Monday, September 9, 2013

Macro Analytics - GLOBAL CURRENCIES - Part I

In Part I of this over 70 minute two part series, Axel Merk in discussions with Ty Andros and Gordon T Long cover a broad range of the most current Global Currency issues relevant to investors. Named a Currency Guru by Morningstar, there is no one more qualified to assist investors understand this complex environment.

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When Will Bond Prices be Low Enough to Buy?

On Thursday, stocks made slight headway for the third consecutive day. Better economic news drove Treasury yields higher, putting pressure on higher-yielding sectors and bonds.

Signs of an economic recovery were confirmed as jobless claims fell to 323,000 versus an expected 330,000. And ADP reported that 176,000 new private-sector jobs were created in August, which matched expectations.

The yield on the 10-year Treasury bond rose to 2.98%, up 8 basis points, confirming the trend of higher interest rates that began three months ago in anticipation of a Fed cutback in its bond purchase plan. (more)

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Ford Kicking Into High Gear — Buy Now

Ford Motor (F) — On Wednesday, the automaker posted its best retail sales month in seven years. Sales of F-series trucks were up 22% and small car sales were up 30%.

S&P reiterated its  “buy” opinion on Ford shares. It also repeated its 2013 earnings estimate of $1.60 per share, up from $1.41 in 2012. And it said it expects EPS of $1.88 in 2014, with an indication that the earnings targets could be increased.

Following twin buy signals from our internal indicator, the Collins-Bollinger Reversal (CBR), Ford jumped from $15.88 at the close on Aug. 27 to $16.91. MACD issued a new buy signal and the stock closed with a solid punch above its 50-day moving average.

Buy Ford for long-term growth and management’s comments about potential special dividend payments and share repurchases. The stock currently has a dividend yield of 2.5%.

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My Top 2 Picks From a Legendary Value Investor: YNDX, CPA

Successful value investors often work in relative obscurity, delivering steady, market-beating returns over decades.

Jeremy Grantham is an investor that has been following a value approach to the markets since at least 1977, when he co-founded global investment management firm GMO. Over the years, GMO has grown to manage more than $100 billion in assets but is still relatively unknown.

Grantham applies a classic Graham and Dodd value approach to the markets. Benjamin Graham and David Dodd wrote the original textbook on value investing, "Security Analysis," in the 1930s. Warren Buffett would later study under Graham. And while countless investors have read the original and revised editions of Security Analysis, only a few have mastered the concepts. The very best value investors, a group that includes Buffett and Grantham, add a unique perspective to their study.
In the case of Grantham, his success is at least partly due to his ability to spot bubbles. He may know more about bubbles than any other investor. In a recent letter to investors, Grantham wrote, "We have studied more or less all assets for as long as we can find data and we have found a remarkable total of 330 'bubbles,' 36 of which we call 'major, important bubbles,' which we define as 2-standard-deviation events."

As an example of what Grantham looks for in a bubble, we can consider the S&P 500 index. According to Standard & Poor's, the price-to-earnings (P/E) ratio of the stocks in the index is 15.31. Using quarterly data back to 1988, the average P/E ratio has been 18.76.

Standard deviations can be used to measure how much the data varies from average. A high standard deviation will indicate the data often moves far above or below average. A smaller standard deviation will show that the data tends to stay closer to the average. In the case of P/E ratios on the S&P 500 index, the standard deviation since 1988 has been 4.44.

A bubble develops when the price of an asset is unreasonably overvalued. Like Grantham, many analysts consider values that are more than 2 standard deviations greater than average to be bubbles. We would expect values to be this high less than 2.3% of the time. P/E ratios on the S&P 500 index greater than 27.64 would signal a bubble.

Grantham used his knowledge of bubbles to deliver gains to his investors when the Internet bubble was bursting in 2000 and 2001. He also lost less than the market in 2008 as the housing bubble burst.

In addition to studying bubbles, GMO develops forecasts for asset classes based on their studies of long-term value. Right now, Grantham is most bullish on stocks in emerging markets, which he expects to provide average annual gains of 6.8%, after inflation, over the next seven years. In the U.S., Grantham's firm sees average annual losses of 2.1% in large-cap stocks and 3.5% in small-cap stocks over the next seven years.

In studying Grantham and other great investors, I learned that the biggest stock market winners have solid fundamentals and strong technicals. I combined these factors into a model that finds market-leading stocks with the fastest growth in cash flow. When applying this system to Grantham's stocks, two buys jumped out.

Given his outlook that emerging markets will provide the largest gains in the long term, it is not surprising to see that two of his largest holdings are in emerging markets. It might be surprising to see an Internet company on the list, but that shows Grantham invests in value no matter what sector he finds it in.

Yandex (NASDAQ: YNDX) is Russia's largest search engine with about 60% of the market. Over the past five years, YNDX has reported average sales growth of 46.6% and an average increase of 39.5% in earnings per share (EPS). Free cash flow turned positive in 2008 and has grown from $0.15 a share to $0.74, an average growth rate of 37.6% a year.

In 2012, YNDX reported EPS of $0.82 and is expected to earn $1.12 in 2013. In 2014, analysts expect EPS of $1.43. After that, analysts expect EPS growth to average 29.5% a year in the next five years. Using 2014 estimated earnings, the stock trades at a P/E ratio of 24.

The PEG ratio compares the P/E ratio to the expected EPS growth rate, and YNDX has a PEG ratio of 0.81. The PEG ratio should be 1 for a stock that is fairly valued. This measure shows that YNDX is undervalued.

Copa Holdings (NYSE: CPA) is also undervalued with a PEG ratio of 0.53. Copa Holdings provides airline passenger and cargo services within Colombia and international flights from various cities in Colombia to Panama, Venezuela, Ecuador, Mexico, Cuba, Guatemala and Costa Rica.

Over the past five years, sales growth has averaged 17% a year, EPS grew an average of 14.7% a year, and free cash flow growth averaged 30.1% a year. Analysts expect earnings growth of 26.3% a year on average for the next five years. Based on 2014 EPS estimates, CPA could be worth more than $300 a share, more than double its recent price.

CPA has been profitable every year since 2006, including the global recession years of 2008 and 2009, when large U.S. airlines like United Continental Holdings (NYSE: UAL) and Delta Air Lines (NYSE: DAL) reported large losses.

Grantham has found winning stocks in the past, and equally important, he has avoided many of the large losses of the past. Most investors would not hunt for value in Russia and Colombia, but Grantham knows that successful investing requires hard work. He now holds YNDX and CPA, stocks which my system also highlights as potential winners.

My latest research shows that following market gurus like Grantham is one of the best ways to make money in the stock market. And Grantham is just one of the 20 investing gurus I follow.

But it's not as simple as looking at their portfolio and buying what they hold. Timing matters.
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A Dividend Stock to Buy and Hold ‘Forever’ :WEC

For those of us who live in four-season locales, the daily weather discussion has begun to shift from beach-worthiness to anticipated snow accumulations.

Now, those of you in perpetually sunny and warm climates don’t need to rush out and buy snow shovels and bags of salt.

But you should pay attention anyway.

You see, I’ve been told that the Farmers’ Almanac is predicting a cold and snowy winter…

And that means the cost of fuel and energy could rise, affecting those in the business of keeping our homes warm…(more)

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US Weekly Economic Calendar

time (et) report period Actual CONSENSUS
3 pm Consumer credit July   -- $13.8 bln
7:30 am NFIB small business index Aug.   -- 94.1
10 am Wholesale inventories July   -- -0.2%
8:30 am Weekly jobless claims 8/31
-- N/A
8:30 am Import price index Aug.   0.6% 0.2%
FRIDAY, Sept. 13
8:30 am Retail sales Aug.   0.3% 0.2%
8:30 am Retail sales ex-autos Aug.   0.3% 0.5%
8:30 am Producer price index Aug.   0.2% 0.0%
8:30 am Core PPI Aug.   0.2% 0.1%
9:55 am UMich consumer sentiment index Sept.   -- 82.1
10 am Business inventories July   0.3% 0.0%
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