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Yale Bock
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Yale Bock is the President of Y H & C Investments, a Registered Investment Adviser based in Las Vegas, NV. My educational background is a B.A. in Economics from UC-Irvine, a MBA from UC-Irvine, and have earned the right to use the Chartered Financial Analyst designation. I have been managing... More
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Y H & C Investments
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Y H & C Investments Blog
  • The Week That Was, The Week That Will Be- 0 comments
    Apr 20, 2013 5:19 PM

    If ever there was a very interesting week in the world, last week certainly was it. As my focus is the financial markets, the headline stories have to be the fall of both the price of Gold and Apple's stock below $400 per share. In many ways, the fall of the price of these two assets is what makes the financial markets so interesting (full of potential or sorrow?) for so many people.

    First, let's start with gold and try to summarize the situation from both long and short side. On the long side (the one which believes the price of the metal will go up), the yellow metal is an alternative to fiat (paper) currencies. If one looks around the world in almost every region, other than maybe China, the Central Banks have been in a contest to see which one could issue more of their currency than the other banks. Viewed from a supply standpoint, creating more supply only makes the current circulation less valuable, holding everything constant (a big assumption). There is only so much gold in the world, and the only way more is put in circulation is from companies which mine it out of the ground. Even with those companies, there is a finite supply in the earth which they can extract. Under these conditions, gold bugs believe the large budget deficits of most (all?) mature countries, as well as the unprecedented monetary stimulus the world has engaged in, dictate a rise in the price of gold. Other reasons gold should see a rise in value include a persistent demand from China and India (43% of all gold bought comes from these two countries), as well as central bank buying to diversify currency holdings.

    On the short side (which believes gold will go down), the main argument is it is not an asset which produces a cash flow which can then be discounted to create a valuation for a cash flow stream. No matter what asset one analyzes, the fundamental worth of an asset is their discounted cash flow stream. Without one, trying to value it like other asset classes yields a worth which can be based on non traditional methods. Historically, these kinds of problems take place when bubbles arise, like in the Tulip mania in Holland. All over financial markets, the rise of the price of gold, and the subsequent beating it has taken over the course of 2013, makes these issues very pertinent. So, where do I stand?

    As in many situations all over the financial world (and other areas), much depends on one's perspective. Some believe that with the growth rate in China slowing down (expected 7.9%, actual 7.7% yoy), commodity demand is waning, leading to a deflationary environment. I find that argument a really bad one. China is only part of the global economy, but a big one at that. A slowing China does not mean a deflationary world, but many have jumped to that conclusion.

    My own view is in the long term, let's say longer than the rest of 2013, gold has merit because printing more money historically leads to inflation, and they yellow metal is a good inflation hedge. Gold is nice insurance in case problems arise with military conflicts, or if people are generally scared of world events. The hard part of owning gold is the lack of an income and cash flow stream. Security analysis is based on cash flows, and without one an investment case is pure theoretical.

    In turning to Apple, you have the opposite situation. The company does have defined cash flows, and oh, have they been impressive over the last 5 years. However, investor sentiment has turned very negative, and last week a warning from supplier Cirrus Logic thrashed the stock even more. This week brings their anticipated earnings report on Tuesday, and the results will have a big affect on how the market performs on Wednesday. Apple has more cash than any company, but the major issue is how much cash will it generate in the future? If it is anywhere close to what it did last year, and that grows at 5-10% per year, a buyer today will probably be very happy 3 years from now. As an investor, this is the fundamental question one faces with almost every security you look at.

    During Monday of last week, the world also had to witness the unfortunate terrorist incident at the Boston Marathon. I really feel for those whose families lost love ones on a day which should be a celebration of their attitude, effort, and accomplishment. Those who continue to attack our country because of its unique values only create a stronger opponent which will not yield to such violence.

    Next week will bring a ton of earnings reports, and the market will be very interesting to watch. Gold, Apple, oil, and plenty of others bear watching, and you can bet the whole world will be paying attention- you know I will.

    Thank you for reading this week, sorry it has been a while, and I hope you have a good weekend!!! If you have any comments or questions about the blog, please post them!!!

    Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.

    Disclosure: I am long AAPL.

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