Highlight of the week of September 9th, 2013

DOW Exit 2013 Exit

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 September 9th, 2013:

  • The DOW-30 Index announced changes on September 10th, 2013.
  • The USA Fiscal Deficit and Debt Ceiling.

The DOW-30 Index Changes announced changes on September 10th, 2013:
On, Tuesday September 10th, 2013, the Dow-30 Index, announced its biggest change in nearly a decade, Alcoa Inc. (NYSE: AA), Hewlett-Packard Co. (NYSE: HPQ), and Bank of America Corp (NYSE: BAC) are being dumped from DOW-30-stock index.

Changes will come into effect at the close of trading on September 20th. The reshuffle was prompted by the low stock price of the three companies slated for removal, and the Index Committee’s desire to diversify the sector and industry group representation of the index,” S&P Dow Jones Indices said in a statement.

  • Alcoa, trading around US$8.08, is down from US$40 in 2007. Its elimination is especially symbolic. The aluminum company joined the Dow in 1959.

    AA Chart

    ALCOA Jan 2002 – Sept 2013 Chart

  • HP, at US$22.36, is less than half the US$50 it was trading at in 2010. An attempt at a turnaround, overshadowed by the revolving door in its chief executive officer’s office, has been slow going.  When added to the Dow in 1997, it was only the second computer company in the Dow (after IBM).

    HPQ chart

    HPQ Jan 2002 – Sept 2013 Chart

  • Bank of America, at US$14.48, is down from $50 in 2007. It became a Dow member in November 2008. Since the financial crisis, Bank of America, has been plagued with lawsuits stemming from its mortgage dealings, and it has been trimming business units.

    BAC chart

    Bank of America Jan 2002 – Sept 2013 Chart

Athletic gear maker Nike Inc. (NYSE: NKE) steps into the place of Alcoa, a Dow component for 54 years. Payments company Visa Inc. (NYSE: V) will unseat HP, which joined the blue-chip benchmark in 1997. And Goldman Sachs Group Inc. (NYSE: GS) replaces Bank of America, which joined the index five years ago.

  • Visa shares have been on a tear, and the company is growing on the strength of new payment technology.

    VISA Chart

    VISA Chart from IPO date – Sept 2013

  • Nike continues to grow revenue and shareholder value thanks to a loyal worldwide following.

    NKE Chart

    Nike Jan 2002 – Sept 2013 Chart

  • Goldman recently reported that earnings doubled in the latest quarter.

    GS chart

    Goldman Sachs Jan 2002 – Sept 2013 Chart

Created in 1897, the Dow has undergone a number of changes since its inception. General Electric Co. (NYSE: GE) is the sole surviving original member.

The blue-chip index is price-weighted, and the performance is based on a company’s stock price, and not market capitalization. Stocks are selected by editors of the Wall Street Journal, which is owned by New Corp, which owns stakes in the indices.

The USA Fiscal Deficit and Debt Ceiling debate:
The United States is set to run out of borrowing authority in mid-October, leaving the government at a high risk of not being able to pay for Social Security checks, military salaries and other operations, the Obama administration said Monday September 9, 2013.

As can be seen from below chart, since 1940, Congress has effectively approved 79 increases to the debt ceiling. That’s an average of more than one a year.

Debt Ceiling Increases since 1940

This past February, lawmakers decided to temporarily “suspend” the debt ceiling,

The debt ceiling was reset at US$16.699 trillion on May 19, up from the US$16.394 trillion where it was before the suspension.

Since then, Treasury has been forced to use “extraordinary measures” to keep the country from breaching the limit.

Under this scheme, Treasury was able to continue borrowing to pay the country’s bills until May 19th. At that point, the debt limit automatically reset to the old cap plus whatever Treasury borrowed during the suspension period.

Republicans are demanding significant new spending cuts in exchange for increasing the nation’s US$16.7 trillion debt limit, with some GOP lawmakers insisting on a delay or the scrapping of President Obama’s signature health-care law.

PGM Capital comments:
By removing ALCOA from the DOW-3o index, the DOW is losing its pacesetter for earnings season, as well as another “industrial” company.

ALCOA was added to the Dow Jones Industrial Average in June of 1959, when it was called Aluminum Company of America.

The most notable thing about ALCOA, was its position as the DOW component that kicked off earnings season, and not just for the index. While there have been debates about how much Alcoa’s aluminum business is a harbinger for corporate America, it stayed in the discussion only because it reported before everybody else.

Regarding the USA debt and fiscal deficit, in 2012 fiscal condition of the United States suffered its worst annual deterioration in the history of the country. Based on generally accepted accounting principles (GAAP-based accounting), the actual  federal deficit hit a record US$ 6.6 trillion in the year ended September 30, 2012, a level that was fully 42 percent of the nation’s annual GDP.

China and Japan the two mayor foreign holders of US Treasuries, led an exodus from U.S. Treasuries in June after the first signals the U.S. central bank was preparing to wind back its stimulus, with data showing they accounted for almost all of a record US$ 40.8 billion of net foreign selling of Treasuries.

Below chart gives an overview of mayor foreign holders of US Treasury Securities.

 MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES

Oil exporters include: Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria.

Caribbean Banking Centers include: Bahamas, Bermuda, Cayman Islands, Curacao, British Virgin Islands and Panama

The sales were part of US$ 66.9 billion of net sales by foreigners of long-term U.S. securities in June, a fifth straight month of outflows and the largest since August 2007, U.S. Treasury Department data showed.

China, the largest foreign creditor, reduced its Treasury holdings to $1.2758 trillion, and Japan trimmed its holdings for a third straight month to US$ 1.0834 trillion. Combined, they accounted for about US$ 40 billion in net Treasury outflows.

Based on the same official GAAP numbers, the federal government’s total obligations as of September 30th, 2012, stood at US$ 85.4 trillion, or 5.5 times the level of fiscal-2012 GDP, as can be seen from below chart.

USDebt-GAAPbased

For 2012, the gross federal debt of the USA totaled US$16,185 billion, composed of
US$ 11,332 billion public and US$ 4,853 billion intra governmental debt.

The following graph of Gross Federal Debt versus GDP plots the level of the government’s fiscal-year end debt level, versus the average nominal (not adjusted for inflation) GDP level for the same fiscal-year ended September 30th.

In 2012, the actual debt level overtook the nominal GDP, as can be seen from below chart.

Debt to GDP

Source: 

By mid-October, the US will have reached its debt limit again. Most have lost track of the exact debt limit and of the number of increases. Give or take a trillion, the limit currently is between 16.5 and 17 trillion US dollar.

In accordance with the official USA Debt Clock Site, at the moment we are writing this article the USA Debt is approx. 16,938 Trillion US Dollars.

The question most investors should ask themselves are:

  • What are the risks associated with the increasing debt burden?
  • Should we act before it is too late or believe that the government will take care of us?
  • How could this debt story end up?

In order to answer the three aforementioned questions, we should go back to the roots of today’s monetary system. The underlying question is: where does money come from in the first place?

Below documentary video entitled “How Our Monetary System Works And Fails” might give an explanation on the above questions.

Due to this, it is not IF but WHEN will the current Debt crisis lead to an imploding of the current FIAT Currency system and when we will return to a fixed asset backed monetary system.

History has proven that every time a FIAT currency collapse the word has returned to gold back monetary system.

Since Gold reached a recovery of half this years losses at the end of August, signals for sentiment have forecast the potential for a profit taking sell off and for the market to correct 50 percent of the improvements from June’s bottom. This would take prices to US$ 1,307.00 a troy ounce.

The fact that on Friday, September 13th, 2013, Gold didn’t broke below this US$ 1,307.00 an oz, price level, but managed to close the day up US$ 4.90 an oz or 0.37 percent, is technically very bullish for the price of Gold going forward.

Please see below chart for details.

Gold Chart September 13 2013

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

Yours Sincerely

Eric Panneflek

 

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