Gold Looks Good In 2014 Despite Fed Tapering, Canadian Oil Price Differential Under $20 Into 2016 pipelines

Key things to note this first month of 2014:  From December 31, 2013 to January 29, 2014 spot gold gained US$85 to close at just under $1270 but keep in mind that if your currency isn't the US dollar then gold got even more expensive thanks to i) ongoing currency crises in emerging markets ii) Canadian dollar drops to 4-year low versus the greenback; country decides not to raise interest rates. iii) fiscal liquidity problem developing in China.  But don't get too excited just yet - At $1255 the April futures gold price remains lower than spot.  Osisko is suing Goldcorp - alleges misuse of confidential information.  I guess that puts an end to Goldcorp's $2.6 billion hostile bid for Osisko.

Canadian WCS oil price:  Canadian oil price differential expected to remain under $20 for the foreseeable future, well into 2016.  A couple reasons for this

• Enbridge is expanding the capacity of a key pipeline in Wisconsin:  from 400,000 bpd to 1.2 million bpd.  That will have a positive effect on the oil and gas industry in the US NW (three-fifths of oil output in ND is shipped by rail).  Enbridge has also proposed the Sandpiper Pipeline which will add 225,000 bpd to Minnesotia plus another 375,000 bpd to Wisconsin.
• BP and Marathon refineries in the US are being upgraded to handle more heavy crude from Alberta.
•  Glut of supply in Wisconsin may be relieved when portions of the Keystone pipeline come online (southern leg of Keystone running through Cushing, Oklahoma became operational January 22).
• Trans Mountain pipeline from Edmonton to Burnaby tripled capacity from 300th to 890th barrels per day.

Despite several factors working in its favor, over the last few weeks the price of gold hasn't really moved in either direction, as investors were anticipating a tapering to the Fed's $80 billion monthly bond buying program (put downward pressure on commodity prices).  When it finally happened on January 29 ($10b/mo) gold went up as is to be expected (no more tapering in the short term).  I have some concerns about Fed tapering.. The Fed claims that economic activity picked up in recent months -> this should cause money to flow out of commodities and into equities... however that doesn't appear to be happening (soft jobs growth in December).  If you're concerned about interest rates rising in response to Fed tapering don't be:  The Fed has explicitly stated that it will maintain a policy of record low interest rates (gold does well when interest rates go down).

Counteracting this and lifting the price of gold is

• Currency crisis in emerging markets specifically Turkey, South Africa, Argentina - safe haven investing favors gold, US security notes
• Financial liquidity problem developing in China; banks aren't lending and that's making it worse
• Less US monetary stimulus is wreaking havoc on currencies in South Africa and Turkey where account deficit problems are forcing interest rate hikes.

Bitcoin Accepted By More Retailers, 3d Sensor Technology; BlackBerry's Turnaround & Bombardier BBD.B More Orders Planes, Trains

          You know things are crazy when the most solid investment right now may not even be tangible !  Bitcoin, the most widely used virtual currency gained 5% in trading the Thursday following Christmas day.  This, on news that major online retailer overstock.com will begin accepting Bitcoin as payment early next year.  Bitcoin prices ranged wildly over the past couple months.. all time high is $1241 (November 29) up from just $100 in October... Bitcoin currently trades at ~$1240 USD.

Canadian Real Estate Investors Have Deep Pockets.. Makes Canadian Real Estate Market Less Risky

I'm optimistic about the Canadian real estate market, specifically commercial properties. Only 1.5 years ago, in May of 2012 Scotiabank sold Canada's second tallest building, Scotiaplaza to H&R Reit/Dundee Reit for an impressive $1.266 billion.  Then, last month we learn that Canadian real estate investors have been a major driving force behind the resurgent US real estate market;  between the years 2009 and 2013, Canadians outspent Americans by about $27 billion !

This year (ended August 2013) the biggest Canadian spenders south of the border were publicly traded companies ($4.6b), institutional investors ($2.3b), and private companies (1.3b).. they invested in office space ($4.2b), apartment buildings ($2.8b), and industrial complexes ($2.1b) among others.  You can be sure that these companies are eyeing the Canadian market and plan to step right in if and when Canadian prices start to decline.

Bad News at BlackBerry Being Overblown Again (surprise ?)

What hurts Microsoft won't hurt BlackBerry:  Unlike Microsoft, BlackBerry offers a robust operating system with the best reputation for security. What worked against MSFT won't work against BBRY. The last quarter was seriously hurt by Thorsten's for sale tag. People were confused about the future of the company, but now the situation is different the future is clear, BlackBerry is here to stay.

The media chooses to focus on only the worst news in the worst possible way !

• Either say that the company sold 1.9 million handsets or say that it lost $4.4b;  The $4.4b loss takes into account 4 million devices sold.
• The adjusted loss of under $400m compares favorably to the quarterly losses Microsoft's handset business has been racking up.
• Without its cheap devices Samsung would be doing bad too (sales of high end devices plummeted at Samsung).  BlackBerry just released Q5 and other low end devices which will appeal to users of the BB7 phones in developing countries.
• During this quarter (2q2014), BlackBerry had the worst kind of media attention possible, talk of the company collapsing which we now know to be false after revelations that the Chinese government was lobbying hard for Canada to permit a Lenovo takeover.  Now we are seeing a turnaround with Germany, and even the US Government favoring BlackBerry over iPhone.  As long as security remains a priority, BlackBerry will be a player.
• Cash equivalents up to $3.7 billion.  Even without the $1 billion share issue cash down by less than half a billion.  A true $4.4 billion loss would've plunged the company into bankruptcy.
• $4 billion of the $4.4 billion loss stems from structural changes + end of licensing deals made when the company was much larger + things that will not happen next year thanks to the foxconn deal.  
• Under construction is a new security technology center in Washington DC.  This will give BlackBerry a cosier relationship with its biggest clients - government and security agencies.
• New CEO John Chen is hiring a rebuilt sales force designed to target regulated industries, including government clients.
• Last quarter BB sold roughly half a million BB10 phones.  That number can only go up since new CEO John Chen has made it his goal of lowering the price of the phones.
• Market share remains strong in the middle east.  Service revenue remains strong being down by only -13% even though the number of devices sold fell at 3-4X that rate.

Thanks To Aldi, Supermarket Competition In the United States Will Intensify In 2014

German Government Relies On BlackBerry, Pretium Resources Proves Seabridge Gold Underpriced, Oil Stocks (CPE)

         BlackBerry (bbry) gains on rumours that German government and possibly others remain more committed than ever to BlackBerry devices - a few months ago they ordered 40,000 q10/z10 units.  Apparently NSA snooping isn't being tolerated at all in Germany, and that has led to a government-wide ban on the iPhone.  Two reasons for this 1) Germany-based firm secusmart has created a micro sd card that, when used on a BlackBerry device, renders the phone impenetrable (enhances BlackBerry security via encryption technology) .. would take a minimum of 149 years to hack.  2) Apple's iPhone servers are located in the US where NSA has governmental authority .. unrestricted access to private information  3) Germany's federation office for information security (BSI) has developed software that must be used in government employee phones.  Apple's devices aren't compatable with secusmart software.

on the flipside
Could the NSA access BlackBerry servers via relationship with government ? The Canadian government helped the NSA collect information during the 2010 Toronto G8 summit.  This leads to other concerns:  Does the Canadian government have unrestricted access to BlackBerry servers in Ontario ? We know that a big reason BlackBerry is off the market is because the government won't ok such a deal if it involves a foreign company such as Lenovo, this leads us to believe that the government of Canada does have a certain level of influence over BlackBerry.

Gold Silver stock doubles on news of higher than expected pre-production

Nov 21-22 Pretium Resources (tsx|pvg) stock climbs 80% on news that initial ore samples taken from the area known as 'Valley of the Kings' within the company's flagship Brucejack gold mine in British Columbia, yielded higher than expected gold grades:  19% higher to be exact (16g vs expected 13g per ton).  That translated into 4200 ounces of gold, 3500 ounces of silver.  The mine won't begin commercial production until 2016.  Reserves estimated at 7 million ounces of gold, 35 million ounces of silver.

That makes my favorite gold mining stock Seabridge Gold (SEA) even more enticing.  You see, Seabridge has 5X as much gold and silver at neighbouring mine Kerr-Sulphurates-Mitchell.  Higher gold grades at Brucejack probably means higher gold grades at KSM !  Either way, Seabridge Gold has to be on your stock radar .. has much more gold than Pretium Resources at a property that is only miles away .. any company looking to develop Brucejack is going to take an interest in KSM.  Future news regarding development at KSM will have a huge impact on Seabridge stock.  With Brucejack prepping for 2016, it's only a matter of time until the focus shifts to KSM.

Watch Out: New tax on gold in India will affect gold demand

Two months ago, in September India raised the duty tax on imports of gold jewelry from 10% to 15%.   Unsurprisingly Thailand, a major source of India's gold (3% of Thailand -India trade) initially objected to the tax hike however by the end of October, Thailand agreed to abide by the new rules after India threatened to suspend imports of gold jewelry from the country.  India also introduced a tax of 10% on gold bullion.

The new tax on Indian gold imports will eventually have a significant affect on world gold consumption:  Last year, India was the primary driver of gold demand - the country accounted for a fifth of gold consumption worldwide (864 tonnes out of 4405 tonnes total; 11% more than China).

Sears Canada being run into the ground by parent Sears Holdings ? (owns 51%; Sears Canada closes)

Over the last five weeks, Sears Canada raised $695 million in two seperate deals that saw the 61 year-old retailer sell a number of its core, revenue generating stores.  In the $380 million October 29 deal, Sears gave up its most profitable location in Toronto's Eaton Centre (335 employees there alone, store is so big mall gets its name from previous tenant Eatons) and one of its biggest stores in Western Canada (Richmond BC).  What's most alarming about the deal is this:

Air Canada (AC.B) Profitable ? Revenue Up At Chinese Banks, Earnings Dividends At Citigroup, HSBC

Air Canada (AC.B) is making more revenue per passenger and that's one of the reasons investors continue to reward this airline stock with record growth (+52% last month, +150% last 3-months).  In fact just yesterday, the stock touched a five year high of $5.80 up from $1.80 exactly one year ago (Oct. 30).  The company has had success charging passengers additional fees for meals, pillows, earphones and other conveniences previously taken for granted.  Also giving the company lift is its own new discount carrier Air Canada Rouge launched in July 2013.
For the first time in a long time, earnings are showing signs of breaking into positive territory !  Quarterly net loss now at $(23) million, down considerably from $(160) million last year.  Passenger revenue is up (+$86m for 2q13, +$89m 1h13),  First half operating profit was $174m up 176% from last year's $63m.

Lower fuel costs (-$57m quarter, -$76m half) not the main reason quarterly operating expenses are down (1.4)% (total increase in salaries + currency effects were +$60m)  : this proves that the company is getting its act together ! 

Despite currency effects weighing on results [1h13 $(114m) vs +$26m] and wages/salaries up bigtime (+9% quarter, +7% half), overall operating expenses declined (-1.4% quarter, -0.6% half).  Also a positive sign: cash equivalents up 4.8% to $790m after declining (6.6)% in the second half of last year.  Long term debt was lowered by $315m (half) vs $238m last year. 

Airline Stock October 30 2013	1-year	3-months	1-month
Air Canada (AC.B)	209%	150%	52%
Westjet (WGA)	54%	34%	8%

Air Canada benefits from more international travel particularly to and from China;  The last two census results show Canada's Chinese population is up 141,070 or +10.5% in five years; in 2010 Canada acquired Approved Destination Status which is key since it was one of the last major countries not to have it.  At the time, it was estimated that by 2014 Chinese travel to Canada would increase 50%.  Direct competitor Westjet (WGA) has also been reaping the benefits of increased air travel within Canada and to and from the country.  First half revenue up +6.5% ($1,810.93 million), earnings up +22.6% ($135.8m).

Among The World's Largest Banks China's Phenomenal Revenue Growth;  Earnings Dividends At Citigroup, HSBC Remain Healthy

• TD Bank reported 18% growth in average loans (3q2013). 
• JPMorgan Chase - 3rd quarter earnings take a hit :  down -$380m due to - $9.15 billion pretax expense; $7.20 billion after-tax (eps down 185c) for legal expense in Corporate, including reserves for litigation and regulatory proceeding. - $1.60 billion pretax benefit; $992 million after-tax (eps up 26c) from lower reserves in Consumer & Community. 
• China Construction Bank - lending fee incomes climbed contributing to increased revenue.  earnings increases lagged analyst expectations of CNY57.69 billion.

 

Canadian Retailer Hudson's Bay Becomes Major Player In North America's Fashion Retail Industry

Just yesterday HBC's $2.9 billion takeover deal for Saks Inc received Saks shareholder approval.  The Toronto-based company will operate 320 stores in prime retail locations throughout North America.  After the merger, Hudson's Bay Company will have annual sales in excess of $7 billion.  Investors take note:  HBC growth plans for the company are synonymous with increasing shareholder value. 

Magna International (MGA) Reaches Record High On Sales, Gold Companies Get Leaner and BlackBerry's Survival (Fairfax FFH)

       A lot has happened since my last post not the least of which is news of BlackBerry's (bbry) disappointing quarter.  Although I'm confident the company will survive as a private entity within Fairfax Financial (aka the Berkshire Hathaway of Canada), as an investor you have to be frustrated with the way things turned out - BlackBerry has already inked a $4.7 billion buyout deal with Fairfax (ffh) which already owns 10% of shares - at $9 a share the offer gives shareholders almost no return for the tech maker's bes, qnx and consumer handset division :  7500 patents alone are estimated to be worth between $1b and $2 billion, then there's the company's $2.82 billion cash on hand (up $800m from a year ago).  In fact BlackBerry's 2500 security-related patents could form the cornerstone of a new secure enterprise company.

As an investor the deal doesn't make sense, but as a Canadian I'm content with it.  You see, Toronto-based Fairfax is headed by Prem Watsa who is a big supporter of Canada's tech industry (1800 technology firms present in Waterloo and Ottawa, Ontario is North America's 3rd largest tech hub after California and Texas).  If there's any company out there that will give BlackBerry a decent chance to survive intact it's Fairfax (taking company private means it won't be broken up).
Personally, I feel as though BlackBerry can still make it the market - the billion dollar quarterly loss-writedown was blamed squarely on unsold z10 phones, the same phone that holds the distinction of being the company's highest priced device (profit from one phone as much as 3X as much as Nokia Lumia).  The corporate market didn't mind paying more (German government and Nato bought it) but many other consumers didn't -  From the reviews I've read and those of my peers, it's obvious the problem with the phone was the high price not the device !  At times last year even Apple blamed slower sales on the price of its phones.

The good news :  BlackBerry has since launched cheaper devices (q5, z30) and a high-end device with touch pad catering to traditional blackberry lovers (q10).  When BlackBerry gets the price right, the phones will sell.  Blackberry Enterprise Server remains in a league of its own, the company's devices continue to receive rave reviews, market share similar to Windows OS which heavyweight Microsoft remains committed to (paid $7b for Nokia handset division).  How much longer can BlackBerry rely on the corporate market ?  by 2016 38% of companies are expected to stop providing mobile devices to staff.

Techstocks continue to shine !   Interbrand just released its annual ranking of the world's most valuable brands and technology companies took four out of the top five spots including, for the first time the top position:  #1 Apple ($98.3b +28%), #2 Google, #4 IBM and #5 Microsoft.  The next highest ranked tech company Samsung also moved up, to #8 from #9 last year.  Microsoft's recent acquisition Nokia was the worst performer, falling to #19 from #57.

Auto parts supplier Magna International is red hot!  

Though last quarter dividends per share didn't change from three months prior, sales (+16%) and earnings (+19%) were up by a healthy margin.  Not unsurprising given that, US auto sales rose at a torrid pace last summer (annualized rate for August was 16 million up 20% the strongest in six years).  Auto sales expected to slow to 1.15 million units this month (at GM only by a couple percentage points; GM is one of Magna's biggest customers); but a big reason for that is fewer selling days.  Ford also one of Magna's most important customers, reported a sales increase of 12% in August.  Last year, Ford awarded one of Magna's car plants in Brazil with a silver award for its 'superior quality, delivery and cost performance".

Since 2009 Magna has also been a key partner of Ford's electric vehicle division, it was in 2011 that Magna began assembling electric and hybrid vehicles for Ford (notable since this year 2013 Ford is on track to break its own sales record for hybrid vehicles of 35,500 reached in 2010).  Ford's August year-to-date auto sales totaled 221,270 +17.5%.

Barrick Gold Gets Leaner

With gold prices testing the $1300 level gold companies are being forced to adjust accordingly - gross production cost which includes expenses associated with exploration must be reduced so that companies can maintain healthy profits (investors have been shown to punish companies when earnings drop - they seem oblivious to the fact that a 20-30% drop in the gold price is going to make it next to impossible to avoid a quarterly earnings drop).  Barrick Gold has responded to this pressue by selling high cost operations;  Last summer it was the 3 Australian mines that comprise Yilgarn South (1h2013 196,000 ounces at a cash cost of $1145/oz), sold for a combined $300 million.  Then this month, the company announced its intention to sell two more mines for $100 million.  This would put Barrick Gold halfway through its ongoing plan to sell or lower output at 12 of its 27 mines.

Gold Price Ratio Suggests Recession Looming, Target TGT Underperforms & Growth Stocks Nasdaq AFCE, ALXN

Relative to the United States, Canada has higher wages, higher fuel prices, stronger unions, and higher distribution costs and that often leads to higher retail prices.  Target Canada will open its first 124 stores in 2013 but it won't be an easy transition; The Canadian dollar is at a low right now (95.0c US) which compounds the problems Target will face in adjusting its prices to Canadian expectations.  Since launching in select markets earlier this year a new problem has cropped up :  consumer satisfaction dipped below 30% in August (vs May).

Target (nyse:tgt) Underperforming

Latest quarterly profit -13% weighed down by Canadian operations (expansion costs).  As of quarter-end Canada is home to 68 locations with another 56 to open by year-end.  Canada accounted for $275 million of the company's $17,120m sales this quarter but Canadian performance still not up to par.  Total North American sales were suppose to be up 2% this quarter not the realized 1.2%.  Earnings at 96 cents a share ($611m vs $704m last year) a cent below expectations.

Recession Looming ?

Signs certainly suggested it on Friday when growth in silver and gold prices contrasted with next to no change for the primarily industrially used platinum group metals. 

So far in August (1-20) investors extracted $30.3 billion from US bond mutual funds which amounts to the highest monthly outflow in 19 years.  Markets both domestic and international have benefited from the US Fed bond buying program which was originally instituted to help keep mortgage interest rates down, however what the Fed is now saying is that, even after its eventual exit from the program, short term rates shouldn't go up even though long term rates will.

The Fed purchases $85 billion worth of bonds each month - half mortgage bonds half treasury notes, as a sort of quantitative easing.  Because the Fed isn't being clear on when it will stop buying mortgage bonds, interest rates are gradually moving up consquently people wanting to buy homes are doing so before the expected spike in rates (July sales of existing homes +17.2% versus last year).  30-year fixed rates - May 1 : 3.35% ; August 23 : 4.58% highest since July 2011 ; 15-year rate @ 3.6%.
Unemployment remains a problem, it was as high as 8.2% in July.  Also, jobs numbers (+170th last month) are weak - most of the new jobs are part time and not specialized;  In June for example 400,000 people with college degrees lost jobs while 250,000 people without college degrees got jobs.  Another sign pointing to a weak economy - average age of vehicles on the road now 11.1 years, the highest on record.