The World’s A Little Richer

Saturday, March 31st, 2012

Imagine your daily consumption costing you less than a cup of Starbucks. About 1.3 billion people around the world live this reality. The good news is that it’s the lowest number of people ever.

The World Bank released an update to its consumption poverty estimates in developing countries, and for the first time ever, the organization found progress in all the regions they track. In terms of the number and percentage of people living on $1.25 a day (on a purchasing power parity) at 2005 prices in 130 developing countries, the world is a little richer.

The area seeing “dramatic progress” was East Asia, reports the World Bank. Back in the 1980s, this region had the world’s highest incidence of poverty. Nearly 80 percent of people lived on less than $1.25 each day; In 2008, the number dropped to 14 percent.

Across these poorest countries, in 1981, 70 percent of people were living on less than $2 a day; 2008 data shows that the figure has fallen to just above 40 percent. Whereas just over 50 percent of people in the poorest countries were living on less than $1.25 a day in 1981, only about 25 percent are today.

I discussed the importance of this rising consumer with CNBC’s Squawk Box Asia’s Martin Soong and Lisa Oake this week. I stopped by their studios while I was in Singapore to discuss my thoughts on the continuing build-out of emerging markets.

Watch it now.

By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

The S&P/ASX 200 Index is a market-capitalization weighted and float-adjusted stock market index of Australian stocks listed on the Australian Securities Exchange. E-7 are the seven most populous emerging market countries—China, India, Indonesia, Brazil, Pakistan, Russia and Mexico.

Tags: Asx 200, Australian Securities, Australian Stocks, Brazil, Cnbc, Dramatic Progress, East Asia, Emerging Market Countries, India, India Indonesia, Market Capitalization, Martin Soong, Oake, Paki, Poorest Countries, Poverty Estimates, Purchasing Power Parity, Russia, S Martin, Squawk Box, Starbucks, Stock Market Index, U S Global Investors
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What Your Handwriting Says About Your Health, and other Weekend Reads

Friday, March 30th, 2012

Here are this week’s reading diversions for your personal enlightenment. Have an awesome (earth hour, Saturday 8:30 p.m.) weekend!

Juice pH and Why the Right Alkaline-Acid Levels Are So Important

A urine test that is less than 6.8 shows you are becoming too acid, and a urine test reading over 7.5 means you are becoming too alkaline. When your pH goes too far into the acid range cells will become poisoned by toxic acidic waste causing many cells to die off. This cell die off will lead too catastrophic illness.

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Top 3 Foods For Long Life

If you don’t like cooked cabbage, you can eat coleslaw or shred raw cabbage on your salad. You should eat some of your cabbage raw anyway because cooking can reduce some of the health benefits.

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Brand vs. Generic: When It Matters (And What To Do When It Does) | Psychology Today

I recently met a rep from a well-known chemical company (whose name I won’t mention) who had traveled to India to visit their generic drugs plant.  “Let me tell you something,” she said. “Anyone that says that generic drugs are the same as brand name is lying.”  She went on to tell me how appalling the plant conditions were, and that there were major safety and contamination concerns.

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Evolutionary Reason For Runner’s High?

Researchers had humans and dogs—both natural-born runners—jog a half hour on a treadmill. Then they sampled their blood for endocannabinoids, some of the compounds thought to trigger the runner’s high. As expected, humans and dogs had much higher levels after the run. But when ferrets—a sedentary species—took the same 30-minute trot, they had no spike in those feel-good molecules.

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Dr. Susanne Bennett: Are These Common Foods Causing Your Allergies?

The correct diet can dramatically reduce your allergy symptoms. Our day one goal is to eliminate allergy-inducing foods and replace them with healthier choices.

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Chemicals in Carpets, Non-Stick Pans Tied to Thyroid Disease – Health News – Health.com

The researchers cautioned that while the data show an association between the chemicals and thyroid disease, they do not prove cause and effect, meaning there could be other explanations for why people with high levels of the compounds in their blood had more thyroid disease.

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Celiac and Crohn’s Disease May Share Genetic Risk Factors – Health News – Health.com

Celiac disease, which makes it hard to absorb nutrients properly, is an inherited autoimmune disease in which the lining of the small intestine is damaged by gluten and other protein found in wheat and some other grains. Crohn’s disease is a form of inflammatory bowel disease.

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Loneliness Hurts the Heart – Heart Disease – Health.com

People who lack a strong network of friends and family are at greater risk of developing—and dying from—heart disease, research shows. According to some studies, the risk of solitude is comparable to that posed by high cholesterol, high blood pressure, and even smoking.

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The 14 best supplements for men | The Health & Wellness Blog

In the May 2012 issue of Canadian Living, we’re featuring a great story on the best supplements for women. I’m sure you’ll love the article and find it really useful. I never know what supplements I should be taking, but now I will know! Be sure to pick up a copy of the issue when it’s on newsstands on April 2.

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The 100 Foods Dr. Oz Wants in Your Shopping Cart

It’s the only grocery list you’ll ever need. Dr. Oz covers everything from produce to desserts to keep your kitchen stocked with only the healthiest foods. Print this list and take it on your next trip to the supermarket.

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What Your Handwriting Says About Your Health

Handwriting is about the brain, not the hand.  Nerve impulses travel down the arm, into the hand, directing the fingers to maneuver the pen. When the ink hits the paper, it actually reveals the complex inner workings inside the writer’s body mind and spirit. A deeply trained graphologist can spot imbalances in handwriting that reveal imbalances in the body mind and spirit.

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Reflexology 101

Reflexology reduces stress (a major contributing factor to disease), enhances the body’s ability to heal itself, and balances both body and soul. Research shows that a single reflexology session can create relaxation, reduce anxiety, diminish pain, improve blood flow and decrease high blood pressure.

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Tags: Acid Levels, Allergy Symptoms, Cabbage Salad, Canadian, Canadian Market, Carpets, Catastrophic Illness, Chemical Company, Common Foods, Cooked Cabbage, Correct Diet, Diversions, Ferrets, Generic Drugs, Half Hour, Handwriting, Health Benefits, Health News, India, News Health, One Goal, Personal Enlightenment, Psychology Today, Thyroid Disease, Treadmill, Urine Test
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Real GDP unchanged in Q4 2011, Corporate Profits Advanced

Friday, March 30th, 2012

Real GDP unchanged in 2011:Q4, Corporate Profits Advanced

by Asha Bangalore, Northern Trust

Real GDP of the US economy grew 3.0% in the fourth quarter of 2011, unchanged from the prior estimate. However, some components of GDP were modified. Equipment and software spending (+7.5% vs. +4.8%), government outlays (-4.2% vs. -4.4%), and structures (-0.9% vs. -2.6%) show upward revisions, while exports show a downward revision in the final report of fourth quarter GDP.

Corporate profits before tax with inventory valuation and capital consumption adjustments rose 0.9% in the fourth quarter vs. a 1.7% increase in the third quarter. In the fourth quarter, the entire increase in corporate profits was from domestic industries (+3.8%), with profits from operations in the rest of the world posting a decline (-9.2%).

There is a controversy about whether one should use real gross domestic product (GDP) or real gross domestic income (GDI) to evaluate the performance of the U.S. economy. Real GDP is obtained by adding up spending across the economy and real GDI is computed by adding up income earned. Conceptually, GDP and GDI are identical but the source data for each is different and they yield different numbers. As Chart 3 shows, the two measures drift apart sometimes. The GDI measure is gaining attention; Jeremy Nalewaik of the Federal Reserve has pointed out the National Bureau of Economic Research uses monthly indicators, GDI and GDP to determine official dates of business cycle peaks and troughs. Going forward, an average of the two measures may become the preferred measure.

Tags: Business Cycle, Capital Consumption, Corporate Profits, Different Numbers, Downward Revision, Federal Reserve, Fourth Quarter, GDP, Government Outlays, Gross Domestic Product, Inventory Valuation, Investment Decisions, National Bureau Of Economic Research, Northern Trust Company, Preferred Measure, Quarter Gdp, Real Gdp, Source Data, Troughs, Upward Revisions
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Paul Kasriel’s Parting Thoughts – Mary Matlin’s Economics

Friday, March 30th, 2012

Kasriel’s Parting Thoughts – Mary Matlin’s Economics

As many of you know, I will be retiring from The Northern Trust Company on April 30. In the few remaining days of my tenure, I will be sharing with you some of my parting thoughts with regard to economics as time permits and the spirit moves me. By the way, after April 30, my Northern Trust email address will disappear into the ether, but I hope I will not follow it there. If you feel the need to contact me after April 30, and I cannot imagine why you would, I have established a personal email address, which has gone live: econtrarian@gmail.com.

Now, on to Mary Matalin. I saw her on one of the cable news shows on Wednesday defending Republican presidential candidate Mitt Romney’s planned car “elevator” in his new La Jolla home in terms of job creation. Ms. Matalin argued that by installing this elevator, Romney would be creating new jobs for the economy. How might Bastiat, the 19th century French political economist, have reacted to Ms. Matalin’s argument? My suspicion is that he would have made a distinction between what Ms. Matalin “sees” and what is “unseen.” Ms. Matalin sees the additional workers manufacturing and installing the elevator. What she apparently does not see are the workers who otherwise would have been hired for some other unrelated project had Mr. Romney forgone the installation of the elevator and rather invested, or saved, these “elevator” funds. Ms. Matalin, a Republican partisan, appears to have bought into the Keynesian fallacy often trumpeted by Democratic (or is it Democrat?) partisans that an increase in saving implies less total spending in the economy and diminished job creation. If Mr. Romney chooses to forgo the installation of a car elevator in favor of, say, purchasing some additional financial assets, in effect, he is transferring some of his purchasing power to another entity – a business, another household or a governmental body – that has a greater urgency to spend currently than does Mr. Romney. So, although Mr. Romney would be hiring fewer workers to manufacture and install a car elevator, the recipient of Mr. Romney’s investment funds would be hiring additional workers to produce whatever they were purchasing. (This concept of transfer credit comes from the Austrian school of economics, whose pupils greatly admire Bastiat.)The only way Mr. Romney’s decision to forgo the installation of a car elevator would not lead to a creation of jobs is if Mr. Romney chose to increase his saving by holding more bank deposits and/or currency, in which case would result in a decline in the velocity of money.

So, boys and girls, like Bastiat, keep your eyes open. Try to see everything when analyzing economic issues. Ms. Matalin was not incorrect to argue that Mr. Romney’s decision to install a car elevator in his new abode would create new jobs. But what she apparently failed to see is that new jobs would have also been created if Mr. Romney had chosen to forgo the purchase of the car elevator and instead invested those funds. Increased saving in general does not result in decreased aggregate spending. Rather, it merely changes the composition of who is engaging in the new spending.

Copyright © Northern Trust

Tags: Cable News, Chief Economist, Elevator, Fallacy, Financial Assets, Job Creation, La Jolla, Mary Matalin, Mary Matlin, Mitt Romney, New Jobs, Northern Trust Company, Parting Thoughts, Partisan, Partisans, Paul Kasriel, Political Economist, Purchasing Power, Republican Presidential Candidate, Republican Presidential Candidate Mitt Romney
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How to Access the EM Consumer? Think Small (Koesterich)

Friday, March 30th, 2012

“If everyone in China lengthened their shirt tails by a foot, the textile mills of England would spin for a year.” That’s what one Englishman reportedly said nearly two centuries ago about the prospect of selling to, and profiting from, consumers in emerging markets.

Today, not much has changed. In a world in which most developed markets are struggling with too much debt and too little growth, few themes get investors more excited than the prospect of benefitting from the billions of relatively debt-free consumers in emerging markets. Across the globe, emerging market growth continues to create hundreds of millions of new middle-class consumers. By 2025 China, India and Brazil are respectively expected to be the 2^nd, 4^th, and 9^th largest consumer markets in the world.

However, accessing emerging market consumers may not be as simple as just owning broad emerging market funds. In fact, investors who are looking to specifically gain exposure to emerging market domestic consumption may want to consider the small cap segment of that market. Here’s why.

The companies that tend to dominate broad emerging market indices are large, multi-national firms that are often more levered to the global economic cycle than to local consumption. Such companies, for instance, make up roughly two-thirds of the MSCI World Emerging Market Index. Just consider the sectors that dominate that index: Financials (24% of the index), energy (15%), technology (14%) and materials (13%).

In contrast, small cap emerging market indices tend to provide a more concentrated exposure to domestic demand. These indices are less dominated by large, global cyclical plays and have a higher concentration of companies in industries with a local flavor, such as capital goods, real estate, consumer discretionary, and food and beverages.

To be sure, I’m not suggesting that investors abandon emerging market large cap stocks. As I’ve been advocating since the end of 2011, there are both short- and long-term rationales for overweighting certain emerging markets.

In the near term, I expect emerging market countries to outperform based on low relative valuations, falling inflation and stronger growth. Longer term, emerging market stocks are likely to benefit from falling emerging market volatility and rising developed market volatility. However, if you’re specifically trying to capture, and profit from, the secular rise of emerging market middle class consumers, it’s worth considering that small cap stocks provide a more targeted exposure. I prefer to access emerging market small caps through the iShares MSCI Emerging Markets Small Cap Index Fund (NYSEARCA: EEMS), which has a relatively high weight to consumer discretionary stocks and real estate management and development, as well as the iShares MSCI China Small Cap Index Fund (NYSEARCA: ECNS) and the iShares MSCI Brazil Small Cap Index Fund (NYSEARCA: EWZS) for more targeted access to Chinese and Brazilian small caps.

Source: Bloomberg

In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Investme

Tags: Billions, Brazil, Cap Stocks, Capital Goods, Centuries, Concentration, Consumer Markets, Domestic Consumption, Economic Cycle, Emerging Market Funds, Emerging Market Indices, Emerging Markets, Englishman, Food And Beverages, India, Market Consumers, Market Index, Middle Class, Msci World, Small Cap, Textile Mills, Two Thirds
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Stocks: Still A Bargain (Koesterich)

Friday, March 30th, 2012

With global stocks up approximately 25% from their fall low and many market watchers endorsing equities in recent weeks, it’s hardly surprising that investors are wondering if stocks are still a good bargain.

While some measures of sentiment – notably abnormally low volatility levels – could be interpreted as flashing yellow caution signs, valuations and fundamentals still favor global stocks over the long term.

Currently, equities look reasonably priced on an absolute basis. Developed market equities are trading at around 14.5x trailing earnings, while large emerging markets are trading at roughly 12x earnings. These valuations are significantly above those touched during last year’s trough, but both emerging and developed market stocks are now trading at a significant discount to their long-term averages.

The relative case for stocks, however, is even more compelling as equities look very cheap compared to bonds. While equity valuations are modestly below their long-term average, bond valuations are significantly above theirs when measured by virtually any metric.

Nowhere is this more evident than in the US Treasury market. Late last year, the yield on the 10-year Treasury note dipped below the level of core inflation for the first time since 1980. Rather than paying investors the typical long-term average real yield of 2.5% to 3%, the US government is now paying a negative real yield to borrow.  As a result, unless the US is sliding toward Japanese style deflation – and so far there is little evidence of this –US Treasuries look extremely expensive and investors in 10-year notes are accepting a loss in purchasing power and no real income. In addition, because coupons are so low, the duration or interest rate risk of Treasuries is at or near a historic high.

Some investors have weighed the volatility of stocks against the low yield on bonds and opted for choice C: Cash. A tactical move into cash is certainly reasonable for brief periods of time. But if you’re worried about long-term purchasing power, having a significant, long-term allocation to an asset paying zero return makes little sense. Stocks are a more reasonable option to consider.

To be sure, investing in equities has its risks. Some have argued that equity valuations are flattered by historically high margins. But in the United States at least, a combination of just enough gross domestic product growth, anemic wage growth and low rates should support margins over the near term.

Among other risks, while US deflation looks unlikely, it’s possible and it’s a scenario that would clearly favor bonds. Under the opposite scenario – higher US inflation – equities would surely suffer thanks to lower multiples. However, in an inflation scenario, equities would likely hold up better than bonds or cash.

In short, equities may not offer the stellar prospects of the 1980s or 1990s, but absent a bout of deflation, stocks are likely to outperform the alternatives over the long term. Possible iShares solutions include the iShares S&P Global 100 Index Fund (NYSEARCA: IOO), the iShares MSCI ACWI Index Fund (NASDAQGM: ACWI) and the iShares MSCI All Country World Minimum Volatility Index Fund (NYSEARCA: ACWV).

Source: Bloomberg

The author is long IOO.

In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. An investment in stocks, bonds or ETFs is not equivalent to and involves risks not associated with an investment in cash.

Tags: 10 Year Treasury, Absolute Basis, Average Bond, Caution Signs, Choice C, Core Inflation, Deflation, ETF, ETFs, Global Stocks, Gold, Good Bargain, Interest Rate Risk, Japanese Style, Perio, Purchasing Power, Tactical Move, Term Averages, Treasuries, Treasury Market, Us Treasury, Volatility Levels, Year Treasury Note
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A Not as Bullish Take on Apple (AAPL)

Friday, March 30th, 2012

While I don’t agree with every comment in this analyst’s letter, it is always good to see both sides of a trade.  I think in part the writer focuses too much on the U.S. market (and capacity) rather than global, but in terms of the impact Apple (AAPL) has on indexes and how it’s market capitalization has grown and the effects, it’s salient.  As an aside I read a story yesterday saying 1 out 4 adults polled expected to buy an iPad – that number was shocking to me.

If you are curious the firm putting this out is an RIA out of Colorado.

As to stock price, Apple simply cannot continue its current pace – it is up around 50% year to date.  Google on the other hand is barely up for the year – I know two different companies but just offering a contrast.  I scanned yesterday for stocks that are the most extended from their 50 day moving averages and that list is usually chock full of names with buyout offers, a recent earning report, or “small/mid cap momo stock of the week” ideas.  Apple was actually on that list yesterday which is startling.  The only thing I can compare this to is the move in Cisco Systems in 1999 during a bubble as both were the largest companies in the universe at the time.  At some point Apple will need to either (a) digest / consolidate / go sideways or (b) pullback substantially.  When it does (either of those scenarios) it will be interesting to see what the rest of the market does as it’s over 4% of the S&P 500 and 10% of the NASDAQ.  Even with today’s weakness the stock has not pulled back to even its 10 day moving average.

Apple Conundrum

Copyright © Market Montage

Tags: Aapl, Amp, Cisco, Cisco Systems, Conundrum, Different Companies, Earning Report, Google, Indexes, Ipad, Market Capitalization, Moving Averages, Nasdaq, Nbsp, Pace, Pullback, S Market, Scenarios, Small Mid Cap, Stock Price
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The Dating Game: Michael Pettis Challenges The Economist to a Bet on China

Friday, March 30th, 2012

The Economist says “China’s GDP, measured in nominal dollars, will be the world’s largest by 2018″. Michael Pettis at China Financial Markets disagrees and says I would like to make a bet with The Economist.

I recently read in The Guardian an article by enthusiastic orientalist Martin Jacques in which he says that The Economist has just predicted that China’s GDP, measured in nominal dollars, will be the world’s largest by 2018. Earlier estimates, he says had China becoming the largest economy in the world by 2027.

I have always been a little skeptical about the 2027 claim … given how much we would have to assume about the sustainability of Chinese growth, about the likelihood of current GDP numbers not having been vastly inflated by an over-investment boom, and about the unstable range of political outcomes. It seemed to me to be a prediction about as valuable as the world-beating predictions about the USSR in the 1960s or Japan in the 1980s.

Still, this 2018 prediction deserves I think more than a little questioning — it requires that nominal Chinese GDP growth in dollars outpace nominal US GDP growth by 12% a year.

So I am wondering whether we could set up a friendly bet — not for too large stakes. I would like to bet that by the end of 2018 China will not be the largest economy in the world.

If I win, perhaps The Economist could invite a very cool underground Chinese band of my choice to perform at their next big conference, whereas if I lose I could buy four-year subscriptions (student rates, please) to a group of Peking University freshmen. Everybody would end up feeling pretty pleased with themselves no matter who wins, right? So?

The Dating Game

Inquiring minds are looking at an interactive chart on The Economist in an article called The Dating Game.

AMERICA’S GDP is still roughly twice as big as China’s (using market exchange rates). To predict when the gap might be closed, The Economist has updated its interactive chart below with the latest GDP numbers. This allows you to plug in your own assumptions about real GDP growth in China and America, inflation rates and the yuan’s exchange rate against the dollar. Over the past ten years, real GDP growth averaged 10.5% a year in China and 1.6% in America; inflation (as measured by the GDP deflator) averaged 4.3% and 2.2% respectively. Since Beijing scrapped its dollar peg in 2005, the yuan has risen by an annual average of just over 4%. Our best guess for the next decade is that annual GDP growth averages 7.75% in China and 2.5% in America, inflation rates average 4% and 1.5%, and the yuan appreciates by 3% a year. Plug in these numbers and China will overtake America in 2018. Alternatively, if China’s real growth rate slows to an average of only 5%, then (leaving the other assumptions unchanged) it would not become number one until 2021. What do you think?

Snapshot of The Economist Baseline Assumptions

The interactive graph is too large for my blog, but the above screen snapshot shows The Economist baseline assumptions. To play around with the numbers, click on the above link.

I share a viewpoint with Pettis that The Economist is way too generous in their estimate of real GDP growth for China.

Pettis thinks China will average 3% growth and I already posted I found that number reasonable. As far as Yuan appreciation is concerned, I am not at all convinced the Yuan is undervalued at all, yet I plugged in a nominal 2% annual appreciation.

Assuming a “Real GDP growth” of 3% and Inflation at 4% yields a chart that looks like this.

Snapshot of Mish Baseline Assumptions

Even still, I wonder if the year 2030 is still far too optimistic from the standpoint of China.

I strongly believe peak oil and energy consumption is going to put a serious damper on Chinese growth, and that is on top a necessary and very painful shift away from an entirely unsustainable growth model based on exports, housing, and fixed investment.

I share Pettis’ view regarding “inflated GDP numbers, an over-investment boom, and the unstable range of political outcomes” adding my own energy concerns and yuan valuation concerns on top of it all.

Thoughts on Chinese Growth

• March 23, 2012: Excellent Document on Decoupling and Global Supply Chains by ECRI; Why BRIC, and U.S. Decoupling Won’t Happen
• February 29, 2012: World Bank Warns of Economic Crisis in China; Only 3% Growth for Decade Says Michael Pettis
• September 21, 2011: Misleading Indicators – China’s Growth Won’t Last; Chanos on Chinese Property Bubble and Growth
• August 22, 2011: Michael Pettis on Long-Term Outlook for China, Europe, and the World; 12 Global Predictions

I find the arguments by Pettis, the ECRI, and Chanos compelling. Add to that the restraint of peak oil coupled with potential political instability and the proper conclusion is that long-term Chinese growth of 7.5% is Fantasyland material.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Tags: Bet, China Economy, China Gdp, Chinese Growth, Dating Game, Economist, Financial Markets, Game America, Gap, GDP, GDP Growth, Inquiring Minds, Interactive Chart, Investment Boom, Market Exchange Rates, Michael Pettis, Orientalist, Peking University, Political Outcomes, University Freshmen
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James Paulsen: Does Gold Still Glitter?

Friday, March 30th, 2012

Does GOLD Still Glitter?

by James Paulsen, Chief Investment Strategist, Wells Capital Management (Wells Fargo)

Gold has been an investment darling in recent years. Indeed, it is often perceived as the cure for any investment worry. Whether you are concerned about inflation, deflation, government deficits, war, a U.S. dollar collapse, recession, or depression—GOLD is the answer!

The extraordinary popularity of gold today is easy to understand—it has done so well for so long! Since the end of the 1990s, the price of gold has risen almost six-fold from less than $300 to its current price of almost $1,700. Many expect the price of gold to rise considerably higher in the next several years and perceive the modest decline in the gold price since its all-time peak last September as a buying opportunity. While owning some gold is fine for all investors (diversification is paramount), we think gold weightings should be scaled back in most portfolios. The yellow metal may soon lose some of its luster as its struggles with its newly elevated valuation and with the likelihood that confidence throughout the economy is beginning to improve.

Gold is OVERVALUED!

Unlike stocks or bonds, gold has always been more difficult to value since it produces no cash flow (i.e., earnings or coupons) that can be discounted to arrive at a present (fair) value. However, Exhibit 1 illustrates a simple “relative valuation” methodology providing an historical perspective against most other investment classes (e.g., stocks, bonds, commodities, and real estate) and relative to the value of labor and a basket of consumer goods and services. In each of the six charts shown, the price of gold on a relative basis is either nearing or is at one of its highest valuations of the last 50 years. At the end of the 1990s, it took almost 5.5 ounces of gold to buy the S&P 500 Stock Price Index. Today, it only takes 0.8 of a single ounce to buy the stock market. Relative to stocks, gold is almost as expensive today as it was in the late 1970s when the price of gold had surged after its peg was eliminated and after the stock market was ravished by a decade of runaway inflation.

Relative to Treasury bonds, the price of gold currently trades near an all-time, post-war record high surpassing its old relative valuation record established in the late 1980s when bonds were incredibly cheap. It is indeed remarkable that gold today is this expensive relative to an asset class (bonds) which most agree is probably itself extremely overvalued.

In recent years, while gold prices have soared, U.S. home prices have collapsed. Although the price of gold relative to U.S. homes is not yet as high as it reached in the late 1970s, its current relative valuation compared to house prices leaves little optimism about the future potential for gold prices. Gold is also expensive relative to worker pay. In 2000, it took less than 20 hours of work (at the average hourly wage rate) to purchase a single ounce of gold. Today, by contrast, it takes almost 90 hours of labor to buy an ounce of gold! In a similar fashion, the price of gold relative to the basket of consumer goods and services comprising the Consumer Price Index is near its all-time record high reached in the early 1980s.

Finally, even compared to other commodity prices, the price of gold is nearing its all-time record relative price reached in the late 1980s. Even though commodity prices in general have increased significantly in the last decade, the price of gold has risen even more dramatically.

While valuation metrics have not traditionally been a good investment timing tool, they have provided a useful indication of the future upside/downside price potential of an investment. Relative to other investments, the charts in Exhibit 1 not only suggest upside is probably limited for gold but also cautions that downside price risk could be significant. At a minimum, these charts do not seem to support the widespread popularity and optimism concerning gold investing.

Gold and the “Fear Premium”?

Exhibit 2 shows the price of gold relative to other commodity prices. Although gold has been a spectacular investment since 2000, so have other commodities. Surprisingly, since 2000, the price of gold has only significantly outpaced other commodity prices during a few months in late 2008 when the “Great Financial Crisis” erupted. Between 2000 and late 2008, the relative price of gold to other commodities remained flat at about 1.5 implying both gold prices and other commodity prices rose by equal amounts during the period. Similarly, the relative price of gold was also unchanged between early 2009 and today. That is, “all” commodity prices rose just as much as gold prices between 2000 and late 2008 and again between early 2009 until today (despite this, however, general commodities remain a much less popular investment than gold).

The only time gold significantly outpaced other commodity investments was when investor “fear” surged. Exhibit 2 illustrates the “fear premium” the price of gold received relative to other commodity prices during the 2008 crisis and how much of this premium is still embedded in its price today. Between 2000 and late 2008, the price of gold oscillated in broad range about 1.4 times the value of the S&P GSCI Commodity Price Index. Today, gold trades at about 2.4 times the value of this commodity index. The risk or fear premium embedded in the price of gold (i.e., about 1.0, the difference between the relative price of gold today at 2.4 and where it used to trade prior to the 2008 crisis at about 1.4) is quite large and needs to be assessed when considering an investment in gold. A primary risk for gold investors is the potential for decay in this fear premium.

Gold’s Best Friend (Fear) May be Fading?!?

Exhibit 3 illustrates the challenge gold investors may face in the next few years should confidence slowly improve and “crisis fears” fade. This exhibit compares the relative price of gold to the Consumer Confidence Index. The confidence index (dotted line) is shown on an inverted scale so a rise (fall) in the dotted line illustrates periods when confidence is declining (increasing).

While not a perfect relationship, the relative price of gold relative to other commodity prices seems importantly driven by confidence. Gold’s best friend in recent years has been fear! As confidence collapsed in 2008, the relative price of gold far outpaced other commodity investments. Likewise, the decline in confidence after the tech wreck and after 9/11 in the early 2000s produced a similar “fear premium” in the relative performance of gold prices. However, between 2003 and 2007, the “fear premium” embedded in gold eventually evaporated once confidence again revived as the economic recovery matured. A similar revival in economic confidence may be emerging today. If the Consumer

Confidence Index does recover to at least 100 in this recovery, a good portion of the “fear premium” embedded in the price of gold may evaporate producing disappointing results for gold bugs.

Summary

Maintaining some gold exposure within portfolios makes sense. Should crisis fears continue to periodically flare in the next several years, gold should provide the portfolio with some defensive properties. However, we believe investors should consider reducing gold exposure. This is an investment which today seems far too popular among the masses, appears extremely overvalued relative to most other asset classes and faces a challenging environment should economic confidence slowly improve in the next several years. The valuation of gold relative to virtually any other asset class (stocks, bonds, real estate or commodities) seems to suggest the price of gold is either extremely rich today and at risk of significant decline or suggests most other asset classes are very cheap. Either way, it is probably time to position portfolios to benefit from a slow but steady revival in confidence rather than in an asset which only “glitters” when fear predominates.

Copyright © Wells Capital Management

Tags: Chief Investment Strategist, Commodities, Commodity, Consumer Goods, Diversification, E G Stocks, Glitter, Gold, Gold Price, Government Deficits, Historical Perspective, Last September, Luster, Price Of Gold, Relative Basis, Relative Valuation, Stock Market, Stock Price Index, Stocks Bonds, Time Peak, Valuations, Wells Capital Management, Wells Fargo
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Defence That Pays: Dividend Equities as a Long Term Strategy

Thursday, March 29th, 2012

Defence That Pays
Dividend Equities as a Long-term Strategy

by Alfred Lee, CFA, CMT, DMS
Vice President & Investment Strategist
BMO ETFs & Global Structured Investments
BMO Asset Management Inc.
alfred.lee@bmo.com

March 29, 2012
Recent Developments:

• Despite the global macro-economic concerns that remain, year to date, investors have clearly favoured risk-assets as improving sentiment has led global equity markets to rally with significant breadth. Although, investors should not put too much focus on day-to-day headlines, last Thursday’s reading of Europe and China’s weak Purchasing Managers Index (PMI), shows how the global economic recovery remains vulnerable. While we have become more optimistic over the mid-term, we still remain concerned on the structural issues remaining over the long-term, and is why we continue to recommend that investors do not throw caution to the wind.
• News of Greece’s debt restructuring several weeks ago, has put concerns on the backburner; although we believe Greece’s solvency issues remain over the long-term. On a short-term outlook, this has lifted a major overhang on the equity markets. Investors should note, however, that credit default swap (CDS) prices of Portugal still remain elevated (Chart A). Moreover, China’s potential housing bubble and inflation handcuffs the nation’s ability to implement a wholesale monetary easing policy. Thus, unlike 2009, China will not be able to shoulder the global economy.
• The year-to-date rally in risk-assets hinges on whether U.S. economic data can sustain or continue to build positive momentum. Although we have increased our recommended allocation to Canadian equities, we still remain defensive in our composition. Concerns on China should weigh on some commodity-based equities over the short-term, so we recommend that investors look at non-cyclical areas such as dividend paying equities in Canada.
• In addition to being more defensive in nature, lower bond yields should lead investors to look to dividend paying equities to source yield. Currently, the 10-year government bond yield is less than the dividend yield of the S&P/TSX Composite Index (TSX) (Chart B). An aging demographic searching for income distributions should provide a further tailwind for dividend paying equities over the long-run.
• Improving economic data has also recently led the yield curve to shift upwards (Chart C), which has negatively impacted bonds, especially those of longer maturity. As we have become more bullish on equities over the short- and mid-term, investors may want to consider reallocating some bond exposure to dividend paying equities as a way of maintaining overall portfolio yield while decreasing duration risk. Investors should keep in mind that equities and fixed income do react to risk in different manners and therefore should keep in mind their overall portfolio risk composition.

Investment Idea:

• Investors may want to consider the BMO Canadian Dividend Equity ETF (ZDV) as an efficient way to gain exposure to a basket of 50 large and some mid-cap Canadian dividend paying stocks. Currently, the underlying portfolio yields 4.5%, diversified across eight different sectors and a management fee of only 0.35%. In addition to being eligible for a dividend reinvestment plan (DRIP) like our other BMO ETFs, ZDV pays a monthly distribution. We continue to recommend defensive holdings such as ZDV as core positions and more cyclical oriented themes around the peripheral as more tactically oriented themes.

Chart A: CDS Prices on Portugal Remain Elevated

Source: BMO Asset Management Inc., StockCharts.com

Chart B: Canadian Bonds Yielding Less than Canadian Equities

Source: BMO Asset Management Inc., Bloomberg,

Chart C: Yield Curve Shifting Upwards Will Impact Fixed Income

Source: BMO Asset Management Inc., Bloomberg

*All prices as of market close March 27, 2012 unless otherwise indicated.

Disclaimer:
Information, opinions and statistical data contained in this report were obtained or derived from sources deemed to be reliable, but BMO Asset Management Inc. does not represent that any such information, opinion or statistical data is accurate or complete and they should not be relied upon as such. Particular investments and/or trading strategies should be evaluated relative to each individual’s circumstances. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment.

BMO ETFs are managed and administered by BMO Asset Management Inc, an investment fund manager and portfolio manager and separate legal entity from the Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in exchange-traded funds. Please read the prospectus before investing. The indicated rates of return are the historical annual compound total returns including changes in prices and reinvestment of all distributions and do not take into account commission charges or income taxes payable by any unit holder that would have reduced returns. The funds are not guaranteed, their value changes frequently and past performance may not be repeated.

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