Month: September 2017

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

SEPTEMBER 27 , 2017

Contact Richard Power with comments or questions. IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

In the last six weeks of IntelDigest, we have focused on the economy and the current market environment for investors. We will wrap up that discussion in this issue.

In October, we will address:  Investor Psychology and Tactics, the Long-Term Market Outlook, the Debt Cycle, Autonomous Vehicles, and Cryptocurrencies.

 

Market “Melt Up”

In several issues, we have discussed the “melt-up in earnings” which has provided buoyancy for the stock markets.  With Interest Rates remaining at historically low levels, we expect the markets to remain strong for several more months.  So, we tightened up the Stop Losses in our own portfolios, and prepared to ride the last few months of the Bull Market.

We have also discussed the arguments for investing in Gold … both the long-term fundamentals and current trends.  Feel free to look over that information in the  IntelDigest  Archive.  See the September 13 and 20 issues.

 

Opportunities for Gain

Where can one make new investments at this late stage of the game?  We have been concentrating on a few sectors:

* Industrial and Precious Metals
* Agricultural Land
* Pipelines and Refining
* Clean Energy
* Japan
* Defense Spending
* Data and Networking

See the September 6 issue for detailed analysis of these investment theses.

 

Amazon

We will complete the discourse on  Investing  with a few words on the special case of Amazon (Amazon.com).  Amazon is special because it has pioneered a new form of business, which some have called “bizarro capitalism.”  And, Amazon is becoming a behemoth

Amazon is a leader among 21st Century companies which effectively use technology to reduce labor costs.  Add in the ability over the last ten years to access capital at virtually No Cost because interest rates are ultra-low.  The result is a business model unlike anything the world had ever seen before.

These are companies with massive scale and massive sales growth … and virtually Zero profit.

Over the last few years, Amazon has grown its revenues by almost 100%, with no increase in profit margins.  With its immense scale and almost no profit, Amazon has been able to grow faster and faster, and expand into all kinds of new businesses.

Amazon does not have to worry about cash flow to support investment in new lines of business;  in the current environment, the cost of capital is virtually Zero.  So, even though Amazon’s profits over the last three years total only $3 Billion, it has been able to invest $17 Billion in growing its core business and building new businesses.

It is a “for-profit” company which doesn’t have to earn a profit because there has been almost unlimited amounts of investment capital available, essentially for free.

 

Expanding Its Reach

Everyone recognizes that Amazon dominates retail online.  It accounts for approximately 43% of all online sales in the U.S., and for more than 50% of all e-commerce growth.  And, the company aggressively pursues growth opportunities in new lines of business.

This year, Amazon acquired Whole Foods, the upscale grocer (so upscale that many referred to Whole Foods as “Whole Paycheck”).  When the acquisition was announced, the stock prices of competing grocery chains took a dive, and for good reason.  An Amazon move into the $800 Billion supermarket industry promises to revolutionize the grocery-shopping experience.

Upon taking control, Amazon slashed prices by as much as 43%!  This was the equivalent of Amazon declaring war on the likes of Kroger, Costco, and Walmart!

As explained by an industry expert, Mark Baum, who is a senior vice president at the Food Marketing Institute:

“Price was the largest barrier to Whole Foods’ customers. Amazon has demonstrated that it is willing to invest to dominate the categories that it decides to compete in.  Food retailers of all sizes need to look really hard at their pricing strategies, and maybe find some funding sources to build a war chest.”

Look at it this way:  Whole Foods is already a profitable enterprise, so Amazon starts out making money in the supermarket business.  Traditional grocers already operate on razor-thin profit margins.  How will they survive if Amazon chooses to slash prices further and operate Whole Foods at a loss?

Amazon also seeks to dominate the growing grocery-delivery market, which is a high-growth segment of the grocery industry.  In addition, the company announced plans to integrate its Prime membership program … already claiming an estimated 85 million customers … with a Whole Foods rewards program.  Along with new lower prices, these strategies could attract millions of new customers to Whole Foods … and drive additional sales of Amazon’s existing products.

Traditional grocers should be plenty worried.

As stated, Amazon has been a pioneer and a dominant actor in a whole new way of doing business, and it is becoming a behemoth.

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

SEPTEMBER 20 , 2017

Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

 

Last week, we discussed the current trends in the Gold market.  In this issue of  IntelDigest, we’ll talk about longer-term issues in Gold investing.

Political Considerations

As we stated in the February 22 issue of  IntelDigest:

Inflation in the economy and a weakening of the U.S. Dollar are primary stimulants of the price of Gold.  There is a looming battle between the Trump Administration and The Federal Reserve over Inflation …

The Fed wants to keep Inflation in check;  typically, The Fed will opt to raise interest rates fast enough to moderate Inflation, which adds strength to the U.S. Dollar.  The Trump Administration, on the other hand, wants a weaker dollar to help U.S. exports and create U.S. export-related jobs.  Donald Trump has railed against several of our trading partners … China, Germany, Japan … assailing them for using cheap currencies to hurt U.S. workers.  He is determined to fight back with a weaker U.S. Dollar.

A weaker Dollar will translate to Higher Gold Prices.  Gold is both a Hard Asset and a form of money, like the Dollar, Yen, Euro, Chinese Yuan.  When the Dollar is weak, the price of Gold (as measured in Dollars) rises.

How will Trump “trump” The Federal Reserve?  He will be in a position this year to appoint up to four of the seven members of the Federal Reserve Open Market Committee.  It is a sure bet that the “reconstituted” Open Market Committee will side with the President.

The resulting weakening of the Dollar will be good for Gold investments.

Fundamentals

We have addressed the fundamentals of Gold investment in prior issues.  The basic arguments are:

1.   Ultra-low … even negative … interest rates around the world, and enormous amounts of public and private Debt, all propel investments in Gold.

2.   Gold is a traditional safe haven in times of insecurity;  it can provide insurance against cyber and political risks.

3.   Demand for Gold is growing in the marketplace, from Russia and China to western markets, while supply has been dormant because new mining projects were delayed or closed down over the last few years, when the gold price was receding from its 2011 highs.

4.   Only a strong U.S. Dollar has kept the value of Gold and Silver from rocketing higher in the last two years.

5.   Historically, Gold has done well when “real” interest rates have fallen.  “Real” interest rates refers to the return one can receive when inflation is factored in.  For example, in the 1970s and 2000s, inflation was high, essentially wiping out any return from normal interest rates on fixed income investments, as well as yields on equities.  Gold performed very well then, because the return from normal investments dropped to zero or went negative.

There are also a number of  International Factors  which affect the Gold market.

The “Gold Season”

We are now at the time of year which leads to important holidays in several cultures, characterized by giving gifts of jewelry, most made of Gold and Silver.

Two countries which generate 50% of global Gold demand … India and China … celebrate major holidays in the fall and winter.  In October and November, India celebrates Diwali, the Festival of Lights, followed by India’s wedding season, when it is auspicious to give Gold to the bride.

Then comes Christmas in the West, followed by the Chinese New Year and Valentine’s Day.

Seasonal jewelry demand makes August to February the best time of the year for Gold and Silver.

Shanghai Gold Exchange

China is the top consumer, importer, and producer of Gold in the world.  China probably has the largest Gold reserves of any country, as it has acquired massive amounts of Gold in the last decade, much of it secretly.  But, government actions are opaque, so outsiders can only make estimates of the reserves.

China is set on dominating the Gold market.  It established the Shanghai Gold Exchange in 2002, and would now like to make it the center of Gold trading and pricing for the world. China has proposed that the Shanghai market would set the price on the basis of ACTUAL PHYSICAL GOLD, not on paper futures contracts.

Increased activity in the Shanghai Gold Exchange would be a significant factor in propelling growth in the Gold market.

Islamic Law Changes

Another development is a change in Islamic law which would allow massive investments in Gold by Muslims around the world, who number 1.6 Billion.

Some interpretations of Islamic law prevent Muslims from investing in trades considered “immoral,” such as alcohol and tobacco; this ban has included investment in Gold bullion as a tradeable commodity for the last few decades. As a result, approximately 23% of the population of the world has stayed out of the Gold market.

Now, however, the Accounting and Auditing Organization for Islamic Financial Institutions is working with the World Gold Council to set a standard allowing Gold trading by Muslims.  If the pent-up demand by this group of investors is unleashed, Trillions of Dollars could soon pile into the Gold market.

Peak Gold

Peak Gold is the theory that the production of new Gold is shrinking around the world.  Declines in new Gold discoveries have coincided with a surge in the costs of mining exploration.  This has resulted in a reduction in mining operations and a steady decrease in Gold production.

Goldman Sachs has warned that there are “only 20 years of known mineable gold reserves.”  Blackrock, the largest asset manager in the world, has also warned about “Peak Gold,” and asserts that Gold production is likely to decline by 20% per year for the foreseeable future.

There is no way to predict if Peak Gold is a concept which will last for years, or if new technologies or discoveries will change the dynamic.  But, for now, the production of Gold is decreasing at the same time that Gold demand is expected to soar.

Global Insecurity

As we stated in the July 26, 2016 issue of  IntelDigest:

Gold is a traditional safe haven in times of insecurity;  it can provide insurance against cyber and political risks.  And, there are good, old-fashioned fundamentals at work …. demand for gold is growing in the marketplace, from Russia and China to western markets, while supply has been dormant because new mining projects were delayed or closed down over the last few years, when the gold price was receding from its 2011 highs.

Deflation

Despite deflationary forces in the world economy over the last eight years … which would adversely affect the price of Gold … we have always been confident that governments will succeed in forcing Inflation, primarily because they have no choice.  Deflation makes the real value of debt go up. Deflation destroys tax collections … when prices and wages go down in deflation, governments collect less tax.  If the value of debt goes up and tax collections go down, then economies collapse.

Governments can’t allow that.  So, they will do whatever they can to produce inflation.  Some economists posit a theory that governments will be forced to go to an extreme to produce inflation, and do so by setting the price of gold at $5,000 per ounce, or even higher.  The Gold market has been manipulated for several years to keep the price of Gold down;  it would be easy to change direction and manipulate the price up.

Effects of Interest Rates

Traditionally, gold prices have tended to go down when interest rates go up, mainly due to carrying costs.  Gold pays no interest, so it has a negative carry.  Compared to bonds, money market funds, and dividend-paying stocks … which have traditionally paid out a return of 4-5% or more … Gold was at a disadvantage.

However, we are in an environment where bond and money market yields are close to Zero.  Many government bonds around the world now trade at Negative interest rates; taking inflation into account, Cash has a negative interest rate as well.

For the first time in history, Gold has a positive carry compared to cash and government bonds.  Central banks, investment banks, and large money managers have bought significant amounts of Gold over the last few years, pushing up the prices of Gold, gold funds, and mining companies.

Even if The Fed raises short-term rates, we expect that Gold will rise even faster!  Any hike of U.S. interest rates will attract hundreds of billions of Dollars from foreign investors seeking yield;  this money will likely flood into U.S. bonds.

As the U.S. bonds are bid up, their yields will come right back down again.  And, as these yields go lower, the positive carry of Gold will become more pronounced, likely leading to a rally in Gold.

Gold Market Manipulation

Other than the strong US Dollar of recent years, the price of Gold has been held back by suspected market manipulation. Investors have been frustrated as Gold fundamentals continue to improve, but the market price of Gold is repeatedly knocked back by manipulation in the paper Gold market, specifically Comex gold futures contracts.

The Comex Gold and Silver markets have been described as “absurdly leveraged paper-trading cesspools, where deep-pocketed players … routinely drive prices down for profit.”

Whenever Gold displays some upward price momentum, hedge funds with short positions can sell tons of “Gold” (really, just paper contracts) in the futures market.  This forces many Gold traders to sell their leveraged long positions.  Momentum trades follow on the automated Globex trading system.

The short traders can then close out their positions with a nice profit, while holders of physical Gold are left to shake their heads.  Many suspect that the short traders often work at the behest of a government or international financial organization to hold down the price of Gold.  The bottom line is that the price of Gold is repeatedly held back.

This manipulation of the futures market has motivated million of investors to take refuge in various forms of physical Gold, and the opening of numerous physical gold exchanges and physical gold vaults.

 

 

 

InnOvation Capital & Management, LLC

IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

SEPTEMBER 13 , 2017

Contact Richard Power with comments or questions. IntelDigest  is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

Continuing our discussions of short-term investment prospects at this late stage of a long-term Bull Market, we expect that the equity markets will continue to “melt up” in these last few months of the year, before beginning a “melt down” in 2018.  In recent issues of  IntelDigest, we have pointed to areas of investment where our analysis shows room for growth over the balance of this year:

Opportunities for Gain

* Industrial and Precious Metals
* Agricultural Land
* Pipelines and Refining
* Clean Energy
* Japan
* Defense Spending
* Data and Networking

In this issue, and again next week, we will update our analysis of the Gold market, and where Gold and other Precious Metals are expected to go over the next year or two. Today, we will discuss the current trend in Gold.  Next week, we’ll discuss longer-term fundamentals of the Gold market, and its challenges.

Come October, we will turn to the reasons for the expected “melt down” to come, and how to protect ourselves from that downturn.  For now, we will stay invested, and pay attention to our Stop Losses.

Precious Metals

As we stated last week:

“Precious Metals, such as Gold, Silver, and Platinum, have been rising steadily against most currencies in recent years. The current slide of the US Dollar has brought Gold close to a 5-year high.”

The Gold “Trend”

The strong US Dollar from mid-2011 to the beginning of this year has been a major “headwind” holding back the value of Gold here in the United States.  That is unwinding now.   Aside from the occasional temporary correction, the Dollar is expected to gradually lose strength with respect to other stores of value, including precious metals and strong foreign currencies.

We have expounded many time in  IntelDigest  on the importance of Interest Rates.  The U.S. economy continues to grow, but not at a rate which would justify large rate hikes by The Federal Reserve.  We expect no more rate hikes this year.  In addition, the size of the National Debt is so massive that raising the rate of interest on U.S. government obligations would be suicidal for the federal budget.

So, if there is no substantial rate hike on the horizon, and the US Dollar continues to lose value (even at a gradual rate), the value of Gold should continue to rise over the next few years.

The 2017 Gold Run

The precious metal has run up 17% this year, moving from $1,125/oz to $1,350/oz, before retracing to its current level at approximately $1,325.  Gold prices are up over 5% in just the last month.

Gold has always been considered a “safe-haven asset,” or disaster insurance.  During times of trouble, Gold prices tend to rise.  Recent headlines regarding tensions with North Korea, major storm damage, domestic political missteps, and trade controversies with other countries have helped to push the metal higher.

Investor money has been pouring into Gold stocks and exchange-traded funds (ETFs), such as the SPDR Gold Trust (GLD), which is up 17% this year.  As reported recently in Bloomberg:

“ETF buyers are building their holdings, joining hedge funds that have boosted their net-long position in bullion futures by almost nine-fold since early July.  Through Tuesday, assets in gold-backed ETFs tracked by Bloomberg posted the biggest three-day gain since February.”

Gold has been building momentum.  The last time that Gold broke out of a long slump (five years or more) versus the stock market was the late 1990s.  Gold had underperformed stocks for six straight years from 1994 to 1999.  Gold fell 26% during that slump, very similar to its price action since 2011.

Within two years after that slump, in 2001, Gold began a streak of 12 years of positive returns.

Another catalyst for higher prices is a technical gauge referred to as the “rolling five-year return.”  From a technical perspective, the down market for Gold over the last five years should be followed by a “reversion to mean.” When long-term rolling returns for Gold are extremely low, they tend to revert to higher returns in the near future.

We haven’t seen this technical pattern since the early 2000s, which led to one of the best opportunities to buy Gold in history.  The recent price movements and the underlying geopolitical and economic concerns add up to a bullish sign for Gold prices.

Next week, we’ll talk about fundamentals and long-term prospects for owning Gold.

InnOvation Capital & Management, LLC

 IntelDigest

LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR

SEPTEMBER 6 , 2017

Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues.  Material may not be reproduced, forwarded or shared without express permission.

We continue to discuss short-term investment prospects in this issue of  IntelDigest.  We expect that the equity markets will continue to “melt up” in these last few months of the year, before beginning a “melt down” by next year.

As reported in earlier issues, we believe that the single most important factor supporting stocks is Interest Rates….

While ultra-low rates have done immense damage to fixed-income investors over the last several years, investors in equities have done very well. There have simply been no easy options for investors, so they have invested heavily in stocks and stock funds …..

There is no chance of large or frequent increases in interest rates at any time in the near future. So, we expect that stocks will continue to be the “only game in town” for the remainder of this year.

We will concentrate on the “melt up” over the next few weeks, discussing opportunities for gain in the short-term. Later in the year, we will turn to the reasons for the expected “melt down” to come, and how to protect ourselves from that downturn.  For now, we will stay invested, and pay attention to our Stop Losses.

Opportunities for Gain

Where can one make new investments at this late stage of the game?  We have been concentrating on a few sectors:

* Industrial and Precious Metals
* Agricultural Land
* Pipelines and Refining
* Clean Energy
* Japan
* Defense Spending
* Data and Networking

Industrial and Precious Metals

Improvement in the global economy has created an uptrend in most commodities, including industrial metals.  The price of copper has risen by 50% in the last year.  Prices of nickel, zinc, palladium, and others have also been in an upswing.

Rare Earth Minerals and similar strategic metals have also risen.  These elements are fundamental components in many electronics products and military systems, and there is a geopolitical angle here.  Most of these metals are found in China.  If fighting breaks out over North Korea, or if there is a trade war with China, the prices of such metals will rocket higher.

Precious Metals, such as Gold, Silver, and Platinum, have been rising steadily against most currencies in recent years. The current slide of the US Dollar has brought Gold close to a 5-year high.

Agricultural Land

Farmland continues to get more and more expensive.  Higher land values have been supported by ultra-low interest rates, as well as increases in farm earnings and productivity.

There is something else going on with American farmland. Farm production is frequently being bought up by foreign companies and sovereign nations.  Obviously, this involves the production of food for export to those countries.  From another viewpoint, this is a way for those countries to import water, i.e., if they don’t have enough water at home to produce enough food (as in Saudi Arabia), buying farmland or farm production in the U.S. achieves the same goal.

Pipelines and Refining

The price of crude oil dropped from $100/barrel in mid-2014 to $30/barrel in the span of 18 months, and now hovers in the high-$40s.  Although oil companies represent good long-term investments, current crude oil prices are likely to stay put for the next couple of years (absent a major outbreak of war).

But, there is still a constant demand for gasoline, especially in the U.S.  Pipelines are always in use and in demand, and represent a good opportunity for gain, plus some of the highest yields available in the market place.  Refiners can actually have higher profits when the price of crude is low … the spread between the prices which they can charge for gasoline and their lower costs of crude oil represents increased profit for refiners.

Clean Energy

Despite Donald Trump’s promise to “bring back Coal” (that is really not happening), the economics for Clean Energy, such as solar and wind, continue to improve steadily.  The use of Clean Energy grows in the U.S., but more so in other parts of the world, such as China.

Japan

After two “lost decades” which began in the early-1990s, the Japanese economy is finally growing again.  Most Japanese companies lost more than 70% of their value from 1990-2009.  However, many companies have doubled since the depths of the Financial Crisis of 2007-2008, partially-aided by actions of Prime Minister Abe and the central bank.

Growth in domestic spending and business capital spending is helping to lift the economy and large-cap companies, and smaller companies are expected to benefit in the coming years.

Defense Spending

One of the few initiatives which the Trump Administration and the Republican-controlled Congress are likely to push through will be a substantial increase in Defense Spending. We can expect more than $50 Billion in additional spending over the next few years.

Data and Networking

We will present a discussion of Autonomous Vehicles in a later edition of  IntelDigest.  This is just one area where the market continues to grow for greater computer power, faster speeds, more interconnectivity.  The Internet of Things (IoT) makes communication among devices more ubiquitous.  More millions of people each year adopt electronic devices and digital platforms.

Companies which provide the networking connections and data storage necessary to run each of these sectors should continue to grow.

More next week …..