You can't rely on Fed policy to push prices higher anytime soon
Gold’s extraordinary run over the past few years has made bulls a lot of money, especially if they held the metal as part of a diversified portfolio. Otherwise, trying to game the market has been a fool’s errand. Wednesday’s announcement by the Federal Reserve shows just why that’s the case.
The general theory behind gold is that it responds inversely to the dollar’s behavior, and that one reason for its meteoric rise has been that it serves as an inflation hedge. Theoretically, all the money our government has been printing makes the dollar worth less. The less the dollar is worth, the more expensive goods become — also known as inflation.
Therefore, anything that has intrinsic value — such as a precious metal — should theoretically become worth more. This theory probably has a good deal of merit when you consider the multiyear run gold has had.
The Fed’s quantitative easing policy prints money so the central bank can buy bonds, thus driving down interest rates. It’s that printing of money that got gold bugs excited. They were hoping the Fed would continue that policy, but instead it decided to just continue with “Operation Twist.” This is where the Fed simply swaps short-term bonds for longer-term ones. It doesn’t actually change its balance sheet, thus it’s not inflationary.
So gold sold off, just as it did when the Fed first announced Operation Twist. It opened yesterday at around $1,610, then dropped to $1,590. Then, however, buyers stepped in and pushed the price as high as $1,620, before settling flat. And that’s the problem with trading gold these days.
So what’s an investor to do?
The first is to understand that numerous crosscurrents are at work in the gold market. There’s always the issue of supply and demand. And some of it is psychological, tied to the overall state of the global economy. That bias is certainly to the bullish side, and will remain there for some time to come.
The supply/demand side of the equation is harder to peg, because you could read a dozen different reports on gold every day and find this variable is far too difficult to actually forecast. That’s why I don’t put much stock in that part of the assessment — because nobody seems to agree on it. So I discount that.
As for the inflation angle, we’re already seeing it in a bad way, it’s just that rising prices are being hidden. Still, given gold’s huge run, it may be that this factor is already discounted in gold’s price. So there may be some slight bullish bias here, but not much.
The Fed may yet do another round of quantitative easing, but it’s not likely to make a move until after the election. If Romney wins, we may get a new face at the Fed, so this remains a big variable. I suppose the bias here is bullish for gold, if anything.
It’s possible that Europeans will start buying the dollar if instability continues across the pond, which would be bearish for gold.
So, if you put it all together, there’s probably still a slightly bullish bias at play here. I think the safest way to play gold — if you insist on playing — is to just buy the SPDR Gold Shares (NYSE:GLD) as part of a diversified portfolio, and decrease that position if and when the world is in a better place economically.
You could also purchase the Market Vectors Gold Mining ETF (NYS:GDX), which removes you from direct exposure to gold prices, but exposes you to the operational risk for these companies. That’s why you get an ETF, though, to spread that risk.
You could also do my favorite play, which is to buy companies that profit from gold’s high prices — the pawnshops. First Cash Financial Services (NASDAQ:FCFS) and EZCORP (NASDAQ:EZPW) make fantastic margins when people come to their stores to sell their gold outright, and they make great margins if people pawn a gold item and fail to redeem it. They turn it into scrap.
Both of these stocks are significantly undervalued and not even close to being totally dependent on gold as revenue sources.
But whatever happens, don’t just trade gold on the technicals. I’ve tried this several times, and was convinced I’d have a winning trade this time around in May. I was dead wrong. Thank goodness for stop loss orders!
You have to give credit where it’s due. Though Microsoft (NASDAQ:MSFT) still is nowhere near toppling Apple (NASDAQ:AAPL) as the king of cool consumer technology, the recently unveiled tablet/laptop hybrid called Surface is going to be an interesting competitor in the red-hot tablet race.
And from an investor’s point of view, one has to be thinking ahead about the fiscal impact that could be made by Surface — if consumers welcome it with even just partially open arms.
See, like Apple’s iPad, most of the guts and assembly of Microsoft’s new portable device isn’t something Microsoft actually makes or does. It pays other companies to come up with those solutions. Given the way Apple’s iPads and iPhones have dragged so many component makers along for the ride, though, solid demand for Surface could translate into solid demand for its suppliers. The question is, who wins and doesn’t win if Surface gets traction?
The consumer-oriented model that runs WindowsRT is presumably going to be powered by a microprocessor and chipset built by ARM Holdings (NASDAQ:ARMH) and Nvidia(NASDAQ:NVDA), which most likely means a Tegra central processing unit will be the brains of the lower-end device. The Surface Pro, which will be operated by Windows 8, will be using a Core i5 CPU, which is made by Intel (NASDAQ:INTC).
It’s not just about the processor, though. The device offers a touchscreen display, which requires a certain caliber of input-handling. That’s potentially good news for Cypress Semiconductor (NASDAQ:CY), which already is powering other devices running Windows 8.
Of course, these are just educated guesses based on existing supply and manufacturing relationships. Nothing is set in stone yet, and the company has dropped few hints about what’s under the hood of the newly debuted tablet.
As if the onset of the tablet era wasn’t frustrating enough, Microsoft just drove the proverbial dagger into the backs of Hewlett-Packard (NYSE:HPQ) and Dell (NASDAQ:DELL).
How so? Although these outfits have watched PC and laptop sales decline for several years now, there was at least some solace knowing they’d each be coming out with a tablet that was run by Windows 8, keeping them relevant somewhere between their prior roles as kings of computers and their contended role as tablet makers. Now, though, it’s not clear whether Microsoft is going to give them leftovers from the launch of their own tablet business.
It’s a risky maneuver from Microsoft, to be sure. Though it’s a fading business, PCs and laptops still are selling, with most of them being operated by Windows. If Microsoft undercuts them on the tablet front, will these PC makers maintain their enthusiasm about a pre-installed Windows OS? (Sadly, they might have little choice but to just suck it up, though it’s clearly more PC and laptop competition they didn’t need.)
Assuming this list of winners and losers is essentially on target, the next question is, how big will the benefit be if Surface tablets actually make a dent?
Unfortunately, it’s a question of degrees: It depends on how strong that strength is. We do have some perspective, though.
In 2011, STMicroelectronics (NYSE:STM) nearly doubled its revenue — from 2010’s $353 million to last year’s $638 million. How? The company sells the electronic gyroscope found in the iPhone and iPad. It’s the hardware that makes the screen image flip from portrait (up and down) to landscape (side to side) when the device itself is turned sideways or right-side up. It’s not a new technology, but the gyroscope didn’t become a prolific seller for STMicroelectronics until it became standard last year’s on Apple’s hot-selling tablets and phones.
Skyworks Solutions (NASDAQ:SWKS), which makes mobile broadband technology, is another iPad explosion beneficiary. Granted, it doesn’t exclusively supply to Apple. It’s growing at least in part because mobile broadband connections are growing universally, from 500 million subscribers a couple years ago to a projected 2.5 billion by 2014. But, let’s face it: The iPhone is leading the charge, and that’s good news for Skyworks. Revenue has soared from $802 million in 2009 to $1.4 billion last year, and better still, profits are growing even faster than revenue, reaching $226 million in 2011.
Yes, those are a couple of cherry-picked extreme cases, and suppliers that have customers other than Apple won’t see improvements as dramatic as those. Every little bit helps, though.
That being said, the reality is — for the time being — there’s more we don’t know about who’s making Surface components than we do know. Intel, ARM and Nvidia are the frontrunners, but it’s the more obscure suppliers that could see the biggest (relative) benefit.
Of course, all this is moot if Surface doesn’t sell well. Let’s at least give it a chance to break into the market.
One value, one speculative and one niche for the grocer in you
I am not a fan of supermarkets these days. While they desperately fight off challenges from stores like Dollar Tree (NASDAQ:DLTR) and the organic juggernaut that is Whole Foods Market(NASDAQ:WFM), they still continue to lose market share.
That’s why I became intrigued by other niche players and think there’s value there to be explored. Let’s check in and see how these markets are doing.
Casey’s General Stores (NASDAQ:CASY) is an intriguing 53-year-old, 1,700-store chain that also operates under the names HandiMart and Just Diesel and stretches across 11 states (but is mostly located in Iowa, Missouri and Illinois).
Casey’s carries all the things you’d expect at a convenience store, but it also offers pizzas, burgers and breakfast items. So it’s like a combination of convenience store and Denny’s(NASDAQ:DENN). The best way to get a feel for the chain is to visit its website One of Casey’s primary advantages is its rural locations, which protects it from competition.
The company’s revenue soared last year, up 24% with earnings up 35% after backing out charges associated with fending off an attempted acquisition. CASY’s fourth quarter was tough, though, as gasoline margins were tight, despite a 13% overall revenue increase. With growth of 13% to 15% going forward, the stock is pricey. Still, it has much better prospects than others.
SuperValu (NYSE:SVU) has been struggling for quite some time. While growth has been anemic, it’s forgivable because the company is undergoing a turnaround. The focus has been on reducing debt, and the company has one big thing going for it: lots of free cash flow. Last year, SuperValu’s FCF was almost $400 million, and this year it’s projected to reach $450 million. CEO Craig Heckert is pledging to use most of it to reduce SVU’s debt from current levels of $5.87 billion, but that’s still a heck of a lot of debt to deal with — and being carried at 9%, no less.
For a while, I thought the 35-cent yield wouldn’t be sustainable, but it’s only $74 million annually, and that won’t make a dent in the debt anyway. Better to keep dividend investors on board. I think SuperValu might just be a speculative buy, but it assumes that free cash flow will stay consistent, and that the company can remain competitive in an increasingly hostile environment.
Given said environment, I’m impressed by Kroger’s (NYSE:KR) ability to keep growing. Total sales for Q1 were up 5.8% and same-store sales were up 4.2%. As other markets struggle, Kroger has managed consecutive same-store sales increases for the past eight-and-a-half years. The company lifted guidance 3% to $2.40 per share for the year. That puts the company at 9.5 times earnings and a long-term growth rate of 10%. When you factor in the 2% dividend, Kroger actually is a modest value play.
The market may love economic stimulus from the Fed, but it obviously acts because the economy is in need of help, and some stocks are more vulnerable than others.
That’s the case with Ford (NYSE:F), where I see risk increasing because of the weakening U.S. economy, Europe’s ongoing struggles and slowdowns in other parts of the globe. Ford’s U.S. business has stayed pretty solid, but I now believe the risks in the U.S. outweigh the company’s growth potential over the next several months. The stock has also been weak recently even in rallies, a sign that investors expect lower earnings for at least for the next few quarters.
F is more vulnerable than a lot of other companies right now because during times of economic turmoil, auto manufacturers’ earnings tend to decline more sharply because of their high fixed costs. For companies like this, lower sales have a more significant impact on the bottom line.
In addition, automakers may need to burn through a lot of cash in tough times, which can weaken balance sheets. I am not expecting serious financial problems for Ford, but investors consider this possibility at times like this, so it is likely to keep some pressure on the stock.
Europe also remains a trouble spot. In the first quarter, sales there fell from $8.7 billion to $7.2 billion, causing Ford’s pretax results in Europe to drop from a profit of $293 million to a loss of $149 million, a total swing of $442 million. If the economy there weakens even more, another drop in revenues would lead to even larger losses. For a while, the North American businesses looked strong enough to outweigh the struggles in Europe, but that is no longer the case with the slowing we’ve seen in the U.S. economy.
For all of these reasons, it is time to sell F. The stock is flat through the first six months of 2012, and it is down about 7% for us over the last couple of years.
I continue to admire Ford’s accomplishments in recent years. It has produced quality cars that consumers clearly want, and as a result, the company is much more competitive – and more profitable with lower breakeven points. Management also deserves credit for regaining the company’s investment-grade credit rating. With the risks we just talked about increasing, however, there are simply better opportunities for our money in the second half of the year.
Best Buy, PetSmart and Walgreens are among the top payout performers
It was a wild week for the markets, with big news events pushing stocks decidedly lower. The Fed’s move to continue dancing the “twist” through the end of the year wasn’t enough to get the bulls excited, and then a bevy of less-than-ebullient economic data slapped investor confidence upside the head.
The final blow for stocks this week, however, was Moody’s downgrade of the credit ratings of 15 major financial institution. The rating downgrades included a two-level reduction in the credit quality of Wall Street giant Morgan Stanley (NYSE:MS).
Yet despite the downbeat week, there were still a host of big names moving to increase shareholder wealth via a boost in payouts. Seven companies made it onto our Companies Increasing Dividends list this week:
Wireless communications property-site owner American Tower Corp (NYSE:AMT) is a REIT that’s also somewhat of a technology play. This week, the company boosted the signal on its quarterly distribution by 4.8%, to 22 cents per unit. The new dividend is payable July 18 to unitholders of record as of July 2. The new dividend yield, based on the June 21 closing price of $67.13 (the day the dividend was announced), is 1.31%.
Big box electronics retailer Best Buy (NYSE:BBY) has enjoyed better days, but the company still is delivering strong dividend performance for its shareholders. Best Buy lifted its payout 6%, to 17 cents per share. The new divided will be boxed up and sent out Oct. 2 to shareholders of record as of Sept. 11. The new dividend yield, based on the June 21 closing price of $19.48, is 3.49%.
Mortgage REIT Dynex Capital (NYSE:DX) invests in agency and non-agency mortgage backed securities, and this week it made a mortgage payment of sorts to shareholders that’s 3.6% higher than the previous payout. The dividend will be paid on July 21 to shareholders of record as of July 6. The new dividend yield, based on the June 21 closing price of $9.92, is 11.69%.
Lodging REIT Host Hotels & Resorts (NYSE:HST) is one of the largest owners of luxury and upscale hotel properties, and this week the company upgraded shareholders to a suite. The new dividend of 7 cents per share is 17% higher than the previous payout. The new dividend will be paid on July 16 to shareholders of record as of June 29. The new dividend yield, based on the June 18 closing price of $15.74, is 1.78%.
Closed-end investment management firm NGP Capital Resources (NASDAQ:NGPC) stirred its fiscal plot and poured an 8.3% bigger dividend cup, to 13 cents per share. The new dividend is payable July 9 to shareholders of record as of June 29. The new dividend yield, based on the June 15 closing price of $7.14, is 7.28%. The company also said it repurchased 250,029 shares in the open market in May. The dividend payout represents the 30th consecutive quarter of dividends paid by NGP.
Specialty retailer PetSmart (NASDAQ:PETM) is a place to go if you want to pamper your pooch. This week, the company moved to pamper shareholders with an 18% bigger dividend collar to 16.5 cents per share. The new payout bowl will be filled on Aug. 10 to shareholders of record as of July 27. The new dividend yield, based on the June 18 closing price of $68.96, is .96%. PetSmart also announced a newly authorized $525 million share repurchase program that’s in effect until January 2014.
Drugstore operator Walgreen Co. (NYSE:WAG) increased the dosage on its quarterly dividend by 22.2%, to 27.5 cents per share. The enhanced fiscal medication will be administered Sept. 12 to shareholders of record as of Aug. 17. The new dividend yield, based on the June 19 closing price of $30.09, is 3.66%. The move represents the largest dividend increase in the company’s 79-year history. Walgreen also has increased its dividend for 37 consecutive years.