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Frances Aylor
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Frances J. Aylor, CFA has over 28 years experience in the financial services industry as a corporate credit analyst, international trade finance officer, and equities analyst. Formerly a director at IronOak Advisors LLC, which managed $3 billion in assets, she currently is focused on managing... More
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  • Why Gold Lost Its Glitter: Don't Rush To Buy

    Until its price peak in late 2011, gold had been in a twelve year bull market. Its price appreciation accelerated following the 2008 financial crisis, more than doubling from less than $800 an ounce in 2008 to over $1,800 per ounce in 2011. During 2013, however, gold lost its glitter. The price fell 3.6% during the first quarter, and another 10% during two days in April. As of July 9, the price was $1,247.80, down about 30% from its 2011 peak.

    (click to enlarge)

    What drove the price fluctuations?
    Following the 2008 financial crisis, investors rushed into gold as a safe haven in an uncertain world, primarily through gold-backed exchange traded funds (ETFs), which were first introduced in 2003. According to the World Gold Council, although total gold demand in 2009 decreased 11% to 3,385.8 tons as rising prices depressed jewelry and industrial demand, investment demand showed strong gains. ETF demand increased 85% to 594.7 tons, representing 17.6% of total gold demand. ETFs had represented only 7.1% of gold demand in 2007 and 8.4% of in 2008.

    Much of the ETF money went into the SPDR Gold Shares Trust (NYSEARCA:GLD), the largest of the gold-backed ETFs, with assets of $37 billion. A smaller gold-backed ETF is the iShares Gold Trust (NYSEARCA:IAU), with assets of almost $7 billion. Another popular way to play the increase in gold was through investment in the Market Vectors Gold Miners ETF (NYSEARCA:GDX), whose top holdings are Goldcorp (NYSE:GG), Barrick Gold (NYSE:ABX), and Newmont Mining (NYSE:NEM). These investments did very well in 2009 and 2010, as shown in the chart below.

    (click to enlarge)
    The enthusiasm for gold started to fade in late 2011. Economic conditions were improving. Unemployment rates were coming down. And investors rushed to the exits, locking in their profits. ETF demand as a percentage of total gold demand fell sharply.

    (click to enlarge)

    Volatility continued in 2012. Gold demand dropped 4% to 4,405.5 tons as overall investment demand, which includes physical bars and coins as well as ETFs, continued to decline, outweighing increased purchases by central banks and increased jewelry demand, primarily from India and China. Investment demand was 35% of total gold demand, compared to 44% from jewelry, 9% from technology/industry, and 12% from Central Bank purchases.

    The price drop in 2013 accelerated, especially after Cyprus sold reserves to cover losses from emergency loans to its banks. The U.S. economy, in contrast, continued to improve, causing investors to continue to desert their safe haven asset.

    Is Gold a Good Value Now?
    Now that gold is down about 25% in 2013, is it a good value? Should you put this asset back in your portfolio?

    The truth is, it is very difficult to determine the appropriate price for gold. It does not pay a dividend. It does generate any cash flow. It has no book value. Therefore, many of the metrics we routinely use to evaluate stocks just do not work for evaluating gold. We do know that the valuation is down to 2010 levels, but it is difficult to determine if there is further downside.

    Why Put Gold in a Portfolio?
    Why do investors like to have gold in their portfolios?

    • To hedge against inflation,
    • To hedge against a declining dollar,
    • To provide a safe haven during geopolitical and financial instability, and
    • To diversify their portfolios and reduce risk.

    Looking at each of these measures, it is difficult to make a compelling case for gold.

    • Inflation is not yet a threat. According to the U.S. Bureau of Labor Statistics, the Consumer Price Index increased 0.1% in May on a seasonally adjusted basis. Over the last 12 months, the index was up 1.4% before seasonal adjustment.
    • After almost 10 years of weakening against major currencies, the U.S. dollar appears to be strengthening, as shown in the chart below from the St. Louis Fed.
      (click to enlarge)
    • While many international economies are still struggling, the U.S. economy appears to be on firmer footing. The unemployment rate is going down. In June it dropped to 7.6%, near the Federal Reserve's 7% target for ending its $85 billion per month bond buying program and its 6.5% target for potentially raising interest rates.
    • A well diversified portfolio is very important, and gold can reduce risk under the appropriate conditions. However, the S&P 500 is up 15.86% YTD. And bond prices are getting more attractive as interest rates rise. Under these conditions, it is difficult to make a table-pounding case for gold.

    Don't Rush to Get Back Into Gold
    Many financial advisors advocate a 5% weighting in gold, for the reasons already discussed: as an inflation hedge, a dollar hedge, a political/economic safe haven, and a portfolio diversifier. Although these issues do not appear to be threats at the moment, situations in the market can change quickly. A small allocation to gold is probably prudent, but there is no sense of urgency to buy gold now.

    The prices of the two major gold ETFs, GLD and IAU, are both down 25% year to date. While they have rallied back up about 2% from their June lows, it is too early to call a bottom. Wait for further evidence of price stability before adding this asset to your portfolio.

    Disclosure: I am long IAU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Jul 11 9:52 AM | Link | Comment!
  • Apple: Is It Safe To Take A Bite?

    Apple stock dropped 44% in seven months, from its peak of around $700 in September 2012 to $390 in April 2013. The drop was due to slowing growth, a dearth of exciting new products, increasing competition, compressing margins, and negative year-over-year earnings comparisons. Analysts demanded a more shareholder-friendly use of the company's huge cash balance. As a result, on April 23 when AAPL reported its 2Q13 earnings of $10.09 per share (down 18% Y/Y), the company announced that $100 billion would be returned to shareholders by the end of 2015, through $60 billion in share repurchases and a 15% increase in the dividend to $3.05 per share.

    Over the past few days, AAPL's stock has rallied about 6%, to its current level around $432. So, is the worst over? Is it safe to buy into the Apple story?

    Depends on your investment perspective. If you are a value investor buying the stock primarily for its dividend, then your downside is probably limited. The 3% dividend yield will help provide a floor for the stock. On a technical basis, there is strong support around $400, where the stock churned for about six months from July 2011 to January 2013. So if you are willing to buy and hold, it's probably worth taking a small position.

    However, there are large numbers of growth investors who were not nimble enough to dump the stock when it started its downspin. These folks will be looking to sell this broken growth stock into any strength, which means it is unlikely that AAPL will have a smooth ride up. Price points of $460 (up 6%), $480 (up 11%), and $550 (up 27%) look especially vulnerable. So, as a value investor, start building a position in AAPL at current levels, while looking to add on pullbacks as growth investors continue to exit.

    Growth investors should stay away from this one. Lower margins, increased competition and delayed new product introductions are not what you want to see in a growth stock. And earnings uncertainty remains high. Consensus estimates for FY 2013, 2014, and 2015 are $37.48, $37.68, and $37.44, respectively, which indicate stalled growth. More significant is the range of estimates. The high estimate for 2013 is 36% above the low. For 2014, the high estimate is 64% above the low. And for 2015, the high estimate is a stunning 91% above the low. This means that analysts have very low visibility in predicting AAPL's earnings. It seems unlikely that the future will have the same growth trend as the past, absent some exciting and as yet unidentified new product.

    The challenge for AAPL stock is that the investor base is changing. Growth investors are still fleeing, while value investors are reluctant to step in until there is more clarity. A huge changeover like this in the investor base does not happen smoothly. It takes time and a lot of "back and fill" on the price action until a new trend is firmly established. Value investors should watch for pullbacks to build positions.

    Disclosure: I am long AAPL.

    Apr 29 4:16 PM | Link | Comment!
  • Apple: A Big Dividend Hike Would Send The Wrong Message

    Analysts expect a big dividend hike before Apple's (NASDAQ:AAPL) April 2013 earnings report, pushing the yield to around 3.5%, in line with Microsoft (NASDAQ:MSFT) at 3.3% and Intel (NASDAQ:INTC) at 4.1%. This would send exactly the wrong message to investors, and would guarantee that Apple would not regain its September 2012 $700 value anytime soon.

    Why? It's a matter of perception. Think back to your high school days. Apple, once up over 600% from its 2009 lows, has been sitting at the cool kids' table in the cafeteria, right there with the jocks and cheerleaders, with all the outperformers like Amazon (AMZN, +374%), Biogen (BIIB, +264%), Celgene (CELG, +176%), and Google (GOOG, +150%). Its strong revenue and earnings growth briefly made it the largest stock in the U.S. by market cap, temporarily dethroning Exxon (NYSE:XOM). But now, because of its slowing growth and lack of a hot new product, Apple no longer fits with the cool kids. It's like the ostracized forward who choked on the tie-breaking three pointer hurled up from midcourt. With its stock down 35% in six months, Apple is now standing at the cafeteria door, lunch tray in hand, trying to figure out where it fits in.

    A big dividend hike would signal that Apple's cool kid days are over. That it belongs at the value stock table with Microsoft and Intel, both of which have underperformed the S&P 500 and the technology sector over the past three years. That its jaw-dropping performance is a thing of the past. That we are unlikely to see a "nothing but net" new product coming out of nowhere to save the game.

    To keep its spot with the cool kids, Apple needs to channel its cash into research and development or accretive acquisitions, into churning out more of those amazing products that we never knew we needed but quickly realized we could not live without. A big dividend hike commits Apple to siphoning its cash away from big ideas and big opportunities. It signals that Apple's momentum days are over, and that longer term it is content to sit at the high-dividend, lower-growth value table.

    Disclosure: I am long AAPL, MSFT, INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Mar 28 12:30 PM | Link | 1 Comment
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