Highlights of the week of February 17, 2014

Tuscon Coppermine areaNestle food logos

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 17, 2014.

  • BHP Billiton and Nestlé reported better than expected earnings.
  • USA Economic data keep on disappointing  Investors in 2014.
  • TEVA completes tender offer for NuPathe Inc. Shares.

BHP BILLITON AND NESTLÉ REPORTED BETTER THAN EXPECTED EARNINGS:
BHP BILLITON:
On Tuesday February 18, 2014, the world’s biggest mining company BHP Billiton (ASX: BHP.AX) posted a 31% jump in profits due to improvements in its iron ore, coal and petroleum businesses.

Highlights BHP Billiton FY-2013 report:

  • Underlying EBIT increased by 15% to US$12.4 billion and Underlying attributable profit increased by 31% to US$7.8 billion.
  • This sustainable increase in productivity supported a 9% increase in the Group’s Underlying EBIT margin to 38% and a strong improvement in the Group’s Underlying return on capital to 22%.
  •  A 65% increase in net operating cash flow and a 25% reduction in cash outflows from investing activities led to a US$7.8 billion increase in free cash flow.
  • Proceeds of US$2.2 billion from portfolio simplification further strengthened the Group’s solid A balance sheet.
  • With strong free cash flow projected, net debt of US$27.1 billion is expected to approach US$25 billion by the end of the 2014 financial year.
  • Increased dividend, with 3.5 procent to USD 0.59 per share of BHP.AX share, payable on March 26, to share holders on record on March 7, 2014.

Source:

As can be seen from below chart the shares of BHP Billiton increased with approx. 500 percent since the beginning of this 21st century, and it has increased its dividend in the same period from US$ 0.1259 a share in 2000 to US$ 1.20 a share today, an increase of its dividend with approx. 850 percent in the last 13 years.

BHP All Time Chart

NESTLÉ
On Thursday, February 13th, Nestlé (SIX: NESN.VX or OTC: NSRGY), the world’s largest food company measured by revenues, reported its full year 2013 results.

Nestlé Brands

Highlights Nestlé FY 2013 report:

  • Sales of CHF 92.2 billion, an increase of 2.7%, compared with full year 2012.
  • Organic growth was 4.6%, composed of 3.1% real internal growth and 1.5% pricing.
  • The Group’s trading operating profit was CHF 14.0 billion, representing a margin of 15.2%, up 20 basis points versus last year, and up 40 basis points in constant currencies.
  • Underlying earnings per share were CHF 3.14, up 11.0% in constant currencies.
  • Strong operating cash flow at CHF 15.0 billion.
  • Proposed dividend increased to CHF 2.15 per share, payable as from April 17, to share holders on record on April 3th, 2014.

Source:

As can be seen from below chart the shares of Nestlé increased with approx. 250 percent since the beginning of this 21st century.

Nestle chart 2000 - February 2014

USA ECONOMIC DATA KEEP ON DISAPPOINTING INVESTORS IN 2014:
In the week of February 17th most investors  were surprised again by a bunch of bad Economic news from the USA as follows:

Empire States Manufacturing index plunges:
The Tuesday February 18, February 2014 Empire State Manufacturing Survey indicates that business conditions improved marginally for New York manufacturers. The general business conditions index fell eight points, but remained positive at 4.5. The new orders index fell to about zero, indicating that orders were flat, and the shipments index declined thirteen points to 2.1. The unfilled orders index remained negative at -6.3.

Source:

Below chart shows the Empire State Manufacturing Index over the last 10 years, for which the shaded area indicates a period of USA recessions.

10-year Empire State Manufacturing Index

Homebuilders sentiment logged sharpest drop ever:
The Tuesday, February 18, monthly home builders sentiment index, plunged from 56 to 46 points, which is the largest drop in the history of the survey, which started in 1985.

Of the three index components, current sales conditions fell 11 points to 51, buyer traffic fell 9 points to 31 and future sales expectations fell 6 points to 54.

USA Existing Home sales plunged in January 2014:
On Friday, February 21st, the “National Association of Realtors” reported that, sales of previously owned U.S. homes dropped in January to the lowest level in more than a year.

Purchases decreased 5.1 percent to a 4.62 million annual rate last month, the fewest since July 2012.

The figures reflect closings on contracts signed months earlier and highlight how higher borrowing costs and property prices have slowed momentum in residential real estate.

While it has been popular to blame much of the slowdown in the winter housing market on colder-than-average temperatures and higher-than-average precipitation, some argue that weather can only account for about a 1-2 percent drop in housing starts and home sales.

TEVA COMPLETES TENDER OFFER FOR NUPATHE INC:
On Friday, February 21st, Teva Pharmaceutical Industries Ltd. (NYSE:TEVA)  announced the successful completion of the tender offer by Train Merger Sub, Inc., a wholly-owned subsidiary of Teva, for all of the outstanding shares of common stock of NuPathe Inc. (Nasdaq:PATH) at a price of US$3.65 per share in cash and the right to receive contingent cash consideration payments of up to US$3.15 per share, net to the seller in cash without interest.

As can be seen from below chart, investors cheered the news by bidding-up TEVA’s share with approx. 10 percent last week.

Teva 5 days chart

PGM CAPITAL COMMENTS:

Nestlé and BHP Billiton:
With approaching food crisis and depleting of all commodities, BHP Billiton and Nestlé, respectively world biggest miner and food producer are poised to outperform the broader market in the near future.

Based on this and their strong balance sheet and ability to increase their dividend year over year, we have a BUY rating on the shares of both companies and own them both personally and have them either directly or as a part of an ETF in several clients’ portfolios.

The USA Economic data:
As discussed in various of our latest blog articles we have serious doubts on the state of the USA recovery and economic status and strongly believe that economic data produced in the last two quarters of 2013, had a “Window Dressing” smell and due to this we informed our readers, that if we are right on this, the year 2014 may become the year of the truth.

Apparently we aren’t the only ones who are foreseeing a crash of the USA, stock markets, because it became public last Friday, February 21st, 2014, that billionaire Investor George Soros, has doubled a bet that the S&P 500 is headed for a fall.

Soros

It was revealed that Soros Fund Management, the firm, founded by legendary investor George Soros, increased a put position on the S&P 500 ETF (NYSE:SPY) by a whopping 154% in the fourth quarter, compared with the third.

The value of that holding, the biggest position in the fund, has risen to U$1.3 billion from around U$470 million.

Below chart shows that the legacy hedge position that the 83-year-old George Soros has been rolling over every quarter since 2010 reached US$ 1.3 billion in December 2013.

Soros SPY Puts

According to Forbes’ latest billionaire list, Soros is the world’s 19th richest person with a net worth of 20 Billion US-Dollars, as of September 2013.

George Soros has also been a fairly savvy investor over the decades, most famously making US$1 billion on a successful bet against the British pound in 1992, an event still known as “Black Wednesday” in the U.K..

He also made almost US$1 billion profit by shorting the Japanese Yen in the period of November 2012 – February 2013,  from bets that the yen would tumble, due Japan’s determination to weaken its currency and boost its economy.

Depreciation of Japanese Yen against US-Dollar from November 2012 – February 2013

Soros was also one of President Barack Obama’s supporters, first in his Senate campaign in Illinois and later when he ran for President.

It is also worth mentioning that Soros fund Management LLC, in 2010 was reported to be one of the most profitable firms in the hedge fund industry, averaging a 20% annual rate of return over four decades.

It should be clear to our readers after reading the above, that George Soros due to his reputation as a successful investor, trader and Hedgefund manager, gets a lot of attention for his actions on the capital markets. Due to this we believe that the news of Soros’ 1.3 Billion US-Dollar bet against the USA Stockmarket will not go unnoticed in the investment world and it may become the last nail in the coffin of the USA Economy, US-Dollar and subsequent USA-Markets.

Our research team has discovered a short and double short ETF, which will go up in value if the S&P-500 falls.

Source:

Note:
A put or short position basically gives the owner the right to sell a security at a set price for a limited time, and in making such a bet, an investor generally believes the security is going to decline.

On the other hand it is worth mentioning that last year when the price of Gold declined, Soros, bought  over U$25 million dollars worth of call options on the GDXJ Junior Gold Miners index.

Source:

Note:
A Call-option agreement basically gives the owner the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.

TEVA Pharmaceutical:
As can be seen from below chart, TEVA Pharmaceutical shares have increased YTD with approx. 20 percent. The company has also increased its quarterly dividend from US$ 0.326 a share to US$ 0.34 a share.

TEVA YTD 2014 share price appreciation

Based on its closing price of last Friday, February 21st, TEVA’s shares have a dividend yield of 2.4%.

From January 1st 2000 up to Friday, February 21st, TEVA’s shares have appreciated from US$ 7.52 a share on December 31st 1999 to US$ 48.45 a share on Friday February 21st, 2014, an appreciation of approx. 540 percent. In the same period the company’s dividend has appreciated from US$ 0.0135 in May of 2000 to US$ 0.34 in February this year, which is an increase of its dividend payout per share of approx. 2,400 percent.

Since 2009, we have a BUY rating on the shares of the Company and own it personally and have it either directly or as a part of an ETF in several clients’ portfolios.

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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