Economic Analysis

Economic Analysis from John Mauldin

  • Wed, 16 Apr 2014 12:52:00 +0000: Dare to Be Great II - Mauldin Newsletters
    I can’t tell you how many thousands of hours I have spent, over the years, thinking about, reading about, and talking about how to be a consistently successful investor; but I can tell you this: I’m still working at it. And once in a while – less frequently as the years pass, it seems – I come across investment advice that strikes me as fundamentally strong, innovative, and worth assimilating. I feel that way about today’s Outside the Box. It’s a client memo sent last week by Howard Marks,...
  • Sat, 12 Apr 2014 14:59:00 +0000: Every Central Bank for Itself - Mauldin Newsletters
    “Everybody has a plan until they get punched in the face.” – Mike Tyson For the last 25 days I’ve been traveling in Argentina and South Africa, two countries whose economies can only be described as fragile, though for very different reasons. Emerging-market countries face a significantly different set of challenges than the developed world does. These challenges are compounded by the rather indifferent policies of developed-world central banks, which are (even if somewhat understandably)...
  • Wed, 09 Apr 2014 14:12:00 +0000: Risk On, Regardless - Mauldin Newsletters
    When Gary Shilling was with us here last fall, he and I were feeling considerably more sanguine about the near-term propects for the US and global economies. In fact, I said about Gary that “that old confirmed bear is waxing positively bullish about the future prospects of the US. In doing so he mirrors my own views.” In today’s excerpt from Gary’s quarterly INSIGHT letter, he tackles head-on the shift in sentiment and economic performance that has ensued since then. He steps us through the...
  • Sat, 05 Apr 2014 21:00:00 +0000: The Lions in the Grass, Revisited - Mauldin Newsletters
    “In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them. “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the...
  • Wed, 02 Apr 2014 15:45:00 +0000: Hollow Men, Hollow Markets, Hollow World - Mauldin Newsletters
    I’m sitting in the British Airways lounge at Heathrow terminal 5, or in other words in my usual office, and trying to catch up on my reading. I was particularly intrigued by my good friend and economic philosopher Ben Hunt’s latest Epsilon Theory post, which he calls “Hollow Men, Hollow Markets, Hollow World.” As he points out, an increasingly smaller portion of trading in the markets is between individuals looking to actually own a fractional portion of a public company for the long term....

Economic Analysis from Casey Research

  • Fri, 18 Apr 2014 16:15:00 +0000: How to Invest in China’s Middle-Class Boom… on the Nasdaq - Casey Research - Research & Analysis

    Dear Reader,

    It was an abject failure.

    In 2006, after conquering the US home improvement market, Home Depot (NYSE:HD) ventured into China to claim its share of the Chinese middle class’s exploding growth.

    It bought 12 stores from local Chinese firm The Home Way, turned them into Home Depots, and waited for voracious middle-class consumers to swarm its aisles, just like they had in the US.

    But they never came. By 2012, Home Depot had closed its last big box store in China and retreated with its tail between its legs.

    The business merits of expanding to China seemed ironclad. Hundreds of millions of Chinese people were climbing into the middle class. Homeownership rose from virtually nil 15 years ago to 70% today. Who doesn’t like to personalize their brand-new digs?

    What Home Depot’s management didn’t understand is that Chinese people aren’t do-it-yourself types. Almost no one in China owned their own home until recently, so furnishing a home was a new concept. They’d never done it before. They needed guidance.

    Which is exactly why Ikea has been so successful there. The Swedish furniture giant arranges its stores into model rooms that showcase furniture combinations and color schemes. Chinese people love it because it helps them visualize how components fit together to make a complete room.

    To a home improvement novice, that’s much more useful than the stacks of lumber and 47 varieties of faucets that Home Depot offers. Plus Ikea’s merchandise is easy to buy and put together. No caulk, molding, or power tools necessary. All you need are the instructions, an Allen wrench, and a few hours.

    Having spent the last two months studying China’s booming smartphone market in search of an investment opportunity for The Casey Report, I appreciate that subtle cultural differences can make or break a company’s bid to transfer its business model to a foreign country. Every smartphone maker wants a piece of China’s huge pie, but the mighty international brands like Apple, Nokia, and LG are struggling to capture it. Tiny upstart Chinese manufacturers, with just a fraction of the resources but a huge advantage in local knowledge, are kicking their butts.

    I’ll let Adam Crawford, Casey Research technology analyst, elaborate.

    How to Invest in the Great Upgrade

    Most people think the smartphone was an overnight success made possible by a sudden technological leap from Apple.

    Not so. Eddie Cantor had it right 50 years ago when he said, “It takes 20 years to be an overnight success.”


    Rise to Fame

    Visionaries first conceptualized the smartphone way back in the 1970s. In the 1990s, that concept became reality when IBM released the Simon Personal Communicator: a cellphone that, in addition to its telephonic capability, could send and receive faxes and emails and featured a touchscreen display. Many consider the Simon the first commercial device that could legitimately be called a smartphone.

    After Simon came a decade of rapid evolution. Smartphone functionality expanded to include video cameras, GPS features, and web browsing. Processing power, storage capacity, and battery life grew geometrically to accommodate the added functionality.

    Meanwhile, the telecoms were doing their part to coax the smartphone caterpillar out of its cocoon. In 2001, they launched 3G networks that achieved data-transfer speeds four times that of 2G networks. Suddenly, media streaming and/or downloading from the web became practical mobile functions.

    Finally in 2007, Steve Jobs and Apple—acting more like Great Synthesizers than Great Innovators—integrated all these converging elements into the iPhone. Then Apple added two important things to the mix…

    1. A unique talent for designing intuitive, user-friendly devices, and
    2. A robust ecosystem with thousands of apps.

    Boom. The smartphone butterfly emerged and took flight. The sales trajectory has been astounding…

    After seven years of sustained and explosive growth, is the smartphone market reaching saturation?

    Not even close. Smartphones are ubiquitous in the US and Western Europe, but that’s not the case everywhere. Old-fashioned feature phones still dominate in many emerging countries. But as incomes rise and smartphone prices fall, legions of consumers will upgrade from feature phones to smartphones.

    Indeed, the great upgrade is already under way. In China alone, almost 300 million people will purchase smartphones in 2014.

    The smartphone megaboom is far from over—it’s just moved to the East... and has a much different look than in the West.


    Commodity Boom

    Price is paramount in emerging markets, including the biggest emerging market of them all… China. Lower- to middle-class Chinese can only afford to pay about $150 for a handset. 35% of smartphones sold in China are priced below $150, and almost 60% are priced below $330…

    Companies are desperate to capture this huge and growing piece of the low-end pie, and so they’re rolling out new, cheap smartphones every month.

    That’s great news for consumers. But here’s the rub: in order to hit low price points, handset manufacturers are stripping out features that differentiate their products. Low-end smartphones are essentially becoming commodities.

    That opens the field up to a slew of competitors. There are literally hundreds of small handset manufacturers in China trying to undercut each other for a piece of this lucrative market.


    How to Invest

    Handset manufacturers and proprietary chip makers are not the way to play the Great Upgrade. For handset manufacturers, competition is simply too fierce—margins, if they exist at all, will be razor thin. And brand loyalty will be almost impossible to achieve.

    The same goes for proprietary chip makers—there’s simply no demand for their products in low-end devices. Such are the problems in a commodity-based market.

    Fortunately, the clever minds at The Casey Report have discovered a way to play this trend. It’s a “picks and shovels” company that supplies Chinese smartphone manufacturers with a trendy, ever-expanding software product that they wouldn’t be able to do without—and it’s beating the competition by having formed strategic alliances with China’s top three wireless service providers.

    What we love most about this pick is that this is one of the few companies (if not the only one) in this massive market that is nearly certain to profit from the smartphone megatrend. Let the handset manufacturers cannibalize each other—this company will cash in by selling them its services, regardless of who ultimately wins the smartphone wars.

    We expect to double our money on this one within the next two years. But best of all, this stock trades on the Nasdaq—that means no dealing with foreign stock exchanges, no complicated transactions. You can profit from China’s middle-class boom and the “Great Upgrade” with just a few mouse clicks.

    You can find the full investment story, including a comprehensive analysis of the Chinese smartphone market, in the newest edition of The Casey Report.

    Dan again. Note that today is the last day to take advantage of our special offer—get The Casey Report for just $298, (a 15% savings) plus receive our special report Going Global 2014 for free.

    Usually we sell this book-length report for $99, and I think it’s worth every penny. If you’ve ever thought of internationalizing your assets (and maybe yourself), Going Global 2014 is an absolute must-read. Put together by our top experts, it shows you strategies to get your money to safety—from very simple steps to more complex plans.

    As always, you have 90 days to test-drive The Casey Report. If you decide it’s not for you, no problem—just let us know within that time and receive a full and prompt refund. Click here to learn more, or go directly to the order form to get started right now.

    Next up is Doug French, with an unglamorous but lucrative investment idea that you’ve probably never considered.


    Betting on a Poorer America

    By Doug French

    Here at Casey Research, we believe what Doug Casey calls the “Greater Depression” is coming, and that it will be here sooner rather than later.

    Americans will get poorer. Not that they’re doing so hot right now:

    • Baby boomers, 10,000 of whom turn 60 every day, have saved nothing.
    • Pension plans are broke, and the average 401(k) balance is just $84,300.
    • 46.5 million Americans are on food stamps.

    That all adds up to a bull market in low-cost housing, especially for retirees on fixed incomes and the working poor. Such housing exists, but is in short supply.

    Granted, this is not a glamorous sector. But it has the ingredients for investment success—growing demand and restricted supply. Some of the best-known and richest investors in the US already have huge investments in trailer parks.

    You might be scared to enter one of these developments. Don’t be. Go ahead and drive through a mobile home park near you. Get comfortable. It might be the investing opportunity you’ve been looking for.


    Falling Supply, Plenty of Demand

    Mobile homes are universally hated—except by people who actually live in and own them.

    There are 8.6 million mobile homes in the US, and 12 million people live in them. “That number is not likely to grow,” writes Gary Rivlin for the New York Times Magazine. “We learned in Southern California, given restrictive zoning laws and the prohibitive cost of building a new park in the boonies, meaning supply is static even as demand for cheap places to live is high.”

    “Since peaking at 374,000 units in 1998, manufactured home placements have fallen by nearly 90 percent,” Fannie Mae Housing Insights reported in June of last year. “During the last four years, manufactured housing placements have averaged 51,000 units per year, one quarter of average annual production during the last three decades.”

    New parks are scarce no matter where you look. Planning boards and city councils are shy to approve land use for them. They’re ugly and have a bad reputation for squalor and attracting police activity. No one wants to stick their neck out for more of that.

    A bank I worked for in Las Vegas financed the construction of a new park, but that was back in the late 1980s. The town has quadrupled in population since, and I never heard of another new park in the area. But I did see a number of parks bulldozed to make way for more houses, when residential land prices increased tenfold.

    In talking to a couple of my appraiser contacts recently, one said he hadn’t appraised a park in eight years, and the other said he couldn’t remember the last time he appraised a park, but it was at least five years ago.


    Like Being Chained to a Booth at Waffle House

    Unlike apartment projects, where only a security deposit and maybe first and last month’s rent prevent tenants from skipping out, rolling a trailer into or out of a space costs around $5,000. Also, many people own their coaches and don’t want to walk away from that equity. Once a coach is set, park owners have a paying tenant who isn’t likely to go anywhere, even if they bump rents up $10 or $20 a month each year.

    The Nevada Legislature considers a mobile home park rent-control bill every two years, evidence that landlords aren’t shy about jacking up rents. Frank Rolfe, longtime park investor and teacher for Mobile Home University, says tenants get used to annual increases, just like they do with their cable bills. Rolfe has raised the rent in one particular park 30% in just three years. He quips, “We’re like a Waffle House where everyone is chained to the booths.”

    With thousands of veterans going to college after WWII on the G.I. Bill, trailer parks appeared around college campuses all over the US to accommodate ex-soldiers looking for cheap housing. I reside in the college town of Auburn, Alabama, and trailer parks here are both numerous and in great demand.

    A friend has lived in a park on the west side of town since 2006 when he enrolled at Auburn. His rent has risen from $175 to $255 since he moved in, and management just emailed him to say it’s upping his rent again. His rent will double each month if he doesn’t sign the new lease with higher rent. With Auburn University’s vet school just down the road, management can play hardball.

    The good news is that my friend can sell his coach for what he paid for it anytime he wants.


    Trailer Park Moguls

    Sam Zell is known as the savviest real estate investor in the US. Nicknamed “the grave dancer,” Zell has bought all types of real estate low and sells most of it high.

    But trailer parks? He hangs on to them.

    Zell is chairman of Equity LifeStyle Properties, formerly known as Manufactured Home Communities, a company he took public in the early 1990s. The company is the mobile home industry’s largest landlord, with 370 communities containing close to 140,000 lots.

    Zell said at a conference of Equity LifeStyle Properties Inc. in 2012, “We like the oligopoly nature of our business.”

    Zell isn’t the only big shot in the mobile home industry. In 2003, the Oracle of Omaha himself, Warren Buffett, bought Clayton Homes, one of the country’s largest mobile home manufacturers, for $1.7 billion.

    Buffett says the manufactured housing industry, from the production side, has “endured a veritable depression,” with no recovery apparent. According to Berkshire Hathaway, US manufactured housing sales were 49,789 in 2009, 50,046 in 2010, and 51,606 in 2011. That’s compared to 146,744 homes sold during the housing boom of 2005. But Clayton is still making money.

    Private equity companies are also becoming interested in mobile home parks. Carlyle Group purchased two parks last October for a combined price of $31 million. Both are higher-end senior parks where tenants have to be 55 or older.


    Not Sexy, But Profitable

    Dan Weissman and David Shlachter wanted to own a business that wasn’t sexy but was fragmented. “The litmus test was if we told someone at a cocktail party what we do and their response was a grimace, we were on the right track,” Shlachter told Bloomberg. “It’s hairy, and it’s colorful, and it’s sometimes scary.”

    For instance, two hours after they closed on the purchase of their second park, a SWAT team descended on the property in Indianapolis, looking for one of the park’s tenants who would eventually be charged with arson and murder.

    The partners, both in their thirties, found small parks for sale around the country with deferred maintenance and vacancies. “When you stop maintaining anything, it goes bad,” Shlachter says. “When you stop maintaining a mobile home park, it goes real bad, real fast.” These are the kinds of situations where new owners can create value.

    In one case, Weissman and Shlachter paid $485,000 for a park and invested another $250,000 toward improvements. This year they think they’ll earn $150,000 from the park, with the project only 40% full.

    Mobile home park pros say buyers should look for parks with a master water meter, which means the current owner is paying for their tenants’ water. The first thing savvy new owners do is install meters for each trailer so renters can pay their own water bills.

    Mr. Rolfe says investors should steer away from tenant-friendly states like California and New York, where it takes too much time and money to evict deadbeats. He won’t touch Las Vegas or Phoenix, believing distressed home prices are low enough to compete with parks. However, both housing markets have rebounded sharply and, I believe, will offer opportunities.

    The guiding sales metric for real estate purchases is cap rate. A project generating $50,000 in annual net income changing hands for $500,000 equates to a 10% cap rate. Low interest rates have brought cap rates down, but Rolfe and Reynolds still look for 9% to 10% caps when they buy.

    Lot rent should top out at half of what a decent two-bedroom apartment in a particular area goes for. However, the sweet spot for lot rent is $495 a month. Go over that and it “could mean death.” Nationwide, rents average about $390 per pad per month, according to real estate researcher JLT & Associates.

    While Sam Zell’s parks offer swimming pools and clubhouses, Rolfe says, “We don’t like amenities of any kind.” Rolfe and his partner Dave Reynolds understand mobile home living is the last chance for many people, and he keeps expenses and rent as low as possible. If he buys a park with a swimming pool, he shuts it down to save on expenses and liability insurance. Laundry rooms and vending machines? Forget it. Rolfe and Reynolds fill vacant spaces with used trailers they can rent out cheaply.

    Rolfe says he and his partner are making a “contrarian bet on a poorer America.” The bet is paying off handsomely so far, with annual returns of 25%. “By catering to those living on the economic margins,” writes the New York Times’ Rivlin about Rolfe and Reynolds, “their parks generated more than $30 million in revenue last year. More than half of that was profit.”

    This is not coupon clipping. But if you’re interested in potentially great returns, a great place to start is MobileHomeParkStore, which has “for sale” park listings located all over the country: all shapes, sizes, cap rates, and price ranges.

    Just remember: as the economy gets worse, this bet may go from contrary to expensive. Good luck and happy hunting in the trailerhood.

    Poverty in America is almost sure to rise in the next few years, as the United States slides nearer to the brink of economic collapse. Don’t believe it could happen here? Watch our new documentary, Meltdown America. Using the harrowing stories of three survivors from Zimbabwe, Serbia, and Argentina, it shows how stealthily a major crisis can creep up on you—and why the US may well be the next domino to fall. If you haven’t yet, watch it here.


    Friday Funnies

    Subscriber Robert Lynn submitted the following short piece to our recently completed Casey Research storytelling contest. I thought his satirical and hilarious take on the erosion of personal responsibility fit best in the Friday Funnies. Take it away, Robert…


    Sue Me

    By Robert Lynn

    I am going to be rich.

    You see, people and companies are committing unconscionable acts, and they are going to pay dearly for them.

    For instance, last week I was performing basic ballet moves on the top step of a ladder, and I fell. How could a company manufacture a hazardous product like this and not properly inform the consumer of the risks involved in dancing on it? Oh, sure, the ladder is covered with warning labels, and any idiot should know how to safely use a ladder, but they didn’t tell me not to do a pirouette on it. They must take responsibility for that. I’m suing for three million dollars.

    As a kid, I never sued anybody. I can see, now, the error of my ways. In my neighborhood, when some kid did something stupid, other kids would taunt him. “Suffer the consequences,” they would say. And suffer they did. That was even more stupid, because, as an adult, I have learned that nothing is my fault. Recognizing this fact is going to make me millions.

    Two weeks ago, I saw a movie in which a stupid person lay down on a busy roadway and tried to avoid getting hit by traffic. Now, I have always thought that the best way to avoid getting flattened by traffic was to stay out of it completely. But what do I know? The messages the media are sending me are so overwhelming, I just have to try stuff like this. Unfortunately, I was hit by a car. I’m all right now, but that movie company is going to pay. Add two million to my total.

    I like to play my stereo at volume levels just below the threshold of pain. My next-door neighbor has never complained once. Now I have partial hearing loss. Are people so callous these days that they only think of themselves? Not if I can help it. I’m suing my neighbor for not telling me to turn my stereo down, to the tune of one million dollars.

    It seems that wherever you go these days, people and companies are so self-absorbed that they don’t give an ounce of consideration to how their actions, or inaction, is going to affect innocent people like me. If you listened to some of them, you’d think that I’m somehow supposed to figure out on my own that I shouldn’t lick the lids of cans I just opened, or that plugged-in toaster ovens are not bath toys, or that drain cleaner shouldn’t be used as eye wash.

    I saw a cartoon in which a character used a hairspray can as a blowtorch. I tried it and burned my house down. Eight million.

    I put my face on an escalator stair as it reached the top, and it sheared off my lower lip. Sixteen million.

    I played a heavy-metal album backwards. It sounded better that way, but I clearly heard irresistible messages about assisting my parakeet’s suicide. One million.

    There was no warning on my cheese grater saying, “Not to be used as a loofah body sponge.” Six million.

    I saw a riot and was forced to start beating people and looting because of the overwhelming mob mentality that swept through the streets. I didn’t have a choice. What was I supposed to do, stay home? Somebody ought to be responsible for that. Twenty-two million.

    I went to one of those Cartoon Characters on Ice shows and sneaked backstage, where I saw my favorite cartoon pig removing his head. I had a nervous breakdown, and I still have nightmares about a headless swine asking to borrow my deodorant (don’t ask me to explain it). Thirty million.

    I broke into my neighbor’s house to steal his Dukes of Hazzard action figure collection set, and he shot me. I think that’s a little severe. I mean, it was a terrible show. He’ll be hearing from my lawyer. Thirteen million.

    My older brother jumped off a cliff, so I did too. Twenty-seven million.

    I have a few other suits in the works. It seems like just about every day I do something that some company or person should have warned me not to do. When will they learn? When will people start taking responsibility for my actions before it’s too late?

    After all my lawsuits are settled, when I have more money than I know what to do with, I’ll focus my full attention on one last case. I’ll sue the United States judicial system for refusing to recognize my free will and denying my right to do stupid things and suffer the consequences.

    Robert Lynn is an Iowa playwright and author of the Pulitzer-nominated one-woman show The Stupid Economy, which can be seen in its entirety here. Robert can be reached at beauxlynn@gmail.com.


    Terrible Wheel of Fortune Player

    My heart goes out to this Wheel of Fortune player who couldn’t solve a puzzle even with all of the letters filled in…


    Income Inequality Institute to Pay Paul Krugman $25,000 per Month

    You can’t make this stuff up.


    That’s It for This Week

    One last reminder that our special Casey Report/Going Global 2014 package deal for 15% off expires tonight at midnight EDT—so take advantage while it lasts. Have a wonderful weekend!

    Dan Steinhart
    Managing Editor of The Casey Report


     
  • Thu, 17 Apr 2014 16:44:00 +0000: Value Investing Is Dead; Long Live Compelling Values - Casey Research - Research & Analysis

    Once you could make money in the markets by looking for value hidden away in financial statements. Thanks to the digital era and its ease of access to information, that day is now past. But there’s still a proven way to consistently earn a positive return in the market—you just have to understand why value investing once worked and why it never will again.

    There’s no doubt that Benjamin Graham and David Dodd shaped the modern profession of investor more than anyone in our history. When they posited—starting in 1928 at New York City’s Columbia Business School—that investors could find companies whose stocks were mispriced by just digging through publicly available numbers, they set off a revolution.

    First hundreds, then thousands, and eventually millions of investors learned the art of scrutinizing those numbers to find compelling companies trading below their “intrinsic value.” Graham and Dodd’s books—Security Analysis and The Intelligent Investor—remain staples on virtually every financial bookshelf in the library.

    Prominent investors all the way up to the inimitable Warren Buffett have long espoused the wisdom of the approach. It has evolved over the years as well, moving from a focus on book value to a focus on earnings value to a combination of similar factors. In fact, there are as many variations on the theme as can be imagined—thousands of permutations on how to discover value by crunching the numbers in the right way.

    However, value investing has a dirty little secret.

    It’s always been based on knowing something that few other people could know. In tech speak, it’s about an asynchronous information advantage.

    In other words, value investing is not that different from, say, insider trading. In the case of insider information, the opportunity lies in being able to position yourself in front of some fact that has the potential to revalue a company on the market. Maybe you know Intel is going to miss on earnings next month because your friend is on the board. Trading on that information is, of course, illegal. But it’s a crime that’s committed again and again because it works and because it can be difficult to prove.

    Value investing, on the other hand, is perfectly legal because in theory it is based only on public information. The catch is that it relies on the information being hard to find or hard to make sense of.

    In the 1930s, of course, gathering information on the performance of a company was difficult. Xerox photocopiers hadn’t even been invented yet. (Those didn’t come around until 1959.) Even then, gathering information on a public company was tedious, time consuming, expensive, and really a task best left to the pros.

    In other words, in order to learn of a compelling value, one had to make a significant time and energy commitment. That kept competition to a minimum, and allowed those with better information and a knack for processing it faster to position themselves earlier and then benefit as the word spread (and often, they spread it themselves—no harm in talking your own book).

    You profit by being ahead of the knowledge of others. Nothing more than information arbitrage.

    Value investing is not alone in its dubious distinction from insider trading, however. The same thing applies to all forms of investing, including technical analysis. In fact, it is the sole basis on which it is possible to make a living investing: your ability to be right about the future value of a company’s paper before others, whether they be your fellow speculators or a corporate suitor in search of an acquisition.

    However, in an age of mass computerization and real-time streams of stock-market data over the public Internet, the idea that one can find a “value” stock by simply crunching the numbers has vanished into the Cloud.

    Want to know what companies have the lowest P/E ratio among mid-caps, but still have >15% ROI and 70% gross margins? It takes only about half a second for one of the dozens of freely available websites to answer that question for me.

    The group meeting those criteria, by the way, contains beleaguered REIT Annaly Capital, Indonesia and Argentina’s telephone companies, and controversial vitamin pusher Herbalife. If the predominant analysis on these companies is right, then they fall into the category of “value traps,” i.e., stocks that look good based on yesterday’s numbers but whose tomorrows will not be nearly as bright.

    Base your investments on screens like that one, and you’re likely to fall into trap after trap.

    Problem is, virtually anyone can find these numbers. Not only that, they can process them in bulk. On top of that, they can do it in near real time. And they can even use a service like Interactive Brokers to automatically trade on any numbers they like, without even involving a human.

    Every day, millions of investors hit sites like Yahoo and Google to dig up value stocks. Thousands more do so on a massive scale across global markets. Every square inch of statistical performance information that can be covered has been, 1,000 times over, before you or I even started looking.

    Value investing itself is, thanks to the Internet, dead… or at least drawing its last few breaths.

    But the underlying principle is not.

    To make money investing, you must find an information advantage you can exploit. It can come in any of a number of forms.

    Those who are 60 Minutes fans know that groups of HFT traders have turned to speed as their information advantage. They analyze the same markets we do, using their computers to dig through data in search of a temporary mispricing they can exploit just a few seconds—or even milliseconds—before the next guy. Of course, once they had that capability, they increasingly turned to pure and simple arbitrage, stepping in between buyers and sellers who don’t even know they exist… a lazy man’s way to riches.

    Of course, most of us mere mortals lack the means to acquire a dedicated fiber-optic feed to the center of the financial ecosystem, to develop artificially intelligent algorithms that exploit tiny gaps in information, and to profit by making fractions of a cent every few milliseconds. But thankfully, there are slower-moving and less costly options available to the likes of us.

    One is to simply understand the world better than the next guy. Instead of finding out what the other guy doesn’t yet know, instead let him be first and then concentrate on figuring out where and when he’ss wrong.

    This happens day in and day out in the markets, where one investor battles the next on assumptions about toothpaste sales at Procter & Gamble next quarter, betting millions on the difference of a few pennies in corporate profits. That’s the world of earnings analysis, and it’s cutthroat.

    Just because a company is big doesn’t mean that Wall St. is either paying attention or correct. Sometimes you can stumble upon a company that’s followed by plenty of analysts, only to discover none has bothered to update his or her guidance in a year or even two. Our most recent BIG TECH pick is a good example. Nearly half a dozen analysts “covering” the stock, but there’s been not a peep from any of them since mid-2012.

    Another possibility is to find herd thinking at work, like we did with HP in BIG TECH. There, every analyst in the world was piling on the doom and gloom, trying to one-up each other in the fear department. But when one swam into the reports they were publishing, one thing was obvious: they were ignoring their own facts. Analysts were calling for 10% sales reductions, but chopping their price targets by 75% or more. Sure, earnings were going to suffer, but this was a company with billions in sales, solid margins, and good if not great management. The realistic view should have been much more tempered, but once those estimates made it into the hands of the mindless computers, the stock quickly plummeted far below sane prices. As they say in the computer world: GIGO (Garbage In, Garbage Out).

    It was the right moment to buy in. In no time at all, cooler heads prevailed, estimates were re-revised, and the stock recovered much of its lost ground. No amount of number-crunching on the spreadsheets could have told a computer that, however. It took human ingenuity and an understanding of what was going on behind the scenes to get there… which is why we exited the position with a tidy profit.

    This illustrates how herd mentality can lead tens of thousands of professional financiers into failure to understand a business they spend every day watching. But if searching for such opportunities sounds a little daunting to you, fear not. There is still one other super-simple way to be right before the other guys.

    Find growth that has yet be discovered. Despite the overwhelming number of computer-armed stock jockeys now saturating the markets, there’s still an amazingly huge universe of stocks which get little to no attention.

    Yes, their numbers are crunched by the computers along with every other stock, because it costs nothing more to add a few thousand additional companies to an algorithm. But when it comes to estimating revenues and earnings going forward, there is no shortage of “blue ocean.” Thousands of smaller-cap companies are completely or mostly ignored by Wall St. simply because it has minimum investment sizes to worry about. Why spend an analyst’s time on a stock that can only take $20 million in investment when you have $5 billion to deploy? Instead, Wall St. focuses most of its attention on the big fish. That’s why, according to Yahoo Finance, there are 30 analysts covering Citibank, and only 1 watching National Bank of Greece.

    This is a huge potential advantage. The lack of coverage for a universe of stocks like this means that any meaningful information you can find gives you a leg up on the field. And thankfully, these smaller companies are often easier to analyze. Want to know if a 25-outlet regional retailer is growing? Much, much easier to discover than for a big, multinational corporate brand, that’s for sure. Stake out a few stores, ask a few suppliers, and voilà, you’ve got an advantage over any NYC desk pilot… no matter how fast his Internet connection might be.

    We do this every day in Casey Extraordinary Technology, where we specialize in companies still flying under the Wall St. radar—ones too small to be noticed today. But as they post bigger and bigger numbers, they get harder and harder to ignore. Wall St., after all, is happy to bend the rules on those minimum investment sizes if it really believes it can make 50% next year just by taking a smaller stake than usual.

    Now, I prefer to find growth because I like to be long the market. I love to position myself in a company before it announces good news and wait for the stock to rise, as those computers and the hordes of investors behind them inevitably race to snatch up a profit in the 15 minutes (who am I kidding? 15 seconds is more like it) that “value” lasts nowadays. Nothing is more predictable to me.

    The same applies on the downside, too. If you browse through the universe of uncovered stocks (or through the overly enthusiastic estimates of herd-thinking analysts), you’re bound to find plenty of stories that are too good to be true. That’s where many an investor has made a killing on the short side.

    Either way, success is about finding your information advantage. What can you know before everyone else knows it? It definitely won’t be an imbalanced price/book ratio in the agricultural sector. It probably won’t be Comcast’s next subscriber count. But it could definitely be sales numbers from the company no one is watching.

    And when you’re right, you’ll be glad to see all those value-investing computerized robots trade your shares right on up, providing you liquidity on the way.

    This is precisely what we do here at Casey Research. We concentrate on the markets best suited to individual investors, we find our distinct advantage, and we exploit it again and again. For the technology team, that consists mostly of finding undiscovered growth. We comb relentlessly through the data, the opinions, and the companies in the tech markets in search of a mismatch between what products are selling and what companies Wall St. thinks are performing. Time and again, we find compelling bargains—never on past performance alone; almost always by uncovering the next big thing that consumers are walking out of the mall with, that businesses are migrating to, or that otherwise has yet to show up in the numbers available on any computer screen from Yahoo Finance to Bloomberg.

    Maybe that’s why we’ve beaten our market index every year since we started publishing. If you’ve yet to see for yourself the advantage this approach provides, then take Extraordinary Technology for a spin and let us prove it to you.

    While the computer may have killed old-fashioned, number-crunching value investing, it’s done nothing to change the rules of the game. It’s just shifted asynchronous information advantages around, making the ones where being human helps better than others.

  • Wed, 16 Apr 2014 14:19:00 +0000: Margins, Multiples, and the Iron Law of Valuation - Casey Research - Research & Analysis

    Garbage In, Garbage Out.

    This well-worn phrase describes how feeding flawed data into a computer guarantees that it will spit out flawed results.

    It applies equally to human endeavors: if you attempt to answer a question using bad data, your answer will be wrong, no matter how rigorous your analysis.

    That’s why the ability to separate important information from garbage is one of the most useful skills an investor can possess. With statistics like these constantly bombarding us…

    “Short Facebook—its price-to-book ratio is 10.8!”

    “Load up on Exxon shares—its price/earnings ratio is just 13.3!”

    “Don’t even think about buying Blackberry—its short interest is over 20.4%!”

    … we need to know which ones to pay attention to, and which ones to ignore.

    Today’s guest author, fund manager, and frequent contributor to this missive, John Hussman, is the king of making such distinctions. He often scolds pundits in his weekly market comment series for citing statistics that make for good sound bites, but don’t correlate at all to what they’re trying to prove.

    In what follows, John reveals a few lesser-known valuation metrics that actually do have proven track records for predicting where the stock market is going. Read on to learn about them, and what they say about how the stock market will perform over the next several years.

    Dan Steinhart
    Managing Editor of The Casey Report

    Margins, Multiples, and the Iron Law of Valuation

    John Hussman, President, Hussman Investment Trust

    The equity market remains valued at nearly double its historical norms on reliable measures of valuation (though numerous unreliable alternatives can be sought if one seeks comfort rather than reliability). The same measures that indicated that the S&P 500 was priced in 2009 to achieve 10-14% annual total returns over the next decade presently indicate estimated 10-year nominal total returns of only about 2.7% annually. That’s up from about 2.3% annually last week, which is about the impact that a 4% market decline would be expected to have on 10-year expected returns.

    I should note that sentiment remains wildly bullish (55% bulls to 19% bears, record margin debt, heavy IPO issuance, record “covenant lite” debt issuance), and fear as measured by option volatilities is still quite contained, but “tail risk” as measured by option skew remains elevated. In all, the recent pullback is nowhere near the scale that should be considered material. What’s material is the extent of present market overvaluation, and the continuing breakdown in market internals we’re observing. Remember—most market tops are not a moment but a process. Plunges and spikes of several percent in either direction are typically forgettable and irrelevant in the context of the fluctuations that occur over the complete cycle.

    The Iron Law of Valuation is that every security is a claim on an expected stream of future cash flows, and given that expected stream of future cash flows, the current price of the security moves opposite to the expected future return on that security. Particularly at market peaks, investors seem to believe that regardless of the extent of the preceding advance, future returns remain entirely unaffected. The repeated eagerness of investors to extrapolate returns and ignore the Iron Law of Valuation has been the source of the deepest losses in history.

    A corollary to the Iron Law of Valuation is that one can only reliably use a “price/X” multiple to value stocks if “X” is a sufficient statistic for the very long-term stream of cash flows that stocks are likely to deliver into the hands of investors for decades to come. Not just next year, not just 10 years from now, but as long as the security is likely to exist. Now, X doesn’t have to be equal to those long-term cash flows—only proportional to them over time (every constant-growth rate valuation model relies on that quality). A good way to test a valuation measure is to check whether variations in the price/X multiple are closely related to actual subsequent returns in the security over a horizon of 7-10 years.

    This is very easy to do for bonds, especially those that are default-free. Given the stream of cash flows that the bond will deliver over time, the future return can be calculated by observing the current price (the only variation from actual returns being the interest rate on reinvested coupon payments). Conversely, the current price can be explicitly calculated for every given yield-to-maturity. Because the stream of payments is fixed, par value (or any other arbitrary constant for that matter) is a sufficient statistic for that stream of cash flows. One can closely approximate future returns knowing nothing more than the following “valuation ratio”: price/100. The chart below illustrates this point.

    [Geek’s Note: the estimate above technically uses logarithms (as doubling the bond price and a halving it are “symmetrical” events). Doing so allows other relevant features of the bond such as the maturity and the coupon rate to be largely captured as a linear relationship between log(price/100) and yield-to-maturity].

    Put simply, every security is a claim on some future expected stream of cash flows. For any given set of expected future cash flows, a higher price implies a lower future investment return, and vice versa. Given the price, one can estimate the expected future return that is consistent with that price. Given an expected future return, one can calculate the price that is consistent with that return. A valuation “multiple” like Price/X can be used as a shorthand for more careful and tedious valuation work, but only if X is a sufficient statistic for the long-term stream of future cash flows.

    Margins and Multiples

    representative measures of future cash flows when investors consider questions about valuation. It’s striking how eager Wall Street analysts become—particularly in already elevated markets—to use current earnings as a sufficient statistic for long-term cash flows. They fall all over themselves to ignore the level of profit margins (which have always reverted in a cyclical fashion over the course of every economic cycle, including the two cycles in the past decade). They fall all over themselves to focus on price/earnings multiples alone, without considering whether those earnings are representative. Yet they seem completely surprised when the market cycle is completed by a bear market that wipes out more than half of the preceding bull market gain (which is the standard, run-of-the-mill outcome).

    The latest iteration of this effort is the argument that stock market returns are not closely correlated with profit margins, so concerns about margins can be safely ignored. As it happens, it’s true that margins aren’t closely correlated with market returns. But to use this as an argument to ignore profit margins is to demonstrate that one has not thought clearly about the problem of valuation. To see this, suppose that someone tells you that the length of a rectangle is only weakly correlated with the area of a rectangle. A moment’s thought should prompt you to respond, “Of course not—you have to know the height as well.” The fact is that length is not a good sufficient statistic, nor is height, but the product of the two is identical to the area in every case.

    Similarly, suppose someone tells you that the size of a tire is only weakly correlated with the number of molecules of air inside. A moment’s thought should make it clear that this statement is correct, but incomplete. Once you know both the size of the tire and the pressure, you know that the amount of air inside is proportional to the product of the two (Boyle’s Law, and yes, we need to assume constant temperature and an ideal gas).

    The same principle holds remarkably well for equities. What matters is both the multiple and the margin.

    Wall Street—You want the truth? You can’t handle the truth! The truth is that in the valuation of broad equity market indices, and in the estimation of probable future returns from those indices, revenues are a better sufficient statistic than year-to-year earnings (whether trailing, forward, or cyclically adjusted). Don’t misunderstand—what ultimately drives the value of stocks is the stream of cash that is actually delivered into the hands of investors over time, and that requires earnings. It’s just that profit margins are so variable over the economic cycle, and so mean-reverting over time, that year-to-year earnings, however defined, are flawed sufficient statistics of the long-term stream of cash flows that determine the value of the stock market at the index level.

    As an example of the interesting combinations that capture this truth, it can be shown that the 10-year total return of the S&P 500 can be reliably estimated by the log-values of two variables: the S&P 500 price/book ratio and the equity turnover ratio (revenue/book value). Why should these unpopular measures be reliable? Simple. Those two variables—together—capture the valuation metric that’s actually relevant: price/revenue. If you hate math, just glide over any equation you see in what follows—it’s helpful to show how things are derived, but it’s not required to understand the key points.

    price/revenue = (price/book)/(revenue/book)

    Taking logarithms and rearranging a bit:

    log(price/revenue) = log(price/book) + log(book/revenue)

    If price/revenue is the relevant explanatory variable, we should find that in an unconstrained regression of S&P 500 returns on log(price/book) and log(book/revenue), the two explanatory variables will be assigned nearly the same regression coefficients, indicating that they can be joined without a loss of information. That, in fact, is exactly what we observe.

    Similarly, when we look at trailing 12-month (TTM) earnings, the TTM profit margin and P/E ratio of the S&P 500 are all over the map. When profit margins contract, P/E ratios often soar. When profit margins widen, P/E ratios are suppressed. All of this introduces a terrible amount of useless noise in these indicators.

    As a result, TTM margins and P/E ratios are notoriously unreliable individually in explaining subsequent market returns. But use them together, and the estimated S&P 500 return has a 90% correlation with actual 10-year returns. Moreover, the two variables—again—come in with nearly identical regression coefficients.

    Why? Because they can be joined without a loss of information; that is, the individual components contain no additional predictive information on their own. Just like the area of a rectangle and Boyle’s Law:

    price/revenue = (earnings/revenue)*(price/earnings)

    Again, taking logarithms:

    log(price/revenue) = log(profit margin) + log(P/E ratio)

    The chart below shows this general result across a variety of fundamentals. In each case, the fitted regression values have a greater than 90% correlation with actual subsequent 10-year S&P 500 total returns. Let’s be clear here—I’m not a great fan of this sort of regression, strongly preferring models that have structure and explicit calculations (see, for example, the models presented in It Is Informed Optimism to Wait for the Rain).

    The point is that one can’t cry that “profit margins aren’t correlated with subsequent returns” without thinking about the nature of the problem being addressed. The question is whether P/E multiples, or the Shiller cyclically adjusted P/E, or the forward operating P/E, or price/book value, or market capitalization/corporate earnings, or a host of other possibilities can be used as sufficient statistics for stock market valuation. The answer is no.

    What we find is that both margins and multiples matter, and they matter with nearly the same regression coefficients—all of which imply that revenue is a better sufficient statistic of the long-term stream of future index-level cash flows than a host of widely followed measures. Emphatically, one should not use unadjusted valuation multiples without examining the relationship between the underlying fundamental and revenues. That is why we care so much about record profit margins here.

    Note that in each of these regressions, the coefficients could place a low weight on profit margins and other measures that are connected with revenues, if doing so would improve the fit. They could place significantly different coefficients on margins and multiples, if doing so would improve the fit. They just don’t, and like the area of a rectangle and Boyle’s Law, this tells you that it is the product of the two measures that drives the relationship with subsequent market returns.

    [Geek’s Note: Gross value added (essentially revenue of US corporations including domestic and foreign operations) is estimated as domestic financial and nonfinancial gross value added, plus foreign gross value added of US corporations inferred by imputing a 10% profit margin to the difference between total US corporate profits after tax and purely domestic profits. Varying the assumed foreign profit margin has very little impact on the overall results, but this exercise addresses the primary distinction (h/t Jesse Livermore) between normalizing CPATAX by GDP versus normalizing by estimated corporate revenues.]

    To illustrate these relationships visually, the 3-D scatterplot below shows the TTM profit margin of the S&P 500 along one bottom axis, the TTM price/earnings ratio on the other bottom axis, and the actual subsequent 10-year annual total return of the S&P 500 on the vertical axis. This tornado of points is not distributed all over the map. Instead, you’ll notice that the worst market returns are associated with points having two simultaneous features: not only above-average profit margins, but elevated price/earnings multiples as well.

    This combination is wicked, because it means that investors are paying a premium price per dollar of earnings, where the earnings themselves are cyclically-elevated and unrepresentative of long-term cash flows. This is the situation we observe at present. It bears repeating that the S&P 500 price/revenue multiple, the ratio of market capitalization to GDP, and margin-adjusted forward P/E and cyclically adjusted P/E ratios remain more than double their pre-bubble historical norms.

    [Geek’s Note: On a 3-D chart where the Z variable is determined by the sum or product of X and Y, a quick way to visually identify the relationship is to view the scatter from either {min(X},max(Y)} or {max(X),min(Y)} as above].

    The upshot is that regardless of the metrics used, S&P 500 nominal total returns in the coming decade are likely to be in the very low single digits—from current levels. But remember the Iron Law of Valuation—for a given stream of long-term expected cash flows, as valuations retreat, prospective returns increase. This should be a cause for optimism about future investment opportunities. Unfortunately, not present ones.


  • Mon, 14 Apr 2014 17:41:00 +0000: The Most-Bought Stock by Insiders on the TSX-V? - Casey Research - Research & Analysis

    Definition: Insider (Inˈsī dər)

    1. A director or senior officer of a company, as well as any person or entity that beneficially owns more than 10% of a company's voting shares. For purposes of insider trading, the definition is expanded to include anyone who trades a company's shares based on material non-public knowledge. Insiders have to comply with strict disclosure requirements with regard to the sale or purchase of the shares of their company.

    When insiders buy, I take notice, and so should you.

    When very smart, successful insiders in the industry buy millions of dollars’ worth of their own company’s stock, I really pay attention and dig into the facts. This was the case this past month, when the insiders of a very promising energy company bought tens of millions of its shares. In total, insiders now own 20% of the stock.

    But what really made me stop everything I was doing and make this my main focus was the fact that one insider in particular—who is one of the savviest, most successful and respected investors in the global resource sector—has been shelling out millions of dollars of his own money to buy the stock, in the open market, at current prices.

    I knew I was on to something when Doug said, “Marin, we need to get on a plane, yesterday.”

    So that’s what we did.

    Traveling with my friend, business partner, and mentor Doug Casey is not just a pleasure, but an incredible education. The only way you can hear the true back stories of the people in the sector and the projects is to learn them from the people who were there. And we try to be there as much as possible, wherever in the world the action is.

    Doug and I have a lot of fun together on the road, but at the end of the day, our success is measured by whether we brought a profitable speculation to our Casey Energy Report subscribers.

    Regarding this particular opportunity, Doug and I were so intrigued that we jumped on a plane and traveled around the world to meet the driller and the government officials, looked at the infrastructure, and completed our in-depth Casey 8Ps analysis—which has confirmed our belief that one of the most successful insiders in the industry is about to score big again.

    I rarely talk about my site trips, mainly because so many of the companies we visit don’t meet our Casey 8Ps criteria and never see the pages of our Casey Energy Report… unlike this one, which was truly memorable.

    For one thing, we visited the site of our “Next Bakken” play—a quaint, rural region in Central Europe. The small oil and gas company with the 2-million-acre concession we’ve been following is entering a very exciting phase of its development, and things are going very well. The situation playing out right now in Ukraine, dire as it is, works in favor of our “Next Bakken” pick, and the stars are aligning to make for a very profitable 2014 on this stock.

    But the Casey Energy Report is not a one-trick pony. We believe we are on to…

    An “Africa Oil Clone,” But in a Better Location

    This may sound like bragging, but Keith Hill and Lukas Lundin—the facilitators of the original Africa Oil miracle—are good friends of mine, and they can confirm that I was the first analyst to see the major potential of that company, especially its 10BB block, and the first analyst to issue a research report and a buy recommendation on Africa Oil. I even went on record on BNN, the Canadian Business News Network, and said, “Africa Oil has the potential to make you 10-15 times your money.”

    Here’s that interview; scroll forward to the 3-minute mark to hear what I said.

    I’m usually early to plays. It’s probably an ego issue, but I love being the first on a hot story. Whatever it is, I thrive on it, and I love being able to bring ideas and companies to my subscribers that are nearly unknown to the masses.

    Right now, Doug and I agree that we found another one of those potential windfall stories in the making. We went to the site, did our Casey 8Ps analysis, and Doug is as excited as I am. And of course it’s a dead giveaway when insiders invest millions in their own stock—and at market prices.

    Not only do I believe that I have found an “Africa Oil Clone,” but this time, it’ll be even better.

    You see, my mistake when we were following Africa Oil was that I lost focus. Subscribers to the Casey Energy Report know that I was very ill at that time, and we took the easy route and locked in +300% gains, when we could have had +1,000%. This time, Doug has promised me that he won’t let me sell and close the position after a +300% gain. We won’t make the same mistake again.

    The company I’m talking about is in a proven oil district, not some just-discovered backwater, and the government fully supports the exploration effort. To sum it up, the company has passed every test with flying colors, and meets every one of our stringent Casey 8Ps criteria. The final risk—and this is why it’s a speculation—is whether the drill rig will be able to execute properly and penetrate the oil deposit; and then the flow rates need to be determined.

    The company is drilling for hundreds of millions of barrels of high-API oil—the previous well proved the oil is there, and the current well will give us an idea of how much. The company was able to attract a major to fund the costs of the exploration, and Doug Casey and I were very impressed with what we saw at the drill site. A first-class drill program for a first-class oil project.

    This oil field is well known to oil men, but it was lost in a backward European country that has seen no modern technology until now. Doug and I have written a detailed analysis on the region and the company, and the story is fascinating. It will go down in the energy history books as a comparable to the “Next Bakken” region in Central Europe that we discovered a year ago.

    All You Need to Do Is Get on Board… We’ve Done All the Work

    I’m putting the finishing touches on the report, which will make up the bulk of our next Casey Energy Report issue. If you agree today to try my newsletter risk-free for 3 months, you’ll get the news and our new recommendation at the same time as our current subscribers.

    There’s no risk to you: If you don’t like the Casey Energy Report or don’t make any money over your first three months, just cancel within that time for a full, prompt refund, no questions asked. Even if you miss the 3-month cutoff, cancel anytime for a prorated refund on the unused part of your subscription.

    As a subscriber, you’ll receive a timely email update on our site visit analysis of our “Next Bakken” play and will be among the first investors to unveil our “Africa Oil Clone.” And of course, you’ll get instant access to our current issue, which details what I call the Greatest Energy Short of All Time—an ingenious and low-risk way to capitalize on the coming liquefied natural gas debacle.

    Click here to get started now.


    Additional Links and Reads


    Japan Approves Energy Plan Reinstating Nuclear Power Plants (Bloomberg)

    As we have said many times, Japan has no choice but to restart its nuclear power plants. 48 of the Japanese nuclear reactors are currently offline, so government will probably start a few reactors first to ease the concerns of the population—and then, over time, slowly restart more. Japan’s nuclear reactors consume over 15 million pounds of uranium annually, and the restart will signal the beginning of the next leg of the uranium bull market.

    Bill Banning Fracking in California Passes First Committee (KCRA)

    Essentially the first vote to ban hydraulic fracking passed. The vote was to temporarily ban fracking until it’s proven to be safe. 200,000 jobs are at risk, and no, this will not increase investment in alternative energies, as the protestors claim it will. If California follows the fate of New York, Vermont, and North Carolina, it could be years before any progress is made one way or another.
  • Mon, 14 Apr 2014 14:39:00 +0000: How I Intend to Survive the Meltdown of America - Casey Research - Research & Analysis

    Dear Reader,

    It is with a troubled heart that I sit down to write today, there being reports of casualties in new fighting in eastern Ukraine. I worry, of course, about my friends and students in the country who may well be in physical danger soon, if the conflict escalates. But that’s personal; as an investment analyst, it’s the financial war the Russians seem quite willing to wage that really has my attention.

    It should have yours as well.

    As one of the experts in our just-released Meltdown America video noted, the Kremlin had already made moves to dethrone the US dollar as the world’s reserve currency before the renewed East-West tensions of this year. Putin has openly threatened what amounts to economic warfare as a response to sanctions placed on Russia after its Crimea grab.

    Now bullets are flying—can Putin’s financial ICBM be far behind?

    Mind you, the US and global economies are on such shaky ground, they could come crashing down without any help from Gospodin Putin.

    One of the things that really struck me while watching Meltdown America was the way the writing was clearly visible on the wall in past cases of financial collapse and hyperinflation—but no one wanted to believe it.

    That’s the way I see the US today. Life seems so normal and there’s so much wealth even in poorer regions, it’s hard to believe the cracks in the foundation could really bring down everything built on it. And that’s exactly why the cracks never get fixed; people don’t want to see them, and politicians do everything possible to deny they exist. So they widen and deepen until the collapse becomes inevitable—and I believe we have already passed the point of no return.

    It’s just a matter of time now.

    Gloomy thoughts indeed, but I’m not here to depress anyone. Hopefully, I can help deliver a wake-up call, as per our Meltdown America video. Perhaps even more useful, I can tell you what I’m doing about it.

    As you probably know already, precious metals are a key part of my strategy. As Doug Casey likes to say, gold is the only financial asset that is not simultaneously someone else’s liability. It’s solid value you can hold in your hand, and come what may, use to store and protect wealth, as well as to make payments when all other systems fail.

    Again, as Doug says, I buy gold for prudence and gold stocks for profit. If I’m right about the economic trouble ahead, gold will protect me, and my gold stock picks will make me a fortune. This is why we focus so much on precious metals and related mining stocks in these Metals & Mining Monday daily dispatches. Fear not; we’ll have plenty more relevant ideas and actionable information in future editions.

    But Doug also says that our biggest risk today is not market risk; it’s political risk. He has moved to rural Argentina to get out of harm’s way. He’s picked a beautiful place, and I had intended to move to Cafayate myself, but then I got married… and plans changed. Specifically, I need to remain in the US for some years to come.

    So instead of expatriating, I’ve moved to Puerto Rico, a US territory that is rapidly becoming the only tax haven that matters for US taxpayers.

    People keep asking me why I chose Puerto Rico and if I’m happy with my choice, so I’ve decided to skip writing about metals this week and write instead about my move here. It’s a break from tradition, but one I hope will provide as much value as anything I could write about rocks at this time.

    Sincerely,

    Louis James
    Senior Metals Investment Strategist
    Casey Research

    Rock & Stock Stats
    Last
    One Month Ago
    One Year Ago
    Gold 1,235.30 1,391.80 1,604.20
    Silver 19.66 22.45 27.61
    Copper 3.05 3.30 3.50
    Oil 96.85 93.13 84.96
    Gold Producers (GDX) 24.49 28.50 44.77
    Gold Junior Stocks (GDXJ) 9.16 11.59 19.21
    Silver Stocks (SIL) 11.72 13.83 18.61
    TSX (Toronto Stock Exchange) 12,129.11 12,732.61 11, 596.56
    TSX Venture 881.40 953.71 1,190.99


    How I Intend to Survive the Meltdown of America

    As I type here in my new home office, I glance up and see waves of Caribbean blue crashing on the palm-lined beach. Surfers are out in force. Scattered clouds add to the already amazing variety of colors in the ocean. I wonder if I will have time to go for a swim before dinner—and I’m amazed yet again to think that it was a shot at lower taxes that brought me here to Puerto Rico.

    It seems almost unnatural for me to be able to enjoy so much beauty while saving money, but that’s exactly what I’m doing.

    The view from my new home office.

    You see, the economy here never really recovered from the crash of 2008. This is very bad news for long-suffering Puerto Ricans trying to make ends meet. When I first came here with my wife to check the place out, locals kept asking us why we were thinking of moving here; jobs are scarce, and something of an exodus is taking place in the opposite direction (Puerto Ricans are US citizens and can travel and work freely anywhere in the US).

    But I wasn’t coming to Puerto Rico to sell hot dogs. My income doesn’t depend on the local economy, so its woes are an obvious opportunity for a contrarian speculator like me.

    Take the most simple and basic asset class one can invest in as a Puerto Rico play: real estate. The market has been so devastated that million-dollar condos are selling for half price. When we closed on our new place, the seller came up short, and we had other options, so we weren’t willing to pay more. The real estate agents involved were so eager to keep the deal from falling through, they kicked in with their own money to help the seller out.

    Personally, I’m not a big fan of gated communities, but for people who are concerned about possible social unrest in the future, it’s good to know that you can buy properties in some of the most posh and secure communities on the island with no money down.

    Now, as much as I like a contrarian bargain, and as much as my wife loves the tropical weather, what really brought us here were the new tax incentives the government of Puerto Rico enacted to make the island more attractive to investors and employers.

    The critical point here is that Puerto Ricans are exempt from US federal income taxes, even though they are US citizens. They pay Puerto Rican taxes, of course, and those have generally been similar to US taxes, so the island has never been seen as a tax haven before. That all changed in 2012, when Puerto Rico passed Acts 20 and 22.

    Act 22

    Act 22 is basically a 100% capital-gains tax holiday designed to attract investors to come live in Puerto Rico. Exactly what is included or excluded is beyond the scope of this article, but for me, the important thing is that it covers the stocks I already owned when I moved here on January 1, 2014. Given that the market bottomed at almost the same time, I have no gains to be taxed on for 2013, and will not be taxed for the gains I make going forward—all the way to 2036.

    This alone was worth the move to Puerto Rico, in my opinion.

    Happily, the application process was simple. My wife downloaded the form and filled it out. I signed it, and a couple weeks later, we got an official tax holiday decree in the mail—no questions asked. I had to accept the conditions of the decree in front of a notary and send in an acceptance form with a $50 filing fee, and that was it. Didn’t even have to hire a lawyer.

    This tax break is not available to current residents of Puerto Rico—it’s designed to attract wealthy people to come live on the island, after all—but it’s available to all others who move here, including but not limited to US taxpayers.

    Act 20

    Act 20 is a tax break on corporate earnings designed to incent job creation in Puerto Rico. The idea is to persuade US employers who might set up call centers in India, or create other similar jobs abroad, to do so closer to home, by offering them a 4% corporate earnings tax rate.

    My fellow Casey Research editor Alex Daley has moved to Puerto Rico as well, and we’ve formed a company here that exports writing and analytical services to Casey Research in Vermont. This is the basis of our application for Act 20 tax benefits, which has not been approved yet, but which we understand is close.

    If we get our Act 20 decree approved, we’ll still have to pay regular income taxes on our base salaries, but the lower tax rate applied to our corporate income will result in a drastically lower total income tax rate for us as individuals.

    I’ll be sure to let readers know when we get our Act 20 decree approved.

    All 100% Legal

    The beauty of this is that Puerto Rico’s tax breaks are not shady tax dodges set up by entities of questionable legality or trustworthiness, but perfectly legal tax incentives within the US.

    Act 20 and Act 22 benefits are available to non-US persons, but they are especially important to US taxpayers because, unlike almost every other country in the world, the US taxes its serfs citizens whether they live in the US or abroad.

    In other words, while a Canadian can get out of paying Canadian income taxes by moving out of Canada, a US person cannot escape US taxes by moving to Argentina, or anywhere else—anywhere besides Puerto Rico.

    It’s like expatriation without having to leave the US, truly a unique situation.

    And it’s a win-win situation; people like us bring much-needed money, ideas, and energy to the island, while getting to keep more of what our crisis-investing strategy nets us. We create jobs, rather than take them. We are part of the solution here, and we’ve been made very welcome.

    Is It Safe?

    So that’s why I’m here. Whether or not my Act 20 status gets approved, I’m so happy about my Act 22 decree that I’m convinced we did the right thing moving here.

    When I tell people what I’ve done and why, most get immediately excited by the idea—and then they balk. The first question they ask is usually: What about crime?

    Puerto Rico isn’t a large island, and a good chunk of its three million inhabitants are clustered in and around the capital city of San Juan. Of course there is crime here, as there is in any large city. There are places I would not walk alone at night—just as there are in New York City.

    Mexico City, Buenos Aires, La Paz… the capital of any other Latin American country or Caribbean country I’ve been to is much larger, more polluted, and more dangerous than San Juan. In my subjective view, San Juan, with its old Spanish fortifications and amazing beaches, is more beautiful. And you can drink the water here.

    Sure, it might be cleaner and safer in Palm Beach, Florida—but it’s a lot more expensive there, it has less charm, and there’s no Act 20 nor 22. It’s a matter of priorities.

    When I say this, most people remain skeptical; they read about the economic problems Puerto Rico has and the financial trouble the government is in, and they wonder if things could get worse.

    Of course they can—but if Doug is right about The Greater Depression about to envelop the whole world, things are going to get worse everywhere.

    Here at least, people are already used to massive unemployment. It won’t come as a shock; it’s never left since 2008.

    Another way of looking at it is that since tropical storms hit the island from time to time (southern Florida is much more prone to major hurricanes than Puerto Rico, but they do happen), people here are more prepared for disasters than in many other parts of the US. The better apartment buildings and hotels have their own electricity generators. Nobody can freeze to death here, anyway, and fruit trees grow all over the island.

    There’s a lot more I could say, but the bottom line is that I think Puerto Rico is a much better place to ride out a global financial storm than Miami, or Anchorage, or almost any city in between. A self-sustaining farm in rural Alabama might be better, but that’s not the sort of place I want to live.

    I Like It Here

    That last is an important point: if I have to hunker down to ride out an economic storm, it should be in a place where I like being.

    Puerto Rico is beautiful and bountiful year-round. I speak Spanish, but most people in San Juan are bilingual, so that’s not really an issue. Our new flat is blocks from the best schools, shops, and restaurants in town—and even the hospital.

    I open the window and the fresh air coming off the ocean carries the sound of waves, sometimes laughing children. There’s more noise pollution during the day, but at night, the city calms down, and we can hear the famous Puerto Rican coquí frogs, which my daughter calls “happy frogs.” Ten floors up, the ocean breeze is cool enough that we have yet to turn on the air conditioning.

    The beaches are fantastic, and the clear water makes for great diving. I’ve never been a surfer, but the waves here are famous too, so I’m thinking of trying it out. There’s no end of other things to try out, and the neighboring islands have their own charms to offer as well.

    Granted, my wife and I try to be smart about what we do and where we go, but we’ve never felt unsafe here—well, apart from the crazy drivers.

    We like it here. We’re happy. For tax reasons, for quality of life, and with the potential meltdown of America in mind, we’re glad we made the move.

    Find Out More

    Doug Casey’s International Man Editor Nick Giambruno, Alex Daley, and I have coauthored a special report on Puerto Rico’s stunning new tax advantages. The report gets into all the details I didn’t have time or space for here. We cover all the specifics of what, why, and how. The report includes links to the forms you need, as well as recommended resources, from lawyers to realtors.

    Whether you’re thinking about expatriating or you’re just tired of paying high taxes, I think Puerto Rico is a place you should consider. I know of no better resource to help you get started than our special report.

    For your own health, wealth, and enjoyment, I encourage you to get your copy today.


    Gold and Silver HEADLINES

    Palladium Bulls Prepare for a Run (CNBC)

    As we’ve pointed out for some time, this article reminds us that the fundamental reasons for higher palladium prices are in place. Supply is squeezed from both major-producing countries South Africa and Russia, while overall demand is growing, especially automobile demand.

    South Africa, which produces about 70% of the world’s palladium, continues to suffer from labor strikes. Russia, the second-largest producer of the metal, has unresolved tensions surrounding the sanctions and may cut its supply.

    Meanwhile, the demand for the metal (which is used for catalytic converters in gasoline cars) is poised to expand, driven by robust increases in auto sales in major markets, especially in the US and China.

    The ongoing disruption between supply and demand is the reason for our bullish views on palladium.

    Dubai Gold Trade Reached $75 Billion in 2013 (Mining.com)

    A hefty $75 billion worth of gold, or about 40% of the world’s physical bullion exchanged, was traded through Dubai last year, said Ahmad Bin Sulayem, executive chairman of the Dubai Multi Commodities Centre (DMCC). This is an incredible twelvefold growth, compared to $6 billion worth of the precious metal traded in 2003, when the DMCC started its operations. Global demand fell 15% last year, but Dubai showed near-record consumption demand growth.

    Dubai had become one of the world’s major gold trade centers in the past decade, and will increase its trade volumes further, said US-based analyst John Hathaway.

    The blossoming of Dubai’s gold trade reveals “a significant shift in the balance of global demand flows”—namely, the shift in demand from the West to the East. There are other reasons for the growth in Dubai, including trade transparency, its strategic location, and a rising number of tourists.

    Matchmaking Miners and China’s $7 Trillion in Saving (Mining.com)

    Australian media reminds us that Asian investors have huge amounts of cash. In 2013, the Chinese had US$7 trillion in savings. Some of this could make its way to mining and other hard assets.

    It’s common knowledge that China is hungry for iron ore and other metals, including precious metals. Just last year, Chinese overseas investment totaled $61.6 billion at the end of September, a 17.4% year-on-year increase. For 2014, China’s authorities expect overseas investment to continue growing at double-digit rates.

    In 2013, the worst year for global-mining mergers and acquisitions in nearly a decade, China accounted for nearly 14% of all mining M&A activity by value, outpacing Canada, Australia, and the United States. PricewaterhouseCooper’s latest outlook suggests that Beijing’s share of global mining deals is set to grow again this year.


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