All That Glitters Is Not Gold

You have no doubt seen one of the many TV ads lately, offering to buy your old gold jewelery. Or how you should buy gold coins to protect yourself from the coming "economic collapse". You can even buy gold from vending machines like this one in the Frankfurt Airport.


News about gold's rise to new highs has been in the main stream media for the past 2 years. The gold bugs are out in full force predicting economic doom and gloom. Does this mean we should rush out and buy gold stocks? Actually, it's the opposite. Gold appears to be in bubble territory, so buying gold or gold stocks may well prove hazardous to your financial health.

One of the problems with buying gold is that it has no intrinsic value. It does not produce income and is priced in the market based on people fear and emotion combined with poor supply/demand fundamentals. So if we can't figure out what it's really worth, then how can we buy it?

If you do a quick google search on "gold as an investment", you will see hundreds of sites offering to sell you gold. They all use the last ten years of data to show how gold has trounced the S&P 500. But, what they forget to tell you is that gold's long term returns are lousy. While it is true that gold has had periods of out performance, the fact remains that it is extremely difficult to predict when the next period of out performance will be. See the chart below and you'll see why owning stocks is clearly been a winner over the long-run.



So, since 1900 stocks have returned 9.5% compound annually. Gold has returned 3.5% annually. So, after inflation you would have a near zero return on gold. Ask someone who bought gold in 1980 how their return was. In fact several investment heavy weights have recently commented on gold. George Soros, the famous hedge fund manager recently commented about how gold is in a bubble. Also, Warren Buffett was recently quoted in Fortune magazine about his thoughts on gold. The following excerpt is a classic Buffettism - the ability to simplify a subject to which Wallstreet makes complicated;

"You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States," Buffett said. "Plus, you could buy 10 Exxon Mobils (XOM, news, msgs), plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"

In the short-term gold could still actually move higher as the euphoria continues and people clamour to buy gold and the plethora of gold related investment products, to protect them from the "doom and gloom".

However, the party has already started and is well underway. In short, gold is a crowded trade.

Do you remember anyone in 2001 wanting to sell you gold coins when gold was $300/oz? I don't.

Merry Christmas to all,

Andre

Disclosure: I currently have a small short position on gold.

RONA - RON.TO

Over the past couple of months Canadian home improvement retailer Rona was regularly appearing on the 52 week low list. That caught my attention. Rona was trading at less than book value. It's conservatively financed and out of favour. Investors are pessimistic about the future of housing related companies. There is uncertainty as to when the economy will be on a more firm footing and consumers start spending on their homes again. In the meantime, Rona management is tweaking their operation to improve margins ( lower margins than Home Depot and Lowe's) and product line-up. While there is still growth ahead for RON, it will likely be slower than in the past. The Canadian home improvement market is quite mature.

A longtime criticism of RON was put to rest last week when management announced a semi-annual dividend of 0.07/share. While small now, the dividend will likely grow in the future. The market reacted positively to the move as management is signalling their confidence about the future.

I don't currently own RON shares. It has moved up briskly over the past week so I'll have to wait for a pull-back. For patient investors, RON would be a good buy with a 2-3 hold period if you think consumers will return in droves to the paint aisle. So, if you find yourself in the paint aisle at your local home improvement store, considering picking up a couple of gallons of your favorite Benjamin Moore colour. Berkshire Hathaway shareholders will thank you.

Andre

WikiWallstreet - Bank of America (BAC)

You have no doubt heard the news about Wikileaks "spilling" sensitive information regarding politicians, government agencies and public companies. Recently, Bank of America was a target, with Wiki alleging they are sitting on 5 gigabytes of harmful documents. The documents allegedly involve Countrywide ( mortgage lender BAC bought ) and Merrill Lynch ( investment bank BAC bought ) and their activities over the past 3 years. When Wiki broke the news BAC stock only sold off 3%, only to gain 10% over the next 3 trading days.The large American banks have been severely out of favour over the past two years. Much of the "bad news" is already priced which is why BAC only had a temporary pull back on the Wiki news. BAC has been on the receiving end of a continuous stream of bad news. Many of the big U.S.banks are under owned. That will change.

During the last week of November BAC was trading at a market cap of 110 billion. They currently have 140 billion in cash and 350 billion in short term securities backed by Uncle Sam. Yes, they still have a whopping loan book that could go sour. However it's unlikely that the whole book is toxic. BAC is trading for less than it is worth if they closed the doors tomorrow. BAC holds 10% of all the deposits in America. They are tightly woven into the economic fabric of America. If you think the U.S. economy with eventually restore itself, than BAC is good value ( but not at any price ) with limited risk. But, there will be plenty of volatility -  which is OK.

http://business.financialpost.com/2010/11/30/wikileak-megaleak-from-unnamed-us-bank-wont-offer-new-news-says-dick-bove/

Disclosure: Long BAC

Manulife (MFC) - It's not so bad...

This is the first post on my new blog. I thought I would start with a discussion about a company that I have recently added that embodies the classic definition of a value investment. It's definitely unloved and out of favour right now (Citigroup just downgraded  to sell). That's Manulife Financial (MFC). There has been no shortage of bad press regarding MFC over the past couple of years. MFC was one of the shining stars of the Canadian markets until 2008 when the financial crisis hit. The market scalped MFC off billions in market cap ( rightly so ) as result of previous management's choice not to hedge many of their guaranteed investment products ( variable annuities - VA ) to falling equity markets. This severely hurt their capital position, resulting in a massive equity raise and significant write downs and a dividend cut. Although, raising capital & the dividend cut was the right thing to do, shareholders didn't like it. Many people saw there holdings sink from $40 to a diluted $10 and sold. I should also note that many of the other Canadian and US life insurer's suffer from the same issues, but to varying degrees. Low interest rates have been hard on the insurer's large bond holdings.
The new management team has steadily increased their hedging program to limit exposure to VA's. MFC is not out of the woods yet, however things are improving as evidenced by their Q3 earnings ( excluding non-cash charges ) of 779 Million. Management has guided for net earnings of 4 billion by 2015, which is similar to their earnings power from 2005 through 2007. I think this is conservative, considering their growth rates in Asia. Many people continue to look at MFC through the rear view mirror ( focusing on all the errors they made ) and not looking out of the windshield. MFC's suite of assets (Manulife Canada, John Hancock, Manulife Japan, Manulife China and Manulife Asia) are all still well positioned in their respective markets. Equity markets are improving. Though, many refuse to believe it. Also, it's likely rates will rise in the years to come. All good for MFC. Management is committed to maintaining a strong balance sheet and limiting exposures to VA's. Going forward MFC will not likely return to the ROE's that they had become accustomed to. All that said, MFC can still be a fine investment going forward, especially when the love returns to the insurance stocks.

So, I first bought an opening position in MFC in June @ $16. I added significantly to MFC in October @ $12 and change. MFC yields 4.2%. After crunching the numbers, it appears MFC is worth somewhere in the range of $26-$32 a couple of years out. If I'm wrong it's likely that I won't lose too much money from these levels. I'll sit patiently and collect the coupon.


Andre