Category: zerohedge

In the past we have explained how QE continues to “fail upward” because instead of injecting credit that makes its way into the economy, what Bernanke is doing, is sequestering money-equivalent, high-quality collateral (not to mention market liquidity) – at last check the Fed owned 33% of all 10 Year equivalents – and by injecting reserves that end up on bank balance sheets, allows banks to chase risk higher in lieu of expanding loan creation. Alas it took a few thousands words, and tens of charts, to show this. Since we always enjoy simplification of complex concepts, we were happy to read the following 104-word blurb from Bridgewater’s Co-CEO and Co-CIO Greg Jensen, on how QE should work… and why it doesn’t.

The effectiveness of quantitative easing is a function of the dollars spent and what those people do with that money. If the dollars get spent on an asset that is very interchangeable with cash, then you don’t get much of an impact. You don’t get a multiplier from that. If the dollar is spent on an asset that’s risky and very different from cash, then that money goes into other assets and into the real economy. That’s really how you see the impact of quantitative easing. What do they buy? Who do they buy it from? What do those people do with that money?

Of course, this is why sooner or later the Fed will proceed to “monetize” increasingly more risky, and more non-cash equivalents assets, until “this time becomes different.” Which it never is, but the Fed will still try, and try and try.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ZGLApkdZhDM/story01.htm Tyler Durden

Today we note that:

 

1)   The US economy is tipping back into recession again

2)   Corporate profits are at record highs and set to fall

3)   Stocks are extremely overvalued

 

All of these add up to a real problem for long-term stock investors today. The classic method of valuing stocks, the P/E ratio is comprised of market cap relative to earnings.

 

If earnings are at record highs today and stocks are already overvalued, how high will P/Es be when earnings begin to contract with stocks at these levels?

 

Speaking of earnings, let us now move to #2 on the list of items I listed at the opening of this issue: the recent collapse in revenues and earnings at economically sensitive firms.

 

We’ve seen a recent spate of terrible results from corporate America.

 

In the last few months alone we’ve seen disappointing earnings at:

 

1)   Caterpillar (global machinery)

2)   Microsoft (software)

3)   Google (search engine ad revenue)

4)   Chevron and Exxon Mobil (oil)

5)   Discovery (credit cards)

6)   Amazon (online retail)

7)   Charles Schwab (brokers)

8)   Wynn Resorts (casino)

 

There are dozens and I literally mean dozens of ways to craft earnings to be better than reality. You can writedown assets, alter depreciation methods, manipulate bad debt expenses in accounts receivables, game the closure of deals, take one time charges, utilize derivatives and mark to model valuation of assets, etc.

 

Indeed, a study performed by Duke University found that roughly 20% of publicly traded firms manipulate their earnings to make them appear better than they really are. The folks who were surveyed for this study about this practice were the actual CFOs at the firms themselves.

 

In this sense, it is safe to that 2013 earnings, as poor, are they are, have been “massaged” to look better than reality.

 

Indeed, we get confirmation of this from revenues misses. As I mentioned a moment ago, earnings can manipulated any number of ways, but revenues cannot; either money came in or not.

 

With that in mind, we’ve in the last few quarters we’ve seen revenues misses at:

 

1)   Merck (big pharma)

2)   Molson Coors (alcohol)

3)   Clorox (cleaning materials)

4)   US Steel (steel)

5)   McDonald’s (fast food)

6)   3M (conglomerate)

7)   GE (conglomerate)

 

This brings me back to an earlier point, that profits and earnings are likely peaking. Net profit margins today are at all-time highs. There is virtually nowhere to go but down here.

 

Finally, I want to draw your attention to the massive cash hoards value investors and wealthy individuals are sitting on.

 

Warren Buffett, arguably the greatest value investor of the last 100 years, is currently sitting on a cash hoard of $49 billion. This is an all-time record for Buffett. And it’s a strong indication that there are few great deals in the market today.

 

Few investors understand inflation as well as Buffett (though his views on Gold are confusing for many). But Buffett is a master of beating inflation. He’s well aware that by sitting on cash today with interest rates at zero he’s “losing money.” The fact he’s willing to do this rather than invest in stocks should be a major warning to investors that there is a dearth of great value opportunities in the markets today.

 

Buffett is not the only one.

 

Mega-private equity firms, Fortress and Blackstone have been urging their clients to get out of the market.

 

Moreover, a recent study by American Express and Harrison Group has found that the wealthiest 1% of clients has been shifting rapidly to cash with their savings rates soaring from 34% to 37% last quarter.

 

Bank of America had similar findings of its millionaire clients with 56% of them stating they have a “substantial” amount of their assets currently in cash.

 

This just confirms my concerns that the market is currently offering few opportunities for long-term deep value investors.

 

For a FREE Special Report on how to beat the market both during bull market and bear market runs, visit us at:

 

http://phoenixcapitalmarketing.com/special-reports.html

 

Best Regards

 

Phoenix Capital Research

 

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/1wh48bXAeb4/story01.htm Phoenix Capital Research

From Archaea Capital Research (pdf)

ANNUAL REPORT – COMMENTARY

2013 & 2014: Closing, Reflection, and Five Bad Trades To Avoid Next Year

December 12, 2013

To our Clients and Investors,

Our investment process continues to focus on filtering highly favorable reward-to-risk opportunities. Yet the last 12 months have presented an interesting anomaly. Looking back and reflecting on 2013, we find a year inordinately cluttered with apparent opportunities that turned out to be bad trades. More so, in fact, than any other year we can remember. In 2013, avoiding bad trades contributed more alpha to an investment portfolio than identifying great opportunities. Not losing was the new winning.

Too many investors, prodded by the unrelenting monetary zeitgeist or their own emotions (or both), voluntarily entered these traps, at one time or another, throughout the year. Identifying the bad calls in advance, and implementing a basic filter, saved a great deal of financial and mental capital—and kept us in the race. Looking through our global macro lens, we list some of these potholes in chronological order:

First among them was the universal belief starting around 4Q12, and lasting well into 1Q13, that Emerging Markets were going to be the star performers this year. Then by March, the latest fashion was to sell the British Pound on coming devaluation. Moving into April, Copper and Materials became a favorite short to ‘play’ the Chinese downtrend. Several faulty assumptions behind that logic chain, to be sure. By late June, the rage was to short Bonds on ‘taper talk’. Emerging Markets were declared dead. As July came, the Dollar was ‘breaking out’, and was a ‘must-own’. As September approached, economists had reached near-universal agreement on an imminent Fed taper. Few bothered to listen to what the Fed was actually saying, for the better part of three months (then proceeded to blame the Fed for poor communication). Fortunately, we had the courage to avoid (and even fade) these ‘top trades’.

Other pockets of frenzied consensus, to our surprise, managed to hold up—and in some cases, became even more misaligned. The ‘Great Rotation’ actually came to pass, as retail investors managed to dump their Bonds at the lows only to pile into Stocks at the high. Never mind who lifted those Bonds from them, and sold Stocks to them. Precious metals and the miners broke after everyone said they would, then promptly disappeared from the investment menu. Selling Yen after May, Selling Bonds and Gold in late June, all struck us as really bad trades. Most haven’t gone anywhere, yet their proponents are even more convinced the gains are coming. This bizarre contrarian “Moebius strip” has disguised several bad trades as good, for now. Even for the mighty S&P, 70% of the year’s gains were clocked in by late May. Chalk it up to Mr. Market’s convincing tricks, and investment mandates where patience has been cut to zero. Having long believed patience to be correlated with alpha, as we transition into 2014, we cannot envision a better time to keep a cool head.

In hindsight, perhaps one of the greatest lessons of 2013 was the importance of Japan to the macro discussion. To any market practitioner (economists not included) who has glanced at a 50-year chart of Japanese Equities, the Yen, and U.S. 10-Year Treasury Yields, we believe these trends happened together for very important, fundamentally separate but systemically inter-related reasons—all of which are too important to fit in a brief reflection note. Suffice to say, if an investor thinks that one of these two trends (Japan/U.S. Rates) has turned for a period relevant to their time horizon, they should take the time to study what the fundamental and systemic implications are for the other. Apparently, most investors have not.

Without further delay, let us return to the discussion on deceptive opportunities that become bad trades, as we ponder the coming year.

Five Bad Trades To Avoid Next Year

BAD TRADE #1 For 2014: Ignoring Mean Reversion

The stock market had a great year. Supposedly, history favors a good follow-through. We disagree. The chart below shows the S&P’s annual returns for the 20 years that followed two consecutive double-digit annual gains in the stock market. Over nearly a century, the third year posted a significantly smaller return than the historical median/average (84% less than the median return, and 65% less than the average return):

Here are the 20 thumbnail charts of those years for quick perusal, in order from the performance bars above:

Nearly every chart, with the exception of perhaps 1945 and 1997, favored mean reversion. In short, buying on January 2 and holding just may not cut it in 2014. Those levering for a repeat of 2013 in U.S. Equities are likely walking in to a meat grinder. As for the lessons of 2013 on currencies, commodities, and even Emerging Markets, please read the first page of this note. Trends were fickle, and we expect plenty of encores in the coming year. As a side note, the most bearish outcome for 2014 would be a gravity-defying big return (net of the mean-reverting swings we expect). From the eight best years above, three came in 1997-1999—and we know what followed. Worse, without these three bubble years, the median return falls to 0%, and the average to -1.45%.

 

BAD TRADE #2 For 2014: Which-flation?

This debate is also related to mean reversion. Below is a 15-year chart of U.S. CPI with relevant Economist magazine covers marked in vertical lines (to the nearest month). The covers read:
     May 24, 1999: Economy Wars – Starring Alan Greenspan, Inflation Fighter
     June 19, 2004: Back to the 1970s? Inflation returns, worldwide
     May 24, 2008: Inflation’s back… but not where you think
     Nov 9, 2013: The perils of falling inflation

As per above, there are only wrong answers in this eternal debate. If we were to guess, the Fed may finally get their inflation ‘on target’ next year—as inflation tends to considerably lag economic activity anyway (roughly 2-4 quarters) and 2013 was on balance an expansion year. Inherent lags could easily drift CPI (and Core) back to 2% or higher, throwing a wrench in all the central planning models.

Speaking of which, below is the “last gasp” (white arrow) in Core CPI during the previous cycle, with a 50-month moving average for guidance. Is a repeat coming?

If the question seems outlandish, the below chart shows the last seven U.S. Recessions, and Core CPI (white) relative to the same 50-month moving average (blue). The S&P is in yellow. Periods of Core CPI trending above its long-term average all led to poor economic and investment outcomes:

Looking to yet another time for guidance, in late 1989 stocks (yellow) made new all-time highs just as Core CPI inflation (white) stabilized around its long-term average (blue)—identical initial conditions observed today.

Inflation then rose for a year, while stocks were put through the meat grinder from September 1989 to September 1990. Ultimately stocks fell 20% as recession hit.

Below we overlay the U.S. 10-Year Treasury Yield (green) against the same Core CPI (white) for that period. Here, yields rose for a few months in tandem with inflation, but by year-end 1990 yields were right back to where they had started. Mean-reversion at its finest:

In a classic repeat of history, 2014 could see a late cycle (last gasp) rise in inflation of 50-100bps, and a Fed once again looking through the rearview mirror of a lagging indicator to set policy. As seen from the previous charts, this alone would present a whole new set of problems for asset prices. And of course, no one would see it coming, as the magazines already suggest.

As for interest rates, here are the same magazine covers placed over a chart of the U.S. 10-Year Treasury Yield. By the end of 2014 the current deflation scare may look a bit silly. Where Bond prices end up, and how they get there, remains to be seen. Between now and then, there will be no shortage of economists with consensus forecasts—try to ignore them.

 

BAD TRADE #3 For 2014: Forgetting Late Cycle Dynamics

Inflation isn’t the only late-cycle theme that has disappeared from the investment discussion:

Large investors turn cold on commodities—Financial Times, December 5

“After two years at the helm of the world’s worst-performing asset class, managers of commodities funds could be forgiven for feeling unloved. Wall Street analysts, big-picture strategists and powerful consultants have turned cold on oil, metals and grain futures as a decade-long rally peters out. And investors are listening, with many now reluctant to commit further funds. Some are heading for the exits. […]”

A Commodities Rally Isn’t Carved in Stone—Wall Street Journal, December 2

“If the market had its own Ten Commandments, near the top would be “thou shalt revert to the mean”—or, what goes up must come down and vice versa. Commodities bulls betting on this lifting their favorite investment out of its funk need to ask themselves where that mean is, though. […] Above all, in historical terms, prices for copper, oil and gold aren’t even that cheap—they only look so compared to recent dizzy peaks. Somewhere in those alternative commandments is another instruction for investors: Thou shalt not catch a falling knife.[…]”

Interest in the Commodities space has been plumbing the depths throughout most of the year—and the market (as measured by the S&P GSCI index) has, unsurprisingly, gone nowhere:

Copper has also returned as a favorite short to ‘play’ China. The grand thesis is that Chinese policy is shifting from industrial to consumption-driven growth. So the consensus is to short Copper into the next Plenum. We’ll pass. The idea that Commodities are ‘dead’, as we noted with deflation also dominating the economic debate, seems to offer fertile ground for a temporary surprise next year.

 

BAD TRADE #4 For 2014: Blind Faith In Policy

Markets break rules. Investment aphorisms that gain enough believers usually stop working—right when they are counted (depended) on the most. On Page 1 of the market rule book stands, alone, “Don’t fight the Fed” (with a nod to Marty Zweig—who probably would have cringed at how ubiquitous the phrase has become—and who also said “the problem with most people who play the market is that they are not flexible”).

Central bank credibility is like any other asset. It swings in and out of favor, in fairly predictable cycles. The time to go long Fed credibility was five years ago. If we could sell global central bank credibility, we would do so today:

There are no good options for late-cycle monetary policy. Central bank mandates have an inherent structural flaw. They are tasked with controlling inflation and unemployment, both of which lag the real economy. That is, when both inflation and unemployment are stable and improving, and policy is accommodative, “Don’t fight the Fed” works rather beautifully. Straight lines work wonders in economic models. Unfortunately at the turns, model-driven policy tends to fall behind the reality curve. Lest we forget, 2007-2008 was a classic example. As the below chart shows, accommodative policy didn’t arrest the crash of 2008, the tech bust in 2000, the recession and bear market of 1990-1991, the double-dip recession of 1982, or the crash of ’74. Perhaps 2014 will see the Fed digging itself into the same late cycle hole, temporarily reducing accommodation just as unemployment troughs and inflation perks up. The models won’t like that—and we worry for those following blindly at the turn.

 

BAD TRADE #5 For 2014: Reaching for Yield During Late Cycle

Moody’s maintains a handy high-yield credit spread model based on rating changes. For the first time in this 5-year credit expansion cycle, predicted high yield credit spreads have crossed rather significantly above actual. It worked quite well as a leading indicator during the crisis. Overall, the history of these gaps does not bode well for sustained spread compression:

The above also suggests that placing blind faith in monetary policy (as we discussed previously), as the sole driver for further spread compression, may ultimately disappoint credit investors. Ignoring credit quality deterioration in late cycle is simply a bad trade.

Add Covenant Lite Issuance at 60% of loans, far surpassing the 2007 highs…

And PIK issuance off the charts (nearly a third to pay dividends)…

In both cases, we have a picture of investors who do not appear to be carefully analyzing individual credit risk. Further, companies are not levering up to invest in future growth, but to feed their shareholders. Call it the pillaging of corporate balance sheets, by the very insiders charged with steering the ship. Incidentally, just as they are (in aggregate) directing their companies to buy back shares and pay dividends (courtesy of savers, prodded by the Fed), only 17% of recent individual insider transactions have been purchases. According to Prof. Nejat Seyhun of the University of Michigan, this is the lowest level since 1990, when his database begins (the average runs at 38%). What could possibly go wrong?

As we enter a new year, we thank you for the opportunity to be a part of your investment process. May we together “figure out” the pieces of the market puzzle. May 2014 be rewarding for the patient, diligent investor.

As we like to say, “imagination, innovation, understanding, and action are pillars shared by all successful investors”. When some of the best opportunities come from doing nothing, the market’s message is one of great informational value. The value of avoiding big mistakes in 2014 may be greater than ever before. And with a long list of potentially bad trades already competing for investors’ attention at the opening gate, we will prepare for the coming year in careful study and thought.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/FRoDISb_abI/story01.htm Tyler Durden

From Archaea Capital Research (pdf)

ANNUAL REPORT – COMMENTARY

2013 & 2014: Closing, Reflection, and Five Bad Trades To Avoid Next Year

December 12, 2013

To our Clients and Investors,

Our investment process continues to focus on filtering highly favorable reward-to-risk opportunities. Yet the last 12 months have presented an interesting anomaly. Looking back and reflecting on 2013, we find a year inordinately cluttered with apparent opportunities that turned out to be bad trades. More so, in fact, than any other year we can remember. In 2013, avoiding bad trades contributed more alpha to an investment portfolio than identifying great opportunities. Not losing was the new winning.

Too many investors, prodded by the unrelenting monetary zeitgeist or their own emotions (or both), voluntarily entered these traps, at one time or another, throughout the year. Identifying the bad calls in advance, and implementing a basic filter, saved a great deal of financial and mental capital—and kept us in the race. Looking through our global macro lens, we list some of these potholes in chronological order:

First among them was the universal belief starting around 4Q12, and lasting well into 1Q13, that Emerging Markets were going to be the star performers this year. Then by March, the latest fashion was to sell the British Pound on coming devaluation. Moving into April, Copper and Materials became a favorite short to ‘play’ the Chinese downtrend. Several faulty assumptions behind that logic chain, to be sure. By late June, the rage was to short Bonds on ‘taper talk’. Emerging Markets were declared dead. As July came, the Dollar was ‘breaking out’, and was a ‘must-own’. As September approached, economists had reached near-universal agreement on an imminent Fed taper. Few bothered to listen to what the Fed was actually saying, for the better part of three months (then proceeded to blame the Fed for poor communication). Fortunately, we had the courage to avoid (and even fade) these ‘top trades’.

Other pockets of frenzied consensus, to our surprise, managed to hold up—and in some cases, became even more misaligned. The ‘Great Rotation’ actually came to pass, as retail investors managed to dump their Bonds at the lows only to pile into Stocks at the high. Never mind who lifted those Bonds from them, and sold Stocks to them. Precious metals and the miners broke after everyone said they would, then promptly disappeared from the investment menu. Selling Yen after May, Selling Bonds and Gold in late June, all struck us as really bad trades. Most haven’t gone anywhere, yet their proponents are even more convinced the gains are coming. This bizarre contrarian “Moebius strip” has disguised several bad trades as good, for now. Even for the mighty S&P, 70% of the year’s gains were clocked in by late May. Chalk it up to Mr. Market’s convincing tricks, and investment mandates where patience has been cut to zero. Having long believed patience to be correlated with alpha, as we transition into 2014, we cannot envision a better time to keep a cool head.

In hindsight, perhaps one of the greatest lessons of 2013 was the importance of Japan to the macro discussion. To any market practitioner (economists not included) who has glanced at a 50-year chart of Japanese Equities, the Yen, and U.S. 10-Year Treasury Yields, we believe these trends happened together for very important, fundamentally separate but systemically inter-related reasons—all of which are too important to fit in a brief reflection note. Suffice to say, if an investor thinks that one of these two trends (Japan/U.S. Rates) has turned for a period relevant to their time horizon, they should take the time to study what the fundamental and systemic implications are for the other. Apparently, most investors have not.

Without further delay, let us return to the discussion on deceptive opportunities that become bad trades, as we ponder the coming year.

Five Bad Trades To Avoid Next Year

BAD TRADE #1 For 2014: Ignoring Mean Reversion

The stock market had a great year. Supposedly, history favors a good follow-through. We disagree. The chart below shows the S&P’s annual returns for the 20 years that followed two consecutive double-digit annual gains in the stock market. Over nearly a century, the third year posted a significantly smaller return than the historical median/average (84% less than the median return, and 65% less than the average return):

Here are the 20 thumbnail charts of those years for quick perusal, in order from the performance bars above:

Nearly every chart, with the exception of perhaps 1945 and 1997, favored mean reversion. In short, buying on January 2 and holding just may not cut it in 2014. Those levering for a repeat of 2013 in U.S. Equities are likely walking in to a meat grinder. As for the lessons of 2013 on currencies, commodities, and even Emerging Markets, please read the first page of this note. Trends were fickle, and we expect plenty of encores in the coming year. As a side note, the most bearish outcome for 2014 would be a gravity-defying big return (net of the mean-reverting swings we expect). From the eight best years above, three came in 1997-1999—and we know what followed. Worse, without these three bubble years, the median return falls to 0%, and the average to -1.45%.

 

BAD TRADE #2 For 2014: Which-flation?

This debate is also related to mean reversion. Below is a 15-year chart of U.S. CPI with relevant Economist magazine covers marked in vertical lines (to the nearest month). The covers read:
     May 24, 1999: Economy Wars – Starring Alan Greenspan, Inflation Fighter
     June 19, 2004: Back to the 1970s? Inflation returns, worldwide
     May 24, 2008: Inflation’s back… but not where you think
     Nov 9, 2013: The perils of falling inflation

As per above, there are only wrong answers in this eternal debate. If we were to guess, the Fed may finally get their inflation ‘on target’ next year—as inflation tends to considerably lag economic activity anyway (roughly 2-4 quarters) and 2013 was on balance an expansion year. Inherent lags could easily drift CPI (and Core) back to 2% or higher, throwing a wrench in all the central planning models.

Speaking of which, below is the “last gasp” (white arrow) in Core CPI during the previous cycle, with a 50-month moving average for guidance. Is a repeat coming?

If the question seems outlandish, the below chart shows the last seven U.S. Recessions, and Core CPI (white) relative to the same 50-month moving average (blue). The S&P is in yellow. Periods of Core CPI trending above its long-term average all led to poor economic and investment outcomes:

Looking to yet another time for guidance, in late 1989 stocks (yellow) made new all-time highs just as Core CPI inflation (white) stabilized around its long-term average (blue)—identical initial conditions observed today.

Inflation then rose for a year, while stocks were put through the meat grinder from September 1989 to September 1990. Ultimately stocks fell 20% as recession hit.

Below we overlay the U.S. 10-Year Treasury Yield (green) against the same Core CPI (white) for that period. Here, yields rose for a few months in tandem with inflation, but by year-end 1990 yields were right back to where they had started. Mean-reversion at its finest:

In a classic repeat of history, 2014 could see a late cycle (last gasp) rise in inflation of 50-100bps, and a Fed once again looking through the rearview mirror of a lagging indicator to set policy. As seen from the previous charts, this alone would present a whole new set of problems for asset prices. And of course, no one would see it coming, as the magazines already suggest.

As for interest rates, here are the same magazine covers placed over a chart of the U.S. 10-Year Treasury Yield. By the end of 2014 the current deflation scare may look a bit silly. Where Bond prices end up, and how they get there, remains to be seen. Between now and then, there will be no shortage of economists with consensus forecasts—try to ignore them.

 

BAD TRADE #3 For 2014: Forgetting Late Cycle Dynamics

Inflation isn’t the only late-cycle theme that has disappeared from the investment discussion:

Large investors turn cold on commodities—Financial Times, December 5

“After two years at the helm of the world’s worst-performing asset class, managers of commodities funds could be forgiven for feeling unloved. Wall Street analysts, big-picture strategists and powerful consultants have turned cold on oil, metals and grain futures as a decade-long rally peters out. And investors are listening, with many now reluctant to commit further funds. Some are heading for the exits. […]”

A Commodities Rally Isn’t Carved in Stone—Wall Street Journal, December 2

“If the market had its own Ten Commandments, near the top would be “thou shalt revert to the mean”—or, what goes up must come down and vice versa. Commodities bulls betting on this lifting their favorite investment out of its funk need to ask themselves where that mean is, though. […] Above all, in historical terms, prices for copper, oil and gold aren’t even that cheap—they only look so compared to recent dizzy peaks. Somewhere in those alternative commandments is another instruction for investors: Thou shalt not catch a falling knife.[…]”

Interest in the Commodities space has been plumbing the depths throughout most of the year—and the market (as measured by the S&P GSCI index) has, unsurprisingly, gone nowhere:

Copper has also returned as a favorite short to ‘play’ China. The grand thesis is that Chinese policy is shifting from industrial to consumption-driven growth. So the consensus is to short Copper into the next Plenum. We’ll pass. The idea that Commodities are ‘dead’, as we noted with deflation also dominating the economic debate, seems to offer fertile ground for a temporary surprise next year.

 

BAD TRADE #4 For 2014: Blind Faith In Policy

Markets break rules. Investment aphorisms that gain enough believers usually stop working—right when they are counted (depended) on the most. On Page 1 of the market rule book stands, alone, “Don’t fight the Fed” (with a nod to Marty Zweig—who probably would have cringed at how ubiquitous the phrase has become—and who also said “the problem with most people who play the market is that they are not flexible”).

Central bank credibility is like any other asset. It swings in and out of favor, in fairly predictable cycles. The time to go long Fed credibility was five years ago. If we could sell global central bank credibility, we would do so today:

There are no good options for late-cycle monetary policy. Central bank mandates have an inherent structural flaw. They are tasked with controlling inflation and unemployment, both of which lag the real economy. That is, when both inflation and unemployment are stable and improving, and policy is accommodative, “Don’t fight the Fed” works rather beautifully. Straight lines work wonders in economic models. Unfortunately at the turns, model-driven policy tends to fall behind the reality curve. Lest we forget, 2007-2008 was a classic example. As the below chart shows, accommodative policy didn’t arrest the crash of 2008, the tech bust in 2000, the recession and bear market of 1990-1991, the double-dip recession of 1982, or the crash of ’74. Perhaps 2014 will see the Fed digging itself into the same late cycle hole, temporarily reducing accommodation just as unemployment troughs and inflation perks up. The models won’t like that—and we worry for those following blindly at the turn.

 

BAD TRADE #5 For 2014: Reaching for Yield During Late Cycle

Moody’s maintains a handy high-yield credit spread model based on rating changes. For the first time in this 5-year credit expansion cycle, predicted high yield credit spreads have crossed rather significantly above actual. It worked quite well as a leading indicator during the crisis. Overall, the history of these gaps does not bode well for sustained spread compression:

The above also suggests that placing blind
faith in monetary policy (as we discussed previously), as the sole driver for further spread compression, may ultimately disappoint credit investors. Ignoring credit quality deterioration in late cycle is simply a bad trade.

Add Covenant Lite Issuance at 60% of loans, far surpassing the 2007 highs…

And PIK issuance off the charts (nearly a third to pay dividends)…

In both cases, we have a picture of investors who do not appear to be carefully analyzing individual credit risk. Further, companies are not levering up to invest in future growth, but to feed their shareholders. Call it the pillaging of corporate balance sheets, by the very insiders charged with steering the ship. Incidentally, just as they are (in aggregate) directing their companies to buy back shares and pay dividends (courtesy of savers, prodded by the Fed), only 17% of recent individual insider transactions have been purchases. According to Prof. Nejat Seyhun of the University of Michigan, this is the lowest level since 1990, when his database begins (the average runs at 38%). What could possibly go wrong?

As we enter a new year, we thank you for the opportunity to be a part of your investment process. May we together “figure out” the pieces of the market puzzle. May 2014 be rewarding for the patient, diligent investor.

As we like to say, “imagination, innovation, understanding, and action are pillars shared by all successful investors”. When some of the best opportunities come from doing nothing, the market’s message is one of great informational value. The value of avoiding big mistakes in 2014 may be greater than ever before. And with a long list of potentially bad trades already competing for investors’ attention at the opening gate, we will prepare for the coming year in careful study and thought.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/FRoDISb_abI/story01.htm Tyler Durden

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.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/W5HY_hObNzY/story01.htm williambanzai7

Submitted by The Idiot Tax

Speculation & Investor Behaviour

I’d been watching the stock for at least a month. A small time oil & gas company in Africa. It managed to secure a huge land position for a company of its size. Looked very promising, well funded for some time. Management previously had success putting together a similar land position with another company before it was swallowed early. But, still highly speculative.This one wouldn’t be dropping a drill on dirt until late 2014. Maybe 2015.

Being a stingy bugger and without a catalyst in the market, I kept sniffing around for a while before I finally slid my buy order in at 18.5 cents – this dude wasn’t going to pay the current market price of 20 cents! Maybe even 18.5 was too much. When it dropped to 19.5, I began to believe my order would get filled, but then when it hit 19 cents my mind started to desert me.

“I could get this for 18 cents.”

Volume. There wasn’t a great deal of it. In fact it was being pushed down on mild trades. Someone needed a new flatscreen or wanted to get their kid Optimus Prime for Christmas. There was no prospect that enough shares would be dumped and I’d get my fill at 18 cents. The holding was tight and the sell side was thin. Regardless, I hit the amend button and my order dropped down the queue to 18 cents.

I assume you know where this story is going. You’re probably wondering why I’m telling it when it inevitably makes me look like an idiot. So why tell? I’ve read countless explanations of investor psychology in a general sense, but rarely does anyone put their name to a calamity, or at least their nom de plume.

Everyone can recognise these paragraphs by Heidi Lefer and Ildiko Mohacsy, in  Journal of the American Academy of Psychoanalysis and Dynamic Psychiatry, but there’s little personality to it and no experience. 

Economic bubbles and crashes have occurred regularly through history-from Holland’s 17th century tulip mania, to America’s 19th century railway mania, to the 1990s high-tech obsession. Though most investors regard themselves as investing rationally, few do. Instead they react collectively, buying high and selling low in crowds. Being subject to the illusion of control, they follow regressive behavior patterns and irrational, wishful thinking. They are victimized by their own emotions of hope, fear, and uncertainty. 

When people feel doubt and panic, they regress to an earlier stage either individually or en masse. Under stress, they revert to affect (Mohacsy & Silver, 1980). Such mobbing has an obvious psychological counterpart in the market. Here, crowds are governed by wishful thinking. “Investors are coached to believe that a stock is a better buy when the price rises, that it’s ‘safer’ to join the crowd in betting the price up and ‘riskier’ to buy a stock declining in price” (Vick, 1999, p. 7). Investors also join a crowd to minimize regret. If something goes wrong, they know others behaved the same way. 

We recognise it when exuberance makes charts go vertically up or when stone cold fear pushes them ruthlessly down, but our ego inevitably makes us shy away admitting that we take part in any function of it – “that’s those other sheep”. We’re merely unemotional observers, until we aren’t. Is anyone going to admit they were buying in the final moments before the last bitcoin crash?

It was inevitable that a few short days after Wall Street lovingly embraced Bitcoin as their own, with analysts from Bank of America, Citigroup and others, not to mention the clueless momentum-chasing, peanut gallery vocally flip-flopping on the “currency” after hating it at $200 only to love it at $1200 that Bitcoin… would promptly crash. And crash it did: overnight, following previously reported news that China’s Baidu would follow the PBOC in halting acceptance of Bitcoin payment, Bitcoin tumbled from a recent high of $1155 to an almost electronically destined “half-off” touching $576 hours ago, exactly 50% lower, on very heave volume, before a dead cat bounce levitated the currency back to the $800 range, where it may or may not stay much longer, especially if all those who jumped on the bandwagon at over $1000 on “get rich quick” hopes and dreams, only to see massive losses in their P&Ls decide they have had enough.

There will be a strange irony, in that anyone you talk to with a bitcoin experience will have left the building at $1100 – “it was looking bubbly, so I took a profit.” Hmmm. The drip that bought at $1155 will be cloaked in anonymity, unless $2200 is later smoked.

Back to me, and the price my mind had agreed pay – 18.5 cents was hit. But where was I? Yeah, I’d cooly (or so I told myself ) shifted another gear down and was expecting to get my happy ending at 17.5 cents. As the share price firmed again, juddering between 19.5 and 20 cents I meekly snuck back to 18.5. At 20 I snuck up to 19, as I wondered whether it might go to 20.5. Of course it did, before coming back to 19.5, at which point I had enough steel to leave my order at 19.

In the midst of this circus, late on a Friday, the buy side appeared to firm considerably and immediately it looked a better buy again – “buy now and I’m with the crowd.” After a fortnight of courting and several times being left with my frank in my hand, maybe it was time to make the move and just get my fill at 19.5. But, but, but, this was Friday afternoon and anything could happen over the weekend. Rating agency downgrades, terrorist attack, tsunami, nuclear disaster, alien invasion, apocalypse. And I’d still have to settle on Wednesday!

And something did happen. First it was a market announcement after the close on Friday that their seismic program had shown positive results. Damn, I assumed this was going to cost me another half cent! Then on Monday  – TRADING HALT.

11 minutes before open on Monday morning. I spent most of Monday cursing my stupidity while muttering F-U under my breath. On Wednesday morning the announcement came out – an unsolicited equity placement at an 18% premium to the previous close. A significantly rare and positive event. And on open, the share begins trading at 23.5 cents.

Where’s my order? Oh I’d moved it to 22 cents now. Sigh. Yeah it was happening all over again. Though a few price bumps up to 24 and 24.5 cents during the day had me edgy. Now the urge is to get ahead of the game because this is surely going higher.

What didn’t help throughout this brain mincing was my constant contact with a share trading forum. Those great analogies that describe a share price ready for take off (see, I just used one then!) were flying into my eyes like poison darts. Common sense is blinded and it further makes me think I gotta get in!

Toot! Toot! Buckle up your seatbelts! The floor is in! A couple of cents will be meaningless soon! 

Then there’s also talk of the big boys buying, holidays (not just theme parks, your own private island), early retirement and Ferraris. Sitting on the sidelines and kicking yourself while reading this is a little unnerving, but a slap to the face and you quickly regain perspective. The real issue becomes the now moving share price. Even if you block out the chat room noise, with every half cent it’s somehow a better inve
stment – or speculation as it were. Yet last week every half cent movement downward made it waft like sun-baking salmon. Someone’s selling, something must be wrong. Drag that order down so you won’t overpay!

After again playing tag and miss with the price for most of the day, a gap opened up at 22.5 towards closing time. That was the entry point. No more mental gymnastics trying to second guess the next movement – if I got hit, I got hit. I placed my order. It sat near the top of the queue and with one foul swoop at 3:51pm I became a shareholder. A few minutes later the price went back to 23 cents and that’s where it closed for the day. After two weeks of games, and being led around by my nose, it was a very painless exercise. Yet I had little control until I pinched my brain in those final moments. There was some satisfaction that I paid less than the premium placement that instigated the jump in price, but I still paid 21% more than if I’d just left my initial order 18.5 cents.

Again, from Heidi Lefer and Ildiko Mohacsy, in  Journal of the American Academy of Psychoanalysis and Dynamic Psychiatry – I’m guilty as charged.

Our brains are hard-wired to get us into investing trouble; humans are pattern-seeking animals . . . .Our brains are designed to perceive trends even where they might not exist. After an event occurs just two or three times in a row . . . the anterior cingulate and nucleus accumbens automatically anticipate that it will happen again. If it does repeat . . . dopamine is released . . . .Thus, if a stock goes up a few times in a row, you can reflexively expect it to keep going up . . . .Brain chemistry changes as the stock rises, giving . . . a “natural high.” You effectively become addicted to your own predictions.

At last close the share price sat at 31.5 cents. I’m in, I’m ahead and I’m finally calm. But I still can’t believe how ridiculous my mental gymnastics became. I’ve got no clue how many trades I’ve completed over the years, but any time I’m buying a new company this farce reappears.

The share forums have gone wild over the company. Just by reading them the brain could start firing with thoughts of short changing your future family tree by not taking a position. I felt similar insanity that day I realised I’d be paying 21% more than I’d initially intended.

It went up remarkably quickly after I bought, then came a sharp pullback. The sentiment around the company has snapped from “gotta get in” to “maybe I can get it cheaper”. A sharp change in the direction of the share price invokes that mental game for any potential new entrant. Now, as a shareholder, I’m less concerned if it goes up or not. I just don’t have to worry about being left behind if it does.

My terror now? The prospect of fighting that uncontrollable and irrational part of my mind when it comes time to sell. Sometime down the line will I play chicken for two weeks in the attempt to get an extra three cents? Or will I chase the price down two cents if it turns on me?

If I can ruthlessly control my saving and spending, surely the same control can be applied to investing (or speculating).

Sooner or later I’ll find out.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/0CmyBXWR4ac/story01.htm Tyler Durden

Submitted by The Idiot Tax

Speculation & Investor Behaviour

I’d been watching the stock for at least a month. A small time oil & gas company in Africa. It managed to secure a huge land position for a company of its size. Looked very promising, well funded for some time. Management previously had success putting together a similar land position with another company before it was swallowed early. But, still highly speculative.This one wouldn’t be dropping a drill on dirt until late 2014. Maybe 2015.

Being a stingy bugger and without a catalyst in the market, I kept sniffing around for a while before I finally slid my buy order in at 18.5 cents – this dude wasn’t going to pay the current market price of 20 cents! Maybe even 18.5 was too much. When it dropped to 19.5, I began to believe my order would get filled, but then when it hit 19 cents my mind started to desert me.

“I could get this for 18 cents.”

Volume. There wasn’t a great deal of it. In fact it was being pushed down on mild trades. Someone needed a new flatscreen or wanted to get their kid Optimus Prime for Christmas. There was no prospect that enough shares would be dumped and I’d get my fill at 18 cents. The holding was tight and the sell side was thin. Regardless, I hit the amend button and my order dropped down the queue to 18 cents.

I assume you know where this story is going. You’re probably wondering why I’m telling it when it inevitably makes me look like an idiot. So why tell? I’ve read countless explanations of investor psychology in a general sense, but rarely does anyone put their name to a calamity, or at least their nom de plume.

Everyone can recognise these paragraphs by Heidi Lefer and Ildiko Mohacsy, in  Journal of the American Academy of Psychoanalysis and Dynamic Psychiatry, but there’s little personality to it and no experience. 

Economic bubbles and crashes have occurred regularly through history-from Holland’s 17th century tulip mania, to America’s 19th century railway mania, to the 1990s high-tech obsession. Though most investors regard themselves as investing rationally, few do. Instead they react collectively, buying high and selling low in crowds. Being subject to the illusion of control, they follow regressive behavior patterns and irrational, wishful thinking. They are victimized by their own emotions of hope, fear, and uncertainty. 

When people feel doubt and panic, they regress to an earlier stage either individually or en masse. Under stress, they revert to affect (Mohacsy & Silver, 1980). Such mobbing has an obvious psychological counterpart in the market. Here, crowds are governed by wishful thinking. “Investors are coached to believe that a stock is a better buy when the price rises, that it’s ‘safer’ to join the crowd in betting the price up and ‘riskier’ to buy a stock declining in price” (Vick, 1999, p. 7). Investors also join a crowd to minimize regret. If something goes wrong, they know others behaved the same way. 

We recognise it when exuberance makes charts go vertically up or when stone cold fear pushes them ruthlessly down, but our ego inevitably makes us shy away admitting that we take part in any function of it – “that’s those other sheep”. We’re merely unemotional observers, until we aren’t. Is anyone going to admit they were buying in the final moments before the last bitcoin crash?

It was inevitable that a few short days after Wall Street lovingly embraced Bitcoin as their own, with analysts from Bank of America, Citigroup and others, not to mention the clueless momentum-chasing, peanut gallery vocally flip-flopping on the “currency” after hating it at $200 only to love it at $1200 that Bitcoin… would promptly crash. And crash it did: overnight, following previously reported news that China’s Baidu would follow the PBOC in halting acceptance of Bitcoin payment, Bitcoin tumbled from a recent high of $1155 to an almost electronically destined “half-off” touching $576 hours ago, exactly 50% lower, on very heave volume, before a dead cat bounce levitated the currency back to the $800 range, where it may or may not stay much longer, especially if all those who jumped on the bandwagon at over $1000 on “get rich quick” hopes and dreams, only to see massive losses in their P&Ls decide they have had enough.

There will be a strange irony, in that anyone you talk to with a bitcoin experience will have left the building at $1100 – “it was looking bubbly, so I took a profit.” Hmmm. The drip that bought at $1155 will be cloaked in anonymity, unless $2200 is later smoked.

Back to me, and the price my mind had agreed pay – 18.5 cents was hit. But where was I? Yeah, I’d cooly (or so I told myself ) shifted another gear down and was expecting to get my happy ending at 17.5 cents. As the share price firmed again, juddering between 19.5 and 20 cents I meekly snuck back to 18.5. At 20 I snuck up to 19, as I wondered whether it might go to 20.5. Of course it did, before coming back to 19.5, at which point I had enough steel to leave my order at 19.

In the midst of this circus, late on a Friday, the buy side appeared to firm considerably and immediately it looked a better buy again – “buy now and I’m with the crowd.” After a fortnight of courting and several times being left with my frank in my hand, maybe it was time to make the move and just get my fill at 19.5. But, but, but, this was Friday afternoon and anything could happen over the weekend. Rating agency downgrades, terrorist attack, tsunami, nuclear disaster, alien invasion, apocalypse. And I’d still have to settle on Wednesday!

And something did happen. First it was a market announcement after the close on Friday that their seismic program had shown positive results. Damn, I assumed this was going to cost me another half cent! Then on Monday  – TRADING HALT.

11 minutes before open on Monday morning. I spent most of Monday cursing my stupidity while muttering F-U under my breath. On Wednesday morning the announcement came out – an unsolicited equity placement at an 18% premium to the previous close. A significantly rare and positive event. And on open, the share begins trading at 23.5 cents.

Where’s my order? Oh I’d moved it to 22 cents now. Sigh. Yeah it was happening all over again. Though a few price bumps up to 24 and 24.5 cents during the day had me edgy. Now the urge is to get ahead of the game because this is surely going higher.

What didn’t help throughout this brain mincing was my constant contact with a share trading forum. Those great analogies that describe a share price ready for take off (see, I just used one then!) were flying into my eyes like poison darts. Common sense is blinded and it further makes me think I gotta get in!

Toot! Toot! Buckle up your seatbelts! The floor is in! A couple of cents will be meaningless soon! 

Then there’s also talk of the big boys buying, holidays (not just theme parks, your own private island), early retirement and Ferraris. Sitting on the sidelines and kicking yourself while reading this is a little unnerving, but a slap to the face and you quickly regain perspective. The real issue becomes the now moving share price. Even if you block out the chat room noise, with every half cent it’s somehow a better investment – or speculation as it were. Yet last week every half cent movement downward made it waft like sun-baking salmon. Someone’s selling, something must be wrong. Drag that order down so you won’t overpay!

After again playing tag and miss with the price for most of the day, a gap opened up at 22.5 towards closing time. That was the entry point. No more mental gymnastics trying to second guess the next movement – if I got hit, I got hit. I placed my order. It sat near the top of the queue and with one foul swoop at 3:51pm I became a shareholder. A few minutes later the price went back to 23 cents and that’s where it closed for the day. After two weeks of games, and being led around by my nose, it was a very painless exercise. Yet I had little control until I pinched my brain in those final moments. There was some satisfaction that I paid less than the premium placement that instigated the jump in price, but I still paid 21% more than if I’d just left my initial order 18.5 cents.

Again, from Heidi Lefer and Ildiko Mohacsy, in  Journal of the American Academy of Psychoanalysis and Dynamic Psychiatry – I’m guilty as charged.

Our brains are hard-wired to get us into investing trouble; humans are pattern-seeking animals . . . .Our brains are designed to perceive trends even where they might not exist. After an event occurs just two or three times in a row . . . the anterior cingulate and nucleus accumbens automatically anticipate that it will happen again. If it does repeat . . . dopamine is released . . . .Thus, if a stock goes up a few times in a row, you can reflexively expect it to keep going up . . . .Brain chemistry changes as the stock rises, giving . . . a “natural high.” You effectively become addicted to your own predictions.

At last close the share price sat at 31.5 cents. I’m in, I’m ahead and I’m finally calm. But I still can’t believe how ridiculous my mental gymnastics became. I’ve got no clue how many trades I’ve completed over the years, but any time I’m buying a new company this farce reappears.

The share forums have gone wild over the company. Just by reading them the brain could start firing with thoughts of short changing your future family tree by not taking a position. I felt similar insanity that day I realised I’d be paying 21% more than I’d initially intended.

It went up remarkably quickly after I bought, then came a sharp pullback. The sentiment around the company has snapped from “gotta get in” to “maybe I can get it cheaper”. A sharp change in the direction of the share price invokes that mental game for any potential new entrant. Now, as a shareholder, I’m less concerned if it goes up or not. I just don’t have to worry about being left behind if it does.

My terror now? The prospect of fighting that uncontrollable and irrational part of my mind when it comes time to sell. Sometime down the line will I play chicken for two weeks in the attempt to get an extra three cents? Or will I chase the price down two cents if it turns on me?

If I can ruthlessly control my saving and spending, surely the same control can be applied to investing (or speculating).

Sooner or later I’ll find out.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/0CmyBXWR4ac/story01.htm Tyler Durden

In my experience, one of the singular best investment strategies is to buy assets/asset classes which are most reviled by investors. By reviled, I mean assets where a mere mention of you wanting to invest in them generates nervous sniggers among others, if not howling laughter. Where upon their mention, people hand you business cards, not their own but of nearby psychiatric centres. And where even friends start to doubt your sanity.

Examples include the Indian rupee, in free fall just four months ago on QE taper speculation and current account issues. It’s up 12% versus the U.S. dollar since bottoming, as shown below.

European stocks and bonds in mid-2011 too. At that time, European stocks neared 2008 lows amid concern about a possible European Union break-up. Since then, the Euro Stoxx index is up ~45%. And investors are now clamouring for their piece of Europe.

Then there’s Japanese stocks. In mid-2012, there wasn’t a more hated asset class. A 22-year bear market, with stocks down almost 80% from peaks reached in 1990. Since mid-2012 though, the Japanese stock market doubled before recently pulling back.

It’s worth asking then where the next great contrarian trade may be? Some investors are pushing emerging market stocks as they scour for laggards in a maturing bull market. While others are suggesting emerging market bonds may be worth pursuing for similar performance/valuation reasons. Both of these ideas have some merit but they probably don’t quite qualify as true contrarian trades.

No, instead, Asia Confidential thinks commodities may be a more prospective potential area. More specifically, gold stocks, or better yet, junior gold stocks. The junior gold miners have been obliterated, down around 80% since the 2011 peak. Causes include a declining gold price, production shortfalls, cost blow-outs, dilutive capital raises and too many snake oil salesmen disguised as CEOs.

There are signs though that some of these things may be turning around: bad management is being given the boot, capital expenditure programs are getting slashed, fewer capital raises are taking place given a lack of market appetite and boards are placing greater weight on shareholder returns over growth. Moreover, the valuations of many quality junior gold miners appear compelling. A number are discounting gold prices of less than US$700/ounce into perpetuity. That means even if gold prices don’t rise from here, the downside on these stocks seems relatively limited. Higher gold prices would just be gravy.

Gold: where too from here?

The gold price has had a tremendous run that’s about to end. It’s been up for 12 straight years in U.S. dollar terms. Unless something dramatic happens, that incredible record will end in 2013.

Regular readers will know that I remain relatively bullish on gold in the long-term. But I’m not dogmatic about it. There’s nothing certain in this world and that includes the future of the gold price.

And there are a number of things which should concern gold bulls at this point. In my view, there are two key drivers for gold prices:

1) The so-called fear trade. That is, the prospect of the financial system breaking down and currencies again being backed by gold.

2) Negative real bond yields. Thereby the opportunity cost of holding gold is negative.

Both of these factors are turning, making gold appear a less attractive asset. At least for now.

Supply and demand for gold also appears to be turning unfavourable. The World Gold Council says gold mining production increased by 4% in the third quarter versus a year ago. Residual gold projects are still going ahead even though the gold price has headed south. It’s true that overall gold supply declined in the third quarter due to reduced recycling, but still…

And demand for gold is softening. Particularly in what was recently the world’s biggest gold market, India. The Indian government has implemented higher excise duties and import payment restrictions. It’s done this to reduce gold imports and thereby improve the country’s current account balance (which is in serious deficit and hurting the currency).

The government’s actions resulted in gold demand in India slumping 32% in the third quarter of this year. And there could well be steeper falls in the fourth quarter. India now accounts for 21% of total gold demand versus a five-year average of 38%.

Lastly, gold bulls have been in denial about the enormous technical damage done to the g
old price mid this year. There are a number of respected technical analysts previously positive on gold who believe the damage was such that it marks the end of the bull market.

So is it all doom and gloom for the yellow metal then? Not quite. We’re of the view that the financial system is more vulnerable today than during 2008 due to the extraordinary policies initiated by central banks around the world. No-one knows what the end-result of these policies will be, including the central bankers.

Those extraordinary policies will continue through 2014. Even with potential U.S. QE tapering, other countries are expected to pick up the slack. Credit Suisse estimates developed markets will expand their balance sheets by a further 19% by end-next year.

More importantly, the recent drop in the gold price from the highs of September 2011 isn’t out of the ordinary. In fact, similar falls have occurred during every gold bull market of the past century. This time, the price declines haven’t been as steep as the mid-1970s, but they’ve lasted longer, as highlighted in a recent post by The Daily Gold.

Lastly, gold valuations don’t appear elevated. The current price remains way below the 1980 inflation-adjusted peak price of close to US$2,400/ounce. You can also value the gold price assuming the world reverts back to a gold standard. With approximately 12.5 trillion in physical and electronic currency reserves and around 155,000 metric tonnes of gold above ground, that results in a gold price of US$2,500/ounce if all of the world’s reserves were to be backed by above-ground physical gold.

Gold bugs could well yet have the last laugh…

Why gold miners are so hated

Show me a bull market and I’ll show you a good time. And gold mining companies had a great time up to 2011, often at the expense of their shareholders. That resulted in serious under-performance versus the physical metal.

Production misses became the norm rather than the exception. Gold ore grades disappointed, along with the fluff known as sales estimates from companies.

Managements of gold companies spent ridiculous sums during 2010-2011 after getting false signals on demand from the massive stimulus package out of China. National Bank Financial in Canada estimates global capital expenditure/tonne/day increased by close to 10% p.a. in the seven years to 2011.

Also, cost blow-outs were a recurring theme. CIBC estimates cash costs/tonne increased by 80% in the six years to 2012. Resource nationalism didn’t help the cause as countries increased taxes to get their slice of the large pie.

And equity issuance skyrocketed. It peaked at US$120 billion globally in 2009, up from less than US$20 billion in 2005.

As gold prices pulled back from September 2011, to say that gold miners became a hated breed would be an understatement. Institutional shareholders wanted blood and got it. A quarter of CEOs at Canada’s top 20 gold mining companies were turned over in 2012 alone.

Uneconomic projects were shut down. Capital expenditure budgets were slashed, and exploration along with it. Offices were closed down. Costs of undertaking mining were trimmed.

Dividend payout ratios were raised. And stricter return on capital targets were enforced.

In sum, an undisciplined industry full of cowboys has had to shape up. And previously sleepy boards and shareholders are scrutinising their every move.

Overall, the changes are very positive for future prospects.

Which miners appear ok value

There are three ways to play gold mining companies. You can bet on those exploring but not yet producing. These are the high risk but highest reward options.

You can bet on higher gold prices and invest in gold producers where current prices are making their projects uneconomic. Thereby if prices rise, these projects will make decent profits and depressed share prices should react accordingly.

The safest route is to invest in producing companies with long-life, low cost assets. Ideally with shareholder-focused management and minimal debt. These companies may not benefit as much from rising spot prices, but will hold up much better if prices remain under pressure.

We prefer the safest option but are not adverse to alternatives should the price be cheap enough.

There is plenty of value on offer with the large mining producers. The share prices of most of these companies have bee
n smashed. For instance, the world’s largest gold producer, Barrick Gold (NYSE: ABX) in Canada, trades on just 3.5x forward cash flow. This is a company with several high quality, low cost assets. Yes, management has done some dumb things, but the valuation is extraordinarily depressed. This article makes a good case for Barrick.

In our neighbourhood, Newcrest Mining (ASX: NCM) in Australia, is worth looking at, perhaps at slighter lower levels. The company has two of the world’s seven largest gold mines. The company’s share price is down ~75% from the peak given years of mismanagement. Current prices factor in a gold price of around US$950/ounce into perpetuity. Cheap, but not obscenely cheap.

To get the more obscenely cheap, you need to look at companies with smaller market capitalisations. The so-called junior gold stocks. We like Medusa Mining (ASX: MML), an Australian-based company with mostly Asian assets. It’s the lowest cost Australian gold producer, with fantastic future production growth and minimal debt to boot. It also trades at valuations which discount a gold price of close to US$700/ounce into perpetuity (this via conservative discounted cash flows, the maths of which I won’t bore you with here).

Among the gold exploration companies, there are many which look stupidly cheap. Bob Moriarty at 321gold does a great job hunting them down. He’s been banging on a Canadian-based company, Novo Resources (CNSX: NVO), for a while and with good reason. It’s a junior with a mine which could contain the world’s largest gold deposit. It helps that the astute, Newmont Mining, recently took a 35% stake in the company. The upside appears enormous even if deposit estimates are half right.

These are but a few ideas. Of course, you could always take the easy option and buy the US-based ETF of junior gold mining companies too (NYSE: GDXJ).

Caveats

Now, a post on gold miners would be remiss without certain caveats:

• In the short-term, the technical picture on gold looks shaky and that could mean spot prices head down towards US$1,000/ounce. If you buy gold miners, you take on that risk.
• Gold miners are leveraged ways to play gold. That means they should outperform spot prices on the upside but also underperform on the downside.
• Beaten down stocks can stay beaten down for a long time. Look at Japan. Gold stocks could well be in that camp.
• Don’t rely on others, including your author, for stock tips. Do your own homework.

This post was originally published at Asia Confidential: http://asiaconf.com/

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/mvS0hyhxQ_Q/story01.htm Asia Confidential

Hours ago, China’s lunar probe Chang’e-3, carrying the nation’s first moon rover onboard, successfully landed on the moon, making it the first time China has sent a spacecraft to soft land on the surface of an extraterrestrial body, joining only the US and the former Soviet Union in accomplishing such a feat. Chang’e-3 is the world’s first soft-landing of a probe on the moon in nearly four decades. The last such soft-landing was carried out by the Soviet Union in 1976. As Reuters reports, the Chang’e 3, a probe named after a lunar goddess in traditional Chinese mythology, is carrying the solar-powered Yutu, or Jade Rabbit buggy, which will dig and conduct geological surveys. China has been increasingly ambitious in developing its space programs, for military, commercial and scientific purposes. This is a teaser to China’s next space ambition – building its own space station. In its most recent manned space mission in June, three astronauts spent 15 days in orbit and docked with an experimental space laboratory, part of Beijing’s quest to build a working space station by 2020.

According to Xinhua news service the spacecraft touched down in the Sinus Iridum, or the Bay of Rainbows, after hovering over the surface for several minutes seeking an appropriate place to land.

A soft landing does not damage the craft and the equipment it carries. As Reuters adds, in 2007, China put another lunar probe in orbit around the moon, which then executed a controlled crash on to its surface.

The Bay of Rainbows was selected because it has yet to be studied, has
ample sunlight and is convenient for remote communications with Earth,
Xinhua said.

China Central Television (CCTV) broadcast images of the probe’s location on Saturday and a computer generated image of the probe on the surface of the moon on its website. The probe and the rover are expected to photograph each other tomorrow.

 

Xinhua’s far prouder summary of the landing is below:

The lunar probe began to carry out soft-landing on the moon at 9 p.m. Saturday and touched down in Sinus Iridum, or the Bay of Rainbows, 11 minutes later, according to Beijing Aerospace Control Center.

During the process, the probe decelerated from 15 km above the moon, stayed hovering at 100 meters from the lunar surface to use sensors to assess the landing area to avoid obstacles and locate the final landing spot, and descended slowly onto the surface.

The success made China the third country, after the United States and the Soviet Union, to soft-land on the moon.

Compared to those other two countries, which have successfully conducted 13 soft-landings on the moon, China’s soft-landing mission designed the suspension and obstacle-avoiding phases to survey the landing area much more precisely through fitted detectors, scientists said.

The probe’s soft-landing is the most difficult task during the mission, said Wu Weiren, the lunar program’s chief designer.

Chang’e-3 relied on auto-control for descent, range and velocity measurements, finding the proper landing point, and free-falling.

The probe is equipped with shock absorbers in its four “legs” to cushion the impact of the landing, making Chang’e-3 the first Chinese spacecraft with “legs.”

Chang’e-3 adopted a variable thrust engine completely designed and made by Chinese scientists. It can realize continuous variation of thrust power ranging from 1,500 to 7,500 newtons, according to Wu Weiren.

The soft-landing was carried out 12 days after the probe blasted off on an enhanced Long March-3B carrier rocket.

Chang’e-3 includes a lander and a moon rover called “Yutu” (Jade Rabbit).

Yutu’s tasks include surveying the moon’s geological structure and surface substances and looking for natural resources. The lander will operate there for one year while the rover will be there for three months.

Chang’e-3 is part of the second phase of China’s lunar program, which includes orbiting, landing and returning to the Earth. It follows the success of the Chang’e-1 and Chang’e-2 missions in 2007 and 2010.

The successful landing shows China has the ability of in-situ exploration on an extraterrestrial body, said Sun Huixian, deputy engineer-in-chief in charge of the second phase of China’s lunar program.

A renewed moon fever has sprung up in recent years following the lunar probe climax in the 1960s and 1970s.

Chang’e-3 is the world’s first soft-landing of a probe on the moon in nearly four decades. The last such soft-landing was carried out by the Soviet Union in 1976.

“Compared to the last century’s space race between the United States and the former Soviet Union, mankind’s current return to the moon is more based on curiosity and exploration of the unknown universe,” Sun said.

“China’s lunar program is an important component of mankind’s activities to explore peaceful use of space,” according to the engineer-in-chief.

For an ancient civilization like China, landing on the moon embodies another meaning. The moon, a main source for inspiration, is one of the most important themes in Chinese literature and ancient Chinese myths, including that about Chang’e, a lady who took her pet “Yutu” to fly toward the moon, where she became a goddess.

“Though people have discovered that the moon is bleached and desolate, it doesn’t change its splendid role in Chinese traditional culture,” said Zhang Yiwu, a professor with Peking University.

“Apart from scientific exploration, the lunar probe is a response to China’s traditional culture and imagination. China’s lunar program will proceed with the beautiful legends,” Zhang said.

“I am so excited about the news. It carries my space dream,” a netizen “Roger-Kris” posted on the Sina Weibo. “I am now so interested in space and I want to study science when I go to college.”

“I am looking forward to seeing more pictures sent back by Chang’e-3,” he said.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/w5jcrjRS4hY/story01.htm Tyler Durden

Hours ago, China’s lunar probe Chang’e-3, carrying the nation’s first moon rover onboard, successfully landed on the moon, making it the first time China has sent a spacecraft to soft land on the surface of an extraterrestrial body, joining only the US and the former Soviet Union in accomplishing such a feat. Chang’e-3 is the world’s first soft-landing of a probe on the moon in nearly four decades. The last such soft-landing was carried out by the Soviet Union in 1976. As Reuters reports, the Chang’e 3, a probe named after a lunar goddess in traditional Chinese mythology, is carrying the solar-powered Yutu, or Jade Rabbit buggy, which will dig and conduct geological surveys. China has been increasingly ambitious in developing its space programs, for military, commercial and scientific purposes. This is a teaser to China’s next space ambition – building its own space station. In its most recent manned space mission in June, three astronauts spent 15 days in orbit and docked with an experimental space laboratory, part of Beijing’s quest to build a working space station by 2020.

According to Xinhua news service the spacecraft touched down in the Sinus Iridum, or the Bay of Rainbows, after hovering over the surface for several minutes seeking an appropriate place to land.

A soft landing does not damage the craft and the equipment it carries. As Reuters adds, in 2007, China put another lunar probe in orbit around the moon, which then executed a controlled crash on to its surface.

The Bay of Rainbows was selected because it has yet to be studied, has
ample sunlight and is convenient for remote communications with Earth,
Xinhua said.

China Central Television (CCTV) broadcast images of the probe’s location on Saturday and a computer generated image of the probe on the surface of the moon on its website. The probe and the rover are expected to photograph each other tomorrow.

 

Xinhua’s far prouder summary of the landing is below:

The lunar probe began to carry out soft-landing on the moon at 9 p.m. Saturday and touched down in Sinus Iridum, or the Bay of Rainbows, 11 minutes later, according to Beijing Aerospace Control Center.

During the process, the probe decelerated from 15 km above the moon, stayed hovering at 100 meters from the lunar surface to use sensors to assess the landing area to avoid obstacles and locate the final landing spot, and descended slowly onto the surface.

The success made China the third country, after the United States and the Soviet Union, to soft-land on the moon.

Compared to those other two countries, which have successfully conducted 13 soft-landings on the moon, China’s soft-landing mission designed the suspension and obstacle-avoiding phases to survey the landing area much more precisely through fitted detectors, scientists said.

The probe’s soft-landing is the most difficult task during the mission, said Wu Weiren, the lunar program’s chief designer.

Chang’e-3 relied on auto-control for descent, range and velocity measurements, finding the proper landing point, and free-falling.

The probe is equipped with shock absorbers in its four “legs” to cushion the impact of the landing, making Chang’e-3 the first Chinese spacecraft with “legs.”

Chang’e-3 adopted a variable thrust engine completely designed and made by Chinese scientists. It can realize continuous variation of thrust power ranging from 1,500 to 7,500 newtons, according to Wu Weiren.

The soft-landing was carried out 12 days after the probe blasted off on an enhanced Long March-3B carrier rocket.

Chang’e-3 includes a lander and a moon rover called “Yutu” (Jade Rabbit).

Yutu’s tasks include surveying the moon’s geological structure and surface substances and looking for natural resources. The lander will operate there for one year while the rover will be there for three months.

Chang’e-3 is part of the second phase of China’s lunar program, which includes orbiting, landing and returning to the Earth. It follows the success of the Chang’e-1 and Chang’e-2 missions in 2007 and 2010.

The successful landing shows China has the ability of in-situ exploration on an extraterrestrial body, said Sun Huixian, deputy engineer-in-chief in charge of the second phase of China’s lunar program.

A renewed moon fever has sprung up in recent years following the lunar probe climax in the 1960s and 1970s.

Chang’e-3 is the world’s first soft-landing of a probe on the moon in nearly four decades. The last such soft-landing was carried out by the Soviet Union in 1976.

“Compared to the last century’s space race between the United States and the former Soviet Union, mankind’s current return to the moon is more based on curiosity and exploration of the unknown universe,” Sun said.

“China’s lunar program is an important component of mankind’s activities to explore peaceful use of space,” according to the engineer-in-chief.

For an ancient civilization like China, landing on the moon embodies another meaning. The moon, a main source for inspiration, is one of the most important themes in Chinese literature and ancient Chinese myths, including that about Chang’e, a lady who took her pet “Yutu” to fly toward the moon, where she became a goddess.

“Though people have discovered that the moon is bleached and desolate, it doesn’t change its splendid role in Chinese traditional culture,” said Zhang Yiwu, a professor with Peking University.

“Apart from scientific exploration, the lunar probe is a response to China’s traditional culture and imagination. China’s lunar program will proceed with the beautiful legends,” Zhang said.

“I am so excited about the news. It carries my space dream,” a netizen “Roger-Kris” posted on the Sina Weibo. “I am now so interested in space and I want to study science when I go to college.”

“I am looking forward to seeing more pictures sent back by Chang’e-3,” he said.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/w5jcrjRS4hY/story01.htm Tyler Durden