Author Archives: Sven Carlin


Metal Madness: Commodity Boom and Bust Cycles

  • Metals have recovered a bit, but even miners are bearish now.
  • Forecasts are not inspiring for at least the next two years.
  • A lot of indicators suggest that there is another commodity boom cycle in the making as the global economy continues to grow and investments in mines decline.


Commodities had hit rock bottom this winter when iron ore prices went below $40, and alongside iron ore all other commodities except gold were in a slump. This slump in prices provided great returns to investors that had the guts to buy when most thought the world was over for miners. Iron ore prices have rebounded by more than 50% since their lows but are still far from their historical highs.

1 figure iron ore 112 months
Figure 1: Iron ore 12-month chart. Source: Index Mundi.

As similar patterns have affected other commodities, this article is going to provide indications as to whether the rebound is going to continue or if it is just a dead cat bounce.

2 figure bloomberg commodity index
Figure 2: Bloomberg commodity index for the last 5 years. Source: Bloomberg.

Miners Are Not So Bullish Anymore

Miners had usually been bullish as they estimated that lower prices would push high cost producers out of the market, and with less competition, allow more profits for the ones that survive. But the strategy did not work that well, nor that fast.

According to the second global iron exporter in the world, Rio Tinto (NYSE: RIO), the rebound in iron ore prices is not sustainable as more production is coming online and will offset improving demand from China. RIO’s CEO is even warning investors that iron prices will remain volatile.

The recovery in iron prices was influenced by strong demand from China that produced a record high of steel in March and will probably increase its production in April and May. This is good news, but the increase in steel prices and iron ore prices brought to the rapid reopening of capacity that had been shut or suspended that will soon put downward pressure on steel and iron ore prices, again.

The CEO of Antofagasta, a major copper producer, Mr. Arriagada recently announced that copper prices have recovered but still face pressures and are likely to remain subdued for at least another two years as surpluses are expected in 2016 and 2017.

In the Aluminum sector, the outlook is also bearish for 2016 and not much brighter for the next 5 years.

3 figure IMF forecast
Figure 3: International Monetary Fund Aluminum Forecast. Source: Knoema.

An indication of how bad this forecast is comes from the fact that Alcoa (NYSE: AA) is not profitable at the above prices as it breaks even at an aluminum price of around $1,800 per ton.

The situation with coal isn’t any better. The US Energy and Information Administration (EIA) forecasts continued oversupply, even with decreased production.

4 figure eia coal supply and demand
Figure 4: EIA coal supply and demand outlook. Source: EIA.

With prices continuing to decline, and omnipresent oversupply, the coal industry will see even rougher times ahead.

Silver is also not in a good situation as its price rebounded 15% from its bottom in December 2015, but is at the same level as it was exactly a year ago and still 63% down from its 2011 high.

5 figure silver prices
Figure 5: Silver prices since 2011. Source: .

The outlook for silver isn’t that positive as falling silver intensifies in electronic and photovoltaic sectors, and declining trends in photographic applications are contributing to overall lower consumption.

6 figure silver forecast
Figure 6: Silver outlook. Source: World Bank.

The story with gold is different than the above mentioned metals as gold is considered a safe haven in difficult economic times. As difficult economic times seem to be over and the likelihood of the FED increasing interest rates yield strengthens, baring assets will be favored and gold should decline. Physical demand for gold has been weak lately as the two largest gold consuming countries, India and China, lowered their demand. In India, an excise tax of 1% was announced on gold and many jewelers went on strike, while in China demand is weaker due to a slowing economy. As the FED has become more hawkish on interest rate increases, gold has lost 5.9%.

Resource Development in an Era of Cheap Commodities

Commodities peaked in 2011 and have been falling ever since. What happened is that with high prices spurred by growing demand from China, many new projects were developed as they were considered profitable with the high prices.

At the moment there is an opposite trend as many resource development projects are put on hold, showing exactly how mining commodities is a purely cyclical industry. With agriculture, higher prices quickly prompt farmers to plant more of that commodity and cycles are shorter. With mining, it is very difficult to just increase production because it is a very long an expensive process to find and develop a mine, and all the low hanging fruit has already been mined.

7 figure copper and gold lead times
Figure 7: Distribution of discovery to production time. Source: Pumpkin Hollow Project.

As the development of gold or copper mines takes at least 5 years, with 12 years being the most common for copper and with some taking more than 60 years, with the current postponing of investments in research development we might soon witness another commodity super cycle as we have witnessed in the first decade of this century.


Low commodity prices have several influences. It’s not that strange that Europe can’t reach any inflation let alone the 2% targeted level, and that the FED is also struggling to reach the target no matter the low interest rates or quantitative easing. As everything that is produced begins with commodities, this is also where the pricing starts. As soon as commodities pick up, inflation will also soon follow, but according to forecasts that should not happen in the next year or two. As stock markets always anticipate what is going on in the market, investors wanting to take advantage of the future commodity boom cycle should position themselves before it is too late.

Low commodity prices also raise concerns about the ability of commodity-exporting emerging markets and developing economies to withstand shocks in the global economy, as their main source of liquidity is exporting commodities. But those economies would benefit from increased commodity prices and markets would soon grow.

Lower investments in research and development and a heathy global projected economic growth of 3.4% by the International Monetary Fund will eventually result in a boom for commodities. When that will happen is unfortunately beyond the scope of this article, but at least it is clear that it will happen.



It’s Just Money: Is it Time to Think About Investing in Banks?

  • Banks have excellent fundamentals and low valuations.
  • Increased interest rates mean increased spreads and higher profits.
  • Complying with Basel guidelines lower the risks of another financial crisis.


Since the great recession investors have been wary of investing in financials as the bankruptcies, bailouts and layoffs left a big mark. This article is going to shed some light on the current banking situation to see if the 2009 debacle was a once in a century happening, or if there are still inherent risks for the US banking sector.

The Banking Sector

The situation in the banking sector is starting to look better, but stocks are still far from their highs reached last summer.

1 figure wells fargo
Figure 1: Wells Fargo & Co trailing 12-month stock price. Source: Bloomberg.

Bank stocks have risen since more good news about the economy came out and interest rate increases become imminent. The economic logic suggests that increased interest rates should be beneficial for banking profitability. Increased interest rates directly increase the yield banks receive on their cash, increasing the margin between what they have to pay on customers’ deposits and the yield received on short term notes. Of course, there are other important factors for banks like the quality of assets and liquidity, but the trend in interest rates suggests good times ahead for banks especially as increased interest rates are a consequence of better economic times.

As the great recession spurred a wave of new legislation in order to prevent a similar financial crisis from happening again, the quality of assets should be at an historically high level. One example of that is the “net stable funding ratio” proposed by the Federal Deposit Insurance Corporation (FDIC) where banks will need to have enough cash to last for a year. The good news is that banks will need to increase their cash balances by only 0.5% as they have already prepared to meet the new requirements. This is one of the final steps for US regulators to complete in order to comply with the guidelines set by the Basel Committee in order to lower the risks for a new financial crisis.

So, with high liquidity requirements, low interest rates and potential interest rates increases, banks should have high PE ratios due to their low current earnings and future expected earnings growth coming from interest rate increases, right?

Fundamental Analysis

Wrong, the below table shows the fundamentals of the 5 biggest banks in the US by market capitalization.

BankTickerStock PricePE Ratio Price to BookDividend Yield
Wells FargoWFC$50.8512.41.53.00%
JP Morgan & ChaseJPM$65.43111.12.70%
Bank of AmericaBAC$14.8811.80.61.40%
U.S. BancorpUSB$42.9513.51.82.40%
Figure 2: 5 biggest US banks – fundamentals. Source: Morningstar.

With the S&P 500 having an average PE ratio of 24.26, the above ratios look like something scary is going to happen to financials, but the reality tells a different story.

3 figure WFC earnings sensitivity to interest rates
igure 3: Wells Fargo’s (NYSE: WFC) earnings sensitivity to interest rate changes. Source: Wells Fargo Financials 2016 Q1 10-Q.

An interest rate decrease would lower WFC’s earnings by 5%, while higher interest rates would have positive repercussions as high as 5%. As banks are prepared for low interest rates, they have switched their portfolios toward assets that are not sensitive to interest rate changes in the short term and therefore the small changes in earnings. But, with higher interest rates banks would be able to increase their profits by adapting their portfolio accordingly, so banking profits would not immediately increase with increased interest rates but slowly in the longer term. By looking at the FED’s targets, the higher rates scenario is more likely than the lower rates scenario.

4 figure federal reserve
Figure 4: FED’s interest rate expectations. Source: Federal Reserve.

With interest rates going up to 3% in 2017, banks should benefit from increased spreads and from a better economy.

Risks and Opportunities

By investing in banks there is always the risk of a financial crisis, but on the other hand, the low PE ratios create extra rewards for bank owners. The historical bank failures chart shows how difficult times sooner or later always hit banks but that longer periods of relative stability are not uncommon.

5 figure bank failures
Figure 5: Number of bank failures per year. Source: CalculatedRISK.

The long, peaceful periods between banking crises and the high bank stability provided by new regulations could create a new 40-year stable period like the one enjoyed by investors between 1940 and 1980. With the current low PE ratios and low interest rates, things should only improve for banks.

Investment Options

There is always the opportunity to invest in a banking ETF and by doing so, being exposed to all of the US financial sector. The iShares US financials ETF chart shows how risky it can be to invest in all financials as the bankruptcy of a few affects the whole sector.

figure 6 perf comp Wells and Citi
Figure 6: Performance comparison of Citi with Wells Fargo in the last 10 years. Source: Yahoo Finance.

Wells Fargo is 50% higher than before the great recession while Citi will probably never recover from its 2009 bailout. The best investing option should be to individually assess each bank and pick the one that presents the best-risk reward opportunity for the investor. If you do not trust your own analysis skills you can always follow Warren Buffet who, through Berkshire Hathaway, owns Wells Fargo, U.S. Bancorp, M&T Bank Corporation, Mastercard Inc., Goldman Sachs, Bank of New York Mellon and American Express.


There are two contrasting conclusions from this article. The first is that banks are undervalued because a PE ratio of 11.58 seems too low for a growing economy and imminent interest rate increases. The second conclusion relates to the fact that if the banks are properly valued, then the low PE ratio indicates a future US slowdown, but then the S&P 500 with its PE ratio of 24.26 is highly overvalued. This discrepancy between valuations of financials and other businesses is pretty strange as one indicates trouble and the other indicates strong economic growth.



Emerging Markets – Time to Buy?

  • Emerging markets have rebounded but are still neglected.
  • Their fundamentals are way better than those of the S&P 500.
  • Volatility and currency risks are omnipresent but a good strategy can increase returns in such an environment.


Only positive news comes from the US economy, from housing growth to the Federal Reserve Chairwoman Janet Yellen signaling a rate hike. All this news is pushing the S&P 500 towards reaching new highs. Yet a stronger dollar in the longer term will mean cheaper imports and more expensive exports. This perspective inevitably leads toward contemplating investing into emerging markets as they are currently shunned by the investment community due to their relative underperformance and slump in commodity prices. But, going by the maxim that the best returns are made by going where no one wants to go, this article is going to provide analysis on emerging market opportunities.

Current Situation in Emerging Markets

According to Bloomberg, global investors pulled $735 billion out of emerging markets with China accounting for 90% of it. This resulted in a sharp decline in the iShares MSCI Emerging Markets ETF that tracks the MSCI emerging markets index which fell by almost 20% in the last 12 months, but was also down 31% in January.

figure 1 emerging markets index
Figure 1: iShares MSCI emerging markets ET last 12 months. Source: iShares.

The MSCI emerging markets ETF consist of 23 countries representing 10% of global market capitalization with the greatest weights attributed to China (23.89%), South Korea (15.29%), Taiwan (12.18%), India (8.1%), Brazil (6.58%) and Russia (3.75%). The PE ratio of the iShares MSCI Emerging Markets ETF is 11.44, the price to book value is 1.4 and the current distribution yield is 3.17%. Emerging markets have a PE ratio that is only 47% of the S&P 500 PE ratio, the price to book ratio is only 49% and dividend yield is 1.5 times higher than the S&P 500. As 23% of the S&P 500 revenues are generated in emerging markets, it seems logical to buy exposure to emerging markets directly at a much lower valuation.

This cheapness and decline in emerging markets was mostly caused by weaker currencies in relation to the dollar, less available capital due to the discontinuation of the US quantitative easing and low commodity prices. With low commodity prices, countries that are rich with natural resources like Brazil or Russia find it difficult be liquid which further ignites a spiral of downgrades and capital outflows.

Risks Related to Emerging Markets

The situation is bad; can it get worse?

The answer is simple: yes. Further increases in US interest rates will create a stronger dollar with higher yields and more money could be pulled out of emerging markets. A stronger dollar lowers global commodity prices and emerging countries have less liquidity on which to count on, especially as many have bigger parts of their debt in foreign currencies.

Weak commodity markets also push down capital inflows and further destabilize emerging economies. It is impossible to exactly catch the bottom or to know if the current pull back is just a temporary one or the start of a long term trend, so the best way to approach emerging markets is to weight one’s exposure to them. There are several reasons why emerging markets portfolio exposure should be beneficial.

Reasons to be Exposed to Emerging Markets

The January 2016 International Monetary Fund outlook forecasts global GDP growth at 3.4% for 2016 where developed economies are expected to grow at 2.1%, while emerging markets are expected to grow at 4.3% despite the above mentioned difficulties. Asia is expected to be the leader in growth with 6.3%, while Latin America and Russia are expected to contract in 2016 and rebound only in 2017. South America and Russia drag emerging markets down, but from an investing perspective the best time to invest is when times are difficult.

The already mentioned lower valuations should provide excellent diversification to your portfolio, albeit a volatile one. Also, any weakness in the US and the dollar would quickly reignite interest for emerging markets and make those interest rates more attractive, thus pushing emerging currencies higher.

figure 2 interest rates
Figure 2: Emerging markets interest rates are high. Source: Trading Economics.

The US interest rate of 0.5% seems really low when compared to emerging markets, therefore exposure to other countries should provide good long term diversification. The volatility of emerging markets is bad when they fall, but could be an extraordinary tailwind if they rebound.

figure 3 emerging markets volatility
Figure 3: iShares emerging ETF vs the S&P 500. Source: Yahoo Finance.

Any pickup in emerging markets economies, or a more positive outlook, could quickly reverse the current trend and push the emerging markets index towards the highs seen in 2007 and 2011, or even higher. It is difficult to expect returns in excess of 50% from the S&P 500, while it is a possibility with emerging markets, but larger losses are also possible.


Investors do not like emerging markets at the moment, so if you have the guts to buy something others dislike and fight the trend, you might be rewarded with extraordinary returns or extraordinary losses. Fortunately, markets do not just obey investors’ sentiment, but also have fundamentals and fundamentals are on the emerging markets side.

As there is a possibility of further declines for emerging markets, a good strategy is to have a proportional weighted exposure to them. By always keeping the same percentage of your portfolio in emerging markets, you get the nice dividend yield, trim your position when markets go up and buy more when markets are cheaper. ETFs give the best opportunities to follow such a strategy.



Peter Lynch – How the Heck Did He Do It?


Peter Lynch was the investment manager of the Magellan Fund at Fidelity Investments from 1977 to 1990 where he averaged a 29.2% yearly return. $1,000 invested became $28,000 after just 13 years.

He is also famous for his investment books One Up on Wall Street, Learn to Earn and Beating the Street, and for coining new mantras like “invest in what you know” and “ten bagger.” A ten bagger is when you make ten times your initial investment on a stock. This article is going to compare what Peter Lynch did, how it’s different than current investing trends and if the current market situation enables such returns.

Investment Rules

Some of his rules are:

  • “You only need a few good stocks in your life time”: The message here is not to water the weeds by holding on to the dogs in your portfolio but sticking to the winners. Most investors usually sell their winners when they go up by 20% or 30% and keep the losing stocks. There shouldn’t be a problem to find ten baggers now. Peter Lynch kept a book where he wrote over 100 stocks that went up 10-fold while he ran the Magellan Fund that he didn’t own. The stock market always gives great investing opportunities and probably always will, the trick is to find them. The easiest way of finding current ten baggers is to take March 2009 as a starting point, but there are also companies that became ten baggers even for investors that bought them before the great recession. An example is Apple (NASDAQ: AAPL) with a price of around $9 in June 2006 that grew to the current $100. As AAPL is one of the most traded stocks on the market, we can only imagine how many investors traded AAPL back in 2006 for a single or double digit percentage gain while they could have enjoyed ten bagger returns just by holding on to a winner.
  • “The person that turns over the most rocks wins the game”: This rule is the opposite of what the current ETF craze suggests where you buy a little bit of everything on the market. By doing what the market does you can never beat the market, and the market is everyone that blindly invests through ETFs or other funds. Just a little bit of market panic could create an avalanche of forced sales and give stock pickers great new ten bagger opportunities.
  • Ask yourself this question when the market declines: “Will this infect the basic consumer? Will this drop make people stop buying cars, stop buying houses, stop buying appliances, stop going to restaurants?” No one likes market declines and recessions but those are inevitable when investing so be prepared to weather those and buy more when stocks are cheap.
  • “Buy what you know”: is what Peter Lynch is famous for, but this does not mean that if you like Starbucks you should just buy it. His advice looks for more specialized knowledge like if you are in the steel industry, you will probably be among the first to know when it starts rebounding. But, that inside knowledge should be combined with serious fundamental stock research.
  • Absent a lot of surprises, stocks are relatively predictable over twenty years, as to whether they’re going to be higher or lower in two to three years, you might as well flip a coin to decide”: A long term approach to investing in stocks similar to many other successful investors like Warren Buffett is the general rule. Investing for shorter periods of time in stocks is just betting and not investing.  
  • “All else equal invest in the company with the fewest color photographs in the annual report”:A simple message; the focus lies on the business and on making profits, and not extravagant investments.
  • “When even the analysts are bored, it’s time to start buying”: Sometimes after one-off events like scandals or sector declines, analysts will look for more hype sectors and bash the untrendy ones. This will leave complete sectors in the shadow and that is the best opportunity to buy in. After a while, analysts will flock back, earnings will rise again and the returns on investment should be made by then.
  • “Owning stocks is like having children – don’t get involved with more than you can handle”: As already mentioned, stock picking takes a lot of time, but you do not need to know every stock in the market. According to Lynch there is no need for an amateur investor to follow more than 8 to 12 companies and have more than 5 companies is a portfolio at any time.


Lynch’s general investing rules are still applicable today as they involve meticulous research in order to understand the financials and the business of a company. What separates Lynch from the rest is that he buys when companies or a sector is in some short term trouble and then sticks to the investment until it is fully valued by the market. Also, as the prices of his investments increase and things go better, Lynch is known to increase his stake at higher prices. A general conclusion should be: buy cheap, stick to your winners and do lots of research.

A funny anecdote from his last interview is that in a bubble market people always ask for stock tips, while on the last two trips no one asked, so this might mean that the bubble is ending. A bubble bursting would provide much more ten bagger opportunities.

To conclude in Lynch’s wisdom, if you invest $100 in stock you can lose only $100 while the returns are unlimited. Pretty simple.


Gold – Investment or Speculation?

  • An increase in interest rates should push gold prices lower while a recession should push them higher.
  • Gold mining cash costs are much lower than current prices and do not provide a safety margin.
  • The high risk/high return investment strategy for gold is mining stocks as they are down 80% from their highs but have rebounded almost 100% in the last few months from their January low.


Gold is a controversial investment asset. Some say that is has no function and therefore no value while other see it as the most secure asset to run to in case of trouble. This article is going to elaborate further on both perspectives relating them to the current situation on the gold market.

Influences on the Price of Gold

The 20-year gold price chart shows how volatile gold has been. Gold has traded from lows of $250 per ounce in 2001 to highs of $1,830 per ounce just ten years later in 2011.

1 figure gold prices
Figure 1: Gold prices per ounce. Source: Bullion Vault.

In the shorter term, the January turmoil on financial markets pushed the price of gold from a December 2015 low of $1,051 to a recent March 2016 high of $1,293. A more hawkish tone from the FED on increased interest rates pushed gold prices down again to the current $1,226. Higher interest rates make it difficult for gold to compete with treasury notes that also represent safety, and on top of it have a yield.

The strongest influence on gold prices comes from interest rates and the figure below shows how the current historically high gold prices are correlated to low interest rates.

2 figure fed rate gold prices
Figure 2: Gold price vs real interest rates. Source: Goldcorp.

But it isn’t only interest rates that influence the price of gold. Gold is usually seen as an inflation hedge, so if higher interest rates will be a consequence of inflation due to the pickup in the economy, higher oil prices and increased demand for houses, gold prices might still rise or stay stable. Also, gold is considered a hedge against currency devaluation due to its relatively stable supply and limited availability but interest rate increases would only make the dollar stronger and therefore devaluation is not a risk the US currency runs at the moment.

As with any other commodity, supply has an influence on gold prices. Maybe not such a strong one as with other commodities as gold is mostly used for investment purposes. In relation to supply, higher gold prices enabled less cost efficient projects to come online and thus gold production has constantly increased in the last seven years.

3 figure gold production
Figure 3: Global gold production and miners expected future production. Source: Goldcorp.

If gold prices decline, the output will immediately decrease as expensive mines are shut down, but the gold production curve shows that gold is a rare metal and mining costs are high.

4 figure gold cost curve
Figure 4: Gold production cost curve. Source: Mineweb.

At the current gold price, less than 50% of gold mining is profitable if we take capital investments, depreciation and total cash costs into account as the average production cost is $1,314 per ounce. If we look at only mining costs it tells another story as average mining costs are $749 per ounce. This means demand for gold is the one influencing prices. From a supply perspective it is difficult to put a bottom to gold prices as a big chunk of production can be cash flow positive at prices of below $500.

Demand for gold is mostly influenced by the already mentioned interest rate and by fear. As the market is near all-time highs there is not much fear in the air but the January market dip quickly pushed gold prices up by 25%. The more turmoil there is on the markets the more people will seek refuge in gold as—due to limited supply and costly mining—it gives certainty in difficult times.

Investment Opportunities

There are several ways to be exposed to gold. One is just to directly buy a bar of gold and hold it in a safe, but there are more sophisticated ways to be exposed to gold as well.

Gold ETFs are a good choice as they trade as a stock, so you don’t have to physically own the gold as they track the price of gold. The biggest gold ETF is the SPDR Gold Trust ETF (NYSEARCA: GLD). An even more volatile strategy but one that can also have a dividend yield attached to it is to invest into gold mining stocks. Gold miners are much more volatile than gold. For example, if a miner breaks even at $1,200 per ounce, every dollar above that price is pure profit and therefore mining stocks are much more sensitive to fluctuations in gold prices.

figure 5 gold stock etf
Figure 5: Van Eck Vectors Gold Miners ETF. Source: Bloomberg.

As gold prices fell 42.5% from a high in 2011 of $1,830 to a 2015 low of $1,051, gold mining stocks have fallen by 79.5%. As gold rebounded to the current $1,226, the Miners ETF rebounded almost by 100% from a low of $13.03 to a high of $25.83. A sharper decline in gold prices could easily push the price of the Miners ETF down by more than 50% and vice versa for an increase in gold prices.


If you like Warren Buffett you will never invest in gold as according to Buffett it is just a metal that we dig out of the ground, transform into bars and put under the ground again while it produces no economic benefit whatsoever. It is estimated that there is about 181,300 tons of gold in the world, that at current prices would be worth $7.8 trillion. For that money you can but one third of the US land that has an estimated value of $23 trillion.

Buffett’s point is that one third of US land is a much more sensible investment as you produce something and enjoy economic returns while gold is just a piece of metal. But, in times of financial trouble when people panic and lose faith in the economy or the currency, gold prices shoot up. As gold does not produce anything, maybe it should not be called an investment but more a speculation.



The Elephant In The Room – Is India The New China?

  • The Indian economy is growing at 7% and the demographics are still very positive.
  • The market is overvalued from a global perspective but the growth should remedy that.
  • Investment exposure to India can be achieved by investing directly in ADRs or ETFs.


A country often dwarfed by its northern neighbor and still not perceived by the investment community as significant is India. As most news is about China, this article is going to give a perspective on the investment potential India offers.

Investing is a function of timing, investing at peak euphoria usually means buying high and selling low when the bubble bursts. But for the more daring investors India still represents an opportunity to buy before it becomes a bubble.

India and Its Economy

India has a population of 1.29 billion and the population is expected to peak in 2065 at 1.64 billion. GDP per capita is $1,820 which is 29 times lower than the US GDP per capita and shows the potential India has. The average American earns $130 a day, a Chinese person $20 and an Indian $10 when adjusted for purchasing parity, so there is plenty of room to grow. The economy is currently growing at a 7.7% yearly rate and that is also the average for the last 10 years.

1 figure India growth
Figure 1: Indian GDP growth in the last 10 years. Source: Trading Economics.

The low starting point of the Indian economy and aggressive growth rate creates enormous potential. The Indian economy has to grow 3.7 times to reach the development level China currently has. A good side of the Indian economy is that the growth, unlike the Chinese based on manufacturing and construction, is based on services. India has become a major exporter of IT, business outsourcing and software. But the road to go is still long as 50% of the Indian population still works in agriculture although the trend is positive as about 11 million people a year are expected to shift from rural to urban employment.

Political Issues

On the political side India is a parliamentary democracy where the Prime Minister is the head of the government. As in many developing countries political issues cannot be avoided and corruption is a big issue.

2 figure India corruption
Figure 2: Global corruption index. Source: Transparency International.

India ranks 76th out of 168 on the global corruption list so investors have to be aware that the ways of doing business in India are different than in the Western world. Corruption is accompanied by a shaky bank system with the worst non-performing loan percentage in Asia.

3 figure non perfroming loans
Figure 3: Non-performing loans. Source: International Monetary Fund.

Apart from various negative issues that should be considered normal for such a big and developing country, a positive note is the ambition of the Indian prime minister Narendra Modi. Elected a year ago his goal is to make this century India’s century and to modernize the country by developing the poorer parts of India where many treatable diseases still linger and education is poor. Many of the goals seem trivial to us but opening 75 million bank accounts or building 100 million toilets would do a lot for the poor parts of India. Also the average Indian person is becoming more demanding which should push the economy forward. Indians want better phones, better internet connections, better infrastructure and more purchasing power.

India does not differ from other emerging countries apart from the enormous potential coming from its low starting point and still huge demographic growth.

Investing Fundamentals

The massive population and growth potential is not unknown, so the valuation of the Indian market is not really cheap. Indian markets have a PE ratio of 20.7 which is similar to the US but much higher than the global average for emerging markets.

4 figure india PE
Figure 4: Global PE ratio map. Source: Starcapital.

A PE ratio of 20 can be considered high, but with an economy growing at 7% and expected to grow at that rate for the foreseeable future, the PE ratio should become only higher.

Investing Opportunities

The Indian stock market has two major exchanges: The National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE). The market has been growing alongside the economy and has grown 10-fold since the beginning of this century.

5 bombay stock index
Figure 5: Indian stock market index. Source: Trading Economics.

A part of the growth is related to something that is also a risk when investing abroad. India has been constantly depreciating its currency by keeping a higher inflation rate and encouraging exports. In the last 10 years the Indian Rupee has depreciated by 50% in relation to the US dollar which would make the real return just a five bagger, which is still not bad.

If investing directly on Indian stock markets might be difficult and un-secure and you think that a part of your portfolio should be exposed to the potential India offers, an opportunity lies in Indian ADRs traded on US stock exchanges.

S. No.CompanyTickerExchange Industry
1Dr. Reddy's LaboratoriesRDYNYSEPharma. & Biotech.
4InfosysINFYNYSESoftware & Computer Svc
5MakeMyTrip LimitedMMYTNASDAQTravel & Leisure IndiaREDFNASDAQSoftware & Computer Svc
7Sify Technologies LimitedSIFYNASDAQSoftware & Computer Svc
8Tata MotorsTTMNYSEIndustrial Engineer
9VedantaVEDLNYSEIndust.Metals & Mining
10Videocon d2hVDTHNASDAQTV Services
11WiproWITNYSESoftware & Computer Svc
12WNS HoldingsWNSNYSESupport Services
Table 1: Indian ADRs. Source:


For the investors who like to be more diversified, there are various ETFs.

TickerCompanyPriceChange AssetsAvg VolYTD
INDAiShares MSCI India ETF$26.320.50%$3,399,4081,892,800.0-4.3%
EPIWisdomTree India Earnings Fund$18.840.91%$1,323,7503,753,153.0-5.1%
INDYiShares India 50 ETF$26.380.76%$758,205181,741.0-3.0%
PINPowerShares India Portfolio ETF$18.420.82%$372,708922,905.0-5.1%
INPiShares MSCI Spain Capped ETF$61.200.72%$238,4969,669.0-4.2%
SCIFVanEck Vectors India Small-Cap Index ETF$38.19-0.05%$173,84771,233.0-11.7%
INCOEGShares India Consumer ETF$30.940.98%$70,79414,889.0-3.6%
INDLDirexion Daily India Bull 3x Shares ETF$42.502.16%$66,44733,131.0-21.1%
SMINiShares MSCI India Small-Cap ETF$30.51-0.29%$53,97016,706.0-8.3%
INXXEGShares India Infrastructure ETF$10.160.10%$39,46816,442.0-3.8%
SCINEGShares India Small Cap ETF$13.00-1.14%$17,9826,734.0-17.1%
Figure 7: Indian ETFs by market capitalization. Source: ETF Database.



As an investment opportunity, India looks quite scary with its corruption, low income, shaky banking system and depreciating rupee but those are the illnesses that affect every emerging market. An investor who can withstand those issues and wait for India to grow into the country it has the potential to become can be rewarded with returns similar to the ones enjoyed by investors that invested in India 15 years ago. There will for sure be ups and downs but the long term trends are pretty clear: India is changing with new technologies pushing Indians to want a western lifestyle and demographic trends that are bound to result in more economic growth.



Retirement Roll of the Dice: How to Make Portfolio Decisions In Today’s Market

  • Stock have historically outperformed bonds in the long term but valuations have never been so high as today.
  • The only time in history that the S&P 500 had a higher valuation and the economy was in the growth part of a cycle was in 2000.
  • Analysts and pension funds usually buy high and sell low.


One of the most discussed financial topics is the best ratio between stocks and bonds or other investments a person should have in order to retire at a certain age with enough funds to last through a long and cozy retirement. As there are many topics related to retirement this article is going to focus on the relation between stocks and retirement.

Historical Long-Term Performance of Stocks

Stocks are considered the best long term investment as they have historically outperformed all other assets. Since 1871, the most reliable stock market data available shows stocks have outperformed bonds 99.3% of the time in a 30-year period, 78.2% in a 10-year period and 61.3% in a period of a year.

1 figure stock outperformance
Figure 1: Percentage of times that stocks outperformed bonds and bills over various holding periods. Source: Jeremy J. Siegel – Stocks for the Long Run.

This brings us to the first factor influencing one’s retirement exposure to stocks, age.

Bonds have much lower volatility in relation to stocks and are therefore more suitable for investors with a shorter than 30-year investment horizon. This can be clearly understood by looking at the chart representing US and international stock returns versus bond returns since the beginning of this century.

2 figure stock vs bods 21 century
Figure 2: Total returns this century – Stocks vs. bonds. Source: Wall Street Journal.

An investment at the beginning of the century in stocks would have provided lower returns than bonds due to the overvaluation stocks had at the peak of the dotcom bubble (the S&P 500 peaked at 1,527.46 points on March 20, 2000). As long term stock returns are correlated to underlying earnings, a look at the PE ratio for stocks will give good indications of whether to go long stocks or to stick to bonds for a while.

3 figure PE ratio sandp 500
Figure 3: S&P 500 PE ratio from 1880. Source: Multipl.

The S&P 500 current PE ratio is 23.67 which is 61.7% higher than the historical median. Such a high current PE ratio makes historical data unreliable as through history, from where the conclusion that stocks always outperform bonds in the long term was extrapolated, the PE ratio was much lower. It was higher than the current one only in a few occasions: in 1895 at 25 in a depressed economy and deflation, in 1992 at 25.93 with peak unemployment at 7.8%, in the tech bubble peak period above 30 and bust period above 40, and in the midst of the great recession at 70 due to low corporate earnings. This means that the only time in history the S&P 500 had a higher PE ratio than it currently does—that was not related to difficult economic times—was in the year 2000 due to the tech bubble which resulted in bonds outperforming stocks with much less risk (volatility) as can be seen in figure 2.

What To Do Now? 

It is impossible to give a straight answer to this question as it mostly relates to one’s personal risk appetite. Figure 2 shows not only that bonds outperformed in the last 15 years but also shows how bonds are far less volatile than stocks. In the last 15 years the S&P 500 index fell more than 45% twice in very short periods of time (from 2000 to 2002 and from 2007 to 2009).

4 figure s&P 500
Figure 4: S&P 500 in last 15 years. Source: Yahoo Finance.

The question is not really what to do, but whether you can sleep well and invest in stocks for the long term even with the above mentioned volatility and risks. If you are close to retirement and the last bull market has created a nice retirement nest for you, it might not be the time to be greedy and want more as, according to history, you might need to wait for about 30 years to outperform bonds.

At this point, while the S&P 500 is still relatively high it is a good time to sit down and assess one’s individual future financial needs and relate them to the risk and reward the stock market offers at this point. We already mentioned the risks while the rewards are related to corporate earnings that have been falling since 2014 and give a current yield from stocks of 4.22% derived from the PE ratio of 23.67. The current 10-year US government yield is 1.83%, which is much lower than stocks but also much less risky at this point.

What Do Analysts Say and Do?

More often than not, investment decisions are left to financial advisors as non-specialists often find it better to let others invest their funds. But do not think that it is always the best option. A simple example of how professionals often get it wrong is the fact that in 2007 corporate pension funds had 69% of their assets in stocks and lowered that to 45% in the 2009 crisis. Advisers that use TD Ameritrade had 26% of assets in bonds in 2007 and 51% of assets in bonds in 2009.

Do not be fooled by someone who does not see the complete picture and just follows the crowd because it often results in buying high and selling low.


The best way to make retirement decisions is to base them on facts. The facts are that stocks currently yield 4.22% with declining earnings and there is always the risk of a 50% decline. Short term bonds yield far less but the volatility is also lower which enables a steady source of investment potential as the imminent interest rate increases arrive and bond yields also increase.

With the S&P 500 at historical highs and extreme historical valuations the good old thesis that stocks always outperform bonds might be in jeopardy. Look at your goals, the risks you can handle and make investment decisions that allow you to sleep well.



Don’t Sweat It: Unexpected Investing Opportunities in the US Retail Environment

  • The sector differences in growth and valuation create investment opportunities.
  • The sportswear industry looks well balanced between growth and valuation.
  • Online retailers are growing fast but still find it difficult to become profitable for investors.


On May 13 the Commerce Department reported an advance in monthly US retail and food services sales for April of 1.3% to $453.4 billion, not adjusted for price changes. Inflation was 0.4% for April on a seasonally adjusted basis thus the growth in retail can be assessed as an important spur for the economy. This article is going to analyze sector changes and general trends in order to give some insight on how to better position one’s portfolio.

Sector Analysis

The motor vehicle and parts dealers’ sales increased 3.2% from March 2016 and 3.1% from April 2015. The April advance completely cancels the stagnation from the last 12 months and puts a question mark on the relative cheapness of the US auto and truck industry that has a trailing PE ratio of 13 (PE ratio averages are sourced from Damodaran Online that compiles data for US companies from service providers on a yearly basis—January 2016—and A growth of 3.2% might significantly lower the expected forward PE ratio of 46.53 for the industry and provide good investment opportunities.

Furniture and home furniture stores sales rose 3.6% from April 2015 which is relatively ok when attached to a trailing PE ratio of 20.14 and a forward PE ratio of 16.94.

Electronics and appliances stores do not show positive signs with a sales decline of 2% in relation to April 2015, which makes a PE ratio of 20 look a bit overvalued. Negative news is also related to department stores that have seen a decline of 1.7%, and gas stations with a 9.4% decline since April 2015. Surprisingly, department stores have a high PE ratio of 35 for a negative price to cash flow and a very low profit margin of 1.8%. If you think that there could be a huge rebound in sales for department stores, then an investment at these valuations might be reasonable but otherwise it is best to stay away.

Food and beverage stores have seen sales grow by 2% from April 2015 but show a relatively high PE ratio of 26. Low interest rates enabled the building of many new stores that resulted in increased competition. Increased competition should put pressure on margins that could lower earnings and push PE ratios even higher, no matter the sales growth.

Sporting goods, hobby, book and music stores showed a nice increase of 4.2% and miscellaneous store retailers were even better with an increase of 4.7% from April 2015. The sporting goods sector has a PE ratio of 24.5, while sporting goods stores have a lower one of 19.5. This is only a continuation of a trend started 7 years ago since when sports apparel and footwear sales jumped 42% to $270 billion in sales globally. Investors interested in investing in sports apparel and footwear should not look at the PE ratio of 24.5 as high due to the fact that the global growth in sales is expected to continue on strong tailwinds from Asia and Latin America.

1 figure sportsewar trends
Figure 1: Expected yearly additions to sportswear sales by continent in billions. Source: Morgan Stanley.

The global sportswear industry is estimated to grow by 30% to 2020.

Two sectors that show respectable growth of 8.1% and 8.2% are building material, garden equipment and supplies dealers and health & personal care stores. But they also show high PE ratios with building materials at 28.88, while healthcare products have a PE ratio of 40. The trend is obvious in healthcare as the baby boomers are starting to retire and need more health care, but these positive numbers are bound to create lots of competition and probably keep the high valuations.

The winner of the sector analysis are online retailers with a growth of 10.2% from April 2015. Unfortunately for investors wanting to grasp that opportunity, the sector has really high valuations with an average of 104.32 and a forward PE ratio of 89.7 that indicates the difficulty online stores have in creating sustainable profits despite the growth in sales.


The US retail report tells us a few important things. First, sector differences are huge with a 10% growth in online and a 9% decline in gasoline. By combining such variations with a PE ratio for the sector it is possible to find undervalued investment opportunities. For example, the automotive industry does not show signs of slowing down but its valuation is almost 50% below market average while online retail does show huge sales growth but low profitability growth as the trailing PE ratio is 104 and the expected forward PE ratio is not much lower at 89. The most balanced sector in relation to growth and valuation seems to be the sporting industry where the potential global growth is not accounted in the 4.2% yearly US growth. We’ll do a deeper investigation into the sportswear industry investment opportunities in one of our upcoming articles.



Investment Banking Analysts’ Recommendations: Be Aware and Decide for Yourself

  • Analysts related to underwriting TSLA’s capital raises upgraded the stock just days before the capital raise, twice.
  • Scientific research shows that analysts are strongly biased toward the goal their analysis has, be it underwriting, brokerage commissions or a fund’s short or long position.
  • The best thing to do for the individual investor is to learn about the potential bias an analyst could have and find more differentiating analyses before making a decision.


TSLA’s stock price has been falling since the last quarterly earnings report that showed a Q1 2016 net loss of $282 million and included an announcement for a new capital raise. The stock slowly declined from a high of $253 at the end of April to last week’s one-month low of $204.66 on Tuesday.

1 figure tsla one month
Figure 1: TSLA’s stock price in the last month. Source: Bloomberg.

A declining stock price is not good for a new capital raise as it makes the company issue more shares to get the necessary amount which further dilutes existing ownership. But then, on Wednesday a Goldman Sachs analyst upgraded Tesla Motors (NASDAQ: TSLA) to “buy” from “neutral” targeting a 22% upside with a target price of $250 in the next six months. Nothing uncommon except for the fact that 16 hours later and after a price jump of 3.3%, TSLA announced a new $2 billion capital raise round with the main underwriters being—guess who—Morgan Stanley and, of course, Goldman Sachs.

Something similar also happened in 2014 when on February 24, Morgan Stanley upgraded TSLA’s target price from $153 to $320 pushing TSLA’s shares up 14% for the day. The upgrade was followed by TSLA’s announcement of a new $1.6 billion capital raise on February 26. As this might be a coincidence, and only an SEC investigation could discover the truth, let’s refrain from conclusions here, but this situation is a good starting point for an investigation into the level of independency investment banking analysts really have and how much their analyses should be trusted. In order to avoid any conflict of interest investment banks are obliged to keep a “Chinese wall” between their research and investment-banking teams. This article will show that this is not always the case.

Scientific Perspective

A good but seldom used resource in financial analysis is scientific research. It is seldom used because it takes a long period of time from when the research is started to publication so the results often become obsolete, but they are scientifically correct and difficult to question, unlike journalists’ opinions.

University of Notre Dame researchers found strong evidence of conflicts of interest involving the investment banking and research departments within large financial institutions. Research shows that, albeit declining, analysts still tend to issue optimistic recommendations on firms with which they are affiliated through underwriting relationships. The research included: all US firms with listed common stock between 1996 and 2009 excluding financials, utilities and government agencies due to regulatory constraints and capital requirements, analyst recommendations prior to all public and private issues of equity and debt by the firm and M&A transactions, and 57 investment banks related to the underwriting of the above transactions. The results are separated into already sanctioned and non-sanctioned banks but paint a clear picture.

2 figure reccomendation bias
Figure 2: Recommendation frequency before investment banker related firm transactions. Source: University of Notre Dame.

Banks that were never sanctioned by regulators for conflicts of interest have a stronger bias towards “Strong buy” recommendations while sanctioned banks are more conservative with more “Buy” recommendations, but the general analysis is strongly skewed to the positive. In defense of investment bankers, they “eat their own cooking” as bank-affiliated investment managers tend to follow recommendations from own sell-side analysts.

Should You Listen to Analysts’ Recommendations?

Even if their analysis might be biased, analysts do provide added value by researching companies, asking questions at conference calls and giving their opinion. All this work certainly saves a lot of time for investors, but recommendations should not be accepted lightly. There are four types of analysts:

  • Buy side analysts that work for various funds and institutional money managers advising their company of what to do that often publicly disclose their analysis in order to promote the firm.
  • Sell side analysts that disclose their research to their clients.
  • Independent analysts that make a living from selling their research to investors.
  • Rating analysts that should independently assess a company and its investment rating in order to aid investment decision making.

All of these analysts have different goals, from the goal of earning a higher fee from underwriting commissions like the example at the beginning of this article, to providing valuable advice to clients, or just selling research. The important thing is to understand the potential bias an analyst could have before reading an analysis. By understanding the underlying reasons, it is easy to request research by other analysts with differing opinions in order to get a clear picture of what is really going on. A biased analyst does not break any laws if he omits certain information in order to make his view more plausible.

A 2013 study called “Inside the ‘black box’ of sell side financial analysts,” showed that on a sample of 363 analysts profitability of analysts’ own recommendations and accuracy and timeliness of earnings forecasts score at the bottom of the analysts’ compensation influence list.

3 figure analyst compensation
Figure 3: Influences on analysts’ compensation. Source: Brown et al.


The conclusion is very simple: the responsibility for any investment lies in the hands of the owner of the funds. Even when delegating investment decisions to someone, the investor still has to choose that person or firm in a sea of options. Therefore, the best solution is to educate oneself in order to see beyond analysts’ biases and make the best risk/reward investment decisions.

A good start is to understand from what perspective the analysis is written. An underwriting relation like from the TSLA case is a clear sign of an optimistic analysis, while a disclosed short position by a hedge fund is a clear negative perspective. Good sites to look for more information about analysts are the SEC and FINRA’s reviews of analysts recommendations.



An Analysis of and the Implication of the FOMC Minutes

  • An interest rate increase is hanging in the air but no one seems to find enough reasons to pull the trigger.
  • The FOMC expects inflation to be at 2% and interest rates at 2.6% by 2018.
  • Holders of long-term bonds might rethink their positions as interest rate increases could have severe negative repercussions on bond prices.


On May 18 the FED released the minutes of the Federal Open Market Committee (FOMC) meeting held in April. The FOMC decided not to increase interest rates in April which gave a short relief to the markets, but an analysis of the FOMC meeting minutes reveals interesting things because it gives indications on the way of thinking FOMC participants have and hints on potential future interest rate increases. While the goal of the FED is to maintain financial stability and increase the resilience of the financial system to shocks, for an investor it is important to look at the economic trends related to the FOMC’s decisions in order to better assess the risks of their portfolio.

The Minutes in Segments

FED’s Disclaimer

There are several important take-outs from the minutes that are interesting for investors. The minutes start with a big warning—more like a disclaimer—saying that the FOMC can make errors as many of the macro-prudential tools used or available to be used are untested. Untested tools combined with the FOMC’s goal of keeping the economy growing at full employment with stable inflation might be dangerous as it can create imbalances in the financial and economic systems.

Economic Situation

The economic information used by the FOMC that brought it to the decision not to increase interest rates was that labor conditions improved but GDP growth slowed, inflation is still below the target of 2%, payroll employment expanded bringing a 5% unemployment rate, part-time employment remained flat and job openings declined slightly but are still at an elevated level and manufacturing decreased reflecting the appreciation of the dollar. One piece of information that changed since the meeting is new housing starts which were down in March but it picked up in April by 6.6%.

Market Situation

Domestic economic releases had a limited effect on asset prices that, alongside market accommodating FED communications, improved the risk sentiment. Nominal 10-year treasury yields declined, and the volatility index (VIX) decreased while stocks went up even though corporate earnings have been falling.

While the situation in the economy might be looking—and the markets looked—stable before the meeting, the stock markets did not react that well to the minutes, anticipating an increase in interest rates in June. It is interesting to see that the FOMC’s financial market overview is a bit larger than the economic overview which sends a mixed message as it is not clear if the economy or market prices are more important.

Economic Outlook

The FOMC expects GDP growth at a moderately faster pace than potential output supported by consumer spending. The unemployment rate is expected to decline further and to reach the natural rate. Inflation is still expected to rise and reach 2% in 2018 from the current 1%. Participants still expressed concerns over the outlook as the current decrease in domestic spending might decrease due to global economic and financial concerns. Business fixed investments declined but participants had mixed opinions as growth in some districts gives positive inputs.

Policy Decisions

The FED decided not to increase the interest rate as weak readings on spending and production, and below target inflation still create some concerns. Thus they decided that it is prudent to wait. In relation to future rate increases, the FOMC will continuously monitor economic data and make further decisions from there.

Implications of Next Meetings

Since the FOMC meeting in April, positive news came out as new housing starts increased which suggests that an interest rate increase might be around the corner for the June meeting. Bond yields immediately increased and bond prices fell. But the potential interest rate increase has mixed effects for investors. An interest rate increase would indicate an improving economy, but at the same time have severe implications on interest expenses for corporations. Higher interest rates would also mean a stronger dollar which would further affect the already declining exports and manufacturing.

Investors in long term bonds should assess their risks properly as if interest rates increase, bond prices decline to match the increased yields. The US 10-year treasury bond yield is still around three year lows with a yield of 1.86%, but is significantly higher than the low of 1.52% reached in February.

1 figure treasury
Figure 1: US Ten Year treasury note in last 3 years. Source: Wall Street Journal.

If the interest rate increases are moderate, bond holders will lose some money on longer term bond prices but will gain on higher interest payments. But, low interest rates do not give much hope that the coupon payments will be high enough to cover the loss in value as a yield increase of 1 percentage point would decrease the bond value by almost 33% at these levels.

In the longer term, the FOMC expects to set the interest rate at 2.6% by 2018 when inflation is 2% and full employment is reached. According to Goldman Sachs, stock markets tend to drop by 10% when tightening cycles start. Higher interest expenses would further push down corporate earnings and have a negative effect on the stock market.

A potential good diversification and hedge against higher interest rates are banks as they are the ones that profit the most from higher interest rates. Higher interest rates in combination with a better economy should increase mortgage rates so home buyers should not wait much longer as interest rate increases are almost certain, though no one knows when.


The FOMC minutes seem like the weather before a summer storm, and there is a feeling that something is coming but no one knows when. Warren Buffet puts it nicely by saying: “So far, I have been wrong on interest rates. It is so hard for me to believe that you can drop money from a helicopter and not have inflation, but we haven’t.”

It looks like the FOMC is anticipating inflation or having the same disbelieve but hesitating to increase interest rates as the economy has not yet reached its full potential. Such a situation is uncharted territory and therefore it seems that no one knows exactly what is to be done, so a wait-and-see strategy prevails. Perhaps a wait-and-see strategy is the best one also for investing; following Buffett who mentioned several times that he invests no matter what the FED does and that knowing what the FED would do in the next year would not change his investment decisions.