LTI Investment Newsletter - May 2013
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Transcript of LTI Investment Newsletter - May 2013
May Investment Newsletter
GOVERNMENT DEBT TO GDP OF THE TOP 20 COUNTRIES
A widely cited research paper by Reinhart and Rogoff showed
that historically, government debt to GDP ratios of 90% or higher
hindered growth and the economy of such a country would experience
GDP average growth rates of 1% or lower than they would otherwise.
Basically 90% debt to GDP is the cutoff point and once you pass this
point, growth will remain subdued until the debt levels are again under
control. There are currently five countries in the top 10 GDP ranking
that have debt to GDP’s above 90% with the United States at 102%.
May Investment Newsletter
Written by Alain Roy
CEO LTI – Long Term Investing
May 13, 2013
In this issue:
• Government Debt to GDP of
the Top 20 Countries
• The Shining Star in the US
Economy
• France – In a Recession
• Overvalued Markets
• Stock Market Technical
Update
• Summary
“Just about every time
you go against a panic, you will be right if you
stick it out.”
Jim Rogers Legendary Investor
To my surprise there were many countries that actually improved their debt to GDP levels
over the course of the last decade. These are the countries that will come out stronger
should another ‘2008 like’ financial collapse occur. Russia, Turkey, Indonesia, Switzerland
and Saudi Arabia were all countries that reduced their debt loads over time. Meanwhile the
world’s largest economies continue to dig a deeper and deeper hole. It should be no
surprise to see subpar and subdued GDP growth coming from the US, UK, Japan, France,
and Italy as they have passed the 90% threshold.
The response to the slow growth has been for central banks of these countries to
print trillions of dollars in new currency in hopes to revive their slow growth economies.
Since 2000 the central banks of the very same governments with high debt to GDP have
printed $8.4 trillion ($8,400,000,000,000) of their own currencies in hopes to stimulate
lending at low interest rates and goose their economies through export led growth.
However, it’s the high debt to GDP that is a large part of the problem in the first place and
governments are quite literally papering over the problem through a supposed separate
entity via their Central Banks.
Now Japan is embarking on the largest money printing campaign in the history of their
existence. Estimates show that the combined central bank balance sheet will balloon to $10
trillion by the end of 2014. The Bank of Japan will purchase government bonds, ETF’s, Real
Estate Investment Trusts and more. What we are witnessing is unprecedented in that
central banks are purchasing stocks and ETF’s, an asset class they have never purchased
before.
Meanwhile more responsible governments and central banks are keeping their debt
to GDP low AND diversifying their balance sheet by buying gold as shown below.
Russia is one of the governments actively buying gold as is China. In short, we see
runaway debt and money printing in some countries such as the US, UK and Japan and
some very responsible governments such as Russia, Indonesia, Switzerland and Saudi
Arabia keeping their debt loads in check and buying gold to protect themselves from a
potential currency crisis which is likely brewing from all this money printing.
I don’t have the warm and fuzzies about the easing strategies of these central
bankers. Obviously they see huge challenges if they feel the need to print $8 trillion dollars
in new money. I will be very surprised if this experiment remains crisis free in the long run.
THE SHINING STAR IN THE US ECONOMY
The shale gas revolution that is occurring in the Texas/North Dakota region of the
United States is absolutely phenomenal and is nice to see amongst all the other problems
they face.
USA is now producing more oil
than Saudi Arabia. BOOM!
This graph shows the stunning
turnaround in US oil production.
Texas Eagle Ford oil production
jumped from 352 barrels per day in
2008 to 471,258 barrels per day in Feb
2013. I don’t know why there is not
more press on this amazing
transformation because this is a very
positive story amid a murky backdrop.
FRANCE – IN A RECESSION
The world’s 5th largest economy by GDP is France and Mr. Hallande seems to have
his hands full as France slips into a recession. The annual growth rate in GDP is now in the
negative territory not seen since the Great Recession which was a much larger recession
than we typically experience.
Business confidence is at historical lows.
Retail Sales Year over Year hover near 0%
The Total Production Index of
France has been declining over the
past year and currently sits at levels
last seen in 1994.
The Markit Manufacturing PMI is
currently 44. Readings below 50 are
typically associated with recessions.
France Services PMI is at 42
and clearly indicates a recession in the
services sector.
Based on all of the above
information I would say that France is
experiencing a recession.
OVERVALUED MARKETS
Stock markets continue to advance forward breaking all-time nominal highs even though
the global economic backdrop remains fairly subdued. The graph below shows the Shiller PE ratio
for the S&P 500 which is adjusted for inflation.
• Currently the Shiller PE for the S&P500 is at 24.26
• The historical average is 16.47
The non-inflation adjusted PE for the S&P 500 (watched more closely than the Shiller PE) sits at
18.88 while the historical average is 15.49
The general theme here is that the S&P 500 and markets are currently very overvalued from a
long term historical perspective. My preference is to buy anything at a discount if possible,
especially equities. Why buy a pair a shoes worth $150, currently selling for $200 when I know
I can buy the same pair of shoes down the road at $100? Buying equities in overvalued
markets increases risk and minimizes reward. Patience and discipline are amply rewarded to
the investor who buys great companies at a discount.
Even though the S&P 500 and Dow Jones have passed their all-time nominal highs the
actual S&P 500 adjusted for inflation is currently at levels experienced ten years ago.
Earnings of companies in the S&P 500 are at all-time highs which is one of the reasons markets
are at nominal highs. Earnings will be the big item to watch in coming quarters and years.
STOCK MARKET TECHNICAL UPDATE
Let’s have a quick look at what the Technical and Sentiment Indicators are telling us
about the market. As of Friday May 10th all indicators are in overbought territory and most are
not even close to the buying opportunity levels. The quick answer is markets are very
overbought and over the long term it is not a good time to buy into equities as risk is high and
reward is low.
Insider Score: corporate insiders
are neutral at this time and are
not buying their own company
stock.
The AAII bears to bull’s ratio
was briefly in the oversold
category a few weeks back
but has since bounced back
into the neutral territory and
is hovering near overbought
conditions.
The Put to Call Ratio is back
into overbought territory.
The volatility index
remains low at the
12.5 level. Markets
are relatively calm.
The Rydex ratio remains
at elevated levels more
typically associated with
longer term tops in
markets.
SUMMARY
Even though markets are overbought they can continue to roar higher. Factors helping
lift markets are strong corporate profits and central bank intervention via quantitative easing
(US, Japan, UK et al) and lower interest rates as we have seen recently with the ECB, Poland,
Australia, China and more. The sheer amount of money printing and easing occurring in our
world today is staggering and I often wonder how it will all unfold in the future. In the
meantime I continue to hold roughly 25% in defensive equities, 10% in gold mining stocks,
55% in corporate bonds and 10% in cash. I continue to build up my cash levels as I wait for a
truly good buying opportunity. The only opportunities out there, in my view, are some of the
mining companies which are at extremely depressed levels. As such, I have been picking away
at a few companies in this sector during the latest sell-off. Otherwise I am raising cash and
waiting.
2013-2017 might prove to be some of the most exciting yet challenging investing
environment we have seen in many years.
Alain Roy, P.Eng, MBA Candidate CEO of LTI – Long Term Investing Email: [email protected]
Website: http://ltinvesting.com/ Blog: http://ltinvesting.com/blog/ Twitter: https://twitter.com/LTInvesting
Disclaimer: The content of this newsletter is to increase your financial intelligence and is
intended as general information only. Any action that you take as a result of this
information and analysis is ultimately your responsibility. I will not be held responsible for
any negative outcomes of any kind as a result of this information. Please use this
information responsibly. Consult your financial advisor before making any investment
decisions.