year in the first half of the year driven by an increase in infrastructure investment by state-owned enterprises.
  • Growth in property investment was also slightly down to 6.1 percent at the end of June from 6.2 percent in the first quarter.
  • Exports slipped 2.1 percent in the first half compared to the same period in the previous year. However, volume of goods sold to several countries that are part of the "One Belt, One Road" initiative increased. This includes sales to Pakistan that rose 22.5 percent, Russia up 16.6 percent, Bangladesh 9 percent, India 7.8, and Egypt 4.7. The major exported items were electronic devices and machines.
  • The consumer price index climbed by a moderate 2.1 percent over the first half.

JAPAN PREPARING FOR HELICOPTER MONEY:
In the past week, Japanese markets have seen hyped-up speculation that the government will resort to using what’s called “helicopter money”, where a central bank directly finances budget stimulus through programs such as perpetual bonds.

Former USA FED Chairman, Ben S. Bernanke, who met Japanese leaders in Tokyo in the past week, had floated the idea of perpetual bonds during earlier discussions in Washington with one of Prime Minister Shinzo Abe’s key advisers.

With Prime Minister Shinzo Abe preparing a big spending package to be announced as early as this month, the Bank of Japan will remain under pressure to expand monetary stimulus at its rate review on July 28-29, analysts say.

Bernanke's version of a Helicopter drop could work two ways:

  1. The government would decide to spend a bunch of money (say on a massive tax cut, or on a new public works program), then the federal reserve would deposit the funds directly in a Treasury account.
  2. The Treasury would issue new bonds, which the Fed would buy and hold forever, while remitting all the interest back to the government.

The difference between the above and the QE programs the FED did during the Great Recession is, that with QE programs, the central bank buys government bonds on the open market and tries to push down yields.

With a helicopter drop, it's coordinating with the rest of the government to finance immediate spending. And while it sounds a bit exotic, there are at least a few scattered examples of it in history.

PGM CAPITAL ANALYSIS AND COMMENTS:

China Q2-2016 GDP figures:
China's economy narrowly beat estimates Friday with a 6.7 percent expansion on-year in the three months through June, as a string of stimulus measures from the government and the central bank helped shore up demand.

The Chinese government is aiming for growth of 6.5 to 7 percent this year, a slower pace than what the world's second-largest economy had got accustomed to in the past two decades.

While growth was a shade better than expected in the second quarter, it is noted that activity was largely driven by government stimulus rather than the private sector.

China's economy is gradually transitioning to a greater reliance on consumption compared with a previous emphasis on manufacturing but the transformation hasn't been all smooth-sailing.

We believe that the country's financial sector will profit the most form the transition of the Chinese Economy toward a more consumption one.

Based on the above combined with their strong balance-sheet, extremely low Price to earning ratio, we have a STRONG BUY rating on the four biggest Chinese banks.

Japan:
As can be seen from below 1-year chart, for the last 12 months the Japanese Yen has been rising against the USD and the Euro, which is hurting Japan's export.

Secondly for the last 12-months, there was a positive correlation between the Japanese Yen and the price of Gold as can be seen from below chart.

This is why, for a brief, glorious moment this week, it seemed possible that Japan was about to embark on the weird monetary policy adventure of econ enthusiasts' dreams.

Sadly, a government spokesman poured cold water on the idea on Wednesday, July 13, by clarifying that, no, Japan's central bank was about try showering the country with “helicopter money.”

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek

9Jul/160

What is the Gold-to-Oil Ratio telling us this time?

By Eric Panneflek

Dear PGM Capital Blog readers,

In this weekend's blog edition we want to elaborate on the Gold-to-Oil ratio which since the beginning of this year is in record territory.

INTRODUCTION:
The Gold-to-Oil ratio measures how many barrels of crude oil is needed to buy one (1) ounce of gold.

On average, the ratio has historically traded around 15, however, as can be seen from below chart, since November of last year the Gold-to-Oil ratio has been surging higher to reach an all time high of 39.15, in January of this year, which literally means that 39.15 barrels of Oil is needed to buy one Troy ounce of Gold.

50-year Gold-to-Oil Ratio

On Friday July 8, the Crude Oil price closed at US$ 45.21 a barrel and the Gold price at US$ settled at US$ 1365.91 an Ounce, which brings the Gold-to-Oil ratio to 30.88

THE OIL PRICE:
As can be seen from below chart, world’s most important commodity, the blood of the earth, crude oil, has fallen more than 60% since June 2014.

Why are the Oil prices falling:
Commodity prices, like most others, are determined by two factors: supply and demand. The longer-term oil price sell-off has been led by a rise in supply, as US production has picked up with the advent of shale gas investment on a large scale.

On the other side, China, the world’s second largest economy, pivots away from energy-intensive industrial growth, towards a more consumption-led model of development.

THE GOLD PRICE:
On Friday, July 8, gold futures in New York for delivery in August, the most active contract, fell to a low of US$1,336.30 shortly after the non-farm payroll numbers data was released, but quickly shot back up US$ 5.41 or 0.43%, to close the trading day and week at 26 month high of at US$1,365.91 an ounce as can be seen from below 3-year chart.

Year-To-Date, Gold prices are up with more than US$ 300,00 an ounce or 28.64 percent making it one of the best performing asset this year.

PGM CAPITAL ANALYSIS AND COMMENTS:
Oil, as measured by an ounce of gold, is at its cheapest in decades and that worries some strategists given the ratio’s uncanny knack for predicting big financial crises.

Economists are still divided about whether or not cheaper oil is good for the economy. The bullish camp argues that lower prices at the pump are the equivalent of a tax cut.

The bearish camp on the other hand, will point out that such a dramatic decline in gasoline prices is an extremely deflationary force on an already vulnerable global economy.

Deflation is dangerous because it slows the supply of money and credit flowing through the economy, and reduces consumer demand in a self-reinforcing cycle.

As usual, the correct answer lies somewhere in the middle. While the impact on the broader economy is debatable, historically, extreme fluctuations in oil have wreaked havoc on financial markets.

Several metrics indicate we’re headed for major volatility.

History has proven, that the Gold-to-Oil ratio is actually very significant, because during the last 30-years it predicted all the previous crises, as can be seen from below chart.

Gold-To-Oil Crisis Chart

 

The main reason for this is, that oil prices tend to fall when economic growth is weak and investors are worried, while gold thrives in that environment, with the consequence that the gold-to-oil ratio spikes around periods of financial crisis.

Below chart proves the above, for which reason investors are asking themselves,

What crisis is the Gold to Oil ratio, predicting this Time?

The PGM Component 50 Index:
The PGM Component 50 Index, which is heavily weighted with precious metals and other wealth preservation's securities, is up 37.15 percent YTD, and has closed on Friday, July 8th at fresh new all-time high of 1,231.95 points.

Screen Shot 2016-07-08 at 5.45.09 PM

Above chart shows also that the PGM Component 50 Index, has also beaten all major markets and Gold YTD .

We believe that a very serious global economic crisis, is on the horizon, for which reason during the last four years, via several interviews and blog articles we have been warning investors, for turbulent times ahead and that Gold and other precious metals are the only insurance against it.

We believe also that Friday July 8th, reaction on the gold market suggests another US rate hike – so long in the making – is now finally baked into the price of gold, and that traders are focusing on the backdrop of negative interest rates in many developed economies, worries global economic growth and geopolitical uncertainty surrounding Britain's exit from the EU.

Last but not least, before following any investing advice, always consider your investment horizon, risk tolerance and financial situation and be aware that prices of precious metals and the stock of their producers might be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek