Category Archives: Market Forecast


Is There A Second Chance For 3D Printing?

  • 3D printing stocks are back to the pre-3D printing stock boom.
  • The future of 3D printing looks too good to be true.
  • Microsoft is an example of how it is also a good idea to wait and invest only when the trend is really confirmed.


3D printing isn’t currently in fashion in the investing world, but it serves as a perfect example of how investors’ excitement about uncertain future prospects can fuel an incredible stock boom that quickly fades as fundamentals don’t support the excitement.

The most widely known 3D printing stocks are 3D Systems Corporation (NYSE: DDD) and Stratasys (NASDAQ: SSYS) which have a current market capitalization of $1.8 billion and $1.2 billion respectively. Both stocks were booming in 2013, with DDD surging 800% and SSYS 500%, only to fall below their 2011 levels in February 2016 and then surge again. Investors who invested in 2011 and sold in 2013 made great profits, but those who invested around the peak, when the biggest volumes we’re traded, saw huge losses.

Figure 1 3D printing stocks
Figure 1: 3D printing stocks in the last 5 years. Source: Yahoo Finance.

Since May, there has been a new but familiar player in the 3D printing industry. HP Inc. (NYSE: HPQ), the hardware part of the recent HP split, announced its first two 3D printers. The market’s reaction to this unveiling has been minimal which only makes the 3D printing story more interesting.

3D printing will certainly be a part of our future and money will be made on it, but the most important thing is not to overpay. Peter Lynch, who we discussed recently, suggests: “When even the analysts are bored, it’s time to start buying.” As we don’t see any Wall Street Journal 3D printing headlines or Cramer screaming about it, this seems like a great time to take a look at what 3D printing is and see if it is or will ever be a good, low risk – high return investing opportunity.

Overview of 3D Printing 

3D printing is also known as additive manufacturing. It turns digital 3D models into solid objects by building them up in layers.

The technology is not new. It was invented in the 1980s and has been mostly used for rapid prototyping. Recently, the industry has evolved and aims to cut out supply chains by producing all the required manufacturing items at the place where you need it via a 3D printer. The stages of 3D printing development haven’t been as smooth as Christopher Barnatt predicted, but we can see in the graph below the areas where 3D printing will most likely grow in the future.

figure 2 explain the future
Figure 3: 3D printing market segment adoption curves. Source: Explaining The Future.

3D Printing:  The Current Situation

The current situation in 3D printing isn’t stellar as both DDD and SYSS have seen their revenues decline. This could be due to the fact that general business investments have been down in the last few quarters or because 3D printing is not yet what it was expected to be.

In comparison to 2014, revenues didn’t decline much in 2015. Revenues were stable for DDD with a 3% decline in 2015, while revenues declined 8% for SYSS in 2015. Both companies see the current slump as a temporary decline and hope that sooner or later their businesses will thrive. The big reported trailing losses both companies have are due to goodwill impairments as their growth scenarios didn’t materialize.

The new player, HP, plans to revive its business with 3D printers and create a world without waste, warehouses and inventory. You can watch a nice video of what HP sees for the future here.


We have already witnessed one 3D printing investment boom and will probably witness more of them in the future as the 3D printing story seems plausible. However, even if the 3D printing industry gains the kind of traction we believe it can, we don’t know when that will translate into positive returns. The only thing that we can state with certainty is that 3D printing offers a 100 bagger opportunity if the world really adopts 3D printing like the companies believe it will, but you could also lose all of your investment if it doesn’t and the manufacturing world remains as it is.

It’s likely the world will change, as it always has. This would result in another boom in 3D printing stocks. Don’t forget that in the 1990s when PCs were already a pretty normal thing, there was still the possibility to buy Microsoft and have a 20 bagger return over the following 25 years. For reference, MSFT’s price in January 1993 was $2.80 and it is currently is $58.3.

figure 3 msft
Figure 3: MSFT stock price. Source: Google Finance.

Maybe it’s a good idea to wait until things really get traction, but as everything moves much faster these days, maybe it will be too late to make profitable investments if you wait.

If you invested in 3D printing back in 2013 you should definitely think about investing now because the story hasn’t changed, only now the stocks are much cheaper. If you are new to 3D printing, you might want to expose yourself to it with a small part of your portfolio. That way, if you lose, you don’t lose much, but if you win, you win big.

The safest way to take advantage of the next 3D printing boom might be to invest into a company like HPQ which is already an industry-leading and profitable company, and is currently undervalued.

Subscribers to Retirement Revival, a newsletter by Investiv’s Thomas Moore, were issued a recommendation to buy shares in HPQ on January 22, 2016 at $10.41 per share. Today the stock trades at $14.48, a gain of 39% in only 8 months.

In addition to identifying deeply undervalued companies which pay abnormally high dividend yields, like HPQ, subscribers also receive a second income opportunity every month. To learn more about a subscription to Investiv’s Retirement Revival click here.



The Future Will Blow Your Mind. How Can You Take Advantage Of It?

  • Global GDP has quadrupled in the last 35 years and will probably do so again in the next 35 years.
  • By 2050 it’s expected there will be 10 billion people on earth and most of them will be living a western lifestyle.
  • While the forecasts are pretty certain, the issue is that the way towards those forecasts will not be linear. Investors should be careful not to get excited and jump into bubbles.


Investing is both complicated and simple at the same time. Today we are going to show the simple side of investing by analyzing a few factors that are almost certain and that will have a huge influence on your investing returns. By analyzing a few global demographic and economic trends we can see where the world will be in the future and connect that with our investments pictures, a scenario that is actually mind-blowing. Keep reading…

Global Population & Economic Development

A number that is essential for investors is the following:

figure 1 global population
Source: Worldometers.


What is even more important is that the population is growing and will continue to grow. Global population is expected to reach 9.7 billion by 2050. The biggest expected growth is in Africa, followed by Oceania, the Americas and Asia.

figure 2 global population forecast
Figure 2: The World’s population. Source: The Economist.


This simply means that the global market for companies and global demand will be at least 31% larger in 34 years. On top of the increase in the global population, the economic structure and growth forecasts for the majority of the global population are astonishing.

The list below shows the current top 15 countries by population and their respective GDP per capita.

figure 3 data
Figure 3: Population and GDP per capita. Source: Worldometers, World Bank.


Of the 15 most populous countries, only the U.S. and Japan have a GDP per capita higher than $10,000. Countries like Indonesia, with 260 million people, have to grow 10 fold to reach the Japanese standard while India has to grow 20 fold. Thankfully, all of these currently underdeveloped countries are growing at amazing rates.

figure 4 global gdp growth
Figure 4: Global GDP growth. Source: The Economist.


If we look at where the global GDP per capita average was 35 years ago we can only imagine where the GDP will be in 35 years with the explosive growth in emerging markets.

figure 5 glboal GDP per capita
Figure 5: Global GDP per capital in current US$. Source: World Bank.


If GDP per capital quadruples in the next 35 years like it did in the last 35 years, in 2050 we will have an average global GDP per capita of $40,000, which is higher than what Japan currently has.

A higher GDP will make many things available that are currently unavailable. Many people will want a car and we can only imagine what will that do for the car industry. Of the 15 countries mentioned above, only the U.S. and Japan have reached a level of car per capita saturation.

figure 6 cars per capita
Figure 6: Global cars per capita. Source: Charts Bin.


Cars, homes, infrastructure, software, hardware, travel, fashion, medicine, food and who knows how many more things that we can’t even imagine at the moment will be a normal in 2050 for the majority of the global population.

How sure can we be that this will become a reality in the next 35 years? Facebook gives us a clue. Their data shows the fastest growth rates in the Rest of the World and Asia which means that people there are more and more informed about a western lifestyle which will encourage them to seek such a life.

figure 7 daily users
Figure 7: Facebook’s global growth in daily active users. Source: Facebook.


We can clearly conclude that the world will be a much different place in 35 years, especially when we look at how different the world is now compared to how it was 35 years ago. Just to gather the data I’ve listed above would have taken me a year or longer to gather 35 years ago, while today I can go online and have everything in front of me in an instant. Globalization, a larger population and inevitable economic development are the trends that will undoubtedly influence your investments in the next 35 years.

What Investors Should Do

If you’re in it for the long-term, you have nothing to worry about especially if you are well diversified and have made smart investments. What do we mean by smart investments? The global growth discussed above is pretty certain, but what is uncertain is the linearity of it. Going back to figure 5 we can see that from 1995 to 2002 there was very little improvement in global GDP.  Only after 2002 did it explode. This means that the road to quadrupling global GDP will not be smooth.

An investor has to be careful not to overpay for an investment. Many people see the above numbers and get very excited. This is what creates bubbles. As we will have many recessions in the next 35 years, it is wise not to get too excited about the numbers above but to invest at maximum pessimism. Currently there is excitement about healthcare, social networks, and consumer discretionary, and negativism in agriculture, food, energy, mining and shipping. With the growth described above, there is more certainty that demand will grow for commodities than for social networks which is a perfect example of how investors get carried away.

Charlie Munger, Buffett’s investment partner, continually restates that investing should be like watching paint dry and that if you want excitement, take $800 bucks and go to the casino. All the inevitable economic and demographic developments are pretty certain, but will slowly grow into the forecasted numbers. If your investment horizon is long you can afford to be invested in the sectors that will surely benefit from the structural trends and wait for the booms. What you should avoid is to be invested in bubbles because those are the destroyers of long-term returns.

For more specific information about a sector that we believe has just reached a point of maximum pessimism and is trading dirt cheap, but is sure to benefit from the massive future growth in global GDP, click here.



Emerging Markets Are Hot – Here Is Where You Should Put Your Money

  • Emerging markets are up 10% since our last article on the subject, but the FED’s rate action might quickly erase the gains.
  • Valuations are starting to diverge, but don’t fight the trend.
  • Keep an eye on China as it is relatively undervalued and still boosts economic growth of 6.7%.


In May we discussed how emerging markets have been rediscovered but are still undervalued. Since then, the emerging markets ETF is up 10%.

figure 1 emerging markets
Figure 1: iShares MSCI Emerging Markets ETF (EEM) since May. Source: iShares.

As emerging markets include a lot of countries and segments, in this article we are going to see which segments in emerging markets are the best investments and which hold the highest risks.

What Has Been Going On?

The central reason emerging markets have outperformed is because investors regained confidence in them and plowed more capital into them, unlike in 2015 when the story was the opposite. The fact that developed countries continue with their monetary easing increases risk appetite and forces investors to search for better returns in riskier assets such as emerging markets. This partly explains why emerging markets asset prices have been pushed higher.

Not only do stocks enjoy the benefit of global monetary easing, but so do bonds. As emerging markets have higher yields, desperate investors pursue those yields no matter the risks. But this is a common trap in which many investors have been caught in the past. Think of Argentina. This is a typical textbook situation, when yields are high and increasing, people pull their money out of emerging markets in fear that things might get worse. But when yields are falling, and it is unlikely that things will get better, people plow money into emerging markets. The emerging markets premium in comparison to U.S. junk bonds is minimal, but let’s not forget that by holding emerging market debt you are often exposed to currency risks.

figure 2 bond yields
Figure 2: Difference between yields on emerging markets and U.S. junk bonds. Source: Bloomberg.

Such a low premium suggest that investors should carefully assess the risks before investing in emerging markets at these low yields. But what is pushing emerging markets up is the opposite of what pushed them down in 2015, capital inflows and outflows. Since the beginning of 2016, capital inflows have been increasing.

figure 3 flows
Figure 3: Total non-resident capital inflows to emerging markets. Source: Institute of International Finance.

With increased capital inflows, asset prices are bound to go up, but not all emerging markets are enjoying the same investor confidence. China is a good example. Global funds toward China are negative as investors fear the further depreciation of the yuan and slower economic growth.

Fundamental Perspective

From a valuation perspective, emerging markets are still undervalued despite the recent upside. The iShares MSCI Emerging Markets ETF (EEM) has a PE ratio of 11.56 and a price-to-book value of 1.56 which is still far from the iShares S&P 500 ETF (IVV) PE ratio of 20.7 and price-to-book value of 2.88. Chinese stocks are the cheapest with a PE ratio of just 8.24 and a price-to-book value of 1.41 for the iShares MSCI China ETF (MCHI).

figure 4 emerging markets funds
Figure 3: Emerging markets funds. Source: Wall Street Journal.

As our primary investment thesis back in May was that emerging markets are undervalued, the current price increase and investor unwillingness to invest in China make it the probable future winner. To know more about recent developments in China read our recent article on it here.

As global emerging markets are in an uptrend and far from fair valuations, it might be premature to completely jump exclusively into China and ignore other emerging markets. However, as valuations in other emerging markets continue to increase, creating an even larger divergence from China, it might make sense to “overweight” your portfolio toward China, since in the long term earnings are all that matter.

As a point of reference, the Brazil ETF (EWZ) PE ratio is 13.29 while the Indian ETF (INDA) PE ratio is higher at 21.15. Compared to a PE ratio of 8.24 for China.  More daring investors might want to look at Russia where the situation has stabilized but still has low valuations with a PE ratio of 7.36 and a price-to-book ratio of 0.76 for the iShares Russian ETF (ERUS). We’ll discuss more about Russia in a future Investiv Daily article.

For specific investments, the “detailed holdings and analytics” document on the iShares ETFs’ page is a great resource.


When investing in emerging markets, don’t forget about risk. Drops are sudden and sharp, especially around high valuations and low yields. For example, the iShares China ETF (MCHI) is still 28.5% below its 2015 high.

figure 5 china ETF
Figure 4: China ETF. Source: iShares.

The moral of the story is to always look at valuations and don’t get euphoric about emerging markets. Boom and bust cycles are much more frequent than with developed markets due to lower market capitalizations that are strongly influenced by global capital flows which are fickle. We have witnessed two sharp emerging markets declines in the last 12 months—one in August 2015 and the second in January—both of which are a good reminder to not forget that volatility is on the daily menu and another downturn might be just around the corner.

The Fed poses an additional risk to emerging markets if it decides to increase rates due to the tightening U.S. labor market in order to stay ahead of the curve. Higher interest rates in the U.S. would quickly shift capital flows to the less risky U.S. from the riskier emerging markets.


Emerging market are and will stay difficult to navigate. Their volatility is based on low market capitalizations that can easily be influenced with relatively low capital flows when compared to developed markets. Therefore, a good idea is to watch them carefully and not fight the trend because emerging markets tend to move fast in various directions. In January 2016, it seemed like the end of emerging markets was near and now, just 8 months later, it seems all roses.

For investors not exposed to emerging markets, the best thing to do is to look at specific assets that have consistent cash flows and provide diversification. Diversification can also be found in individual companies that have revenues both in the developed world and emerging markets.

Chinese companies have relatively low PE ratios as investors are still not confident about the Chinese economy. Beware that we are not talking here about a recession, but only about growth worries related to China managing to continue growing at more than 6.7% a year.

Stay tuned to Investiv Daily for market updates and specific investment reports on emerging market stocks.


Making The Case: Why Investing In Healthcare Is A Good Move Now

  • Healthcare spending is expected to grow at 5.8% per annum, or around 4% in recession time.
  • The healthcare index is as equally valued as the S&P 500; global healthcare is cheaper.
  • Government involvement and budget limits are the risks, but the risk reward ratio is one of the best in the market.


Yesterday we talked about how the market and the economy are sending mixed signals and look fragile which results in increased risks for low expected returns. One way to be defensive but still grasp the upside is to invest in healthcare stocks. In this article we are going to elaborate on the rationale for investing in healthcare and discuss diversified investing possibilities and risks.

Investing Rationale

Healthcare isn’t a sexy topic because inevitably, day by day, we are getting older. As we age, demand for healthcare increases. The speed at which the U.S. population is getting older will best be explained by the two charts below.

In the 1960s the baby boom is evident. The largest demographic group were children and the oldest group was 85+.

figure 1 1960
Figure 1: Age distribution in 1960. Source: AEI.

In the following 5 decades, things changed. Not only did life expectancy increase with the oldest group now being 100+, but the once children are sill the largest demographic group, only now they are 50 years older (red rectangle).

figure 2 2015
Figure 2: Age distribution in 2015. Source: AEI.

As the baby boomer generation will be retiring in the next decade, let’s be honest, their eating and lifestyle habits haven’t been the best and we can absolutely expect continuing increases in demand for healthcare.

The percentage of people above 65 has increased from 12.29% to the current 14.8% in just 10 years, and the trend will continue. It is expected that the number of people above age 65 in the U.S. will increase from the current 47 million to 58.6 million by 2022, an increase that is expected to increase demand for healthcare by 25%. This 25% increase in the next 6 years is a certainty, unlike many other economic forecasts. In total, U.S. healthcare spending is projected to grow 5.8% annually up to 2024. The Bureau of Labor Statistics expects that healthcare jobs have the fastest employment growth and will add the most jobs between 2014 and 2024, representing 1 in 4 new jobs.

The population is older in Europe where more than 18% of the population is over age 65, and is older still in Japan where 25.71% of the population is above 65. Therefore, global healthcare diversification may be a good idea.

Let us now look at the investment opportunities.

Investment Opportunities

This aging trend and increasing demand for healthcare can be played in various ways. There are pharmaceutical and biotechnology companies, REITs specialized in healthcare, and companies that provide healthcare equipment or services. As this aging trend isn’t a new one, healthcare stocks are fairly valued, so it is necessary to do thorough research to identify the best investments.

If you’re looking for diversification without the headache, an ETF is a good option. The iShares Global Healthcare ETF (IXJ) has a PE ratio of 22.92 and the iShares U.S. Healthcare  ETF (IYH) has a PE ratio of 25.26. With the S&P 500 PE ratio being at 25.21 and given the expected growth outlined above, both ETFs seem undervalued, with the global one being a little bit cheaper. It might look a little late to join the party now as healthcare stocks have had amazing returns in the last 7 years, but with the positive trends continuing there might be more upside.

figure 3 etf growth
Figure 3: iShares U.S. healthcare ETF performance last 10 years. Source: iShares.

Of course with an ETF, you buy a little bit of every company, never mind if the company is good or bad, and you will incur in some additional expenses. Therefore, by being willing to put more effort into it, you can pick the best companies and likely outperform the healthcare index. Low interest rates have enabled many participants to enter the market but they hold high debt levels, so to limit the downside you should look for companies that have a low PE ratio, low debt levels and good growth prospects. With the healthcare index still being below its 2015 high, there are plenty of opportunities to be found.

For more aggressive investors, a good idea might be to look at the biotechnology stocks which have double the volatility of the above mentioned ETFs because of the higher risks involved in developing new drugs. A good, diversified approach can be found in the iShares Nasdaq Biotechnology ETF (IBB), or you can also find great stocks to research in the iShares portfolio.


As with every other investment, investing in healthcare comes with its specific risks. The main risk for healthcare stocks is additional government involvement. As healthcare should be for the common good, the government will always try to at least lower margins if not regulate prices or similar other market influences. The latest concerns for the healthcare industry are the Affordable Care Act and talks of mandated government drug pricing.

In addition to the above mentioned political issues, budget limits could also prevent the growth rate from hitting the expected 5.8%. A recession would quickly limit spending to only the most necessary segments of healthcare, therefore and again, proper stock picking is essential. During the last recession (2009 – 2013), healthcare spending grew at less than 4% annually which is below average, and well below the expected 6% in better economic times, but it was still growth.

When looking at individual healthcare companies, we look at various specific risks that vary from government contracts to various medicaments being replaced by cheaper solutions.


Healthcare is one of the few trends that is certain to grow in the future due to inevitable demographic trends. However, this doesn’t mean that every investment related to healthcare is the best investment.

As the healthcare growth trend has been present for a while now, it is important to carefully analyze each investment and pick the best risk reward options. If a recession comes along, the healthcare index will probably do better than the S&P 500 as it did in 2009 with a 38% decline compared to 55% for the S&P 500.

If you are uncertain about future economic prospects, you might want to dig deeper into healthcare, it is the sector with the most certainties.


Signs of Fragility in the Economy Point to an Impending Bear Market. What To Do Now To Protect Yourself.

  • The last jobs report was good news but it also indicates higher costs and full employment.
  • An “easy to hire, easy to fire” mentality is in the air.
  • Healthcare, cash or short term trades should be the best options in this situation.


Last week the Nasdaq and S&P 500 reached yet another record high. Aggressive central bank stimulation pushes investors to disregard risks and look for any kind of yield or growth. Not looking at risk is the worst thing an investor can do, but they also shouldn’t fight the trend.

Even from a long term perspective the market is irrationally valued, and no one can know how long it will stay that way. Being in cash might seem logical but a 0.1% return looks much worse than the S&P 500’s 8.9% year-to-date return.

Today, we are going to analyze earnings as 86% of S&P 500 companies have reported them, but first take a look at Friday’s jobs report which sent mixed signals.

The Jobs Report

On Friday, the U.S. Bureau of Labor Statistics reported an increase in total non-farm payroll employment of 255,000 in July. The unemployment rate was unchanged at 4.9 percent which is great news for the economy but not so much for investors because it indicates that we are close to full employment. The unemployment rate has stabilized at 4.9% and wages have started to increase (2.6% over the year). Higher wages mean higher costs which have a negative effect on margins and earnings.

figure 1 unemployment rate
Figure 1: Unemployment rate. Source: Bureau of Labor Statistics.

Apart from the reach of full employment and higher wages, the fact that businesses prefer to hire more than to invest in equipment signals that corporations are not so optimistic about the future. They easily hire but know that they can fire with the same ease, if necessary. If you buy equipment, you are stuck with it in most cases.

figure 2 employment equipment
Figure 2: Lower equipment spending in favor of labor. Source: Bloomberg.

The “easy to hire and fire” effect is even more pronounced by the increase in the number of people forced to work part-time for economic reasons, which rose from 5.84 million to 5.94 million.

All of the above means that job numbers are fragile and can quickly shift in the opposite direction. This, along with slow GDP growth, will probably keep the FED on hold or result in minimally increased rates to hold off inflation.

S&P 500 Earnings

The second quarter of 2016 is the fifth consecutive quarter with a decline in earnings.

figure 3 earnings growth
Figure 3: S&P 500 earnings growth rate. Source: FACTSET.

The S&P 500 reported sales were flat in comparison to Q2 2015 which means that the increased hiring does not create growth but is necessary to merely keep up with the competition.

Analysts have postponed expected earnings growth to Q4 2016, which doesn’t mean much as they had expected earnings growth for this and for the next quarter. So, as always, analysts’ expectations have to be taken with a grain of salt.

From a sector perspective, consumer discretionary was the best performer with earnings growth of 10.7% which is logical seeing that consumer spending is the only growth segment of the U.S. GDP. But as consumer discretionary is not essential, any kind of bad news or tightening credit might quickly turn this trend around.

For investors interested in not taking on much risk if a bear market hits us, the healthcare sector continued its good news. Healthcare earnings grew 4.9% and revenue grew 9%. As we know that the global population is getting older, especially in the developed world we can expect demand for healthcare to stay stable, or fall the least in a recession or bear market. Therefore, finding good healthcare investments is essential for a defensive portfolio that is still open to growth in this bull market but limits the potential downside if things take a turn for the worse.

figure 4 sector
Figure 4: S&P 500 Earnings growth by sector. Source: FACTSET.

All other sectors are exposed to negative volatility because consumers are going to save on all things except for food and healthcare. With oil prices around $40 we cannot expect an earnings pickup in the energy sector.

The most important factor for long term investors is valuation. Lower earnings and higher prices have brought the current S&P 500 PE ratio to 25.25. If the FED is forced to increase rates due to high employment rates, corporate earnings will be further pressured downwards by the high debt levels and tightening credit will lower consumer spending.

figure 5 multpl
Figure 5: S&P 500 PE ratio continues to grow. Source: Multpl.


We are in a situation where the S&P 500 is consistently breaking new highs while there have been 5 consecutive quarters of declining earnings, slow GDP growth, lower productivity and where bank credit, the main factor for GDP growth, is about to tighten due to increased interest rates and full consumer indebtedness.

We cannot know for how long such a surreal situation will last, but as smart investors we have to be prepared for the worst and still try to grasp the benefits of the upside. As Warren Buffett has $66 billion in cash on his balance sheet, we might to also want think about having cash on hand just in case a bear market comes that will enable us to buy the bargains. As earnings yields are at 4%, that would be the opportunity cost for holding cash but we can hold cash for 5 years and still break even if a bear market comes along. It is difficult to mentally accept such a strategy as we are in the 7th year of this bull market, but some returns have to be sacrificed in order to lower risks.

Another option for diversification is to use a part of your portfolio for well-placed short term trades. The S&P grew minimally in the last two years but in the meantime it gave great trading opportunities. With stop losses and by knowing what you are doing, you can limit the time you are invested, thus lower the risk of being caught in a bear market while still creating healthy returns on the liquid part of your portfolio.

Investiv has developed a robust stock screening tool which analyzes over 15,000 US and Canadian stocks and ETFs and generates reliable short-term swing and position trading buy and sell signals. To take a free, no credit card required 14 day trial, with no obligation to continue, click here (no long, annoying video).


Euphoria & Denial Point to the Last Days of the Bull Market

  • Risks are cumulating and getting bigger.
  • U.S. GDP growth is slower than expected, earnings and oil prices continue to decline.
  • Japan is unable to grow while BREXIT risks are still unfolding.


It is difficult to find good news lately. The last really good news was the June jobs report when 287,000 jobs were added. Since then, most of the news seems dismal, however, it has yet to have a negative impact on financial markets. It’s as though investors are just hoping for something good to happen in the future. As hopes are an immaterial human feeling, they should not be the base for investment decisions.

In this article we are going to analyze what’s pushing the S&P 500 to new highs. Are we in a state of euphoria about stocks or are the valuations and price increases rational?

GDP News

The U.S. economy was expected to grow 2.5% in Q2 2016, but it only grew 1.2% (seasonally adjusted). U.S. economic growth for 2016 is currently at 1% which is the weakest start of a year since 2011. Saving the economy from a recession is consumer spending which increased by 4.2%.

Low interest rates create cheap money which fuels two trends, growth in both consumer spending and the S&P 500. Consumer loans have increased at a faster pace than consumer spending which makes it clear that spending growth is fueled by debt.

figure 1 consumer loans
Figure 1: Consumer loans at all commercial banks (blue) and consumer spending (green). Source: FRED.

Anyone who has studied economics will tell you that the economy works in credit cycles, when money is cheap and prospects good, people take on credit and spend it. But one can only take on so much credit, and all banks want their money back sooner or later. When sentiment shifts, a credit contraction arises and consumer spending falls. As this is inevitable, the only justification for the current hope of increased GDP growth can be explained with the most dangerous words for investors: “this time is different.”

figure 2 credit cycle
Figure 2: Credit cycle. Source: Loomis Sayles.

As we are in the expansion part of the credit cycle, a recession is going to hit us as soon as we reach the downturn part of the credit cycle because consumer loans are the only thing still boosting growth.

figure 3 gdp contributors
Figure 3: Contributions to Q2 economic growth. Source: Wall Street Journal.

If it wasn’t for consumer spending fueled by cheap loans, the U.S. economy would most likely already be in a recession.

The S&P 500

With economic growth largely missing expectations you would assume the S&P 500 would tank, but that’s not what happened Friday when the economic data was released. On the contrary, the S&P 500 reached a new intraday high at 2177 points. The main reason for the new S&P 500 high is hope of future economic growth, the same economic growth that didn’t realize itself in this quarter.

Another reason stocks have continued to rise has been the Q3 2016 expected corporate earnings growth, but that also vanished like the above described economic growth. As most companies have issued negative guidance we cannot expect higher earnings in Q3 2016.

figure 4 positive guidance
Figure 4: Q3 2016 earnings guidance for the S&P 500. Source: FACTSET.


It would appear the FED is also somewhat in denial about the true state of the U.S. economy and S&P 500 earnings, and is holding on to the hope of increasing interest rates as soon as the economy shows signs of strength, be we’ve been hearing the same story for a while now.

Last week the FED left the door open for interest rate increases as the economy seemed to be improving, but this was before Friday’s GDP debacle. With growth being lower than expected, the FED will probably continue with its status quo policy. As we now know that the only thing pushing the economy higher is consumer spending fueled by consumer debt, any interest rate increases would be detrimental for the economy and push it into the downturn part of the cycle because higher interest rates would increase the cost of debt.

Data on jobs, consumer spending and inflation will be available before the FED’s next meeting in September so we will closely watch that in order to see if the FED will eventually move, highly unlikely after the latest GDP debacle.

Global Situation

The BREXIT had only a short-term effect on markets as investors soon focused on other things and hoped that it would not have any long term effects. But any BREXIT effects won’t be seen in economic data for a few years as it will take the UK at least two years to exit the EU, if not four.

figure 5 brexit
Figure 5: Soon forgotten BREXIT. Source: Google.

News from Japan was also not that good. As economic targets have not been reached, the Bank of Japan decided to double the annual amount it uses to buy exchange traded funds, from ¥3 trillion to ¥6 trillion ($57 billion). This is only a modest increase to Japan’s easing policy, measured in hundreds of trillions, and brings us to the conclusion that Japan is out of monetary policy ammo. Even with constant increases in monetary easing, Japan has experienced a 0.5% deflation in June and slower consumer spending. This should be a warning sign for the U.S. as it is clear that easing has its limits.


All the above indicates that we are currently in the denial phase of a stock market cycle. We have had a bull market for 7 years now and no one wants to look at the above data as it indicates a turn in the credit cycle, lower business spending and earnings, a strong dollar and global uncertainties with the UK, Japan and China. We will analyze the situation in China soon as it requires a special article.

figure 6 stock market cycle
Figure 6: Stock market cycle. Source: The Gold and Oil Guy.

Not to mention oil prices coming close to $40 dollars per barrel, which will push energy earnings down, again.

All of the cumulating risks we’ve discussed send a strong message. Investors have to start thinking about risks and rewards. In the late stage of a bull market, many are overweight stocks, which means they can expect a beating if any of the above mentioned risks trigger a bear market. The options are to increase one’s cash in order to have liquidity when a market decline comes, or to own more uncorrelated asset classes. I’ve written more on this in our recent article on Ray Dalio’s strategy.

For stocks, simply ask yourself, how much are you willing to risk for a 4% long term expected yield?



Will A Bet On Commodities Pay Now?

  • Iron ore prices are falling as supply continues to grow, while copper and zinc prices show signs of supply gaps forming.
  • Low exploration and discoveries indicate that metals will be winners again in the future.
  • The possibility of future inflation increases the appeal of commodities.


Diversification is the ultimate protection against various economic factors, in recessions you might want to hold gold or treasuries, in inflationary times you want to be long stocks and commodities. Therefore it is very important to always know what is happening in each potential diversification sector.

Three weeks ago we discussed how aluminum is a bet on global transportation and while a supply gap is not the issue, productions costs are. In this article we are going to analyze what is currently going on with iron, copper and zinc. Before we analyze each individual metal, there is one very important trend in the mining sector which will affect all three metals, low prices which minimize exploration investments and new discoveries.

figure 1 discoveries
Figure 1: Expenditures and mineral discoveries. Source: Rio Tinto.


The low number of new discoveries means that sometime in the future there will be a new supply gap like the one we experienced in 2011. It is too early to call for such a situation now, but those are the future benefits of a well-diversified portfolio with commodities.


Let us start with the most mined metal in the world, iron. Iron prices have been declining since 2011 after hitting a 30-year high of nearly $200 per ton. Prices then bottomed out in December 2015 at $40 per ton, only to jump to $60 per ton in April 2016 and then slowly decline to the current price of $50 per ton. From an historical perspective, prices are still high, but it is important to analyze the current supply and demand situation in order to see if iron is a good diversification metal, especially as central banks target inflation.

figure 1 iron ore prices
Figure 2: Historical iron ore prices. Source: index mundi.


All the biggest iron ore producers recently came out with their Q2 2016 production reports, giving a clear indication of the trend in commodities. The results are mixed, Rio Tinto (NYSE: RIO) increased iron ore production by 10% year over year while BHP Billiton (NYSE: BHP) decreased production by 2% and Brazilian Vale (NYSE: VALE) decreased production by 1%. As all major producers are developing new mining projects—like Vale’s 90 million tons per year S11D—and are able to increase production if necessary, we cannot expect the formation of a supply gap in iron and a surge in prices similar to what we witnessed in 2011. Further, as major producers keep increasing production it will keep a lid on future prices.

In order to be diversified with iron, the best thing is to look at the lowest cost producers who are profitable at much lower prices.

figure 2 iron ore cost curve
Figure 3: Iron ore cost curve. Source: Metalytics.


The lowest cost producers manage to have positive cash flows even with iron ore prices below $40, which is still a possibility if we see more global turmoil or slowing in China. On the other hand, iron should be a relatively good hedge against inflation.


Copper has reached its seven year low in January 2016 with prices below $2 per pound, but the recovery has been much smaller than with iron. Current prices are at $2.20 and copper has been trading in the $2.05 to $2.25 range since March.

figure 4 copper prices
Figure 4: 10 year copper prices. Source: Nasdaq.


But copper is expected to enter a supply gap in the next few years as global copper grades are getting lower, big mines are being closed and demand is constantly growing.

figure 5 copper deficit
Figure 5: Expected copper supply gap. Source: Visual Capitalist.


A sign of how important copper is comes from the fact that both Rio Tinto and BHP Billiton base their strategic exploration on copper. In 2015, Rio Tinto spent 66% of its exploration budged on copper with 25 of 37 exploration targets being copper focused.

figure 6 rio tinto exploration
Figure 6: Rio Tinto’s exploration. Source: Rio Tinto.


A commodity that is already in a supply gap and is a great example of what can happen to copper, is zinc.


Similarly to the above described commodities, zinc has reached its multi-year low in January 2016 with prices below $0.7 per pound. But, unlike copper, prices have quickly rebounded to the current $1.03 and the trend looks very positive.

figure 7 zinc prices
Figure 7: One year zinc prices. Source: Infomine.


The reasons for such strong performance are an increase in Chinese infrastructure spending, mine closures and a global increase in demand. With current zinc usage a few percentage points higher than production, we should expect even higher prices.

figure 8 zinc supply
Figure 8: Zinc supply and usage. Source: International Lead and Zinc Study Group.


Investing Opportunities

The lowest risk commodity investments are big miners with low debt levels and low costs.

Another option is to invest through ETFs that hold metal futures. Such an ETF equally spread in aluminum, copper and zinc is the DB Base Metals Powershares. Higher returns can be achieved by investing directly into specialized miners with low debt and low costs, giving a greater assurance of a profitable investment, however the risks also increase. 


Knowing how metal markets work, that near term supply gaps exist for several metals, and that prices are still close to multi-year lows minimizes risk and makes metals an attractive investment opportunity. But the main point of this article is that commodity metals are a protection against inflation since the metal supply is not flexible in the short term and fewer and fewer profitable mining operations are being discovered. With global central banks keeping interest rates very low, and increasing money supply, sooner or later inflation will kick in. Until that happens and metal prices rise, you can enjoy the high dividends miners are currently paying and have a well-diversified portfolio.



Have Recent Market & Currency Gains In Brazil Just Increased The Risks?

  • Brazil’s economy contraction is slowing and the trend is turning positive.
  • The political situation is currently stable but trouble is always around the corner.
  • Fundamentals show potential but also risks as the price to book value is relatively high at 1.4.


In April we wrote about Brazil and described it as a good risk reward opportunity as all the bad things had already happened. Brazil’s president Dilma Rousseff had just been impeached, the economy had declined by more than 5% and Brazil’s currency was at historical lows against the dollar.

As Brazil is a young country, rich with natural resources, the investing logic was that Brazil is oversold and undervalued from a longer term perspective. As predicted, the currency has strengthened and the Brazilian stock index has increased. This article is going to discuss the current situation, and take a look at fundamentals and economic factors, in order to see if this improvement is backed up by concrete facts or if it’s just a change in sentiment and Brazilian stocks are now riskier than they were three months ago.

Current Situation

The economic situation in Brazil hasn’t improved since April. While the economy did shrink, it only did so by 0.3% in Q1 2016 which is better than expected as the Brazilian Institute of Geography and Statistics predicted a 0.9% contraction. The economy is still contracting but is shifting in trend. The International Monetary Fund (IMF) forecasts a 3.3% contraction in 2016 and then finally small economic growth in 2017 based on business confidence bottoming out and higher commodity prices. The better than forecasted contraction in Q1 shows that Brazil is on a good path to reach growth in 2017. IMF warns that stronger growth is difficult to forecast as political uncertainties remain.

1 figure - brazil gdp - new copy
Figure 1: Brazil’s GDP per quarter. Source: Trading Economics.

The economic shift in trend was immediately reflected in the stock market. The Brazilian stock index has increased by 10% since April and by 50% since the global stock bottom in January.

figure 2 Bovespa
Figure 2: BOVESPA index. Source: Google Finance.

But on top of the stock index increasing, international investors have also benefited from the stronger Brazilian Real (BRL). The Real has strengthened by 22% in relation to the dollar since January, and 10% since April.

figure 3 BRL USD
Figure 3: BRL per 1 USD last 12 months. Source: XE.

As the 10-year average is 2 BRL for $1, there is still plenty of space for currency gains from Brazilian investments.

figure 4 10 year brl
Figure 4: BRL per 1 USD last 10 years. Source: XE.

When Brazil returns to its normal economic growth rates the currency will return to normal levels, thus there is still a 50% potential gain. But for that gain to be realized a lot of things have to improve in Brazil, starting with its politics.

Brazil has an interim president at the moment, Michel Temer, who is trying to stabilize things by limiting government spending to the inflation rate and limit social benefits. Such moves are already priced into the market, but there is always the risk that a left-leaning party takes over as this is just an interim president which could affect prices to the downside. Elections are planned for 2018 but many invoke early elections, especially the impeached Dilma Rousseff who has called for a referendum for early elections.

Political risk is still the main risk for Brazil. With the markets 50% up, any new political turmoil might bring the markets down quickly.


A look at fundamentals shows that Brazil is still amongst the lowest priced global markets. The cyclically adjusted price to earnings ratio, which looks at 10-year average earnings, is 8.5 but the current PE ratio is very high at 44.1 due to the economic crisis and high interest rates. The price to book value is also relatively high at 1.4, thus it does not give much downside protection.

figure 5 valuations
Figure 5: Fundamental valuation ratios in international equity markets. Source: Star Capital.


Despite Brazil’s political and structural issues, the country remains a promising one. With a population of 200 million, and with a GDP per capita at only $11,208, there is still plenty of room to grow in order to reach a developed level (for reference, the US’ GDP per capita is $53,041).

In the long term, there’s no reason that Brazil won’t eventually return to its previous growth levels of around 3% annually. In the short and medium term, Brazil still has many issues. Apart from the political issues previously discussed in this article, the country also has a constitution that has been amended 91 times in the last 30 years, indicating an instability that consequently makes it very difficult to plan long term investments.

Since we wrote in April, the economy has improved a bit, but it is still contracting. The mere fact that there haven’t been any political scandals recently is not enough to base an investment case. While Brazil looks cheap, a return to power by Dilma Rousseff or any further indication of early elections may increase its risk and send asset prices down.

Until real structural, economic and political developments are reached, higher asset prices and a stronger currency means more investing risk for foreign investors. Traders might want to grasp the opportunities created by the current stability and positive trend, but long term risk averse investors might want to wait for lower risk with cheaper prices.



This Commodity May Have Reached Its Bottom. Find Out What It Is In Today’s Article.

  • Fertilizer prices have been declining alongside food prices, but food prices are picking up.
  • Fundamentals give downside protection with some risk coming from short term earnings.
  • The long term outlook is positive with balanced markets and demand growth.


In agriculture and horticulture, potash is the common term for nutrient forms of the element potassium (K). It is used globally for increasing agricultural yields and is an essential fertilizer.

From an investing perspective potash has been beaten down alongside other commodities but seems to be close to its bottom. This article is going to elaborate on an investing thesis for potash producers.

Current Situation

Two supply contracts, between the Belarusian Potash Corporation and two major Asian consumers, China and India, are very important for potash prices. At the end of June, India signed on to buy potash at $227 a ton which is the lowest price in the last decade and China signed on to buy at $217 a ton which is 30% less than last year. The low prices are not good news for potash producers, but those prices usually establish a global price floor. Other potash miners typically settle prices with India and China at the same levels.

The low prices are a result of current low food prices after a few years of favorable weather. This resulted in farmers putting-off increased fertilization and $50 billion spent in investments for increased potash production in the last ten years making supply 10% higher than current demand and bringing prices to multi-year lows.

figure 1 potash prices
Figure 1: Potash prices. Source: PotashCorp.

As potash prices are currently 50% of what they were a few years ago, potash stocks are also down more than 50%. However, if prices have bottomed an opportunity might be developing in this slump.

figure 2 potash price
Figure 2: Price movement of the Potash Corporation of Saskatchewan Inc. in the last 5 years. Source: Bloomberg.

Any improvements in the potash market would quickly give a boost to stocks of all potash producers.

figure 3 global potash producers
Figure 3: Global potash producers. Source: K+S.

Before we look at the fundamentals of individual companies, we are going to elaborate on the short- and long-term market outlook.

Market Sentiment

PotashCorp CEO Jochen Tilk stated in his Goldman Sachs basic materials conference this May that potash prices have bottomed and gave a cautious but optimistic view for the future. The basic drivers for potash prices are not contract negotiations, but rather the weather and planting, thus in the short term we can expect potash prices to be correlated to food prices.

figure 4 food prices
Figure 4: FAO food price index. Source: Food and Agriculture Organization of the United Nations.

Several agricultural commodities, such as sugar, soybeans, and coffee have seen significant increases in price this year after prolonged multi-year declines. This indicates that the bottom is likely in or near for most food based commodities. We therefore believe that fertilizer prices have also likely reached their bottom. As food prices increase, applying fertilizers becomes more attractive to farmers and demand increases.

Long Term Outlook

Food price correlations are also the main factor in long term potash prices forecasts. As the global population is expected to be around 10 billion in 2050, arable land is constantly decreasing while global calorie consumption is rising. Therefore, demand for both food and fertilizer should continually increase.

figure 4 arable land
Figure 5: Less land, more demand for food. Source: K+S.

On the supply side there is current overproduction, but as potash is a pure cyclical play, with a turnaround in food prices—also cyclical,—a change in the current oversupply might soon be possible.

By 2020 PotashCorp expects supply and demand to level out as demand is expected to grow in line with demand for food at a few percentage points per year. The current weak demand is expected to normalize with higher food prices, lower inventories and some mine closures.

figure 6 outlook
Figure 6: Potash outlook to 2020. Source: PotashCorp.

In a stable market environment, potash prices could pick up a bit which would be enough to significantly increase profits for producers, as most of them are profitable even with the current low prices and oversupply.


For a fundamental analysis of the Potash market we are going to use data from the Potash Corporation of Saskatchewan Inc. (NYSE: POT), Mosaic (NYSE: MOS) and Agrium (NYSE: AGU), which are more U.S. oriented.

 PE RatioPrice to BookDebt to EquityGross MarginOperating MarginDividend Yield
Table 1: Potash Fundamentals. Source: Morningstar.

If we are truly at the bottom of the potash cycle, then the above fundamentals actually look very intriguing. With an average trailing PE ratio of 13, potash producers are almost 50% cheaper than the S&P 500. The same holds for their book values and dividend yields, with an exceptionally high dividend yield from POT. It’s exceptionally high because the payout ratio is 120%. In order to sustain the payout ratio POT is taking on debt, however, management is confident that a bottom is in place.


The main risk is that potash prices further deteriorate, although this risk is minimal as the price floor has been set with the Asian contracts. A further decline in potash prices could be caused by benevolent weather conditions, crop yields remaining high without the need for fertilizer, or low food prices which don’t make it economical to use fertilizer. Seeing that food prices are increasing, this negative scenario seems unlikely, but investors need to be prepared for it. Another thing to be aware of is that none of the companies identified above are pure potash producers, so proper due diligence and specific risks should be assessed before investing.

The second risk may come from the upcoming earnings declines. As the current contracts are 30% lower than last year we can expect lower earnings for 2016. This could put pressure on stock prices even if it seems that the bottom in potash prices has been reached. However, the market may have already discounted any further decline in earnings. More aggressive investors could establish positions now, and more conservative investors could follow the earnings reports  and if bad, with stock prices falling further, buy cheaper.


The potential rewards may outweigh any further downside risk since we have good companies with low PE ratios and high dividend yields, that are still profitable even at these low potash prices. They also have good supply chains in place and low cost production that creates an advantage in the market.

Investors should also remember that a drought in the U.S., or El Nino waking up and destabilizing global food production, would quickly increase food prices as well as the affordability of fertilizers, causing potash prices to rise.

An investment in potash looks like one with limited downside and huge upside potential with a nice dividend yield while you wait, which is something to think about during these long Summer days.


Disclaimer: Sven Carlin, the article’s author, is long K+S, AGU and The Mosaic Company, and may initiate a new position in any of the above mentioned companies in the next 72 hours.


Should You Bet On Small Cap Growth Stocks? Why It May Not Be A Good Option Now

  • Small cap growth stocks only outperform in the two years after market bottoms.
  • At this moment they provide more risk and less returns than the S&P 500.


While it’s possible to make money in the stock market, it’s not easy. One thing an investor should know well, and constantly assess, is their exposure to various kinds of stocks, from value and growth stocks to large or small caps. Each type of stock performs differently depending on the economic cycle. However, over the long term small caps and value stocks have outperformed the rest of the market.

In this article we are going to investigate what we might expect from small cap growth stock performance at this moment in the economic cycle.

Small Cap Growth

Small cap growth stocks are companies whose earnings are expected to grow at an above average rate, relative to the market and their market capitalization, which is typically less than $2.5 billion. These companies have tremendous potential and if they manage to become large cap stocks, the returns to shareholders are phenomenal. This is magnified by the fact that mutual funds are often restricted in buying small caps and thus as a company grows there are more and more buyers who can invest.

While the returns of investing in small caps can be very rewarding, the risk is also higher than with large caps. Since the business isn’t as well established, there is a lack of corporate transparency, and more difficulty in attracting capital.

The chart below shows how small cap growth stocks have performed in various cycles since 1980 in comparison to the S&P 500.

figure 1 small cap vs sandp
Figure 1: $100 invested in the S&P 500 vs U.S. small cap growth stocks in 1980. Source: Fidelity, iShares, Author’s Calculations.

In the long term, the S&P 500 outperformed small cap growth stocks even with the standard deviation of returns being much lower (22.33 for small cap growth and 16.2 for the S&P 500). A higher standard deviation of returns means that you can expect more volatility, thus more risk, but as we can see it does not translate into higher returns over the long term. A higher standard deviation means that there will be periods when small cap growth stocks outperform.

In researching the performance of small cap growth stocks through economic peaks and troughs, the conclusion is that small cap growth stocks outperform other types of stocks in the short period after recessions. Investing $100 in small cap growth stocks at the beginning of 2009 would have returned $181 in the next two years and largely outperformed the S&P 500’s $144. However, from 2011 onwards the S&P 500 would have outperformed small caps by 10% in total.

The same situation happened after the 2003 bottom where small cap growth stocks returned $175 for a $100 investment in the two years after 2003 and outperformed the S&P 500 which returned only $142. The same holds for the 1991 recession with two year returns at $170 for small cap growth stocks and $139 for the S&P 500.

So one thing is pretty clear: small cap growth stocks outperform after the economy and the markets have reached their bottom. This is good to know for future recession lows, but does not help much in the current seven-year bull market.

By looking at the data from 1980, small cap growth stocks have underperformed in all the stable growth periods from two years after the bottom to the peak of the market. They also underperform in bear markets and flat markets.

figure 2 performance in bad years
Figure 2: Small cap growth performance in bad and stable years. Source: Fidelity, iShares, Author’s Calculations.

This means an investor would do well to avoid small cap growth stocks at all times except for the darkest recession and bear market periods.


Given that long term returns are correlated to underlying earnings, the first thing to consider in order to better understand the performance of small cap growth stocks is valuations. The iShares S&P Small-Cap 600 Growth ETF (NYSEArca: IJT) has a PE ratio of 24.29 and a Price to Book ratio of 2.9, while the iShares Enhanced U.S. Large-Cap ETF (NYSEArca: IELG) has a PE ratio of 19.84 and a price to book ratio of 2.3. Higher valuations make small cap growth stocks riskier, and at the first sign of a recession or tightening of financial markets, investors flee small cap growth stocks, which is the reason for their underperformance in flat and bear market years.

The reason they outperform in the recovery phase of an economic cycle is derived from the above. Since small caps are battered in recessions, their recovery is much better as they start from a lower starting point and have to play catch-up. As soon as they catch up, they begin to underperform as their valuations are usually too high.

figure 3 economic cycle
Figure 3: Stock types and economic cycles. Source: BlackRock.

Also, large caps are more globally diversified and derive about 38% of their revenues from abroad. Small cap growth stocks are mostly concentrated on their focus market and do not have the benefits of international diversification to help them in case of a U.S. recession.

What To Do

Passive investors should rethink their exposure to small cap growth stocks. As most, if not all of the extra returns from the 2009 recession low have been made, they now offer a lower return for more risk than a boring investment in the S&P 500.

However, there is one caveat. During moments of an economic peak like today, merger and acquisition activity intensifies, which should give a boost to small cap growth stocks. If you hold a portfolio consisting of many small cap growth stocks, you might want to select the ones that have a higher chance of being bought out by a bigger company.