Highlights of the week of April 28, 2014.

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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 April 28, 2014.

  • Disappointed Q-1, 2014 USA GDP figures.
  • USA labor force participation rate falls sharply in April 2014.
  • Twitter stock tumbles below its IPO price.

DISAPPOINTED Q1-2014, USA GDP FIGURES:
The U.S.A economy barely grew in the first quarter of 2014, as exports tumbled and businesses accumulated stocks at the slowest pace in nearly a year, the country Gross domestic product expanded at a 0.1 percent annual rate, the slowest since the first quarter of 2011, the Commerce Department said on Wednesday, April 30, 2014.

Below chart shows USA GDP Quarter-over-Quarter, from Q1-2007 up to Q1-2014, for which the orange line shows the preliminary figures and the black line the revised ones.

The chart here below shows the QOQ breaks down per component of the USA GDP figures from Q1-2011 up to Q1-2014.

Q1 GDP first revision

USA LABOR PARTICIPATION RATE FALLS SINCE 1978:
On Friday, May 2nd,  the Labor department said that the USA Economy added  288,000 jobs, the strongest month for job growth in two years.

The unemployment rate fell to 6.3% from 6.7% in March.

However, much of the change in the unemployment rate is due to labor force participation rate, which fell to 62.8% in April from 63.2% in March and was the lowest labor participation rate since 1978 as can be seen from below chart.

USA labor particpation rate

If calculate the unemployment rate for the USA is calculated, using the labor force participation rate of 2010 –the first year after the 2008-2009 recession– it would be much higher and closer to 9.9% as can be seen from below chart.

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TWITTER STOCK TUBMLES BELOW ITS IPO LEVEL:
Twitter (NYSE: TWTR) investors sent the company’s share price tumbling by more than 10 percent in after-hours trading Tuesday, April 29th, after the company’s growth figures for Q1 2014 failed to impress.

The company posted a net loss of US$132 million – four times greater than a year earlier – though revenue came in at US$250 million, up 119 percent on 12 months ago. Of the US$250 million, US$226 million came from mobile advertising.

As can be seen from below chart, the company’s shares closed on Friday, May 2nd 2014, at US$ 39.02 a share which is a decrease of more than 13 percent from its IPO value of early November 2013.

Twitter landed on the stock exchange in November last year. Shares sold for US$26 a share, peaking in February at US$73.71 a share.

 

Screen Shot 2014-05-03 at 11.48.09 AM

Year-to-date the stock of the company is down with 42.19 percent.

PGM CAPITAL COMMENTS:

Disappointed Q1-2014 USA GDP:
If this is the growth that is occurring as QE has run its course -when the stimulus ends- and as escape velocity nears. If the “weather” can do this much damage to the US economy, should stocks really be trading at the multiple of an exuberant hope for the future that they are doing now?

The USA April job report:
Regarding the USA job picture, how you turn it around, the bottom line is:

The drop in unemployment rate is not just about job creation; it’s also about fewer people looking for work.

Twitter:
What investors are buying in high-growth stocks like Twitter, is the potential for a company to be a game-changing stock.

The problem is that the company is loses money, trading at huge multiples to sales and will have to grow at high rates for the next decade to please investors. With US$801 million in revenue over the past year and a market cap of $22.2 billion, Twitter trades at a whopping 27.2 times sales.

Based on the above we believe that the share price of the company hasn’t seen its bottom yet and have a STRONG SELL on it.

Sell in May and Go away:
Since the beginning of this year, we have been warning our readers that based on several fundamental analysis we believe that the USA markets are over valued and that they are heading for a cruel correction / crash.

Last week some prominent technical analysts are sounded the alarm that certain technical indicators are calling for a serious correction for the USA indexes.

According to below technical chart of the S&P-500, in 2011, the index corrected by about that much to its 150-week moving average after making moves very similar to its most recent price action.

Recent fundamental US economic data such as:

  • This week’s first-quarter GDP report that showed a sharply slowing US Economic growth.
  • Very weak earnings from growth stocks.
  • US mortgage lending crashes to a 14-year low in Q1-2014, due to higher interest rates.

As well as the Shiller P/E-10 ratio, which is at a 5-year high are also sustaining this coming correction/crash of the USA stock market.

Last but not least, the fact that one of USA biggest banks last week disclosed that for several years it had reported US$4 billion more capital than it actually had, doesn’t increase the trust in the USA capital markets.

We believe that after the crash of the USA stock market, money will go into quality mining stocks, food producers and precious metals that has been out of favour the last 2 years due to the hype in social media and other low quality stocks.

Time will tell if the old Wall Street adage “Sell in May and go away” is applicable this year.

Before following any investing advice, always consider your investment horizon and risk tolerance and financial situation and be aware that stock prices don’t move in a straight line and that sharp corrections may happen in the short term.

Yours Sincerely,

Eric Panneflek

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