Duck Quacks and Golden Echo’s

Richard (Rick) Mills

Ahead of the Herd

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As a general rule, the most successful man in life is the man who has the best information

The US Dollar, on a slippery slope for years, has reversed and broken out against every major currency and developing economy currency. A global wide quantitative easing (QE) is happening. Almost every central bank (Sweden’s Riksbank became the 14th central bank to ease monetary policy in 2014) is now creating money as fast as they can potentially leading to a global liquidity storm.

A strong dollar helps Americans by making imports cheaper and curbing inflation –  U.S. import prices fell 2.8% in January, are now down 8% yoy and January’s consumer price inflation is expected to be less than 1%.

However a strong US$ hurts U.S. based multinationals who have overseas earnings in those very same currencies that have taken such a severe beating versus the soaring U.S.$.

Over 85% of companies have lowered guidance for 2015 and the S&P 500 looks ready to turn over – despite a ‘last gasp’ headline record breakout – based on:

• Observance of decreased volume
• Rather tame market breadth
• Overvaluation
• Earnings collapse

The dollar’s surge is reducing earnings, bringing those declining yen, pesos, dinars, francs etc. home isn’t doing any good for bottom lines, in fact it could be an earnings disaster in the making.

“The S&P 500 Index has traded inversely to the currency moves over recent years, and it has become increasingly negatively  correlated. One reason, we believe, is that a growing share of revenue and profits for U.S. corporations comes from overseas—and that share seems likely to increase with the globalization of the economy.” Jeremy Schwartz, U.S. Dollar Strength Continues to Impact U.S. Multinationals

“Virtually every currency in the world devalued versus the U.S. dollar, with the Russian ruble leading the way. The outlook for the year will remain challenging. Foreign exchange (FX) will reduce fiscal 2015 sales by 5% and net earnings by 12%, or at least $1.4 billion after tax.” A.G. Lafley, Procter & Gamble chairman, president and CEO

Amy Hood, Microsoft’s CFO said: “Our guidance is based on our current view of FX rates. Should the U.S. dollar strengthen beyond those assumptions, as it did this quarter, we would see additional negative impact to earnings, revenue, our balance sheet and our contracted-but-not-billed balance.”

Profits are the largest driver of stock prices. S&P profits are, in this authors opinion, going to collapse. The vacation, the time spent visiting La La Land appears over, mainstream investors might want to start exiting Disneyland.

John Hussman, of Hussman funds, in an article titled ‘Extreme Overvaluation and the Inventory Problem’ says: “Our estimate of prospective 10-year S&P 500 annual nominal total returns has declined to just 1.4%, suggesting that even the dismal 2% yield-to-maturity on 10-year bonds is likely to outperform equities in the decade ahead.”

Consider

There’s a whole sector out there, way off just about every investors radar screen, that might be set to start showing immense profits.

This sector has costs in vastly weakened local currencies yet sells their product in U.S. dollars – revenue is in dollars while costs are occurred in countries where exchange rates have depreciated by significant amounts over the past year.

These same corporations have also been working very diligently over the last few years getting costs under control and the fall in oil prices will have a significant impact on profitability.

I’m talking gold miners. Those currently unloved and much scorned multinational corporations whose blood is running in the streets. They work in faraway places flung across the globe paying capex and opex in depreciated currencies yet reaping their golden rewards in a soaring U.S. dollar.

The gold mining sector is going to stand head and shoulders above all others – after the billions of dollars in inglorious write-downs are finished and investor confidence returns. A good point to make here is the write downs are non-cash and have no impact on day-to-day operations. They reflect bad decision making during the heady good times when gold spiked to almost $1,900.00 an ounce.

The globes major gold mining companies are definitely getting their act together and thanks to plunging energy prices and much weaker local currencies miners will definitely have improving margins. They’ll need them, with a US$1,300.00 per ounce gold price needed just to break even for most gold miners the industry is currently not generating any, let alone acceptable returns for its investors.

“The focus is now on generating sufficient returns for shareholders rather than production growth. While that might sound like common sense, it’s an attitude that has been sorely lacking from the sector over the past decade.” Motley Fool

By whatever valuation metric you choose to use, the gold exploration, project development and mining industry is trading at levels we haven’t seen in a very long time.

Good news, higher gold prices or news coming from operational efficiencies (cost cutting initiatives and better capital allocation – cutting exploration and non-critical spending) impacting the bottom line might make investors take notice of the one sector showing improving margins versus the possible widespread earnings carnage to come on the S&P500.