Author Archives: Sven Carlin


Time To Get Smart About Stock Picking – Find Out Why

  • An aging population diminishes GDP growth and US GDP growth is bound to further decline.
  • Fertility rates are at an historical minimum and the labor force participation is falling.
  • Corporate earnings growth is correlated to GDP growth.


One of the worries for the stock market apart from interest rates and a slump in commodity prices is baby boomers retiring and selling their stocks in order to fund retirement. As the fertility rate is falling, the worry is that there will be less people standing in line to buy those shares.

This article is going to elaborate on the current situation by analyzing the most important takeaways from the National Center for Health Statistics (NCHS) latest births report, demographic trends and their impact on GDP, and corporate earnings.

The Data

As we all know, the birth rate per 1,000 women aged from 15 to 44 is falling, but something often disregarded is that the number of births is still very high.

1 figure number vs rate
Figure 1: Birth rate vs number of births. Source: NCHS.

The all-time peak in the number of births was reached in 2007 and has been slowly declining since, but it is still relatively high when compared to the 1970s. This high number alongside immigration makes the demographic picture of the US positive. The number of inhabitants is growing at a constant rate.

2 figure US population
Figure 2: US population. Source: Trading Economics.

A growing population is essential for a healthy economy as it enlarges the labor force, provides a larger domestic market for the economy and encourages competition. The high number of new born babies does not mean that the fertility rate is the same; the larger base of people keeps the newborn numbers high but the fertility rate is decreasing.

3 figure birth per woman
Figure 3: Births per woman aged 15-44. Source: Wall Street Journal.

The lower fertility rate brings to another well-known issue: population aging and worries about ‘demographic time bombs.’ One of the biggest fears is that the future generations will fail to meet pension requirements from an ever increasing number of retired workers.

Not only that, research from the Center for the Study of Aging (CSA) has shown that for every 10% increase in the fraction of the population aged 60+, a 5.7% decrease in GDP per capita can be expected as the labor force diminishes. The number of Americans aged 65 and above is expected to double by 2060.

4 figure population selection
Figure 4: Percentage of US population in selected age groups. Source: Population Reference Bureau.

According to the CSA research mentioned above, the increase from 15% to 21% of population being older than 65 in the next 15 years should diminish US GDP per capita by around 20%. With the population expected to grow only 11% from now to 2030, the aging population will remove 10% of US GDP in the next 15 years. With increased global competition and increased US debt, we should not expect big US GDP gains.

The aging issue has already been having a negative effect on the US labor force participation for almost two decades.

5 figure us labor force participation rate
Figure 5: US labor force participation rate. Source: Trading Economics.

This trend perfectly coincides with the slowing down of US GDP growth, confirming the thesis that an aging population diminishes the labor force and consequently, economic growth. The US GDP average growth rate has been 1.85% per year since the beginning of this century while the average for the 1990s was 3.38%, 1980s 3.16%, 1970s 3.3% and 1960s 4.46%.

Effect on Portfolio

Investors today should not expect the same returns in the next 50 years as the investors in the second part of the last century had enjoyed. The second part of the 20th century had an average yearly GDP growth of 3.72%, thus double the average GDP growth in this century as the population and the labor force were constantly increasing. Such an environment made it easy for companies to grow and find new opportunities.

This half century trend is now in reverse mode. Curiously enough, the year 2000 was exactly the end of the past trend and the beginning of the new trend. S&P 500 corporate earnings in the 1990s were growing at a geometric average of 6.6%, while earnings in this century grew at only 3.7% per year. This almost 50% decline in earnings growth is perfectly correlated with the 50% decline in GDP growth.

Buybacks and international growth are seemingly not enough to contrast the decline in US GDP growth.


Unfortunately, the FED can’t do much to fight the negative demographics trend. Monetary policies can have an effect but in the long term, productivity is what matters and with less workforce, productivity eventually declines. Declines in productivity bring increased debt levels as the previous standard is kept and investments are made with the hope of economic improvements. A similar situation is affecting Germany but in order to fight the trend, Germany allows a million immigrants (more than 1% of the German population) to enter and work in Germany per year.

With negative demographic trends we cannot expect high growth levels from the general US economy which brings to the conclusion that investments in mutual funds or the general market which were great for the 20th century will not do well in this century as the general economic situation does not allow similar corporate general performances. This will be the century of smart stock picking investment strategies.


If Stocks Are Risky, What About Bonds?

  • Yields should be the main factor when choosing whether to invest in bonds or stocks.
  • As yields cannot go much lower, bonds become risky too.
  • Historically any significant increase in bond yields brings to negative returns.


It is almost common knowledge that in the long term stocks outperform bonds as bonds are less risky and therefore have lower yields. But if we look at the question from the title of this article from a long term perspective where stocks always outperform, then there is no risk in investing in stocks as eventually you will be rewarded with higher returns. And this is exactly the current market’s perception on the stocks vs. bonds issue.

figure 1 bonds earnings dividends
Figure 1: Dividend yields, bond yields and S&P 500 earnings yield since 1927. Source: Federal Reserve, Multpl, NYU.

Historically the corporate earnings yield was the highest, except for the high inflation period in the 1980s and the dotcom bubble in the late 1990s, early 2000s. We could say that things are finally returning to normal as corporate earnings are higher than bond yields and therefore the logic that stocks will outperform bonds in the long run is correct at the moment.

Stocks did not outperform bonds in times when the earnings yield was lower than the bond yield. 2011 was the first time that bonds outperformed stocks over a 30-year period which is logical as in 1981 bond yields were higher than stock yields. The same has happened since the beginning of this century.

2 figure stock vs bods 21 century
Figure 2: Stocks vs bonds since 2000. Source: Wall Street Journal.

As bond yields were almost double corporate earnings in 2000, bonds smoothly outperformed stocks. We can easily conclude that yields are the main factor in the return puzzle and that investors can expect their returns to be perfectly correlated to the underlying earnings when investing in stocks or to the yields when investing in bonds.


Bonds are considered much less risky than stocks and if we look at the above figure that is clear as bonds did not experience the swings stocks did. But do not get fooled by bonds and their stable growth as most of the above returns were influenced by declining interest rates. As interest rates decline bond returns increase. The opposite happens if interest rates increase.

3 figure bond yields and returns
Figure 3: Bond returns versus changes in yields from 1927. Source: NYU and author’s calculation.

The almost perfect correlation in the above figure shows that no investment should be made based on general assumptions like the ones that bonds are less risky and that stocks always outperform in the long term. The first thing to look at is the yield of the potential investment, be it stocks or bonds, and then the risk.

The current S&P 500 earnings yield is 4.16% and the 10-year treasury bond yield is 1.62%. By looking at the risk side of the puzzle, it is clear that we are in an asset bubble, as both yields on bonds and stocks are historically low (figure 1). Bond yields have never been below 2% and stock yields are far below the historical mean of 7.42%. The main risk for both assets lies in interest rate increases. As there is no historical precedent to the current low yields and monetary policies, we can only assume an eventual return to normalcy.

As figure 3 shows, any increase in bond yields of 25% from the current yield results in negative returns from 5% to 15% for bonds. At current levels a yield increase of 25% would bring bond yields from 1.61% to just 2.01% and have a negative effect on bond returns. We can only imagine what a 100% bond yield increase would do to bond returns as we have no similar data in the last 90 years to analyze such a situation. A 100% increase in bond yields would bring the current yield to only 3.2% which is still historically very low.

The same can be expected for stock returns because with bond yields going higher, expected stock yields will also be higher and therefore stocks would have to go down.


No one knows what will happen in the future and all that we can make are assumptions based on analysis of historical data. Those assumptions tell us that the risks to an investor by being invested in stocks or bonds are high as both asset classes are in a bubble. If interest rates increase, and eventually they will as that is the goal of every central bank, are you willing to risk 20% of your investment for a yearly 1.6% yield from bonds or 40% for a 4% yield from stocks.

The usual investment tradeoff between bonds and stocks of being overweight the undervalued one and change accordingly might be a good solution. On the other hand, the recent negative yield on the German 10-year note shows how crazy the market can get so that nothing should be excluded but we should properly assess risks.

What Are The Options? 

One option that is usually blasphemy for investors but has to be considered is cash. As most asset classes are overvalued, cash might be a good option to weather the turmoil and give liquidity to buy stocks or bonds at lower prices.

Another option is to find stocks that will outperform the market and perform well in an environment with higher interest rates and inflation. Commodities that are uncorrelated to the economy can be a good protection, as well as utilities with low debt.

All of the above is easy to write about but very difficult to correctly time, but the purpose of this article was not to give exact forecasts and advice, but rather a mere overview of what can happen.


Big Returns on Silver Could Be at the Finish Line, But Are You In for the Wild Ride?

  • Silver is both a precious metal and a commodity, which makes it a very interesting investment.
  • Silver prices jumped 26% year to date and the market has been in a deficit for 3 years.
  • In the long term, silver will continue to be very volatile but might present excellent investment opportunities for brave investors.


Silver is a special metal as it is considered both a precious metal and an industrial commodity. Silver is used for solar panels, water filtration, jewelry, electrical contacts and conductors, LCD screens, x-rays, disinfectants and for other various applications. This makes silver have, unlike gold, a pragmatic use influencing the demand for the metal.

This article is going to provide an analysis of the current silver market, elaborate on the investment thesis for silver by assessing risks and rewards, and provide investment opportunities.

Silver has been battered alongside other commodities but what strikes is its volatility.

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Figure 1: Silver price per ounce. Source: SILVERPRICE.

Silver has much more accentuated spikes and busts than gold but they are positively correlated, so an investment in silver would resemble one in gold and add the benefit of a commodity.

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Figure 2: Gold price per ounce. Source: SILVERPRICE.

Supply and Demand

In 2015, silver demand hit a record high while mine production growth declined to its slowest pace in four years. This resulted in an annual physical deficit for silver of 129 million ounces, making it the third consecutive annual deficit. Even with the deficits, silver prices continued to fall up to December 2015 when silver reached a low of $13.7 per ounce because of expected higher interest rates in the US and slowing industrial demand in China.

As the situation in the US is not that good and demand from China did not fall as expected, silver has rebounded alongside other commodities to the current price of $17.25.

3 figure silver prices last 5 years
Figure 3: Silver price in the last 5 years. Source: Bloomberg.

It is interesting that as silver prices fall, demand for silver coins increases as coins are priced per ounce.

4 figure silver coin
Figure 4: Silver eagle coin as an investment. Source: APMEX.

Except for investment, silver demand has increased for jewelry and silverware bringing to a total increase in demand of 25% in the last 10 years.

5 figure silver supply and demand
Figure 5: World silver supply and demand. Source: World Silver Survey 2016.

Meanwhile the supply has increased only by 13.4% in the last 10 years. The fact that silver supply remained stable in the last decade, even with silver prices going above $40 per ounce, shows how small imbalances can make silver a very profitable investment, especially at these low prices.


Silver has two purposes, it is a precious metal and therefore considered a store of value and protection from inflation. As inflation is something most of the millennials only heard about in school and the last years have been good for the markets, silver got the short end. But any turmoil in global markets or hint of inflation could spur the metal. The volatility of silver is further excited by paper silver trading as currently, according to the U.S. Commodity Futures Trading Commission, there are 64,790 short contracts and only 22,928 long contracts so more volatility can be expected if shorts have to cover or try to force the market down.

Increased demand from China and a weaker dollar influenced this year’s rebound and the question now is if this can be sustained. In the long term, the World Bank does not expect average silver prices to go much higher as industrial demand stabilizes and investment demand declines, but the forecast is opposite from what is really going on as more investment coins are bought with silver prices declining.

6 figure World bank outlook
Figure 6: World Bank long term outlook. Source: World Bank.

Long term downside risks to the forecast include stronger-than-expected monetary tightening and dollar strength. Upside risks include weaker global growth, financial stress in key economies, heightened geopolitical events, and stronger demand from consumers, central banks, and investors. As the Word Bank’s outlook is known to be the average, investors can expect both downside and upside risks that will make silver volatile in the long term.


One opportunity to invest in silver is through the iShares silver trust which follows the price movement of physical silver.

For more entrepreneurial investors, investing directly in silver stocks is a possibility but a limited one as silver is usually a byproduct from mining gold, zinc or copper. However, there are some potential investment that can be researched like Silver Wheaton Corp. (NYSE: SLW), Fresnillo Plc (FNLPF), Taho Resources (NYSE: TAHO), Coeur Mining (NYSE: CDE), First Majestic Silver Corp (NYSE: AG) and Pan American Silver Corporation (NASDAQ: PAAS).

Investing directly into mining stocks brings along other risks than just the above mentioned general risks related to silver, but can provide extra returns.


Silver gives two opportunities, one from being a precious metal and one from industrial demand. At current low prices, if you think the FED is not going to raise interest rates as the economy is not doing as well as it should, silver might be a very good investment.

It is impossible to know what will happen but we can be sure that silver will be volatile as short sellers will push prices down in a negative scenario and cover in a positive one. This makes silver a good diversification investment as it is uncorrelated to the general market or an investment for those who have the stomach to withstand large swings in prices.



Do You Feel 50% Richer than 7 Years Ago?

  • US net worth has been increasing due to asset price inflation.
  • Asset price inflation has been influenced more by cheap money and less by GDP that has been growing on debt based consumer spending.
  • As the FED is out of firepower to protect the markets and the economy from any shocks they have no downside cushion.


On June 9 the FED released its quarterly Financial Accounts of the United States. The report shows the total of accounts for various things, from net household worth, debt per segment, consumer spending to the general flow of funds. Unlike the usual newspaper that focuses on easy to reproduce single pieces of information, this 196-page report gives a clear picture of what is going on in the US economy, the developing trends and therefore has to be well understood by anyone who has an interest in the US economy.

The Data 

Household net worth is at its highest level ever at $88,087 billion. The latest increase was mostly influenced by the $498 billion increase in real estate value while the value of held corporate equities fell by $160 billion.

1 figure net household worth
Figure 1: US net household worth. Source: Federal Reserve.

Household net worth has increased from $56,214 billion in 2008 to the current $88,087 billion in 7 years that represents a growth of 6.6% per year. In the meantime, GDP has grown from $14,718 billion to the current $18,229 billion that represents a 23.8% growth for the period or just 3% per year.

The fact that asset prices have grown at twice the speed of the real economy indicates an asset inflation. This asset inflation is not publicized because it is not measured as asset prices commonly fluctuate and inflation is measured mostly through the consumer price index that reflects consumer spending. Thus it is not measured but is important for common wealth.

So if the wealth didn’t come from economic growth, it had to come from some other source. As you can imagine that source is not a very sustainable one in the long term. It is the same source that ignited the 2009 Great Recession, but now the culprits are not the banks. The culprit is the FED, which has been increasing its debt by rates never seen before.

2 figure debt growth by segment
Figure 2: US debt growth by sector per year in percentage. Source: Federal Reserve.

The FED’s debt grew by a yearly average of 10.69% in the last 10 years, foreign debt grew at an average rate of 7.77%, while consumer spending grew at an average rate of 3.83% and has increased to 6.5% for the last 4 years. FED borrowing has been slowing down in the last few years but it has been replaced by higher consumer spending based on debt and foreign debt. The conclusion is very simple, the increase in wealth is purely created by debt and cheap money which has never been a good sign for the long term.

The debt has fueled consumer spending that has further fueled increases in corporate earnings, which alongside low yields, increased the market value of domestic corporations by a staggering 132% since 2008. This increase contributes to 65% of the increase in net wealth since 2008. Any decrease in the US stock market would quickly erase the gains made in the last decade. The FED is well aware of that and therefore is more focused on the effect its monetary policies have on the market than on the economy.

Repercussions of Asset Inflated Wealth

When asset prices rise, most people don’t complain as it gives a good feeling of increased security. But that feeling is a very deceptive feeling as in order to use the benefits of the increased wealth, the only option is to sell those assets.

If a few people start selling there is no issue, but what happens when the majority starts selling? Well, a crash. And as most of US wealth is locked up in assets whose value easily fluctuates, the above 50% increase in wealth has to be taken with two grains of salt. A 25% S&P 500 decline would lower national household wealth by 10%. This is something to worry about as after a 7-year bull market, a 25% market decline is not improbable, especially since we have experienced two 12% declines in the last 12 months.

Will the FED Continue to Protect Your Wealth?

The FED is trying to keep things stable by not increasing interest rates as the economy is still not rolling as expected, even after 7 years of incredible quantitative easing. As soon as stocks have fallen a little bit, the FED has announced that any further increases in interest rates will be postponed and the market rallies. This does not mean that the FED will always be there to protect our wealth as at one point it will have to shift focus from asset prices to the long term economy. The fact is that the FED has no more fire power, it cannot lower interest rates by several percentage points like it did in 2008 to save the economy from a downward spiral or in 2002 to propel house buying. A return to quantitative easing is unlikely as it did not create sustainable economic growth in the last decade.


Unfortunately, the conclusion is not a rosy one, but a warning has to be sent out.

Everybody makes money in a bull market and with inflated asset prices, corporations find it easier to attract capital and investment banks make money on those deals. In such an environment, nobody wants a market decline except for some isolated shorts, but as no fundamental and structural reasons underpin the growth in wealth and the economy, a crash is bound to happen sooner or later. Nobody can know when but the fact that the S&P 500 did not grow in the last 18 months gives a clear indication that the party might be close to an end.

In this week’s meeting, the FED will probably sit tight by not increasing interest rates and try to issue consolation statements reassuring the public that the economy is doing well or that if the economy isn’t doing that well, the FED will intervene. This leverage that the FED has used to keep the economy stable and consumers to buy more things will eventually backfire. If it is already starting to backfire will be clear not after the economic data is released in June or FED actions, but after the earnings season in July when we will see how corporate earnings are affected by the above repercussions.



Global Smartphone Growth Isn’t Done Yet – Should You Invest?

  • The smartphone trend is bound to continue as 25% of the world has low penetration levels.
  • 2015 was stellar in growth so it is logical that 2016 will be somewhat slower.
  • Valuations are really cheap when compared to the general market.


The smartphone industry is not only interesting because it includes the biggest company by market capitalization (Apple – NASDAQ: AAPL) but also because it is in a global growing trend and has low valuations. This article is going to provide an overview of the industry and its two biggest players.

Current Situation  

Global smartphone sales have been growing constantly in the several last years and this has been very rewarding for investors that invested in the industry at its beginnings.

1 figure smartphone sales
Figure 1: Global smartphone sales growth. Source: Statista.

But fears are increasing that this amazing growth story is about to stop as many estimates show slower growth of smartphones sales, and some even estimate a fall in 2016 based on the first ever smartphone shipments decline in Q1 2016. Global smartphone shipments fell 3 percent annually from 345.0 million units in Q1 2015 to 334.6 million in Q1 2016. Samsung is the market leader and shipped 79 million units in Q1 2016, a 4% decrease, while Apple shipped 51 million units, a 16% decrease in relation to Q1 2015. The third player in the market is Huawei, an employee-owned Chinese manufacturer that grew its market share from 5% in 2015 to 8% at the begin of 2016.

Even with the current stall in growth the numbers still look stellar and the we cannot say that the industry is finished just by one declining quarter. Especially after Q1 2015 was 21.5% better than Q1 2014 due to the new iPhone and Galaxy smartphones, so that was tough to beat. In general, the industry is expected to continue on its growth trajectory and only stall in 2018.

2 global outlook
Figure 2: Smartphone sales outlook. Source: Statista.

But the above data seems pessimistic when we know that current global smartphone penetration is at 50% and is expected to grow to 60% in 2020 according to the Mobile Economy Monitor. Developing countries like Indonesia and Brazil have penetration rates below 25%, and India has a smartphone penetration rate of only 13%. The three countries together represent 24% of the global population, so there is plenty of room still to grow.

3 figure penatration
Figure 3: smartphone penetration levels. Source: smsglobal.

Industry Valuation

Now that a trend has been identified, let us see what the valuations are in the business in order to estimate the risk and rewards of a potential investment.

As the smartphone market is very fragmented we are going to analyze the two biggest players which should give an indication for investors willing to dig into the multitude of smaller smartphone producers in order to find the new Apple.

4 figure market share
Figure 4: Smartphone market share. Source: Statista.

Huawei will be left out as you can only invest in it if you are an employee and you work for the company in China. Good luck with that.

Samsung has 24% of smartphone market share but is not a purely mobile company. Consumer electronics, Device Solutions and Display panels account for 46% of revenue, while 54% comes from selling mobile devices. Samsung has witnessed declining revenues in the past 3 years as their other segments find it difficult to compete, but mobile growth keeps revenue at a high level of 200 trillion Korean Won or $173 billion. EPS are $118 and the share price is $1,050 which gives a PE ratio of 8.9, a price to book value of 0.9 and a dividend yield of 1.7%. As Samsung is a global company, investors do not have to be concerned about the Samsung’s reporting currency. Samsung has no long term debt.

Apple has a market share of 15% and mobile devices represent 65% of total sales. Apple has also witnessed its revenue decline in this decade due to seasonal effects and the difficulty in topping the iPhone 6 sales boom of 2015. This decline brought the share price down to the current $98.94 that gives a PE ratio of 11, price to book value of 4.2 and a dividend yield of 2.2%. Unlike Samsung, Apple has 35% of its assets financed by long term liabilities and 90% of its cash hoarded abroad.


The goal of this article was to give an overview of the smartphone industry and not to give investment advice. Much more research is needed to accurately grasp the risks and rewards from an investment in the industry, and in depth analysis is needed to find the next success stories in the sea of new small players. But, the analysis of the two biggest players shows that their valuations are relatively low in comparison to the general market, especially when we know that 2015 was an explosive year with 21% growth and it is logical that it will be difficult to top in 2016. This pause in growth has created large fears in the market and brought valuations down. The low valuations in correlation to the long term upward trend represent an interesting investment opportunity.



Forget About The November Elections – This Will Impact Your Investments Even More

  • Slower global growth will have a much stronger impact on corporate earnings than interest rate increases.
  • US productivity is declining and GDP growth is based on increased consumption amidst cheap financing.
  • Corporate earnings are the source of your investment returns, and the picture is not one of growth.


Amid all the fuss around interest rates, Yellen, jobs, Clinton and Trump there is one piece of information that is very significant for investors but is often disregarded.

The World Bank has revised its 2016 global growth forecast down to 2.4 percent from the 2.9 percent pace projected in January. The cut comes mostly due to sluggish growth in emerging markets, weaker growth in developed economies, stubbornly low commodity prices and lackluster global trade and capital flows. A faster growth rate is expected only in 2018 and it’s still not spectacular as it will be only 3%.

There are more downside risks coming from the limited use of monetary policies at this point as rates are already close to zero, worsening conditions among key commodity exporters and softer than expected activity in advanced economies. On the upside, hope lies in structural reforms as space for fiscal and monetary policies is narrow.

This article is going have a look at what the World Bank says about US growth in order to get a FED-independent opinion and to discuss how slower global growth affects a portfolio, the economy and corporate earnings.

The World Bank’s Look at the US Economy

This a different analysis than the FED’s as it looks from a structural perspective and has no political goal attached to it.

Softer than expected activity since January has led to downward revisions of growth projections. Low oil prices led to a collapse in capital expenditures, while a strong US dollar and weakening demand from emerging markets contributed to stalling exports. The current growth is mostly a result of higher disposable income due to lower commodity pricing and cheap financing that increase consumption.

1 figure invesments US
Figure 1: Non-financial investments in the US are down. Source: World Bank.

In relation to labor, the trend is one of declining productivity amidst low corporate investments and most of the growth comes from services which do not contribute to sustainable GDP growth as much manufacturing does.

2 figure consumption
Figure 2: Consumption is the biggest driver of GDP growth. Source: World Bank.

The World Bank revised its US GDP growth forecast from 2.7% to 1.9% due to rising external risks and the inability of monetary policies to reach their set targets. In the longer term it forecasts US GDP growth at around 2% as investment growth remains modest, demographic pressures are intensifying, and a significant turnaround in productivity growth is unlikely in the short-term.

An interesting thing which is not commented on but is of great importance is that the US economy has reached its natural rate of unemployment which means that further employment or growth will come with increased costs. That should spur inflation which would leave the FED no choice on interest rate increases, no matter the state of the economy.

3 fiugre labor force
Figure 3: US labor force. Source: World Bank.

To sum up the situation in the US we can say it is fragile. The FED is not increasing interest rates as is knows that it would hurt the economy. Such a long period of quantitative easing and low interest rates should have had a much stronger influence on the economy, so the missed targets have the FED navigating in uncharted territory.

From an economic perspective, productivity is the main contributor to long term growth and it has not been increasing. Typically in the US, productivity has grown by an average of 2.2% since World War II, but has been growing at only 0.5% in the last 5 years and even fell by 0.6% in the second quarter of 2016.

Global Outlook

The global economy still hasn’t reached the growth rates from before the Great Recession.

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Figure 4: Global GDP growth rate. Source: Trading Economics.

The global economy typically was growing at levels around 4%, which would fall to 2% under the influence of a global shock like the 1970 oil crisis. Currently there is no shock in the global economy and central banks are stimulating the economy as never before. Any shock would therefore soon resend global growth into negative territory as we saw in 2009. A risk to keep in mind.

Impact on Corporate Earnings

As about 50% of S&P 500 corporate revenues come from abroad, global GDP growth is essential for earnings. The US is reaching full employment any growth potential will be subdued by increased hiring costs, and abroad growth is subdued by lower growth rates as countries like Russia and Brazil are still in a recession and China is slowing down.

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Figure 5: S&P 500 corporate earnings. Source: Charts.

There is a high probability that corporate earnings are going to continue on their declining trend as companies are investing less and less while wage expenses are increasing and demand from abroad is weakening due to a strong dollar.


The above described structural trends bring to a conclusion that more investing activity than just buying the S&P 500 is required in order to reach satisfactory returns. As productivity decreases and global growth decreases, companies dependent on exports or with larger parts of their revenue coming from abroad should become underweight in a portfolio. Also companies that base their business model on services should have more difficulties in keeping their margins as the economy has reached natural unemployment level and wages are bound to go up.

As the economy still looks fragile, it is also opportune to look for companies that can withstand shocks, like a potential inflation shock coming from prolonged low interest rates or an interest expenses shock coming from inevitable future FED rate increases.


Is Your Portfolio “Irrational Exuberance” Proof?

  • There are a few tools to test if the market is in “irrational exuberance.”
  • There are indications that the current market is irrational, but history shows that 100% returns are still possible.
  • The stock market is still risky, so an appropriate premium should be expected.


“Irrational exuberance” is a phrase first used by former FED chairman Alan Greenspan in his December 5, 1996 speech. His intention was to question whether low inflation should imply “higher prices for stocks and other earnings assets,” and to assess the risks of such a market by asking “how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?” Let’s not forget here that Japan is still in the same prolonged contraction mentioned by Greenspan in 1996.

His speech came after the market had been rallying for 14 years if we exclude the 1987 dip. The market rallied further for another 3 years and doubled before the dot-com bubble crash, but eventually never returned to the level at the time of Greenspan’s warning in nominal terms.

1 figure 1996 2002 sandp
Figure 1: S&P 500 from December 5, 1996 to the bottom of the dot-com bubble in 2002. Source: Yahoo.

This shows how easy it is to proclaim that the market is overvalued, but also how risky it can be as even an icon like Greenspan largely missed. A more scientific approach to analyze whether the market is in “irrational exuberance” was given by Nobel laureate Robert Shiller in his equally named book.

This article is going to use the tools given by professor Shiller in order to assess whether the current market is in “irrational exuberance.”

Testing for Irrational Exuberance

According to Shiller “irrational exuberance” happens when asset prices increases are not backed by increases in real economic indicators and earnings. From a long term perspective, it is easy to explain earnings as they are influenced by natural economic cycles, and a short term earnings spur or decline should not be considered as a new economic big leap forward. But this is exactly what happens, as earnings grow stock markets get into bull mode and rally on optimism based on hope for the repetition of the past trend. When earnings fall, stock markets get into panic mode and crash precipitously.

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Figure 2: S&P 500 historical inflation adjusted earnings. Source: Multpl.

In the long term, markets grow in perfect correlation with earnings growth and the straight line we can draw through the above earnings chart shows how normal it is for corporate earnings to be susceptible to cycles. So from the historical earnings perspective presented in the above chart, the market is currently in irrational exuberance as corporate earnings are above historical averages and returning to their mean in the last year and a half.

Apart from earnings falling and being above the historical growth mean, another indicator for irrational exuberance testing is the Shiller PE ratio that uses 10-year average earnings in order to smooth out cyclical influences (CAPE – cyclically adjusted PE ratio).

3 figure CAPE ratio
Figure 3: Shiller S&P 500 CAPE ratio. Source: Multpl.

The CAPE ratio has historically been higher only on three occasions, at the end of the famous 1920s stock boom, at the peak of the dot-com bubble and just before the great recession of 2009. Now as back then, the most common explanation for the high current valuation comes along with the most dangerous words ever used on Wall Street: “the new normal” where seeing that stocks have historically always outperformed other investment types they carry less risk, and therefore a smaller premium should be attached to stocks. With this shift in the fear perspective on stocks based on the assumption that stocks will always outperform no matter the paid price, stock prices—aided by low interest rates—just go up.

The Investor’s Dilemma 

The dilemma facing every investor is if the market is in “irrational exuberance,” how much higher can it go and will I look like a fool if I sell now. One of the biggest irrational markets was the 1980s Japanese stock market that went up almost 8 fold in the period from 1976 to 1992.

4 figure japan nikkei
Figure 4: Japan Nikkei 225 stock market index. Source: Trading Economics.

Imagine how the investors that had sold in 1983 at a CAPE ratio of 25 that thought of it as irrational felt when they saw the increases the market delivered up to 1992 and the CAPE ratio jumping to 90.

5 japan cape
Figure 5: CAPE for Japanese stock market. Source: Telegraph.

Should you sell everything now as the S&P 500 has a CAPE of 26.35 or should you stick to your stocks and hold them because they are just going to go higher? Second question, if the S&P 500 doubles in the next two years, are you then going to sell or you are going to hope for more?

The goal of every investor is to reach the highest possible returns with, and this is a part that is usually disregarded, the lowest amount of risk. On the return side we can expect anything, as the FED keeps interest rates low, the European Central bank continues buying corporate bonds and Japan is printing money like crazy, a return of 100% should not be regarded as impossible.

From a more fundamental earnings perspective, the S&P 500 with an average PE ratio of 25 will deliver 4% returns over the long term. On the risk side, looking from an historical perspective, a PE ratio of 25 is overvalued and a 4% earnings yield from stocks is almost 50% below the historical average yield of 7.42%.

6 figure earnings yield
Figure 6: S&P 500 earnings yield. Source: Multpl.

A return to the average would have the S&P 500 falling to a PE ratio of 13.68 or 46% below the current level.


This is the stock market, amazing returns are possible but so are painful experiences. Years of stable growth make investors more and more greedy and therefore willing to pay for higher valuations as their exuberance makes people quickly forget the stock market pains suffered in the past.

It is impossible to give clear advice on what to do as Alan Greenspan also missed the mark in 1996, but the best thing to do is to rethink your portfolio in relation to potential rewards and risks. The current market has a 50% chance of going higher and 50% chance of going lower, but some investments have much better odds than that.



Get Ready For A Zinc Deficit

  • Zinc prices are already up by 50% this year and more growth is expected.
  • Mine closures and limited mine openings create a supply gap.
  • The World Bank estimates tight zinc markets for the foreseeable future.


Zinc is the fourth most used metal in the world. It is mostly used for steel galvanization – the process of corrosion-resistant zinc plating. Other uses include alloys such as brass, and dietary supplements.

The metal is typically mined in combination with copper, and similarly to copper, the main investing thesis behind zinc is that it is entering a supply deficit phase due to mine closures and increased demand.

This article is going to provide an overview of and outlook for the zinc market, an elaboration of the investment thesis and analysis of investment opportunities.

Zinc Market Overview

Due to global urbanization and development, zinc production has increased by 55% since 2000 and demand for the metal is expected to continue growing by a rate of 4% per annum. This constant demand growth is creating a zinc market deficit due to the fact that current zinc production cannot keep up with demand.

According to the International Lead and Zinc study group (ILZSG), mine production in 2016 is going to fall by 1.4%, total metal production that includes recycling will increase by 0.5%, while demand is expected to increase by 3.5%.

1 zinc 2016 estimate
Figure 1: Zinc is in a strong supply deficit. Source: ILZSG.

Supply was already lowered in 2015 as MMG removed about 350,000 tons of zinc from the market by closing its Century mine that was Australia’s largest open-cut zinc mine, and Vedanta Resources removed an average of 300,000 tons of zinc concentrate annually by closing its Lisheen mine in Ireland. Glencore has also cut back its zinc production by one third—or 500,000 tons—due to its high production costs.

As total mine production is forecasted to be 13,271 thousand tons of zinc in 2016, the closure of the two mines and Glencore’s cutback only removed about 8.5% of the global zinc supply. As there were no major zinc mine openings and there aren’t any in sight as it takes an average 15 years to develop a zinc mine, this resulted in a huge spike in zinc prices since the beginning of the year and lower London Metal Exchange (LME) zinc inventories.

2 figure zinc prices and LME stocks
Figure 2: Zinc prices and LME inventories. Source: World Bank.

As zinc moved into a supply deficit, LME inventories started to decline, and as supply got tight, prices shot up.

3 figure 12 months zinc price
Figure 3: Zinc prices in the last 12 months. Source: Witco.

The above represents an increase of 40% since December 2015 lows, but the outlook and average historical prices (figure 2) show that there is still plenty of room to grow.

The outlook for zinc is very positive from both independent and zinc dependent sources. ILZSG expects a further deepening of the zinc supply gap in 2016, and Teck Resources expects a continuation of the zinc supply deficit for at least 5 years.

4 figure up to 2020
Figure 4: Expected zinc supply deficit up to 2020. Source: Teck.

This is in accordance with the Word Bank and the International Monetary Fund expectations related to zinc prices.

5 figure expected prices
Figure 5: Expected zinc prices per ton. Source: World Bank.

The World Bank’s expected steady increase in zinc prices shows that there is a structural trend developing in the zinc market. But this doesn’t mean that the price will develop exactly like above. Short term periods of market tightening can result in large price increases, while risks like slower economic growth in China can negatively affect the price.

6 figure china zinc
Figure 6: China is the biggest consumer of zinc. Source: ILZSG.

Investment Opportunities

As the situation in global zinc markets is pretty straight forward and positive, an issue with zinc arises from the fact that it is difficult to find pure zinc investments as zinc is often a by-product in mining and mining corporations usually have other main resources. But a good alternative is the PowerShares DB Base Metals Fund that has a 33% exposure to zinc, with the remaining two thirds exposed to copper and aluminum. The copper exposure is also good as copper is expected to enter into a supply deficit by 2018.

For direct zinc stock exposure the important thing is to calculate the revenue percentage deriving from zinc in a company, assess the future outlook for other metals, and to see if production costs are below the cost curve.

7 cost curve
Figure 7: Zinc cost curve. Source: Teck Resources.

Low production costs enable a company to weather price declines and add extra profits when the cycle turns.


The conclusion is simple: zinc is going into a huge supply gap if global economic conditions stay stable. Most risks are related to the continuation of growth in China but this can be offset by India as it is entering a phase of high urbanization and infrastructure investments.

In relation to zinc investments, pure zinc miners can be found on the Canadian stock exchanges but as those are mostly young miners, their risks are not only related to zinc prices but also to the quality of their development projects and execution capacities. With more established miners the issue lies in their portfolio diversification. The best opportunities are to invest in ETFs with exposure to zinc.



Headline Rollercoaster: The Economic Limbo Continues

  • Europe and Japan continue with their easing policies as not much changes.
  • Chinese Purchasing Managers’ Index is positive but not far from stagnation.
  • US data flirts between a dead cat bounce and a stronger economic recovery.
  • Finding specific good investments should be the best answer to uncertain economic times ahead.


Last week was an interesting one as it was filled with various economic news. It is important to summarize that news to see if it will move the needle as the market has moved only sideways since December 2014.

Global News

Mario Draghi, the president of the European Central Bank, announced on Thursday that the ECB will keep rates unchanged as it expects only moderated but stable economic growth, and there are still several sectors that need time to recover as turmoil in emerging markets and in some European countries disables stronger growth. As for EU inflation, expectations are that it should stay stable in 2016 and pick up in 2017 and 2018, but this is a story that we hear over and over again with just the timing being delayed. Inflation in the EU would be globally beneficial as it would push for higher interest rates in Europe and keep the balance between the currently rising dollar and weak Euro. Eventually it will rise but who knows when, and in the meantime US exports are already expensive and will be even more so if the FED raises interest rates.

Shinzo Abe, Japan’s prime minister delayed the announced rise in consumption tax from 2017 to 2019, despite repeatedly saying that only a shock of the scale of a Lehman Brothers collapse or an earthquake could delay the implementation of the increased tax. Such a move indicates that the Japanese economy is not strong enough to withstand any kind of tapering. So the story in Japan is practically the same as in Europe with continuing easing amid weak economic circumstances.

After some positive news from China at the beginning of the year and a hoped faster growth, the latest data from the Chinese Purchasing Managers’ Index (PMI) at 50.1 still indicates growth but a subdued one.

figure 1 china pmi index
Figure 1: Chinese Purchasing Managers’ Index. Source: Statista.

The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. An index value above 50 indicates a positive development in the industrial sector, whereas a value below 50 indicates a negative situation. The 50.1 mark is just above neutral and not the kind of news that could move global markets into bullish territory.

The Australian GDP gave a positive note to the week as the annual growth stepped up to 3.1% from an expected 2.9% mostly based on a larger than expected pickup in commodity prices.

News From The US

Unfortunately, news from the US starts on a darker tone as employers added only 38,000 jobs in May, which is the weakest performance since September 2010. As the rule of thumb is that an increase of 150,000 jobs indicates economic growth while any number below that indicates a weak job market and rough times for the economy, the news might make the FED delay interest rate increases, especially now that Europe and Japan are continuing with their easing policies.

The unemployment rate fell to 4.7% from 5% but mostly due to a decline in labor force participation as half a million Americans dropped out of the workforce. On the positive side, consumer spending advanced by 1% in April which is the fastest pace in the last 7 years. On a yearly basis, the inflation index climbed 1.1%. The US Purchasing Managers’ Index came in on an upbeat tone at 51.3, which indicates expanding activity, especially as it was at 50.8 in March 2016.

figure 2 pmi us
Figure 2: US Purchasing Managers’ Index. Source: Trading Economics.

The final interesting piece of news is the Nation’s international trade deficit that increased from $35.5 billion in March to $37.4 billion in April. Both exports and imports increased but imports increased at a faster pace.


The situation in the US is difficult to analyze as it paints a contradictory picture. Spending is increasing which is good for the economy, but it doesn’t spill into additional hiring which is the main factor for creating sustainable growth. The increase in spending can easily be attributed to a purchasing rush before inflation, and the expected increased interest rates kick in.

The global perspective isn’t better as Europe and Japan find it difficult to reach their targets and China is slowing down. It isn’t surprising that the market didn’t go anywhere in the last year and a half with such news.

As governments cannot reach set targets by using all the monetary policy mechanisms at their disposal, investors should be aware of investing in the market and opt for strategies that are not sensitive to economic activity. Also in the current ETF era, stock picking might come in handy as it enables one to find the best companies that can survive financial shocks or outperform in a longer term ‘economic limbo’.



Sportswear: A Different Global Warming Trend

  • Sports apparel and footwear sales have jumped 42% in the seven years and the trend is continuing.
  • The industry has a higher PE ratio than the market, but offers individual investing opportunities.
  • There is no sportswear ETF so only individual investments are available for investors wanting to be part of the growth.


The sportswear industry has been one of the fastest growing industries in this decade, building on the developing trend of sporting, healthy living and fashionable clothes, or the so called ‘athleisure’ trend. The trend is expected to continue as it spreads globally and sportswear sales are expected to hit $300 billion in 2017.

The US is still the largest market but developing economies are the most active as alongside smartphones, sportswear gives a cheaper and faster way of feeling modern and cool. The growth opportunity comes, for example, from the fact that per capita spending on sportswear is 6 times higher in Japan than in China. The biggest global players on the sportswear field are Nike Inc. (NYSE: NKE) with almost $32 billion in sales, Adidas with almost $20 billion in sales and Under Armour (NYSE: UA) that is quickly catching up with growth rates of around 30% and sales of $4.2 billion. All of the above had spectacular growth in the last few years, with a yearly average of 25% for UA and around 10% for the bigger Nike and 7% for Adidas.

1 figure adidas, nike UA sales
Figure 1: Adidas, Nike, Under Armour sales growth by year. Source: Company filings.

In total, sports apparel and footwear sales have jumped 42% in the last seven years to a total of $270 billion. The question most investors want to know is whether the growth will continue and what the price to pay is for such an investment.

Growth Opportunity

In fashion there are many fads and a few trends. A fad is an intense, short-lived and widely shared enthusiasm for something, think of brands like Crocs (NASDAQ: CROX) or UGGs (NYSE: DECK), while a trend is a long lasting development or change in the way people behave.

Sporting has really developed into something that is changing the way we live. More and more teenagers are playing sports, and as they move into their prime apparel and footwear buying years they should further fuel consumption growth.

2 figure high school
Figure 2: Percentage of high school boys and girls playing sports. Source: Morgan Stanley.

From a global perspective, seeing that Asia is expected to triple its middle-class population by 2020, opportunities are even bigger than in the US. Nike’s current market is about $3 billion, and the company expects it to become $4 billion by 2020 as the brand will be available in more countries and have a larger geographical reach with global ecommerce.

Ecommerce business is going to play a big role in sportswear development and will create high barriers to entry for smaller brands as global ecommerce sales require high visibility, brand recognition, and large investments in supply chains. Apart from ecommerce developments in new technologies like 3-D printing, new knitting machines and automation, are also going to aid bigger players as they have the technology and capital to develop those fields.

4 figure NKE 3d printed shoe
Figure 3: Nike’s partly 3-D printed shoe. Source: Nike.

All of the above developments alongside global economic growth should make sportswear sales grow by at least 5% a year in the next 5 years. Nike expects a faster growth rate of 10%, while Under Armour expects to grow even faster at 25% per year.

3 figure sales estimates 5 year
Figure 4: Expected sportswear growth by continent. Source: Morgan Stanley.

Growth in the US will still be strong but is expected to slow down, while Europe, Asia and Latin America are expected to be the drivers of global sales growth. This is logical as most of the global economic growth is expected to come from developing countries. As there is a high probability of the sportswear trend continuing with its growth path and really changing the way we live, a look at fundamentals will show if it could also be a good investment.

Fundamental Analysis

Sportswear brands are valued higher than the market, but also their 15.09% average yearly growth has been much higher than the market’s. Lululemon and Under Armour’s PE ratios are the highest which is also logical due to their stellar growth, while Puma is finding it difficult to grow but the market sees lots of potential and therefore the highest valuation.

Nike and Adidas are the rulers of the sportswear industry with stable high single digit yearly growth, and are not highly priced in relation to the S&P 500 average PE ratio of 24.28.

CompanyTickerPrice52-Week Range PE RatioEPSDividendPrice to Book5 Year Ave. Rev. Growth
NikeNKE$54.77$47.25 - $68.2025.5$
AdidasADDYY€115.53€62.76 - €117.9929.4€3.781.44.17.12%
Under ArmourUA$36.58$31.62 - $52.9466.9$0.54012.930.08%
PumaPUM.F€212.58€140 - €21785.6€2.480.224.59%
LululemonLULU$67.04$43.14 - $69.7335$1.8908.223.69%
Figure 5: Top sportswear brands fundamentals. Source: Morningstar.

In case the sportswear trend continues, an investment in companies like Nike sounds pretty reasonable on these levels as EPS growth of 10% per year would bring Nike’s EPS to $3.47 in 5 years and a PE ratio of 15.


The most important thing when investing in anything related to fashion is to accurately separate fads from trends. The athleisure trend is a global reality with lots of room still to grow, but it’s also fairly priced with the relative high valuations. Perhaps the best way of investing is to wait for increased temporary pessimism that gives good buying opportunities.

6 figure bloomberg
Figure 6: Current example of pessimism – Bloomberg headline May 31 2016. Source: Bloomberg.

Nike and Under Armour are both closer to their 52-week lows than highs, while Adidas, Puma and Lululemon are close to their 52-week highs. This discrepancy shows how strange the fashion apparels world can be, but on the other hand the future trend is pretty clear. Unfortunately, there is no sportswear ETF so investments have to be assessed on an individual basis.

Sportswear brands provide good global diversification as their sales are well spread globally, except for Lululemon and Under Armour which are still mainly US oriented.