Monday, April 30, 2012

Marc Faber May 2012 Market Commentary

Marc Faber has just released his May 2012 market commentary on the website.

This month report is entitled "Economics is the Sum of all our Choices". In this report, he refers to Alfred Marshall, one of the greatest economists that ever lived, who wrote in “Principles of Economics” that, “economics is a study of mankind in the ordinary business of life” and that, “the laws of economics are to be compared to the laws of the tides, rather than with the simple and exact law of gravitation. For the actions of men are so various and uncertain, that the best statement of tendencies, which we can make in a science of human conduct, must needs be inexact and faulty.” Mar Faber then explains that the same principles can be said about the movement of asset markets. Any forecast is therefore going to be inexact and faulty. 

There are 3 attachments with this monthly market commentary (MMC)
  • A report by Geoffrey Batt,  Managing Member at the Euphrates Iraq Fund Ltd.
  • "Another tsunami of cash is hitting Dubai, get invested!" by Peter Cooper at
  • A newsletter by the Child’s Dream Foundation, a charitable, not-for-profit organisation dedicated to empowering marginalized children and youth in the Mekong Sub-Region, which includes Myanmar, Laos, Thailand and Cambodia.
If you want to access the full Monthly Market Commentary (MMC) by Marc Faber, it is available for 300 USD per year. Sometimes, Summaries or highlights are available on the web, I'll repost it here if one becomes available.

Marc Faber on Money Printing, Asset Allocation, Crude Oil and More

Here's a 2 part interview of Marc Faber by Future Money Trends uploaded on the 29th of April 2012.

In the first video, MArc Faber explains that money printing won't help the general population, but it will increase asset prices, so people who own assets will benefit. The other issue is that central banks can't control where the money go and as a consequence the unemployment rate has not improved much ion the US and in Europe, but people living in emerging economies have benefited.

When asked about equities, he said that also equities are not a good bargain right now, and we may have the high for the end on the S&P 500 at 1422, there is a big risk in not owning equities because of (you guessed it) money printing. He recommends to own some equities especially in Asia (dividends are good ~ 5 to 7%) possibly via ETFs, some precious metals, and for US residents, some real estate in the South of the US.

He concludes by explaining that eventually there will be a complete reset, a complete collapse because there is simply too much debt with bankrupt banks lending to bankrupt to governments and vice versa, and the Ponzi scheme will come to an end. In the second video, they discuss how the ponzi scheme could end. Marc thinks there could be significant price inflation, government may try to give more handouts to their citizen while increasing taxes on rich people, and eventually they'll go to war to put the blame on some other countries.

Then  they switch to discussing about crude oil. Marc Faber first explains that oil prices are volatile and much of it is due to government policy such as manipulating interest rates. When he looks at several aspect of the oil market (demand in the west flat, demand rising in emerging markets, supply constraint and geopolitical tensions in the middle east), he would rather be long on oil.

Marc then talks about  the declining standard of living of US citizen which has started some 30 to 40 years ago compared to the rest of the world and it will continue to fall.

Finally, he's asked what he would advice to young people in Western economies. It might not always be a good idea to borrow money to get a degree, but if your parents are rich enough to pay it, then go for it. He would then start to work for somebody successful in any industry and acquire knowledge. Obviously, you should choose something that you like. There are different kind of success, not only monetary, but a happy family, helping others may also be successes.

Friday, April 27, 2012

Eric Sprott: When (Gold) Fundamentals No Longer Apply, Review the Fundamentals

Sprott Asset Management published their monthly newsletter Market at Glance (April 2012) entitled "When Fundamentals No Longer Apply, Review the Fundamentals".

Eric Sprott and David Baker explain they still don't see a recovery:
  • US housing situation is still a bust with both existing and new home sales well below the highs reached in 2006.
  • Unemployment is still high, and despite all the news cheer-leading, the most recent numbers show week data. and the same is true for jobless claims numbers.
  • US tax receipts are only up 2% over a year (lower than inflation at 2.7%)
  • ECRI Weekly Leading Indicator (WLI) has started to trend down again in April
  • US Durable Goods Orders have dropped 4.2% in March, representing the largest decline since January 2009.
  • China's most recent Purchasing Managers Index (PMI) indicates that China's manufacturing activity has now been in contraction for six months in a row.
  • The situation in Europe continues to worsen: Spain is a complete disaster, Italy prospects do not look good either, and German PMI shows a decline in economic activity with the fastest rate of contraction since July 2009.
All those bad numbers guarantee that central banks will print money again, and the IMF most recently secured $430 billion worth of new "pledges" from various G20 member countries to increase its potential lending capacity to $700 billion in the event of further problems in the Eurozone. BRIC countries are irritated by these actions and their lack of voting power in this institution.

Possibly to counter this issue, BRICs have planned to start their own financial institution at the last BRIC summit and reports seem to indicate a BRICS central bank - an institution that could facilitate their ability to "do more business with each other in their local currencies, to help insulate from U.S. dollar fluctuations" might be created.

China has also been importing a lot of Gold via Hong Kong recently. In February, China imported 40 tons of Gold via Hong Kong, 13 times more compared to the same month last year and other emerging countries also follow suite, with 12 countries increasing their Gold reserves by more than 58 tons in March (that's 696 tons annualized). There is so much Gold bought by central banks, that Merk and Baker wonder where they'll find that Gold for delivery.

Eric Sprott concludes as follows:

We have written at length about the disconnect between the paper gold price and the physical gold market. If the demand changes stated above applied to any other market, the investing public would lose their minds. Could you imagine, for example, if the demand shifts described above were applied to the global oil market? What would happen if a single country came in from nowhere and increased its oil purchases by a factor equivalent to 30% of the world's annual oil supply? We are students first and foremost of the physical market, and the numbers stated above speak for themselves. We remain confident about gold for the simple reason that the demand we are now seeing for physical is completely unsustainable without higher prices, and we do not see that demand abating in the coming months. The US recovery is not happening. Europe is poised for yet another full-fledged economic crisis, and the BRICS countries continue to aggressively convert to hard assets like gold in order to protect themselves from currency debasement. The paper market for gold can continue its charade, but demand in the physical market will soon overpower it through sheer momentum - there's only so much physical to go around, and it appears that there are some very large buyers that are eager to take it.
The full version of the newsletter is available at,-review-the-fundamentals/

Monday, April 23, 2012

Anonymous Analytics Uncovers Huabao (0336.HK) Alleged Pump & Dump Scam

Last time around, Anonymous Analytics found that Chaoda Moderm (0682.HK) may have lied about their assets and since then, the company stock (listed in Hong Kong) has been suspended.

Today, they have released a new report on another stock listed in Hong Kong: Huabao International Holdings Ltd (0336.HK), a flavor & fragrance (F&F) and Tobacco company. They view the company as "a pump and dump scheme with the primary objective of enriching its Chairwoman, Chu Lam Yiu and her proxies at the expense of shareholders. Since the inception of Huabao, Ms. Chu has sold nearly US$1.2 billion in stock, bringing her ownership of the Company from 97.6% to 37.7%"

In the 44-page report, the research team reviewed Huabao’s backdoor listing, its history of related party transactions, massive insider selling, and suspiciously strong financial metrics.

They found the company has a much higher profit margin than peers (close to 75% vs 40 to 50 %) which is not an issue in itself, but may raise eyebrows. The disturbing part is that AA contacted their alleged customers and many claimed they did not do business with Huabao or even did not know the company.

One "funny" part (except for investors in the company) is the way they altered the picture of one of their facility in Africa to make it look much larger than it actually is.

And that's not the only place AA found where management has grossly exagerated the scale of their operations as the multi-billion US dollars R&D center in Germany with at most 12 staff.

The history of the company shows a fair amount of resignation of key manager as well as audit companies.

Their conclusion is that "management is materially overstating Huabao’s earning power. The genesis of this overstatement was the Chemactive acquisition dating back to 2007, when management reported a questionable explosion in gross margins."

There is much more in-depth analysis in the report which is available at

Investing in individual stock can be very risky, it is safer to either buy stocks in a (large) basket of companies if you have enough capital or more simply invest with ETF or mutual funds.

Friday, April 20, 2012

GMO 7-Year Asset Class Forecasts - March 2012

GMO has just released its quarterly 7-year Asset Class Forecasts and here are the expected annualized return (based on valuation and historical earning growth):

  • US Large caps: -0.3% per year
  • US Small caps: -2% per year
  • US High Quality: 3.7% per year
  • International Large caps: 3.9% per year
  • International Small caps: 3.4% per year
  • Emerging Markets: 5.4% per year
This last month expected returns have gone down for US stocks and International large caps and up slightly for international small caps and emerging markets, but the returns are still nothing to be excited about.

Different kinds of bonds are expected to return between -2.2% and 1.0% per year.
Managed Timber (stable as ever) is expected to return 6.5% per year. Those are real returns adjusted for inflation of 2.5% per year.

You can receive GMO's forecasts (monthly) and the quarterly newsletter for free by registering at

Wednesday, April 18, 2012

Jeremy Grantham's Quarterly Newsletter April 2012 Summary

Jeremy Grantham, GMO, has just released its Quarterly Newsletter entitled "My Sister’s Pension Assets and Agency Problems (The Tension between Protecting Your Job or Your Clients’ Money)".

In this newsletter, he focus on how career risk for people working in the investment business affects the markets. The first priority for professional investors is to keep their job, and for that reason they usually go with the flow to avoid being wrong on their own and be able to use the all convenient "nobody saw it coming".  Career risk (which I discovered thanks to Jeremy Grantham) is what made me realize that as an individual investor, you could beat the market over the long term, as long as you are disciplined and patient.

Here are the key points brought forward by Jeremy Grantham:
  • Career risk is a main cause of volatility: two-thirds of the time annual GDP growth and annual change in the fair value of the market is within plus or minus a tiny 1% of its long-term trend, whereas the market’s actual price is within plus or minus 19% two-thirds of the time.
  • Ignoring long term trends may be the correct response on the part of most market players, for ignoring the volatile up-and-down market moves and attempting to focus on the slower
    burning long-term reality is simply too dangerous in career terms.
  • The quote “The market can stay irrational longer than the investor can stay solvent.”  can be expressed as “The market can stay irrational longer than the client can stay patient.”  for investment companies. GMO found that clients patience time has been around 3 years on average in normal conditions.
  • 3 conditions must be met to bet against market irrationality:
    • Allow a “margin of safety” and wait for a real outlier before you make a big bet
    • Stay reasonably diversified
    • Never use leverage
He admits that his sister portfolio (managed by himself) did better than his clients' portfolio, mainly because he has only had to consider absolute return without the investment constraints some investors impose and felt absolutely no career risk.

GMO tries to find the right balance between short term client expectations and long term prospects, but this is challenging as it appears they lost 40% of their clients when they stayed out of the 1999/2000 stock market bubble. But as they were proven right as time passed by, the company  eventually "attracted a flood of new business" in 2003 to 2006.

Before the 2008 crash, his sister portfolio had virtually 0% allocation in stocks, but GMO clients still had about 45%, again because of business risk. 

GMO now offers a "Benchmark-Free Allocation Strategy" which allowed great return during last decade and reflects little career or business risk. The strategy intended to protect capital first and yet still make good money by taking into account historical trends and valuations.

The second part of the newsletter "Force Fed" written by Ben Inker provides GMO's investment outlook and explains how the Federal reverse market manipulation makes it to invest.

Here are the key points I noted:
  • The Fed has engineered a situation in which the really unattractive asset classes are the ones we have always thought of as low risk: government bonds and cash. (etfideas: That's actually the main reason why I hate the fed)
  • Stocks are expensive relative to GMO estimate of long-term fair value, but so are bonds and cash.
  • Australian and New Zealand government bonds are the only bonds (unenthusiastically) liked by GMO because of decent real yield and government spending policies that are sustainable in the
    long run.
You can read the complete newsletter for free on GMO website.

Sunday, April 15, 2012

GEAB 64 - France 2012-2014 - The Great Republican Earthquake and its International Impact

Français : Déplacement à Asnières sur Seine
François Hollande
Here are the highlights of GEAB 64 (April 2012) entitled "France 2012-2014 - The Great Republican Earthquake and its International Impact":
  • Global Systemic Crisis: France 2012-2014 - The Great Republican Earthquake and its International ImpactFrançois Hollande victory will trigger a set of massive changes in the direction of the European project, which make the French presidential election more important than the US presidential race.
  • Political Anticipation Methodology - Knowing how to decrypt the attempts to take control of the collective psyche.LEAP here talks about the methods used by government (e.g. declaring wars) to control the collective narrative, for example by inventing an Iranian threat...
  • The madness of Canada real estate, repetition of the US mistakes – Towards a slump in price between 15% to 25% from 2013. The current real estate boom in Canada is due to excessive private debt.
  • Strategic and operational recommendations. AUD and NZD outlook, the great fiscal attack starts now, the next leg down for the US stock market and economy has (re)started, Canadian residential real estate prices will sharply drop and European politician ready to counter attack against Euro speculators.
  • The GlobalEurometre - Results & Analyses. 74% of respondents (vs. 71% in March 2012) expect a sharp decline of the US dollar.
The full GEAB 64 (PDF format) is available to LEAP 2020 subscribers for 200 Euros per year (10 + 6 issues). 

Thursday, April 12, 2012

Investing in Natual Gas Revisited - FCG ETF

I've been keen on investing in natural gas for well over a year, and the timing hasn't been right until now. But with natural gas spot price dropping below 2 dollars per million British thermal units (MBTU) yesterday, and hitting a 14-year low, I thought I might deal with this investment idea again.

First let's make the case for investing in US natural gas.

The best time to buy commodities is when they are depressed. Let's have a look at US natural gas for the last 15 years (Source:

The price is now back to 1997/1999 levels, right before the start of the massive commodities bull market and massive monetary inflation by central banks do not appear to be affecting natgas price.

If you think a 15-year low might be a good investment opportunity, what about an inflation adjusted 36-year low?
Source:Our Finite World
This chart was updated in January 2012, when natural gas was still above 2 USD per MTBU and it has since dropped to 1.98 USD per MBTU, so we are at least at a 36-year low (or very close to it) when adjusted with official inflation numbers.

Pundits explains the price is low because of the glut of natural gas attributed to new technologies such as fracking, and this is certainly a very good point. But there is another aspect which is very bullish for US natural gas: international gas market. Russian natural gas and Indonesian LNG are still in a upward trend, and currently Russian natural gas is over 6 times more expensive than US natural gas as shown in the 15-year charts below (Source:

Russian Natural Gas (1997-2012)

Indonesian LNG (1997-2012)
Natural gas is not has easy to transport as crude oil for example, but one of the issue is the lack of LNG terminal with the ability to export liquefied gas to international markets which would increase the price of natural gas in the US and help decrease the cost of natural gas overseas. According to Wikipedia, there is only one liquefaction terminal (for export) in Alaska for the whole US, but there are 13 regasification terminals (for import). There are 2 proposed liquefaction terminals in Louisiana and Oregon. Once completed, the US will be able to export more natural gas and hopefully take advantage of the differential between local and international prices.

Finally, Crude Oil (WTI) to Natural Gas price Ratio stands now at over 50, whereas the historical norm has been around 8 to 10. See chart below (Souce:

So that means for a given amount of energy natural gas is about 5 times cheaper than crude oil. In reality, this is obviously not that easy as those 2 fuels are not interchangeable, but companies may start to invest more in power plant and transportation that can accommodate natural gas.

Now we have made the case to invest in natural gas, let's see how it can be done

There are some ETF to invest in Natural Gas such as UNG (USA) that are supposed to track natural gas price. However, their cost (due to diverse costs and contango) is prohibitive so that I would really advise against investing in those, unless you are able to correctly guess the price of Natgas within 3 months. Those types of ETF will go to zero by design.

You could potentially invest in companies such as Chesapeake or SandRidge Energy (SD), but if natural gas stays too low for too long some of those companies may go bankrupt and you'd lose all your investment. If you have enough capital, you could buy a list a companies involved in natural gas extraction and exploration, but for most of us, the simplest is to invest in mutual funds or ETF.

First Trust ISE-Revere Natural Gas Idx (FCG) is an ETF tracking ISE-REVERE Natural Gas Index which is composed of the stock of companies dealing with natural gas production and exploration.

Let's see how FCG fared in the last five years (Source: Yahoo Finance).
The first obvious thing is that it tracks natural gas rather poorly. FCG followed the price hike in 2008, but since 2009 it has more or less tracked the performance of the S&P 500. This makes me a little uneasy to buy FCG right now, but in case of further weakness (at least  below 15), it might be interesting to start buying this ETF to have some (limited) exposure to natural gas.

I'm not fully satisfied with this method of investing in natural gas, but it's the best I've found so far. If you have better ideas, let me know.

I've also seen some companies are selling Oil and Gas Royalty Rights, but I have not checked this into details yet, as it may not be easy to access such investment for oversea investors.

Monday, April 9, 2012

Jim Rogers: How to Invest in the Agriculture Sector in China

Jim Rogers is interviewed by China Daily on the 9th of April 2012 where he gives a few investment ideas for the Agriculture sector in China from becoming a farmer to owning commodity futures.

Tuesday, April 3, 2012

Marc Faber: Inflation or Deflation ?

Marc Faber is interviewed by Lauren Lyster's Capital Account on Russia Today on the 3rd of April 2012.

Marc Faber says inflation in money and credit can cause bubbles, but it is hard to know where they are, and it is not easy to know where inflation is taking place. He also notes that governments hide inflation and much of that inflation goes into asset prices. We do not know exactly how much the Federal Reserve, the ECB, the BOJ, etc. are propping up the prices of stocks, commodities, etc. We can only estimate. The money printing and loose language of the central bankers and policy makers around the world certainly does distort the price mechanism, however, and Marc Faber is not optimistic about the ramifications of these actions.

He also mentioned the quadrillions in derivative, and that derivatives bubble will eventually collapse and lead to massive wealth destruction.

When asked to give advice to young people in their 20s and 30s, he referred to his generation and how it was easy to get a job at the time, but since the collapse of communism and the advance of the internet, 3 billion persons entered the world economy and western youngster have a lot of competition by young people living in developing economies, so he just think young people should lower their expectations and people in the western world should change their mentality and reject the nanny state.

 The interview starts at 3:18.

Marc Faber: Well to-do People Will Lose Up To 50% of Their Total Wealth

Marc Faber is interviewed on CNBC on the 2nd of April 2012.

He explains that down the road their will be a massive wealth destruction and that in the next 10 years, investors should not think how could I get the highest return, but how do I need to invest to lose the least. He expects rich people to lose up to 50% of their wealth.

For US residents, he recommends real estate in the south of the US (Arizona, Georgia), some gold and equities.

Sunday, April 1, 2012

Marc Faber April 2012 Market Commentary

Marc Faber has just released his April 2012 market commentary on the website.

This month report is entitled "He had been one of those People who was greatly improved by Death".

This month, there are 2 MMC attachments:
  • Stocks, Bonds, and the Efficacy of Global Dividends by Jim O´Shaughness, chairman, and CEO of O'Shaughnessy Asset Management,
  • Value Subjectivism and Monetary Instability by Ron Herafounder of Hera Research, LLC.
The first report by Jim O'Shaughness is available as a free download at (January 2012 research paper) after registration. In this report, Jim O'Shaugness looks at bonds and stocks investing as well as global dividend investing. He compares different strategies over a long(-ish) period of time. Here's the conclusion of this study:
Bonds seem poised for low single-digit returns and, potentially, negative real returns. A conservative analysis of historical equity returns leads us to believe that equities could see mid to high single-digit nominal equity returns, though still below average. Dividend investing has historically been a reliable strategy producing superior excess returns in both U.S. and foreign markets. Expanding the universe of potential investments to include a global framework provides a greater opportunity set of high-quality, cash-rich multi-national companies with strong dividend yields.

Dividends are historically a significant component of total equity returns during low-return environments. When applied to pre- and post-tax income investors, a high-yield dividend strategy not only offers protection of purchasing power but also growth of income on a real basis.
The second attachment "Value Subjectivism and Monetary Instability" is an article published on where Ron Hera pinpoint 15 fundamental issues with fiat currencies.

If you want to access the full Monthly Market Commentary (MMC) by Marc Faber, it is available for 300 USD per year. Sometimes, Summaries or highlights are available on the web, I'll repost it here if one become available.