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Speed Up or Slow Down--Don't Exit the Commodities Highway
A positive signal received this week came from Goldman Sachs, when the firm recommended stepping back into the markets in its latest Commodity Watch. Goldman is anticipating a 29 percent return for the S&P GSCI Enhanced Commodity Index over the next 12 months and suggests investors might want to increase their position in commodities.
China Eases the Way
Following negative data last week, investors were clearly concerned about global growth and anxiously anticipated government actions. While Europe and the U.S. disappointed investors, China surprised on the upside by cutting interest rates. The market reacted positively, as the S&P 500 Index increased 3.7 percent. Its clear the governments tone in China shifted this week with the rate cuts. The government appeared to be comfortable with slower growth, but that position seemed to change as the country took steps to avert a hard landing and cut interest rates to stabilize the economy.
Will the ECB and Fed Follow Where China Leads?
Every month, policymakers track purchasing managers indices (PMI) around the world as they consider fiscal and monetary actions. To us, a PMI is a measure of health of companies around the world, because it includes output, new orders, employment and prices across manufacturing, construction, retail and service sectors. Historically, weve seen Chinas PMI number leading the year-over-year change in exports by three to four months, so when the PMI has increased, a few months later, Chinese exports have historically risen, and vice versa.
The Golden Wealth of Turkey
When I talk about the Love Trade, India and China are frequently discussed since the two countries have been dominating world jewelry demand. Turkeys love for gold, though, cannot be overlooked, as an estimated 5,000 tons have been accumulating in peoples homes for years. Turkey is now offering incentives for people to store their gold in the bank instead. By acknowledging the hidden wealth of the Eastern European nation, this move will allow banks to lend more money and ultimately improve the countrys current account balance.
There's No Place Like America
Investors arent endorsing U.S. equities today. With all the positive aspects mentioned above, todays low participation in the U.S. stock market is perplexing. Here are two more reasons to invest today: 1) About 620 companies in the S&P 1500 Index are growing their revenues at more than 10 percent; and 2) 428 stocks in the index have an annualized dividend yield higher than the 10-year Treasury.
China Gives Green Light to Car Buyers
China just made it a little more affordable to buy a car. Last week, the government announced a one-year, RMB 26.5 billion subsidy program devoted to energy-efficient products. About RMB 6 billion will be set aside for fuel-efficient cars, and the remaining incentives focus on LED lighting, high-efficiency motors, and air conditioners, refrigerators, washing machines and water heaters that comply with energy saving standards.
Pocket of Strength: Turkey Retail Stocks Rally
To add alpha, we believe investors need to continually seek pockets of strength amidst todays mire of pessimism. One bright spot weve seen lies just east of Greece: Turkey. Many investors believe banks are the only investment play in Turkey. The sole question for those investors is to hold or not to hold banks. Heres what we think is a better strategy: Invest in undervalued, diverse, smaller companies that will benefit from a resilient consumer, low unemployment rate and sound government policies.
Gold: The World's Friend for 5,000 Years
Investors have defriended gold recently in favor of the dollar, as Greek and French voters rejected austerity measures. Greeks have been responding to their escalating debt issues for a while by steadily pulling money from overnight deposits. I often say, money goes where it is best treated, and these deposits will need to find a safe haven.
How Gold Demand Remains Resilient
Demand for gold was relatively resilient in the first quarter of 2012, with global demand falling 5 percent. Marcus Grubb, managing director of investment, calls this slight quarter decline in demand noise in the context of 22 percent rise in the price of gold compared to first quarter of 2011. Also, gold demand was very strong in the first three months of last year. Gold faced a complex quarter, as you can see by looking at jewelry demand by country. There was a significant rise in demand for jewelry from Russia, Egypt, Indonesia, Taiwan, and China, compared to the first quarter of 2011.
Looking to China to Fire Up its Economy
Following on the heels of renewed concern over Europes debt situation, China released its monthly economic data. Fixed asset investment, industrial production and retail sales all rose in April, yet growth was not as strong as analysts anticipated. Weak is the word to describe Chinas April figures, says CLSAs Andy Rothman in his Sinology Report. But China wants the ability to manage a stable decline to promote medium-to-long-term structural reforms as well as avoid a hard landing, says CEBM.
Chart of the Week: Where Global Industrial Production Is Coming From
Many have compared todays economic recovery to the slow, stagnant growth Americans lived through in the 1970s. I argue theres at least one significant difference: Four decades ago, the world couldnt depend on emerging market growth like it can today. Take a look at Macquarie Researchs chart comparing industrial production (IP) following the 1970s with the output after the downturn in late 2008. The output during the mid-1970s and todays cycle looks very similar over the first two years. The decline experienced around the 31-month mark today also mirrors the drop of the 1970s.
Gold Takes It On the ChinWhats Next?
The market reacted strongly to the elevated debt crisis in Europe by liquidating positions in multiple asset classes. Gold fell 3 percent this week, losing its safe haven status as the dollar grew stronger and the 10-year government note headed lower. Seasoned advisors know the markets usually overreact to negative news; they also are very aware of golds normal monthly historical volatility. Throughout the past 20 years of monthly returns, the precious metal generally increased only 0.5 percent in May, and has historically declined in June and July.
Apple is a WantGlobal Resources are Needs
Investors seem to be overlooking the fact that Apples products are wants, not needs. Millions of consumers want an iPad and many want a computer, yet, every single person in the world needs global resources. We need companies to grow our food; we need oil, natural gas and coal to fuel our cities. And so do the other 7 billion people on the planet. To outperform the S&P 500 over the long term, we believe investors should overweight their portfolio to the global products and services that people need, not want.
Do Emerging Markets Win, Place or Show in Your Portfolio?
The recovery in U.S. stocks is significant and helps restore confidence in equities. Were pleased to see markets improving, especially following a rough finish in 2011. Yet there lingers a persistent negativity toward emerging markets growth and commodities that prevents many investors from jockeying their portfolios into a position for growth. Rather, they remain spectators on the sidelines, with equity fund outflows continuing.
Sell in May and Go Away? Not this Year
One catchy investing maxim thats popular this time of year is sell in May and go away, the notion that investors should cash in their investments and take the summer off. We believe its a much better market this year. After following a similar trajectory as the previous year from October to the beginning of March, improving economic data pushed the S&P 500 over 3 percent higher in March 2012 after trending sideways during the same time period last year.
Outsized Outsourcing Opportunity in the Philippines?
Our investment team has reported in the weekly Investor Alert about a number of positive trends coming out of the Philippines lately, including a narrowing of the budget deficit, easing inflation and rising export numbers. In addition, CLSA reported last fall that, the Philippines increasingly looks like it could be where Indonesia was five years ago in terms of the potential for a multi-year credit and investment cycle to kick in after years of post-Asian Crisis de-leveraging.
Weighing the Evidence of Oil and Gold Stocks
We believe in thinking contrarian and keeping a close eye on historical trends to discover inflection points, as stocks tend to eventually revert to their means. For example, in March 2009, we noted significant changes signaling the market had hit rock bottom; following that time through the end of the first quarter, the S&P 500 Index rose more than 100 percent. Todays extreme divergence in oil and gold stocks and their underlying commodities presents a rare opportunity: what these stocks need now are investors to take advantage of it.
What CLSAs Andy Rothman Thinks is the Biggest Misunderstanding in China
In our webcast last week on what to expect from China, Andy Rothman from CLSA outlined the major misconceptions about China. He believes the biggest myth that investors think about China is that its economy is primarily driven by exports. Using two charts which debunk this misconception, Andy explained that domestic investment and domestic consumption have long been the most significant drivers of Chinas economic growth.
Wheres the Beef for Gold Equities?
If you plan on shopping for bargains in the gold miner department, youre going to fight a crowd. Numerous global investors have been pounding the table for gold stocks, including Marc Faber who said gold shares have become extremely oversold and could rebound in the next few days and Global Portfolio Strategist Don Coxe, who reiterated that gold equities are undervalued compared to the precious metal. A big buyer has been the miners themselves. Mergers and acquisitions in the mining sector have been at an all-time high over the past two years. Theyve been willing to pay a premium too.
Managing Expectations: Why Gold Should Thrive
It was a challenging week for gold investors. Although the yellow metal has been on a spectacular 11-year bull run, some think golds heyday is over. This March, there seemed to be one main driver eight thousand miles away negatively affecting gold prices. I often say that government policy is a precursor to change, and fiscal policy strongly affected the Love Trade in India last month. To trim its current account deficit, Indias finance minister proposed doubling the customs tax on the precious metal. As a result, gold imports into the worlds largest gold market fell 55 percent.
Managing Expectations: Why Gold Should Thrive
Its been a challenging week for gold investors. As I often say, investing, like life, is about managing expectations. Over the past 11 years during golds spectacular bull run, investors should remember that price action can go both ways. What helps is to look at the historical rise and fall of gold. For example, looking at the past decade of one-day 5 percent drops in gold, you can see that this event is pretty rare. In 2006, gold dropped more than 5 percent in a day only two times. In 2008, there were three such events. Another one occurred at the end of this February.
The Blue Chips of China
Business Insider created a slideshow that showcases Chinas biggest brands from BrandZs ranking of companies by brand value. The list is a global recognition of how China is increasingly becoming a brand creator and marketer, not just an export machine. Many of the companies are state-owned; all of the brands are publicly traded, report positive earnings and formed by a mainland enterprise. Because the country is growing as an economic powerhouse, it is time that others around the world understand the power brands of China, says BrandZ.
Time to Pay the Piper
One way investors can offset higher tax rates is through municipal bonds. In general, interest generated from municipal bonds is exempt from all federal income taxes and some state and local taxes (depending on your state). While municipal bonds carry a greater amount of risk than Treasury bonds, tax advantages and higher yields make them extremely attractive to Treasuries on a relative basis. The yield on government debt is currently in the doldrums just above 3 percent while the yield on the Bond Buyer 40 Index of munis is above 4 percent.
The World's a Little Richer
The World Bank released an update to its consumption poverty estimates in developing countries, and for the first time ever, the organization found progress in all the regions they track. In terms of the number and percentage of people living on $1.25 a day at 2005 prices in 130 developing countries, the world is a little richer. The area seeing dramatic progress was East Asia, reports the World Bank. Back in the 1980s, this region had the worlds highest incidence of poverty. Nearly 80 percent of people lived on less than $1.25 each day; In 2008, the number dropped to 14 percent.
Does China Hold the Winning Ticket?
Some bears may think the odds of China being the winner among emerging markets in 2012 are also remote. Over the past few years, Chinese stocks have lagged compared to its emerging market peers. However, the Periodic Table of Emerging Markets perfectly illustrates: last years loser can be this years winner. Historically, every emerging country has experienced wide price fluctuations from year to year. Over time, though, each country tends to revert to the mean.
Who Will the Next President Be?
For global investors, its important to keep track of the presidential elections happening all around the world, as leaders can significantly affect their countries policies. And as our investment process indicates, we believe government policies are precursors to change. The Economist, which provided inspiration for U.S. Globals Election Interactive, discussed how the leaders who run the world could change this year, along with the ideas: A battle of ideas is under way From Shanghai to Mumbai and Sao Paulo, governments that removed economic restrictions have made their citizens richer.
Gold and China: Where the Bulls and Bears Square Off
To paraphrase the great Steve Martin, todays investors are very passionate people and passionate people tend to overreact at times. An overreaction is exactly whats happened in gold and global markets in recent weeks. While market bulls have been sniffing out data points to support their case, market bears have continued to take a glass-half-empty approach. Gold and China are two areas that have been caught in the bear trap this week, but we believe the gold and China bulls still have room to run.
Why Gold Can Go the Distance
Golds been knocked down lately, but several enduring factors have conditioned the yellow metal for an inevitable comeback. Since the beginning of 2012, gold has trailed its precious metals peers, gaining only about 6 percent compared to double-digit returns for silver and platinum. At the end of February, gold was especially hard hit, following Ben Bernankes announcement that there would be no additional quantitative easing and the European Central Bank offering additional LTRO loans to banks.
The Heart of March Madness
Everyone agrees that its unethical to put the firms interest ahead of its clients. More importantly, a self-serving financial attitude is a breach of fiduciary duties. It may be possible that Goldman Sachs has moral issues, but not all financial firms are morally bankrupt. Nor are thousands of executives and professionals employed in the industrymoms, dads, uncles, aunts, daughters, sonswho are hard-working and acting in the best interest of their customers.
Chart of the Week: The Worlds Infrastructure Plans
Demand for access to basic needs, an emerging middle class and a never-ending use of global resourcesthese are the primary drivers of major infrastructure projects over the next several years. The infrastructure plans taking place across emerging markets emulate a 1950s America. As these governments help their residents pursue the American Dream of better homes, health care and quality of life, I believe the companies with a strong footprint in these growing markets stand to benefit.
And the 2012 Pritzker Prize Goes to
Winning the Pritzker gives Wang credibility on the world stage,. It also gives credibility to Chinese architecture. Zhu Tao, a University of Hong Kong architecture critic, told The Wall Street Journal that Wangs award sends a message to young architects working in the context of explosive urban growth that architecture is a cultural enterprise, not just a commercial enterprise, and that architects are creators of culture. In this globalized world where China is a powerhouse economy, modern Chinese culture is being sculpted right alongside its skyscrapers.
Appreciating China to its Fullest
While most analysts dont expect another moon shot rise in China's GDP this year, a 7.5 percent growth rate still exceeds most emerging economies and all developed nations. Advanced economy growth is expected to be meager, slowing from 1.6 percent to 1.3 percent in 2012, according to The Conference Board. For long-term investors learning to appreciate the finer points of the country, we believe China is somewhat like fine wine; it only gets better with age.
Trading Volume's Disappearing Act
What do investors in the stock market need? Trading volume.
After daily trading volumes in the S&P 500 Index hit a high in July 2002, volume quickly declined before leveling off, bouncing between 20 and 30 billion shares on a daily basis for a few years. Since its January 2009 high, daily shares traded have quickly spiraled downward. Today, volume is at a 15-year low, with only 7 billion shares traded.
The Apple Doesn't Fall Far From the Global Resources Tree
After Apple reached $500 billion in market capitalization, it was inducted into a very elite club of businesses that have reached this size. Only Cisco, ExxonMobil, General Electric, Intel and Microsoft have made it to the $500 billion mark. Since October, the tech companys stock has increased nearly 40%, making it the top driver of the S&P 500 rally. This increase caught the attention of many analysts, including Thomas Lee from J.P.Morgan, who declared that the company is a sector unto itself. At a market cap of just under $500 billion, Apple represents 3.7 percent of the S&P 500 Index.
Will Oil Continue Heading Higher?
We expect there to be corrections in the price of oil throughout 2012, just like the ups and downs commodities experience from year to year. While the world is hungry for energy, theres no free lunch on the Periodic Table of Commodities, and historically, from year to year, commodities fluctuate. Crude oil, for example, has seen its share of ups and downs: In 2008, oil lost 53 percent; in 2009, it increased a substantial 78 percent. While oil may remain elevated, use these higher prices to your advantage by owning natural resources companies that benefit from higher prices.
Cures for the Apathetic Investor
A lack of faith and trust has driven investors to the sidelines and halted the flow of capital in the U.S. According to the Investment Company Institute, investors pulled more than $130 billion from equity mutual funds during 2011. This is a common reaction in the cycle of market emotions where investors generally move from a fear of losing money, to becoming apathetic about the markets, to feeling confident about investments, and finally, to irrational exuberance. Right now, many investors appear to be stuck in an apathy sandpit.
The Emotions of Fear and Apathy Create Good Buying Opportunities
One of the reasons money has found its way back to the market is that low interest rates and a bubble in bonds have upped the attractiveness of equities relative to other asset classes. In fact, many large-cap equities come with a higher yield. This means that investors can wait for the growth, while receiving the income. Overall, it looks like the markets dark clouds are lifting and we could be in for a period of sunny skies in the months ahead.
The Enduring Popularity of Gold
For thousands of years, pharaohs, explorers, rulers and investors have been attracted to gold, as the precious metal has been a vital tool in building and protecting wealth. While gold naysayers focus on the day-to-day fluctuations in price, I believe gold equities and bullion will continue to enjoy maximum popularity, as the Oracle of Omaha puts it, for years to come. The allure of goldwhether it is from Fear or Lovecannot be underestimated.
The Quiet After the Storm
Its all quiet on the equity front. For the past month, the S&P 500 Index has experienced an unusually calm period of lower volatility. Bespoke Investment Group says the timeframe between December 28 and January 26 has been remarkably lacking in 1 percenters. The firm found that its been more than a year since the S&P 500 has gone 26 trading days without declining one percent. We believe government policies are precursors to change, which is why our investment team continually monitors and tracks the fiscal, monetary and regulatory policies of countries.
Theres Value in Russias Future
Increasingly, Russian companies have begun paying dividends, with some companies paying as much as a 10% annual dividend. As interest rates around the world will remain low or even negative for years to come, dividends offer investors the opportunity to earn income with the potential of appreciation. Although political risks remain, we believe Russia continues to be a hotbed of opportunity for emerging market investors.
A Spark That Lit the Economy
Fridays employment data was the latest of a series of data showing marked improvement in the U.S. economy. ISI counted 18 straight weeks of stronger U.S. data including better vehicle sales, same store sales, homebuilding and manufacturing. Also, U.S. money supply is growing at a robust 10 percent year-over-year, greasing the wheels for Americas economic engine, which showed 3.7 percent growth in nominal GDP in the fourth quarter.
In the Bullring With Gold
We anticipated that the Year of the Dragon would spur an increase in the buying of traditional gifts of gold dragon pendants and coins. Gold buying did hit new records, says Mineweb, with sales of precious metals jumping nearly 50 percent from the same time last year, according to the Beijing Municipal Commission of Commerce. This should serve as a warning to all of golds naysayers. Gold bullfighters bewareyou now have to fight the gold bull while fending off a golden Chinese dragon.
What Milestone Will China Achieve Next?
The Economist put together a comprehensive dateline, charting which year China overtook or will overtake the U.S., using 21 indicators of consumption, GDP or spending. It summarizes the significant milestones reached over the last decade or so, reminding us how far China has come. Looking into the next decade, The Economist also plots an estimation of when Chinas GDP will be larger than that of the U.S. China stands to be the largest economy by 2018. However, if China grows faster with all the other factors remaining the same, the countrys GDP could be larger than the U.S.s GDP by 2017.
Junior Resources Companies Set to Outperform?
In volatile markets, small stocks typically lag larger companies as investors flee what they perceive to be risk. However, this love affair with large-caps is generally short lived as investors return to the beaten-up small caps when the turmoil subsides. Historically, small-caps have outperformed their larger counterparts. In 2011, junior miners were shunned, but Global Resources Fund co-portfolio managers Evan Smith and Brian Hicks pointed out to me this week that were beginning to see signs of small-cap strength.
Filling an Energy Order with Chinese Takeouts
Years ago, China did not have a global footprint, but over the last few decades the country has transformed itself into a global power. It boasts the largest automobile market and the largest consumer of steel, copper, mobile phones, and energy. It has built 18k miles of high speed rail connecting 250 cities with 5.5k skyscrapers. This tremendous infrastructure has amplified and globalized M&A activity, which has a positive effect on commodity-related stocks. For commodity equity investors, BCA says to expect Chinese firms to play an increasingly important role in global capital markets
Heart of China Bull Beats Strong
With rising incomes and increasing urbanization, we believe China is pursuing the American Dream, and the government has shown great determination to build the necessary infrastructure along with a robust urban labor market. On a purchasing power parity basis, Chinas share of world GDP has risen significantly, from around 3 percent in 1985 to a current world share of nearly 16 percent.
Peering Through Exxons Looking Glass
The emerging world will push global energy demand 30 percent higher by 2040, according to ExxonMobils Outlook for Energy: A View to 2040. The report contains some interesting projections on what may be in store for the energy sector in the coming decades. The global population is expected to reach a staggering 9 billion over the same period, but it isnt population growth that will drive the increase in energy demand. Instead, rising affluence and higher living standards in regions such as Africa, Latin America, the Middle East and India will be the biggest factors.
Significant Growth Potential for Indonesia's Middle Class
Indonesias workforce is growing 7,000 people stronger each day, adding an estimated 21 million people to its workforce by over the next decade. This is second only to India. This growth has given birth to a burgeoning middle class willing to spend money on durable goods such as clothing, personal-care items, home appliances and electronics. Currently, domestic consumption accounts for two-thirds of Indonesias GDP. Weve already seen double-digit growth in sales for televisions, cars, computers and laptops over the past few years. More importantly, this trend is just getting started.
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