Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
We see there’s a significant amount of economic news mounting against the argument that key stock indices will go higher this year. We see major companies on the key stock indices reporting corporate earnings that are dismal to say the very least. We see indicators of prosperity suggesting the opposite is likely going to be true for the U.S. economy. Lastly, we also see troubles developing very quickly in the global economy.
First on the line are the corporate earnings of companies on the key stock indices—which is hands down one of the main factors that drive these indices higher. We see companies showing signs of stress. Consider General Motors Company (NYSE/GM), for example; the company’s corporate earnings declined 22% in 2013 from the previous year. (Source: “GM reports lower-than-expected 4Q earnings,” Yahoo! Finance, February 6, 2014.)
Some might call this a story of the past; we need to look at what the future looks like instead. Sadly, going forward, companies on the key stock indices and analysts look worried as well. Consider this: so far, 57 S&P 500 companies have issued negative corporate earnings guidance, while only 14 have issued positive guidance. At the same time, analysts’ expectations are coming down as well. On December 31, the consensus estimate expected S&P 500 earnings to grow by 4.3%; now, these expectations have come down to 1.5%. (Source: “S&P 500 Earnings Insight,” FactSet, February 7, 2014.)
Looking at the broader U.S. economy, it’s not moving in favor of the key stock indices, either—the economic data isn’t looking very promising.
Industrial production in the U.S. economy declined in January from the previous month. This was the first decline since August of 2013, and this shouldn’t go unnoticed. The index tracking the industrial production in the U.S. economy declined from 101.4 in December to 101 in January. (Source: “Industrial Production and Capacity Utilization,” Federal Reserve, February, 14, 2014.) What industrial production declining essentially means is that companies aren’t producing, and this tells us that consumer spending is declining.
Looking at the global economy, troubles are growing very quickly.
We hear China’s economic slowdown may pick up speed. The number of bad loans at the end of 2013 reached its highest level since 2008. The nonperforming loan ratio in the country stands at one percent; this means that one percent of all the loans in the Chinese economy are in bad health. In the third quarter, bad loans accounted for 0.97% of all loans. (Source: “China Banks’ Bad Loans Reach Highest since Financial Crisis,” Bloomberg, February 14, 2014.)
As all of this happens, there’s an interesting phenomenon occurring. It tells me that skepticism towards the key stock indices is growing, and investors are realizing they won’t show returns like they did in 2013. We are seeing the start of a rush towards safety, not just to gold, but to bonds and utilities stocks as well. Please look at the chart below: the red line represents gold prices, the purple line marks the action in 10-year Treasury notes, and the green line indicates the Utilities Select Sector SPDRA (NYSEArca/XLU), which is an exchange-traded fund (ETF) that tracks utilities stocks.
If this situation persists, investors can profit by investing in these safe havens through ETFs like the SPDR Gold Shares (NYSEArca/GLD) ETF for gold, the Utilities Select Sector SPDRA ETF for utilities stocks, and the iPath US Treasury 10-year Bull ETN (NYSEArca/DTYL) for 10-year Treasuries.
By Moe Zulfiqar
