Highlight of the week of February 24, 2014


Dear PGM Capital Blog readers,

In this weekend’s blog edition, we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of February 24 and the month of February 2014.

  • Global dividend surpasses 1 trillion US-Dollars for the fist time in 2013.
  • How much Bad News can the USA FED live with?

Shareholders received more than $1 trillion in global dividends for the first time in 2013, buoyed by growth in payouts from emerging market firms, a study showed.

As can be seen from below chart, from Henderson Global Investors, dividend payments grew  43 percent since 2009, hitting US$1.03 trillion in 2013.

Below chart shows that in 2013 one of every US$7  dividend paid came from Emerging Markets firms.

It is also worth mentioning that dividends from Emerging markets company have risen with 107 percent over the past five years. Regarding the Asia-Pacific region, Australia is the dominant source of dividends ahead of Hong Kong,  and dividend payment by Australian companies grew 79 percent from 2009 to 2013.

See below chart for details:

However, 2013 also represents the slowest growth for dividends in the post-crisis era. Last year, dividends rose 2.8 percent as US companies began dropping payouts in the fourth quarter. That’s when the US Federal Reserve confirmed it would taper the pace of its bond-buying program in the first step to unwind more than US$ 3 trillion of quantitative easing.

Financial stocks paid the most in dividends globally with US$217.6 billion in 2013, a 14.2% increase from 2012. Technology stocks, however, showed the highest dividend growth with a 15.5% year-on-year rise to US$62.2 billion in 2013.

The US Federal Reserve cannot be a very happy place at the moment. There will be a lot of people who are starting to question whether tapering should (or can) be continued. But the signs are that the new Chairman of the Fed, Janet Yellen, will have to stay with the policy and reduce quantitative easing by a further US$10 billion in March and by another US$10 billion each month until the end of the year.

Were the bad figures in January down to the weather?
Many pro-tapering economists had hoped that poor economic figures for January were down due to the bad weather, but analysis has shown that the weather only had a limited effect.

As can be seen from below chart, further evidence that bad weather had nothing to do with the recent weakness in the economic data of the housing sector comes from the west coast.

Looking at the housing data by region, the number of building permits in the North East dropped by 10.3% which could be attributed to the bad weather, but the number of West Coast building permits also dropped, by 26%, in a region with a milder climate.

January Building permits

The figures become even more confused when we take a close look at below housing starts chart. In the North East, which was meant to be affected by the weather, these were up by 61.9%, while the West Coast declined by -17.4%.

 January housing starts

After viewing the above charts, a child would conclude that the severe weather which hit the Northeast of the US has nothing to do with the current economic weakness, as the major negative data came in from the sunny West Coast.

Global Dividend Surpassed 1 Trillion USD in 2013:

We believe that the low rates environment has created a culture of “dividend Vikings”.

Dividends from Europe, excluding the UK, rose by 8 percent since 2009, reaching US$199.8 billion in 2013. This increase made the region “comfortably the second most important region in the world for income, after North America.

For the rest of the developed world,  Australia was the leading country regarding dividend payment, its companies paid out US$40.3 billion in dividends last year, a 10.2 percent gain on the previous year, and placing the country ahead of Canada (US$38.5 billion), Germany (US$36.4 billion) and gaining ground on Japan (US$46.4 billion).

Dividend payments

The USA Economic data and the FED:

If the Fed wanted good figures to show that tapering is having a limited impact on the economy this is not what they got. The numbers below paint a very negative picture:

  • Challenger Jobs Cut rises 11.6%
  • Industrial Production falls -0.3%
  • Capacity Utilization Rate ease to 78.5%
  • ISM Manufacturing Index declines to 51.3
  • Richmond FED Manufacturing Index slips to 12.0
  • Chicago PMI falls to 59.6 and Milwaukee to 52.8
  • NAHB Housing Market Index retreated to 56.0 in January and 46 in February
  • Retail Sales decline by -0.4% and Core Retail Sales showed no growth
  • Empire State Manufacturing Index falls to 4.5
  • Building Permits decline by 5.4%
  • Housing Starts sinks by 16%
  • Philadelphia FED Manufacturing Index crashes to -6.3 from 9.4
  • Existing Home Sales falls by 5.1%

After reading the above data the question has to be asked as to whether the US economy can expand without the support of the government especially if productivity levels remain weak?

So, we are now all waiting for the Federal Reserve’s March meeting. If further tapering by US$10 billion goes ahead in March what could this mean and what are the FED’s options:

  1. Economy shows growth:
    If the US economy improves and the recent figures are reversed then the Fed will continue to taper.
  2. Economy weakens further:
    • Tapering is paused:
      If the economic data does not improve or slides further it would be prudent for the FED to stop or significantly slow the tapering.
    • Tapering is continued:
      If the economic data does not improve the Fed may decide to risk further slowing the economy and continue tapering for a while longer, awaiting further evidence of economic slow down

If the Federal Reserve has to increase QE to US$85 billion or higher in order to restore the pace of growth, this will increase pressure on the US dollar.

A cheaper USD will make gold much more attractive

To value investors and particularly to the Chinese, who are now the world’s largest buyers of Gold. If another burst of QE were to finally ignite price inflation, again gold will benefit.

Below chart shows the correlation between the Gold price and the several QE programs since 2008.

Gold and QE

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Commodities,  as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Until Next Time,

Eric Panneflek

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