Category Archives: General

EU Raises Growth Outlook

Bloomberg, May 5, 2015

The European Commission raised its euro-area growth forecast as the impact of a weaker euro and unprecedented monetary stimulus help the economy overcome pressure on confidence from the continuing crisis in Greece.

Gross domestic product in the 19-nation currency bloc is forecast to increase 1.5 percent this year, up from 1.3 percent in February, according to the commission, the European Union executive in Brussels. It slashed its growth projections for Greece at a time when the cash-strapped country is struggling to persuade its euro-area partners to help pay its bills.

“The legacy of the crisis will continue to be felt for years to come,” Marco Buti, the head of the commission’s economics department, said in the report. “Will the economy be able to generate a self-sustained and balanced expansion once these temporary tailwinds fade? The answer is not self-evident.”

The European Central Bank’s quantitative-easing program “is having a significant impact” on financial markets and the economy, the commission said. “Fiscal policy is also accommodating growth.” Lower oil prices, the euro’s depreciation and steady global growth also are supporting the European economy.

Debt Pile

Tuesday’s report shows that while the euro area is slowly recovering, France, the bloc’s second-largest economy, will not expand as quickly in 2016 as the EU forecast just three months ago. Italy, the third-largest euro-zone economy, will see its debt pile get larger this year as it records growth of 0.6 percent, according to the forecasts.

The cut in the growth forecast for Greece — where Europe’s debt bomb exploded more than five years ago — may make it harder for Prime Minister Alexis Tsipras’s government to convince the EU and the International Monetary Fund that it should row back austerity while it struggles to record a primary budget surplus.

“There is a choice for the Greek government to make — time is running out,” European Commission Vice President Valdis Dombrovskis said in a statement. “All fundamentals for a return to growth and stability are still very much there.”

Greece will grow 0.5 percent in 2015, the commission projected. That compares with a 2.5 percent prediction in the EU’s most recent forecasts published in February.

“Positive momentum” in the Greek economy has “been hurt by uncertainty since the announcement of snap elections in December,” the commission said. “The current lack of clarity on the policy stance of the government vis-a-vis the country’s policy commitments in the context of the EU/IMF support arrangements worsens uncertainty further.”

No Exit

While the more pessimistic outlook for Greece means it’s as important as ever that Greek authorities reach an agreement with their creditors, the commission does not see the country leaving the euro-area, European Economic Commissioner Pierre Moscovici said.

“Grexit is not an option that the commission is envisaging,” he told reporters. “Once you have one country leave, the next question is, who’s next?”

The Brussels-based commission forecast euro-area inflation to start creeping up again and avoid the deflation it predicted in February. Yet it will remain below the ECB’s goal of just under 2 percent throughout this year and next. Inflation will stand at 0.1 percent in 2015, before quickening to 1.5 percent in 2016, the commission said.

Consumer Prices

Euro-area consumer prices ended a four-month streak of declines in April, underpinning ECB President Mario Draghi’s claim that his program of quantitative easing is already having an impact.

“The expanded asset-purchase program adopted by the ECB has lowered interest rates while stabilizing inflation expectations, thus reducing the real interest rate,” Buti said.

A significant weakening in the euro and a decrease in the price of oil has also helped the euro area recovery, the commission said.

The euro has fallen more than 8 percent against the dollar since the start of year. The cost of oil decreased by more than half since a peak in June, the commission said.

The EU said that tension with Russia over its involvement in violence in Ukraine, which has led the bloc to impose sanctions, could have a negative effect on growth.

Unemployment in the euro bloc looks set to “remain intolerably high for a long time,” according to Buti. It will gradually decrease from a projected 11 percent this year to 10.5 percent in 2016, the commission said.

‘Fragile Recovery’

The commission downgraded its 2016 growth forecast for France, the second-largest economy in the euro area, after Germany. It forecast GDP to expand 1.7 percent in 2016, having predicted 1.8 percent in February. France will grow by 1.1 percent this year, it said, a slight improvement on the 1 percent forecast in February.

“A lower pace of structural reforms could jeopardize the nascent improvement in household and business confidence and weaken the fragile recovery,” according to the report.

Tuesday’s forecast signals that France’s deficit will narrow from 4 percent of GDP in 2014 to 3.8 percent this year and 3.5 percent in 2016. This represents a more optimistic forecast than it made in February. Earlier this year, the commission allowed France two extra years to meet the EU’s deficit target of 3 percent of GDP.

Italy’s economy, burdened with the second-largest amount of debt in the region after Greece, will grow 0.6 percent this year. The commission predicts growth of 1.4 percent in 2016, compared with its February forecast of 0.6 percent and 1.3 percent, respectively.


Fed’s Yellen says met firm at heart of leak probes

Reuters, May 5, 2015

U.S. Federal Reserve Chair Janet Yellen met with a research firm that later published confidential information from the central bank, she said on Monday.

Yellen met with Medley Global Advisors in June 2012, she said in a letter, months before the firm unveiled details of a September Fed meeting a day ahead of the publication of the central bank’s own record of the discussions.

The Justice Department is investigating Medley over a possible leak of information from the Fed.

“Nothing Medley Global Advisors reported in October … could have been conveyed in June, and let me assure you that, in any case, I did not convey any confidential information,” Yellen said in the letter to two Republican members of the House of Representatives, Jeb Hensarling and Sean Duffy.

Yellen said she would also disclose the names of other staff members who had been in touch with the firm.

Yellen in March said that the central bank’s internal watchdog, the office of the inspector general, was investigating the matter. She also said that she did not know where the information had come from.

At the policy-setting meeting, Fed officials laid the groundwork for the massive bond-buying stimulus they were to roll out later that year. Early knowledge of that discussion could have given traders an unfair edge.

The probe comes as politicians such as Hensarling boost pressure on the Fed to tell the public more about its inner workings, including its decisions about monetary policy.

Jeb Hensarling, head of the House Financial Services Committee, wrote to Yellen in March to express his concern about lack of response to an earlier letter by Duffy, who heads the Subcommittee on Oversight and Investigations.

In that letter, Hensarling said that an internal probe by the Fed’s general counsel was dropped at the request of several members of the Federal Open Market Committee, the group that sets the central bank’s interest rate policy, and that a criminal investigation into the matter was pending.


Investors dumping US stocks for better opportunities abroad

CNBC, May 4, 2015

You better look beyond U.S. borders if you haven’t made the move already. That’s the message that exchange-traded fund flows data is sending stock investors.

A month after March set a five-year high for monthly inflows into overseas equity ETFs—at $22 billion—the April level of flows into overseas equities ETFs broke that record, with $25 billion in net flows into international equity ETFs.

The month-over-month record leapfrogging means the message is not new, but it’s a sign that instead of leveling off, the trend among investors bailing on U.S. equities for more international exposure has accelerated.

The $16 billion fear signal

Investors pulled a net $16 billion from U.S. equity ETFs in April, according to monthly data from FactSet. The list of the biggest ETF losers in April flows runs the gamut of U.S. equity buckets: small-cap, large-cap, financials, technology, real estate, health care, utilities. But the biggest flow loser of all was the proxy for the U.S. market—the SPDR S&P 500 ETF (SPY)—which saw negative $13 billion in flows.

The only bright spots in April for U.S. stocks were mid-cap and energy, which were No. 5 and No. 6 in April flows among ETF asset classes—energy being no surprise with the big crude-oil price rally.

Stacey Brorup, of FactSet’s ETF research team, said the most notable positive turn for the U.S. was in the fixed-income market. March had seen net outflows of $900 million, while April saw inflows of around $3.56 billion. “That’s a big reversal in investor sentiment,” she said.

Top 10 ETF asset classes

  1. Developed markets, ex-U.S.: $6.9 billion
  2. Developed Europe: $4.9 billion
  3. Emerging markets: $2.5 billion
  4. Japan: $2.3 billion
  5. U.S. mid-cap: $1.7 billion
  6. U.S. energy: $1.5 billion
  7. Global ex-U.S. equities: $1.5 billion
  8. U.S. total market: $1.1 billion
  9. Germany: $1 billion
  10. U.S. government treasury short-term: $939 million(Source: FactSet, April ETF net flows)

The biggest winners of all in the overseas push—and they have been since last year—are the hedged equity ETFs, targeting markets such as Japan and Europe. As the dollar strengthened and central banks in Europe and Japan have become the forefront of stimulus efforts, the hedged international equity approach has been the biggest ETF asset winner.

“Europe and Japan stock markets in particular are expected to continue to benefit from their central banks’ largess. They also look attractive from the valuation perspective, as U.S. stock valuations are getting stretched after more than six years of bull run,” said Neena Mishra, director of ETF Research at Zacks Investment Research.

WisdomTree Europe Hedged Equity Fund (HEDJ) took in near-$3 billion in April flows, while more than $4 billion flowed into MSCI EAFE Hedged Equity ETF (DBEF).

“Currency hedging has been the biggest story in the ETF world this year as monetary policy divergence sent the U.S. dollar soaring against other currencies,” Mishra said. She thinks inflows into currency hedged ETFs may continue in the coming months, though not at the pace seen in the first quarter.

Mishra said that data should not be interpreted as a sign investors are bailing on U.S. stocks wholesale, but that more investors are finally getting the message about international diversification. U.S. stocks may continue to grind higher, but the easy money in U.S. stocks has already been made, and returns this year will most likely be lackluster, she said. So investors have been looking for better opportunities abroad.

Biggest U.S. equity ETF losers

  1. U.S. large-cap: negative $12.8 billion
  2. U.S. small-cap: negative $2.5 billion
  3. U.S. real estate: negative $1.4 billion
  4. U.S. high-dividend yield: negative $1 billion
  5. U.S. financials: negative $812 billion


America’s capsizing economy: Can it right the ship?

CNN Money, May 3, 2015

rough economic seas

America has had the wind knocked out of its sails this year.

Volatile stock markets, weak economic growth and a hiring slowdown have created a perfect storm for nearly flat growth. The question is whether the U.S. economy and markets can right the ship in May and beyond. There’s reason to believe they can start to this week.

“We’re in a slow growth economy,” says Dorothy Weaver, former chair of the Miami Federal Reserve branch and CEO of Collins Capital. “I don’t think we’re heading for a capsized economy, but that doesn’t mean we couldn’t be hitting low winds and a doldrum.”

The economy’s storm clouds: April was rough all around. It started with news that the economy only added 126,000 jobs in March, and previous months of job gains were revised down. Retail sales for March arrived in mid-April and they were sluggish.

Then last week we learned that America’s economic growth was next to nothing, a mere 0.2% in the first quarter. Maybe the worst news about the growth: Businesses haven’t been investing in themselves this year.

The newest projections for economic growth published by the Atlanta Fed show this spring could be disappointing too — less than 1%.

It all creates a gloomy picture.

But this week’s jobs report could be the first sign that the economy is righting the ship back to last year’s strong performance. Many experts believe the March report was a fluke and that job growth will pick back up in April.

“The labor market is good not great,” says Scott Wren, senior global equity strategist at Wells Fargo Investment Institute. “It was an aberration what we saw [in March.]”

Experts point out that the U.S. economy is still widely considered the best performer in the world. But that’s also a problem for big multinational companies. Demand from China is dropping while Europe is just beginning to move in the right direction. That’s causing American exports to go down. The strong U.S. dollar is putting an extra burden on emerging markets, another key trade group, too.

All those global economic factors will continue to give stocks a rocky ride for the rest of spring, experts say.

The market’s gusty winds: Stocks haven’t fared much better either. Overall earnings growth is down 3% so far this year, according to S&P Capital IQ. Last Thursday the Dow plunged 195 points and lost almost all its gains for the year. It regained steam Friday, but it appears the bull market has less room to run this year.

Many forecast that the S&P 500 could finish the year in high single digits, or even 10%, but it’s got a long way to go. The index — which returned 11% to investors last year — has only grown 2.4% this year. The Dow has shown tepid growth too, just around 1%.

“The market is having a lot of difficulty finding its footing,” says Kevin Mahn, managing director at Hennion & Walsh, a wealth management firm in New Jersey. “Part of it is this most recent volatility and concerns over economic growth.”

There is some good news. Barring the markets falling off a cliff, the bull market will become the third longest in history this week, according to Bespoke Investment Group.

Sunnier skies ahead?: This year could still morph from The Perfect Storm to the Love Boat. The economy was even worse a year ago and stocks weren’t surging ahead yet. Then both rallied. Last year was the best for job gains since 1999. The bull market charged ahead, eventually reaching its 6-year anniversary in March.

Wren of Wells Fargo is optimistic that the economy and markets will catch their tailwinds later this year.

“The bull market still has room to run,” says Wren. “The economy has not stalled. We’re going to continue to move forward at this modest pace.”


Sprott’s Thoughts: Why the Rush into Canadian Gold Mines May Continue

By Henry Bonner, May 1, 2015


In the mining sector, mergers and acquisitions can deliver rapid returns to shareholders.

Investors in Cayden Resources saw their shares swell by 300% in price late last year, when Cayden received a takeover offer from Agnico Eagle Mines.

Steve Todoruk, a broker at Sprott Global Resource Investments Ltd., has been eyeing the next possible takeover. He believes he’s narrowed down the most likely targets.

In a recent note, he explains why it comes down to safety for the company making the acquisition:

I’m seeing two trends in mergers and acquisitions right now, as I look around the space for the next Cayden or the next Osisko Mining (which received a generous takeover early last year).

First off, in the last bull market, many big mining companies went after mines in higher-risk jurisdictions around the world. Today, investors are retrenching towards areas that are perceived as ‘safe’ – where governments aren’t likely to change the rules or confiscate assets. Investors are increasingly risk-averse and want exposure to mines in countries like Canada, the US, and Australia.

That’s why we’ve seen Eldorado Gold recently announce it was spinning off its Chinese assets, for instance.

The second trend we’re seeing is the strength of the US dollar relative to the Canadian dollar. If investors and mining CEOs believe this will last, then it will make sense for them to build mines in Canada. Their mining costs will be paid in Canadian dollars and they can sell their gold in US dollars. This could offer companies a bump to their bottom line, simply for building their mines in Canada.

In fact, the weak Canadian dollar is one of the few positive effects of poor resource markets. It’s a big break for mining companies that are trying to control costs now that their margins have contracted dramatically.

Investor preference for safe jurisdiction, coupled with a weak Canadian dollar, make Canadian mining assets especially appealing.

We’ve already seen a significant rush into Canadian assets as a result, besides the Osisko takeover. Goldcorp acquired Probe Mines in March, 20151 for their deposit located in Ontario, near an existing Goldcorp mine.

Soon after, Centerra Gold entered into an expensive joint venture agreement with Premier Gold Mines to develop its Hardrock gold deposit in eastern Canada.2 In April, Alamos Gold tied the knot with Aurico Gold through a merger in order to gain exposure to its Young Davidson Mine in eastern Canada.3

We’ve also just seen Yamana Gold announce a takeover of junior explorer Mega Precious Metals for their Monument Bay gold project in central Canada.4

As you can see, there’s a strong amount of interest in Canadian gold mines and deposits currently, and I believe it may continue.

There’s a short list of Canadian gold deposits and mines still on the market, which may look attractive to a major miner.

Based on my experience, majors will try to acquire medium-sized or large mines that will be able to produce at least 100,000 ounces of gold per year once they’re in operation.

As we saw in Goldcorp’s acquisition of Probe Mines, big miners also prefer to have mines that are close to their existing operations. This minimizes additional costs for new infrastructure or mine planning. Their labor force is already close by, and geologic conditions are likely to be similar, meaning they will have the right expertise in-house to develop the mine efficiently.

For mines that are further from where they are currently producing, an acquisition target will likely need to be larger and high-grade, with sufficient economics to warrant the strain and costs of extending out to a new area.

So which potential acquisition targets are left standing?

In my view, a short list of well-followed companies would include Detour Gold for its Detour Lake mine, Pretivm Resources for its large, high-grade Valley of the Kings deposit, Rubicon Minerals for its very near-production Phoenix gold mine, Richmont Mines with its Island Gold mine, Lakeshore Gold with its producing gold mines in the Timmins mining camp, Kirkland Lake with its producing mine in eastern Canada, and Kaminak Gold which owns the Coffee gold deposit in the Yukon.

Of course, we don’t know when a takeover could occur, and prices of these stocks could drop from here. Shareholders waiting for a takeover can often be left disappointed. If no takeover occurs, share prices can decline as investors lose interest, and a takeover can occur at a price that’s below where some investors purchased their shares.

Still, in my view the trend of mergers and acquisitions for control of Canadian assets will continue and more companies could receive bids, offering the possibility for attractive returns to shareholders in the midst of a bear market.

When a company gets taken over, it can deliver attractive returns to shareholders. We’ll be watching the companies on Steve’s short list for signs of interest from a major miner.

Steve’s short list does not constitute a recommendation.