Is the “Easy Money Era” Over?

By Justin Spittler

It finally happened. Yesterday, the Federal Reserve raised its key interest rate for the first time in nearly a decade. Dispatch readers know the Fed dropped interest rates to effectively zero during the 2008 financial crisis. It has held rates at effectively zero ever since…an unprecedented policy that has warped the financial markets. Rock bottom interest rates make it extremely cheap to borrow money. Over the last seven years, Americans have borrowed trillions of dollars to buy cars, stocks, houses, and commercial property. This has pushed many prices to all time highs. U.S. stock prices, for example, have tripled since 2009.

The Fed raised its key rate by 0.25%.....

U.S. stocks rallied on the news, surprising many investors. The S&P 500 and NASDAQ both gained 1.5% yesterday. The Fed plans to continue raising rates next year. It’s targeting a rate of 1.38% by the end of 2016. So, is this the beginning of the end of the “easy money era?” For historical perspective, here’s a chart showing the Fed’s key rate going back to 1995. As you can see, yesterday’s rate hike was tiny. The key rate is still far below its long term average of 5.0%.

Josh Brown, writer of the financial website The Reformed Broker, put the Fed’s rate hike in perspective.

The overnight borrowing rate…has now risen from “around zero” to “basically zero.”

In other words, interest rates are still extremely low, and borrowing is still extremely cheap. We’re not ready to call the end of easy money yet.

Cheap money has goosed the commercial property market..…

Commercial property prices have surged 93% since bottoming in 2009. Prices are now 16% higher than their 2007 peak, according to research firm Real Capital Analytics. Borrowed money has been fueling this hot market. According to the Fed, the value of commercial property loans held by banks is now $1.76 trillion, an all time high. The apartment market is especially frothy today. Apartment prices have more than doubled since November 2009. U.S. apartment prices are now 34% above their 2007 peak.

Sam Zell is cashing out of commercial property..…

Zell is a real estate mogul and self-made billionaire. He made a fortune buying property for pennies on the dollar during recessions in the 1970s and 1990s. It pays to watch what Zell is buying and selling. He was one of few real estate gurus to spot the last property bubble and get out before it popped. In February 2007, Zell sold $23 billion worth of office properties. Nine months later, U.S. commercial property prices peaked and went on to plunge 42%.

Recently, Zell has started selling again. In October, Zell’s company sold 23,000 apartment units, about one quarter of its portfolio. The deal was valued at $5.4 billion, making it one of the largest property deals since the financial crisis. The company plans to sell 4,700 more units in 2016. Yesterday, Zell told Bloomberg Business that “it is very hard not to be a seller” with the “pricing currently available in the commercial real estate market.”

Recent stats from the commercial property market have been ugly. In the third quarter, commercial property transactions fell 6.5% from a year ago. Transaction volume also fell 24% between the second quarter and third quarter.

Auction.com, the largest online real estate marketplace, said economic growth is hurting the market.

Both commercial real estate transaction volume and pricing have showed signs of softening over the past few months. It’s likely that what we’re seeing is the result of reduced capital spending due to some weakness in the U.S. economy, coupled with a highly volatile economic climate in China and ongoing financial issues in Europe.

Zell is bearish on the U.S. economy..…

On Bloomberg yesterday, he predicted that the U.S. will have a recession by the end of 2016.

I think that there’s a high probability that we’re looking at a recession in the next twelve months.

A recession is when a country’s economy shrinks two quarters in a row. The U.S. economy hasn’t had a recession in six years. Instead, it’s been limping through its weakest recovery since World War II.
Zell continued to say that the U.S. economy faces many challenges.

World trade is slowing. Currencies continue to be manipulated. You’re looking at the beginnings of layoffs in multinational companies. We’re still looking all over the world for demand…

So, when you look at those factors it’s hard to see where strength is going to come from. I think weakness is going to be pervasive.

Like Zell, we see tough economic times ahead. To prepare, we suggest you hold a significant amount of cash and physical gold. We put together a short video presentation with other strategies for how to protect your money in an economic downturn. Click here to watch.

Chart of the Day

The U.S. economy is in an “industrial recession”. In recent editions of the Dispatch, we’ve told you that major American manufacturers are struggling to make money. For example, sales for global machinery maker Caterpillar (CAT) have declined 35 months in a row. In October, CAT’s global sales dropped by 16%...its worst sales decline since February 2010.

Today’s chart shows the yearly growth in U.S. industrial production. The bars on the chart below indicate recessions. Last month, U.S. industrial production declined -1.17% from the prior year. It marked the 19th time since 1920 that industrial output dropped from a positive reading to a reading of -1.1% or worse.
15 of the last 18 times this happened – or 83% of the time – the U.S. economy went into recession.

The article Is the “Easy Money Era” Over? was originally published at caseyresearch.com.

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The Time of Maximum Pessimism Is the Best Time to Buy

By Nick Giambruno

“The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”—Sir John Templeton


As you may have heard, Doug Casey and I traveled to Cyprus in search of crisis driven bargains… and we found them. This has been previously outlined in the articles here and in our specific investment picks in Crisis Investing in Cyprus.

Speaking of those picks, we outlined eight companies on the Cyprus Stock Exchange that we thought were fundamentally sound, but unjustly beaten down by the crisis. And thus far they have performed exactly as we thought they would.

The eight stocks that Doug and I identified are all up since the publication of Crisis Investing in Cyprus. Two of them have more than doubled, including one that’s up 335%ⁱ.

While those returns are nothing to bat an eye at, we believe there is still a lot more room for upside, and that it’s not too late to get in.

The top three catalysts for an economic recovery are still at the very earliest stages of being played out. And if the returns to date on our picks are any indication, we expect them to go much higher once these catalysts are fully under way.

Additionally, for the vast majority of people, there is still an aura of “maximum pessimism” surrounding Cyprus, which is what makes it an excellent contrarian investment. However, it’s clear this sentiment—and the current buying opportunity—won’t last forever.

Here are the three main catalysts to watch for.

Catalyst #1 Elimination of Capital Controls

Cyprus was the first eurozone country to implement official capital controls (but probably not the last). The restrictions put in place during the crisis are still there, though they are being gradually eased.

The first step toward the relaxation of capital controls occurred last week, and it’s possible that they will be fully lifted later this year. While it remains to be seen whether that will actually happen, there has been tangible progress in that direction.

Additionally, Cyprus has been meeting and exceeding its benchmarks set by the Troika (the IMF, the European Commission, and the European Central Bank), including the privatization of inefficient state-run enterprises and quickly enacting reforms, such as cutting government spending. This progress and the gradual relaxation of the capital controls are reasons for guarded optimism.

A couple of points to clarify about the capital controls:

First, they do not apply to new money brought into Cyprus (nor the capital gains and income generated from that money). That money can be taken out of the country without restriction. Second, the bank deposit confiscation only applied to cash balances above the guaranteed amount of €100,000 at the two troubled banks, Laiki Bank and Bank of Cyprus. Relatively sound institutions were not affected. Also, there was no forced selling or conversion of securities held in brokerage accounts. All of the brokers whom we met with held the majority of their cash in institutions outside of the country for additional protection.

Of course, the government could always come up with a new edict or decree, but we view that as unlikely at the moment, since they’re actively encouraging new investments in the island.

Catalyst #2 Offshore Gas Bonanza

In 2011 there was a discovery of a massive gas field about 100 miles south of Cyprus. The resources there are estimated to be worth tens of billions of dollars (not insignificant for a country with a $23 billion GDP)—and are enough to turn Cyprus into an energy exporter. Though it could be a number of years before these resources are monetized, it gives Cypriots a lot to look forward to over the intermediate term.

 

 

Catalyst #3 Relisting of the Bank of Cyprus

Previously the Bank of Cyprus and Laiki Bank accounted for a large chunk of the volume traded on the Cyprus Stock Exchange. Laiki Bank is now defunct, with its good parts having been folded into a restructured Bank of Cyprus—whose shares have been suspended from the stock exchange.
The restructured Bank of Cyprus is expected to start trading again sometime midyear, which will be an important catalyst in rejuvenating the stock market.

This is not to say the Bank of Cyprus is completely out of the woods. Far from it. While it has restored its capital base following the bail-in, it still has major issues with non-performing loans (NPLs).

That said, the Bank of Cyprus is the cornerstone of the Cypriot financial system, which is a major pillar of the Cypriot economy, and it has the backing of the Troika. The IMF believes that, despite the NPLs, the bank will be able to maintain an adequate capital base through at least 2016.

Owning a country’s premier bank—especially after it’s been chastised by a near-death experience—can be a profitable speculation.

It’s Not Too Late to Snatch These Bargains

While our eight investment picks are all up since the publication of Crisis Investing in Cyprus, including two of which that have more than doubled (including one that is up 335%ⁱ), that doesn’t mean it’s too late to get in.

The fact that we’re still at the very early stages of these three catalysts, combined with the continued “maximum pessimism” sentiment tells us that there’s still a lot more upside potential.

With features that make it a popular tourist and retirement destination combined with the potential economic boon from exploiting the offshore gas reserves, the Cypriot economy has a good chance to recover over the medium term.

When you weigh it all together, it’s clear that now is the time to start deploying speculative capital.
In order to invest on the Cyprus Stock Exchange, you’ll need a local brokerage account. Our preferred Cypriot broker can open accounts remotely for online trading, with no minimum balance requirements, and they still accept American clients.

This is information that you won’t find anywhere else. And there’s nobody better to guide you through it all than legendary crisis investor Doug Casey.

You can find out more about Crisis Investing in Cyprus by clicking here.
ⁱReturns denominated in euro terms from 11/6/2013 through 3/4/14

The article The Time of Maximum Pessimism Is the Best Time to Buy was originally published at International Man.

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What NOT to Do When Investing in Miners

By Eric Angeli, Investment Executive, Sprott Global Resource Investments

 

Precious metals miners are the most volatile stocks on earth. They're so volatile that investors often forget that underneath those whipsawing stock prices lie real businesses. But even many of those who consider themselves old pros in natural resource investing tend to get one thing wrong. Eric Angeli, an investment executive with Sprott Global Resources and protégé of legendary resource broker Rick Rule, explains how not to fall into the "top down" trap…



If the past two years have taught us anything, it's that trying to predict short term moves in the gold price can be a road to ruin. Parsing the umpteen countervailing forces that combine to set the price of gold is tough. And it's even tougher when you consider that oftentimes, market moving news, such as a central bank trade, isn't reported until after the fact.

In my years spent evaluating natural resource companies as a broker and analyst, I’ve found that there are two ways to successfully invest in precious metals equities. Doing it right can bolster the strength of your portfolio, not to mention your own confidence in your holdings.

Method #1—Top-Down Approach

 

You may have heard this method referred to as “Directional Investing.”
A directional investor decides that gold prices will increase in the long run. That's the starting point of his thesis. He then proceeds to find the companies that will be successful if his prediction comes true. He looks for companies with leverage to the gold price.

If an investor can get the timing right, this can be a lucrative strategy. There is an obvious caveat, though: for this strategy to work, precious metals prices must rise.

In my role as a broker, I deal with both companies and investors all day long. I can tell you that most speculators involved with gold equities use this top down approach.

That's why the number one question I’ve heard over the last three months has been, “Why isn’t gold moving up?” To directional investors, the answer to this question is paramount.

This mindset leads to the herd mentality and, frankly, gives us our best bull markets.
I prefer method #2.

Method #2—Fundamental Approach

 

Fundamental investors ignore prognostications about where gold prices might move next. We eliminate gold price movements as the crux of our investment decisions, which removes a lot of the guesswork from our portfolios. For a fundamental investor, gold prices are still a piece of the puzzle, but they are not the only driver.

Fundamental investors want to know: which company has a promising deposit in a relatively safe jurisdiction? Which has a tight share structure? This “bottom up” method, however, does require a lot more homework.
Fundamental investing is all about identifying the difference between a stock’s intrinsic value and the price at which it is trading at in the open market.

While I do believe in higher gold prices eventually, and inevitably, I know that short-term movements in the price of gold are beyond my control. I instead prefer to position my clients for success in the current environment. Instead of focusing on when the gold price will move, which we can never know, we focus on picking quality companies.

Why Hasn’t the Top-Down Approach Been Working?

 

You might say: because the price of gold hasn’t gone up! That's true, but there’s more to the story.
Until quite recently, gold has continued to rise, though not at the same clip we enjoyed after 2008. The problem is that miners' operating costs rose faster than the price of gold. Investors didn't expect that.
Nor did they factor in other cost increases. Sure, the value of a deposit rises every day the gold price rises. But did oil prices jump at the same time, making trucking the goods out more expensive? Did your laborers start demanding high wages? Did energy costs increase? Did the federal government demand a bigger slice of the pie?

Top down investors can stop trying to figure out why they haven’t been correct over the last several years. They were correct on the gold price, but they ignored underlying cost factors.

The Top 7 Things to Look For

This is where the Fundamental Approach shines. All of your investments should fulfill a few key checkpoints:

1. Look for companies where management owns a large percentage of the stock. A vested interest at a higher share price is even better.
2. Look for a tight capital structure. A bloated outstanding share count is a red flag. As is a history of management carelessly diluting away shareholder interest by issuing new stock.
3. Look for a thrifty management team. A good company should spend their capital on projects, not swanky new offices.
4. The company's mine should remain profitable even if gold drops to $1,000 per ounce. It could happen.
5. Look for companies with enough cash to finance their current drill program, expansion plans, feasibility study, or construction phase. This year in particular, companies are having a very difficult time finding financing. Those who have adequate cash are diamonds in the rough.
6. Know which countries support mining. A tier-one asset under the control of a wildly corrupt government isn't really a tier-one asset. You don't want to get caught in the middle of a government dangling final permits above managements’ heads.
7. Know the geological potential of the exploration area. A four-million-ounce gold deposit is swell, but what if your company discovers not just one gold mine, but an entire new gold district? How will you factor in that upside?

Don't Let Fear Make You Miss Out

 

Mining companies have a fiduciary responsibility to make their shareholders money, so they can’t help but paint a rosy picture for potential investors. That's why you need to have a disciplined and impartial eye. Most companies are not worthy of your hard earned capital.

Having an advisor you trust, or access to technical expertise, is crucial. Ideally you should have both. The most educated investor always has the edge.

I'll conclude with this: the markets have not been kind to the miners recently. But selling a stock just because it dropped in value is an emotional decision. Seeing red on your computer screen is painful, but it is not relevant. What is relevant is what you do with that capital going forward. Don't let emotion cloud your judgment.
 
On the other hand, if you’re waiting for the gold price to move higher before you sell, then you’re a speculator masquerading as an investor, and you may as well buy a ticket to Vegas.

My boss and mentor, Rick Rule, recently said, “Bear markets are the authors of bull markets.” When these markets do start moving, if you’re not positioned with the highest quality tier one companies, you could miss out on one of the biggest bull market moves of your investing life.

Eric Angeli is an investment executive at Sprott Global Resources. 

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