PGM Capital – Blog

Highlights of the Week of April 27, 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 April 27, 2015:

  • Ping An Insurance Group's stock at an all-time High.
  • Disappointed US, Q1-2015, GDP figures.
  • Shares of LinkedIn and Twitter down with more than 25% in the week.


About Ping An:
Ping An Insurance (Group) Company of China, Ltd. is a holding company, which was founded 1988 and has its headquarters in Shenzhen and Shanghai, with a focus on insurance, banking, and investment businesses in China.

The company began as only a casualty insurance company. Since the mid-1990s Ping An has been diversifying into financial services from its core business of insurance and began taking investments from overseas firms.

Since June 24, 2004 Ping An has been listed on the Hong Kong Stock Exchange under the symbol

Ping An has operations across all of the People's Republic of China, and in Hong Kong and Macau through Ping An Insurance Overseas. Ping An has branches or a representative agent in 150 countries.

The Hang Seng Index Services Company announced on May 11, 2007 that Ping An will join as Hang Seng Index Constituent Stock (Blue Chip Stock) since 4 June 2007.

As can be seen from below chart on Thursday, April 29th, the company's stock closed at an all-time high of HKD 111.14 a share.

On Wednesday, April 29, the USA department of Commerce reported that, the country gross domestic product grew between January and March at an annualized rate of 0.2 percent. The pace fell well shy of the 1 percent mark anticipated by analysts and marked the weakest quarter in a year as can be seen from below chart.

Source: Bureau of Economic Statistics

The only good news: the massive inventory build, the largest since 2010, boosted GDP by nearly 3.0%. Without this epic stockpiling of non-farm inventory which will have to be liquidated at some point (and at a very low price) Q1 GDP would have been -2.5%.

Below chart shows a breakdown of the GDP figure by its components.

As can be seen from below chart, shares of LinkedIn (NYSE: LNKD), operator of the most popular social network for professionals, fell 20 percent in early trading on Friday, May 1st, wiping out more than US$6 billion of market value, after the company slashed its full-year forecast.

As a consequence of the weak results of Twitter's (NYSE: TWTR) on Tuesday, April 28, Twitter's stock fell by as much as 24 percent, slicing about US$6 billion off its market value as can be seen from below chart.


Ping An:
As can be seen from above all time chart of the company, its share price has increased with approx. 976 percent since it went public in June of 2004.

With a P/E ratio of 18 and a strong balance sheet we can consider the company fairly valued. As can be seen from below chart, the company has increased its dividend steadily during the last 5 years, for which its current dividend pay out ratio is only 15.12 percent, which makes its current dividend payout extremely safe and gives the company room to further increase its dividend in the future.

Ping An Dividend history and Payout ratio

Based on the above we have a BUY rating on the stocks of Ping An Group

USA Economy stalls in Q1-2015:
The slow down reflected lower consumer spending, declining exports, lower business investment and less state and local government spending. The declines were offset by lower-than-expected imports, inventory build-ups by private business and an increase in federal spending.

As can be seen from below chart, the biggest factor was a deterioration in net exports, with lower exports subtracting nearly 1 percentage point from the annual growth rate and rising imports subtracting another quarter point. The strengthening dollar, which ended the quarter 8% higher than it had started and 20% higher than it had been a year earlier surely contributed to this.

Hours after the fresh data was released the Federal Reserve said that winter slowdown was “in part” reflective of “transitory factors” and that “economic activity will expand at a moderate pace” going forward. Economists expect that the central bank will hold off until the second half of the year, gauging the direction of the economy, before raising interest rates for the first time in 6½ years.

We  believe that the Federal Reserve won't be in any hurry to increase interest rate in parts, because of the softer U.S. economy at the start of the year and the zero to negative yield in Europe.

Twitter & Linkedin:
Regarding the massive sell-off, of the shares of both Twitter and LinkedIn we can be very short, this is something we have been predicting for a longtime. Chances are that the sell-off of these stocks are signalling the first signs that the current bubble in the US stock-market is about to burst.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek


Russian Central Bank bought 1 million Ounces of Gold in March

By Eric Panneflek

Dear PGM Capital Blog readers,
On Monday, April 20, the Central Bank of the Russian Federation (CBR) published its official reserve assets report that indicated, that  the country has added 30.5 tonnes of gold (981,500 troy ounces) to its reserves in March 2015. The massive purchase is the largest since September last year and is valued at approximately US$1.15 billion.

According to data from the World Gold Council (WGC), Russia sold less than half a tonne of gold in January. This, however, is peanuts compared to the 30 tonnes it purchased two months later or to the metal it had snapped up in the preceding months. Moreover, this sale seems to follow the pattern we observed in January 2014 when the country sold roughly the same amount of gold as can be seen from below chart.

As a consequence of this on April 1st, the country’s gold reserve stands at about 1,238 tonnes or 39.8 million ounces as can be seen from below chart.

Above chart shows a clear pattern of purchase of Gold by the Russian Central Bank which has boosted the country's gold holdings from just above 400 tonnes to well over 1,200 tonnes since 2001.  Above chart shows also that roughly 173 tonnes of Gold were purchased last year alone, which is more than double the 77.4 tonnes of gold bought in 2013 and above the amounts acquired in any of the previous years.

We are not surprised of the Russian government's decision to continue to accumulate gold, as their consistent accumulation since 2008 suggests something more than simple "reserve diversification".

In our opinion, Russia strategically  is accumulating Gold, to both hedge against financial calamity and to push the world away from the U.S. dollar.

Below chart shows, the decline of the US-Treasuries holding by Russia, since January 2014, and demonstrates unambiguously that country began its de-dollarization efforts before it was hit with Western sanctions.

The message the Russian government is sending is clear, by offloading treasuries and loading up on gold, Russia is making an all-in bet against the US dollar, in favor of the yellow metal.

The continuation of Russian gold accumulation is a sign that the country is still not satisfied with the current shape of financial markets, and that their desire to replace the reserve currency role of the U.S. dollar is not over.

Concurrently, it’s playing an active role, along with the likes of China, Iran, and Kazakhstan, in the expanding international movement to bypass the dollar’s use in trade settlement via the employment of currency swaps and other measures.

The news of the latest Russian gold reserve addition confirms the World Gold Council prediction that overall central bank gold reserve rises will continue at a strong rate this year, beside this, there is also speculation that China may also confirm a big rise in its reserve by as much as 2,500 tonnes or more in the months ahead as it jockeys to try and have the Yuan accepted by the IMF as a part of the make-up of a revised Special Drawing Rights basket.

The IMF-SDR, with currency code "XDR" currently consists of a basket of the US$, Euro, GBP and JPY, with the following weight factors, since January 1st 2006.

The weights assigned to each currency in the XDR basket are adjusted to take into account their current prominence in terms of international trade and national foreign exchange reserves.

Below video, provides more details on the IMF SDR.

The IMF review this basket every five years, for which December 30, 2005, was the last time it was updated.

Earlier this year, Ms. Christine Lagarde, the Managing Director of the International Monetary Fund (IMF) said:

"It was a question of when, not if, China's Yuan will be included in the SDR basket"

The first step in the IMF's review of the basket for the SDR, an international reserve asset, is an informal board meeting in May, followed by a formal review in the autumn. Any changes would likely come into effect in January 2016, and can be passed by a simple majority.

In order for the China's Yuan to be included in the SDR basket, it must be a free floating currency.

Currently the Chinese Yuan is pegged to the US$, analysts believe that a depegged, Chinese Yuan, will appreciate immediately in value against the US$ and other currencies in the SDR Basket.

The IMF will decide on China’s internationalization in December. It is a date to watch. It will be a hint as to how China-U.S. relations will be for the next five years.

The IMF makes such decisions only twice a decade.

The time for China is now!

If the IMF decides to add the yuan into the basket, the path to its internationalization will be well paved, with the consequence that the US-Dollar will have a true rival.

Until next week

Yours sincerely,

Suriname Times foto

Eric Panneflek


Highlights of the Week of April 13, 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 April 13, 2015:

  • On Wednesday, the US-Treasury Department said that Japan overtook China in February as the top foreign holder of U.S. Treasury Securities.
  • The Dow-Jones Industrial triple digit lost on Friday, April 17 and is flat Year-to-Date.

According to data from the USA Treasury Department, released on Wednesday, April 15, Japan surpassed China in February as the largest foreign holder of U.S. Treasuries for the first time since August 2008 as can be seen from below chart.

As can be seen from below chart, Japanese holdings of Treasuries actually declined in February by US$14.2 billion or 1.1 percent to US$1,224.4 billion from US$1,238.6 billion in January, while China’s holdings declined in February by US$15.4 billion or 1,2 percent to US$1,223.7 billion. On a year-over-year basis, Japan’s holdings increased US$13.6 billion, while China’s declined US$49.2 billion.

It is also worth-mentioning that foreign central banks sold US$11.1 billion in Treasuries in February,
shedding U.S. government debt for a fifth straight month.

All over holdings by foreign holders of US Treasuries declined with US$56.6 billion in February, to US$6,162.8 billion, from US$6,219.4 billion, in the previous month as can be seen from below table.

The Dow Jones industrial average declined on Friday, April 17, with 279.47 points or 1.54% and is now flat for 2015 as can be seen from below chart.

American Express (NYSE: AXP) fell 4.4 percent to its lowest level since 2013 after quarterly revenue missed estimates. Travelers Cos. (NYSE: TRV), 3M Co. (NYSE: MMM) and United Health Group Inc (NYSE: UNH). dropped more than 2.3 percent to pace declines in the Dow Jones Industrial Average as all 30 of its components slid.

  • The Standard & Poor’s 500 Index fell 1.1 percent to 2,081.11, on Friday and is now below its average price for the past 50 days.
  • The Nasdaq composite finished down 1.5% and the S&P 500 closed 1.1% lower.


Japan overtakes China as Biggest Holder of USA Debt.
The US Federal Reserve remains the single biggest holder of Treasuries, after snapping up US$2.5 trillion through its quantitative easing program. The bond-buying has since ended, but repayments and coupons are being reinvested in the market, keeping the Fed’s holdings steady.

However, Japan and China are by some distance the biggest foreign holders of Treasuries and account for about two-fifths of all foreign ownership of US-Treasuries.

As can be seen from below chart, Chinese ownership of U.S. government debt has been generally declining since it peaked in November 2013 at US$1,316.70 billion, while Japanese ownership of U.S. government debt hit its most recent peak in November 2014, when it hit US$1,241.50 billion.

In a paper published last month, the Congressional Research Service (CSR) said:

“China’s purchases of U.S. government debt help keep U.S. interest rates low.”

However, over the past few years, Chinese officials have expressed concern over the 'safety' of their large holdings of U.S. debt. They worry that growing U.S. government debt and expansive monetary policies will eventually spark inflation in the United States, resulting in a sharp depreciation of the dollar. This would diminish the value of China’s dollar asset holdings, for which reason they are diversifying their reserves out of the US-Dollar.

The Chinese aren't the only one selling US-Treasuries, overall international investors like overseas central banks, hedge funds, insurers, asset managers and pension funds decreased their holding of US government debt to US$ 6.16 trillion at the end of February, compared to US$ 6.21 trillion in January.

Dow-Jones Industrial flat Year-To-Date.
Friday April 17, recorded the worst drop for the Dow-Jones Industrial this year since March 25. The Dow has struggled since reaching a record high on March 2 of this year and is now back where it started the year.

Investors have been bracing themselves for a disappointing earnings season. Analysts expect companies in the S&P 500 are expected to report earnings per share fell 2.6 percent from a year earlier.

While the US markets are flat for the year, the markets in Asia, mainly the Hong Kong - Hang Seng Index - and the Chinese - CSI-300 - have risen double digit year-to-date, as can be seen from below chart.

Blue Chart = CSI-300 Index, Green Chart = HSI Index, Red Chart = DOW-30 Index

Up to now, Q1-2014 earnings-season, has showed slowing to declining earnings growth in the USA. On top of this with a Shiller P/E ratio of the S&P-500 of above 27,  we can consider the USA markets to be overvalued.



On the other hand we can consider the Hong Kong, "Hang Seng Index", - which contains most of the Chinese Big Caps - , with an P/E ratio of 10.50, as extremely undervalued.

Below chart shows the historical P/E ratio of the Hong Kong, Hang Seng Index (HSI).


Due to the above we believe that based on their P/E ratio and fundamentals, we can expect the Hang Seng Index to soar this year and for the USA Index to perform sideways or to go into a correction this year.

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 markets of emerging markets can be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek