The Impact of Federal Stimulus Measures on the Price of Gold

The Impact of Federal Stimulus Measures on the Price of Gold

 

Historically, the value of gold and fluctuations in its price have been linked directly to the wider economic performance. As a general rule, the value of gold tends to be most resolute during periods of recession, as investors look to commit their capital into physical assets that deliver genuine financial security.

 

The most recent statistics underline this trend, with the price of gold set the retreat from a near three-month high in the face of measured stimulus tapering in the U.S. A string of poor data releases had forced the government to initially reconsider their approach to stimulating economic growth, only for the Federal Reserve to reaffirm their commitment to restoring long-term growth.

 

The Facts and Figures: Gold Values in 2014

 

It was during the last week that the price of gold hit a three-month high, amid rising global shares and continued economic uncertainty in the U.S. While the Federal government had spoken at length during the first financial quarter about tapering their stimulus measures and laying the foundations for more sustainable, long-term growth, underperformance within the labour market has persuaded them to reconsider their stance. As a result on this, investors were encouraged to believe that the ultra-easy stimulus policy would continue for the foreseeable future.

Incoming Federal Reserve Chair Janet Yellen performed a sharp-about turn this week, however, by reiterating the U.S. Central Bank’s commitment to a measured tapering of its gold-friendly stimulus policy. While Yellen has stated that has a strong belief in the current bullion and monetary policy measures, however, the sudden drop in gold prices has forced many to question the wisdom of her decision making. More specifically, it could trigger a sudden rise in interest rates and force investors to develop a more risk-averse approach in the financial markets.

Does Gold Represent a Good Investment in 2014?

The decision to taper bullion stimulus measures will only serve to undermine the appeal of gold as an investment opportunity still further. While the presence of under-employment may have caused growth in the labour market to slow, investors have continued to disregard this and similar macroeconomic factors as being insufficient to derail the tentative global recovery. This has had a direct impact in reducing the appeal of gold, and the sudden depreciation in value will force a growing number of investors to consider alternative precious metals and commodities.

If it would be fair to say that gold holds minimal investment appeal as we approach the second financial quarter of this year, however, it is worth considering the performance of additional market options such as silver and platinum. The former, which has experienced considerable growth during the last eighteen months fell by 0.3% in the wake of recent events, while the latter gained a respectable 0.1% amid global political issues. The upshot of this appears to be that investors are likely to avoid the precious metal market for the foreseeable future, at least until the U.S. economy has adapted to its new monetary policies.

Foster Wheeler AG

FWLT : NASDAQ : US$28.86
BUY 
Target $37.50

Corporation Description

Based in Zug, Switzerland, Foster Wheeler AG is a global engineering and construction contractor and power equipment supplier delivering technically advanced, reliable facilities and equipment. The company employs approximately 13,500 professionals with specialized expertise dedicated to serving clients. Its two primary business groups consist of the Global Engineering & Construction Group and the Global Power Group.
All amounts in US$ unless otherwise noted.

IMPROVED OUTLOOK & SURGING E&C BACKLOG: TARGET TO US$37.50 FROM US$30.00, REITERATE BUY RATING


Investment recommendation
We reiterate our BUY rating and increase our one-year target price 25% to US$37.50 following strong Q3/13 results and an increased EPS forecast. Global E&C backlog is 71% higher y/y (and 61% above last cycle’s peak) and we found management’s view of booking opportunities incrementally more positive. We see robust EPS growth through 2015, notwithstanding our downgraded E&C margin expectations to reflect mix. We have increased our 2015 EPS estimate to $2.45 from $2.15 and our target multiple to 14x from 13x, brining our target price to US$37.50 when adding $3.50/share in freehold cash forecast at year-end 2014.
Investment highlights
Excluding a $0.05 FX gain, FW reported Q3/13 EPS of $0.47, ahead of our $0.40 estimate and the Street at $0.43. Scope revenue was 7% below forecast, but GPG EBITDA margin offset this coming in at 25% compared to our 17% estimate on solid profit enhancement realization. GPG 2013 margin guidance was unchanged at 17-19% while E&C was increased to 11-13% from 10-12%.
Management believes activity is picking up in E&C. This is especially true in N. America (abundant small/medium sized awards and EPC opportunities in the US plus SAGD in Canada) and the Middle East (Iraq and Saudi Arabia where a $70 billion petchem spend is on tap).
Valuation
FW trades at 15.2x our 2014E EPS vs. the group at 14.5x.

Goldman Sachs Analysis of the Government Shutdown

The crux of the matter is that the House GOP is not inclined to pass a budget that doesn’t include some kind of delay or defunding to Obamacare. And obviously Democrats won’t agree to that. So, impasse.

Markets are already falling, it would seem, on the news.

But there are reasons to think this would be good.

Goldman explained why this could be helpful in a note to clients last Friday:

It would be a mistake to interpret a shutdown as implying a greater risk of a debt limit crisis, in our view. It would not be surprising to see a more negative market reaction to a shutdown than would be warranted by the modest macroeconomic effect it would have. We suspect that many market participants would interpret a shutdown as implying a greater risk of problems in raising the debt limit. This is not unreasonable, but we would see it differently. If a shutdown is avoided, it is likely to be because congressional Republicans have opted to wait and push for policy concessions on the debt limit instead. By contrast, if a shutdown occurs, we would be surprised if congressional Republicans would want to risk another difficult situation only a couple of weeks later. The upshot is that while a shutdown would be unnecessarily disruptive, it might actually ease passage of a debt limit increase.

This seems kind of vague, but there are three distinct reasons it could be a

positive.

  1. The market is reacting now. It’s often said that politicians can’t act until they see the stock market crack up in some way. A government shutdown is a good way to precipitate a mini-fall without the kind of full-blown financial collapse we could see in a debt ceiling breach. With the debt ceiling likely to be hit in a few weeks, the pressure builds early.
  2. The GOP will get blamed. Republicans can claim all they want that it’s the Democrats in the Senate or whoever that’s responsible for the shutdown, but everyone knows that if the government shuts down, and the polls ask which side is responsible, the majority will say the Republicans. This is a fact. So, having the party take a political hit now puts pressure on them to solve this before we hit the debt ceiling.
  3. A shutdown will bring outsiders off the sidelines and start exerting pressure now. This is a point that Ezra Klein made this weekend. He writes: “One way a shutdown makes the passage of a debt limit increase easier is that it can persuade outside actors to come off the sidelines and begin pressuring the Republican Party to cut a deal. One problem in the politics of the fiscal fight so far is that business leaders, Wall Street, voters and even many pundits have been assuming that Republicans and Democrats will argue and carp and complain but work all this out before the government closes down or defaults. A shutdown will prove that comforting notion wrong, and those groups will begin exerting real political pressure to force a resolution before a default happens.”

Not everyone shares this view. Molly Ball writes persuasively in The Atlantic that there’s no reason to think a shutdown could “cool the fever,” so to speak. And indeed people have predicted many times (incorrectly) that the GOP fever had finally broken.

The Rich Get Richer ( and the poor get children)

The Rich Get Richer and you can too with Jack A. Bass Managed Accounts based on :

the Apprentice Millionaire Portfolio ( available from Amazon.com)

Weakest Economic Recovery on Record Means the Rich Get Richer, the Poor Get Poorer in America

By Michael Lombardi, MBA for Profit Confidential

According to a study by economists at the University of California, Berkeley, the Paris School of Economics, and Oxford University, the income gap in the U.S. economy in 2012 was similar to what it was in 1920s! (Source: Associated Press, September 10, 2013.)

In 2012, the income of the top one percent of earners increased by almost 20%; for the bottom 99%, their income only increased by one percent.

But that’s not all…

The top 10% of all the income earners in the U.S. economy had more than 48% of all the net earnings in 2012. Going back further, since the Great Recession’s end in June of 2009, 95% of all increases in net earnings in the U.S. economy have gone to the top one percent.

Dear reader, this is not economic growth, it’s just a classic example of the rich getting richer and the poor getting poorer. When a country experiences real economic growth, you will see a steady rise in all incomes.

As I stated earlier, in 2012, almost 50% of all the net earnings went to the top 10%, meaning only 50% went to the bottom 90%. Will this increase consumer spending in the U.S. economy? Of course not. The top 10% can only buy so much and the economy can only go so far on that. For economic growth to happen, you need the middle class to be spending.

What we are witnessing today is the slowest post-recession recovery most living economists have ever experienced. If you take out the rally in stock prices since 2009, there has been no real economic growth.

Auto sales have risen, but auto loans have gone through the roof. (See “Scary Story on the Booming Auto Sales No One Is Talking About.”)

Housing has come back somewhat, but rising interest rates have resulted in a big decline in mortgage applications (the collapsing homebuilder stocks are telling us there’s a problem with the housing recovery).

Retailers from the low end of the market to mid-market are complaining that sales are not growing—their stock prices, a leading indicator, are again trending downward. Retailers are not seeing economic growth in this country.

And the unemployment picture in the U.S. economy remains a problem for economic growth. Add in people who have given up looking for work and those who want full-time jobs but are only able to find part-time work, and the unemployment rate sits at almost 14%—and it’s been there or higher for years now! How can you have economic growth with the unemployment level so high?

As I have written before, the U.S. is headed in the same direction as Europe, where there are only the rich and poor—the middle class no longer exists. You won’t hear politicians talking about this depressing trend, but it’s the doomed road that America is on, and it’s not leading to economic growth.

AMP Portfolio Overview : Higher Stock Prices Are Set In Place

The Apprentice Millionaire Portfolio ( available from amazon.com) sets three criteria in selecting investments :

In order

1) forecast for the economy THEN

2) select the sectors to benefit from that forecast And Finally

3) in your own and the Jack A. Bass Managed Accounts, select the stocks that will do best in the selected sectors.

So, first ascertain :

Where are the most important economies ( U.S. and China ) headed in the next 12 to 36 months ?

China’s economy showed fresh signs of resilience in August, with key trade data pointing to a sustained strengthening in global demand for goods from the country.

Exports continued to gather steam, rising 7.2% in August from a year earlier, according to data released Sunday by the General Administration of Customs. This was up from a 5.1% rise in July and a contraction of 3.1% in June. Imports rose 7.0% from a year earlier in August, down from 10.9% in July.

The overall picture was of a Chinese economy benefiting from progressive strengthening of demand in the U.S. and other key export markets. China is also continuing to stock up on raw materials for its industrial sector. “China’s back,” said Stephen Green of Standard Chartered Bank. “It won’t be a strong recovery but it’s increasingly clear we’ve bottomed.”

AND the reason is U.S. growth leading to increased demand for products from China.

One sector that benefits is shipping because that increase will be moved by ships.


AFP/Getty ImagesEnlarge Image

China’s trade surplus strengthens in August on strong exports driven by U.S. demand.

August’s trade numbers are the latest in a series of positive data releases, after overseas sales and factory output in July showed signs of improvement.

There are still some questions surrounding the sustainability of the current upswing.

Rising wages and a stronger currency dent the competitiveness of China’s exports. Beijing’s recent moves to slow lending growth — after years of credit-fueled economic expansion — could curtail investment and imports.

Still, two months of stronger data has increased optimism that the government will be able to hit its full-year target for gross domestic product growth, which stands at 7.5%. It also reduces the chances that leaders will introduce a major new stimulus policy.

Economists have responded to the signs of strengthening by edging up their growth forecasts. J.P. Morgan now expects 7.6% year-on-year growth in the third quarter, up

their growth forecasts. J.P. Morgan now expects 7.6% year-on-year growth in the third quarter, up from a previous forecast of 7.4%, which points to an acceleration from 7.5% growth in the second quarter.

China’s trade surplus widened, with the difference between exports and imports growing to $28.5 billion in August, up from $17.8 billion in July, marking its highest level since January.

Foster Wheeler AG

FWLT : NASDAQ : US$24.09
BUY 
Target: US$30.00 

Based in Zug, Switzerland, Foster Wheeler AG is a global engineering and construction contractor and power equipment supplier delivering technically advanced, reliable facilities and equipment. The company employs approximately 13,500 professionals with specialized expertise dedicated to serving clients. Its two primary business groups consist of the Global Engineering & Construction Group and the Global Power Group.
All amounts in US$ unless otherwise noted.

Investment recommendation
We reiterate our BUY rating and $30.00 target price on Foster Wheeler following strong Q2/13 results. FW reported scope revenue of $642mm (-7% y/y), in line with our estimate, and adjusted EPS of $0.54 (+69% y/y), which was above our $0.28 and the Street at $0.34. There were a few tailwinds: tax 7 cents, FX 2 cents, and ~5 cents from a revised allocation of earnings from the Power project in Chile.
Global E&C has a near record scope backlog of $2.1Bn (+60% y/y) and with a mega EPC award booked this quarter backlog could end Sept. at $2.5Bn. However, pricing is still flat so we must look to operating leverage (better utilization and cost absorption) to drive margins higher. Additionally, by its nature, the mega EPC award carries lower % margin. Thus we are reducing our 2014 EBITDA margin (scope) assumption to 14.5% from 15.0% and introducing 2015 at 15.5%. We see upside to our margin estimates should close-out margins materialize in 2H/13, which is expected, and later should pricing improve (mid-cycle margin is 19%).
The Global Power Group (GPG) had worse bookings than expected and its backlog is 34% lower y/y at $616mm. Thus we have reduced our 2014 revenue estimate by 30% to $710mm and, given the lower volume, took our EBITDA margin (scope) assumption to 15% from 17%.
Our long-term thesis and favorable view of the stock remains unchanged: we continue to believe we are in the early innings of multi-year margin expansion phase in Global E&C. However, while 2014 should be good, 2015 could be better. Our target equates to 13x cash-adjusted 2015E EPS plus $3.50/share in freehold cash one year out. FW trades at 13x 2014E EPS versus the group at 13x.

 

Caterpillar

(CAT : NYSE : US$83.06), Net Change: 1.00, % Change: 1.21%, Volume: 6,583,381


$2 billion? All in US$2 bills?

Caterpillar announced plans to purchase $1 billion of its own common shares under an
accelerated stock repurchase transaction. In April, the company announced a similar $1 billion transaction, which was
completed in June. Repurchasing an additional $1 billion of CAT stock in Q3/13 will bring CAT’s total 2013 stock repurchases
to $2 billion. In February 2007, the Board of Directors authorized the repurchase of $7.5 billion of CAT stock, and in December
2011, the authorization was extended through December 2015. Through the end of Q2/13, $4.8 billion of the $7.5 billion
authorization was spent. Pursuant to the accelerated stock repurchase agreement, CAT has agreed to repurchase $1 billion of its common stock from Societe Generale, with an immediate delivery of approximately 11 million shares based on current market prices.

The final number of shares to be repurchased and the aggregate cost to CAT will be based on CAT’s volume-weighted
average stock price during the term of the transaction, which is expected to be completed in September 2013.

Last week, CAT announced its Q2/13 results and reduced its outlook as dealers draw down inventories. CAT reported Q2/13 revenue of $14.6 billion (-16% y/y) compared with the consensus estimate of $14.9 billion, while EPS was $1.45 (-43% y/y) below the consensus estimate of $1.70. CAT reduced 2013 guidance on a more significant reduction in dealer machine inventory than originally expected, not due to a change in market expectations. For 2013, CAT now expects revenue of between $56 and $58 billion and EPS of $6.50 compared to $57 to $61 billion in revenue previously and EPS of $7.00. CAT’s retail sales of machines in North America declined 10% y/y.

This is the seventh consecutive month that it was in negative territory since April 2010.

AMP Hedge Fund : Great Day

Symbol   Last          Chg

PNE          1.08+0.08

DSX          10.32+0.18

FRO         2.26+0.12

DRYS     2.01+0.08

CKG        3.51+0.11

BTO        2.58+0.03

ORIG     17.46+0.005

AAPL      433.32+3.01

DGC             9.62+0.12

CPLP          9.88+0.2199

DCIX         4.53+0.03

Minimum Investment  $50,000

Return to date  30 %

 

Mosaic Capital Corporation

M : TSX-V : C$7.31
BUY 
Target: C$9.75 

COMPANY DESCRIPTION:
Mosaic Capital acquires majority stakes in small industrial companies in mature market niches. The company currently controls six industrial and one commercial real estate investment company, all located in Western Canada.

Investment recommendation


We think Mosaic is an attractive investment opportunity for investors looking for an industrial acquisition story. The company has demonstrated an ability to acquire strong cash-generation firms at attractive prices. We believe the cash flows from the existing portfolio of companies supports the current share price, and Mosaic’s considerable “dry powder” capital provides the potential for $4.50/share additional growth. The story has the potential to grow considerably beyond that point as additional capital is deployed.
We are launching coverage with a BUY rating, given the strong 35.0% one-year potential rate of return to our C$9.75 one-year target (including a 1.6% dividend yield).
Investment highlights
We believe there are four good reasons to consider investing in Mosaic:
1. Solid track record – Mosaic roughly tripled its EBITDA from 2011 to 2012 while driving return on capital from 5.7% to 12.9%. Over the same period, the company returned more than $13 million to shareholders and has a trailing payout ratio of 63%.
2. Strong portfolio of niche businesses – Mosaic’s portfolio consists of small defensible niche businesses. The low capital requirements combined with strong, stable margins deliver solid (and we think growing) free cash flow.
3. Significant dry powder – We estimate Mosaic has $35 million of available capital to deploy towards future acquisitions. We estimate that the
deployment of this capital could add $4.50/share of value.
4. Aligned management – With 53% of the common stock held by management and insiders, we think the company’s interests are strongly aligned with investors.
Valuation
Our target is based on low-single-digit organic growth and a premium 6.5x Q1/15E EV to Q2/15E – Q1/16E EBITDA multiple for potential acquired EBITDA.
We believe the bulk of the valuation upside potential lies in the deployment of Mosaic’s already-raised capital on accretive acquisitions.

The Deficit Is Shrinking! (and Nobody Cares) – Bloomberg Businessweek

Logo of the United States White House, especia...

Logo of the United States White House, especially in conjunction with offices like the Chief of Staff and Press Secretary. (Photo credit: Wikipedia)

On May 14, as Washington officialdom was transfixed by the IRS scandal, the Congressional Budget Office announced that the budget deficit will shrink this fiscal year to $642 billion, or just 4 percent of gross domestic product. It’s the smallest deficit since 2008, and less than half 2009’s record $1.4 trillion shortfall. Since February, the CBO has cut $200 billion off its deficit projection for 2013 and $618 billion off its cumulative estimate for the next decade. Thanks to higher tax revenues and deep spending cuts, the deficit has been shrinking by about $42 billion a month for the past six months. The CBO projects that the deficit will fall to $342 billion by 2015, or only 2 percent of GDP.

Even so, the country’s improving finances haven’t lowered the din of partisan bickering over U.S. fiscal policy. Keynesian economists say that the deficit is narrowing too quickly, curtailing growth and threatening to derail an economy that grew a tepid 2.5 percent in the first quarter. Republican deficit hawks are unimpressed by the short-term reductions and want more cuts to head off exploding long-term debt driven by rising spending on Medicare, Medicaid, and Social Security.

“I must have missed the Kool-Aid,” says Douglas Holtz-Eakin, a former CBO director who served as John McCain’s chief economic adviser during the 2008 presidential campaign. To Holtz-Eakin, a deficit that’s 4 percent of GDP isn’t worth bragging about. Plus, the short-term reductions are mostly from technical revisions such as tax code changes and a $95 billion, one-time payment from Fannie Mae and Freddie Mac. The long-term situation is still scary, he says.

As millions of baby boomers retire, entitlement spending will start eating up government funds. Unless those programs are reined in, the CBO projects the budget deficit will start to rise again in 2016 and hit $895 billion by 2023. Also, today’s low interest rates, which allow the government to sell 10-year Treasury bonds below 2 percent, won’t last forever. The CBO projects that by 2023, annual interest payments on the country’s debt will nearly quadruple, to $823 billion. A new plan being floated by über-austerians Erskine Bowles and Alan Simpson, co-chairs of President Obama’s 2010 debt commission, calls for replacing the $85 billion in cuts from the sequester with $2.5 trillion in additional deficit reduction, including $220 billion in defense cuts and $585 billion in health-care savings through reforms to Medicare over the next 10 years.

Doves say that’s overkill given that the government is already shrinking faster than at any time since the post-World War II military demobilization. “The patient is checking out of the hospital, and the doctors are still planning surgery,” says Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities and Vice President Joe Biden’s former chief economist. Echoing a warning the International Monetary Fund issued last summer, Bernstein is concerned the deficit is contracting too fast from all the spending cuts enacted since 2010, including the $1 trillion in cuts President Obama agreed to in 2011. That’s stymied growth. In 8 of the last 10 quarters, the federal government has been a drag on the economy, subtracting 3.25 percentage points from GDP since the fourth quarter of 2010. “We’ve overfocused on the deficit,” Bernstein says. “It’s time to tackle the jobs crisis.”

According to the CBO, the economy is operating 6 percent below its potential, a difference of about $1 trillion this year. For every dollar the economy runs below its optimal level, the deficit rises by 37¢ due to cyclical factors such as lower tax receipts, says Andrew Fieldhouse, a budget policy analyst at the Economic Policy Institute. That’s what’s happened in Europe, where austerity has boosted debt-to-GDP ratios by about 5 percent. “Fiscal stimulus right now would decrease debt to GDP,” Fieldhouse says.

Not everyone thinks Medicare is doomed. Based on lower growth rates in health-care costs since 2010, the CBO cut its estimate for Medicare and Medicaid spending by $162 billion over the next decade. That could change, however, when Obamacare and potentially higher policy premiums go into full effect.

One thing the dip in the deficit has changed is the urgency to reach a deal on long-term debt reduction. Continued gridlock might not be so bad. “The last thing we want is some grand bargain,” says James Paulsen, chief investment strategist at Wells Capital Management. He argues that as long as the economy keeps growing, the deficit will continue to trend lower: “Who would you rather put in charge of fixing the country’s finances: Congress or the invisible hand of Adam Smith?”

 

The bottom line: The federal deficit will shrink to $642 billion in 2013, or 4 percent of GDP, less than half the $1.4 trillion shortfall in 2009.

Follow

Get every new post delivered to your Inbox.

Join 1,941 other followers