Timing & trends

Heads A Deflationary Implosion - Tails A Hyperinflationary Depression...

Posted by Clive Maund

on Monday, 18 June 2012 09:36

The acute global economic crisis today is the direct result of the continued wilful obstruction and overriding of the normal checks and balances that should operate within a capitalistic system of commerce. This interference has been perpretated by powerful banks and governments acting in collusion, for reasons of profit and power. At every instance in recent years when it looked like the economy was slipping into a necessary recession they have assumed a godlike role and stepped in to head it off. These periodic recessions are necessary to prevent excess debt building up within the system, but the banks liked the ever growing debt, because it meant ever bigger profits for them as they created money out of thin air and then lent it to everyone and everything and raked in massive interest payments. Being immensely powerful they exerted more and more control over governments and succeeded in bending them to their will, culminating in them "coming out" by actually maker bankers into Presidents and Prime Ministers, as has recently occurred in Greece and Italy. So there you have it - the world is now controlled and governed by bankers. The problem with this situation is that their objectives, which are the accumulation of ever greater profit and power, are at odds with those of the population at large.

....read more HERE



Timing & trends

Double-Trauma Strikes Europe! U.S. Next?!

Posted by Larry Edelson: Uncommon Wisdom

on Monday, 18 June 2012 08:33

An urgent report on the next, explosive stage of the European crisis now unfolding before your eyes …

Yesterday’s election in Greece is just one chapter in this saga.

Regardless of its consequences, the European Union, the largest economy in the world, is now suffering under the weight of TWO traumatic crises striking simultaneously:

Trauma #1. Europe’s governments are in big trouble — debts out of control, tax revenues plunging, interest costs surging.

Trauma #2. Europe’s banks are under siege — drowning in massive losses, swamped with withdrawals, and lining up for bailout money that no government can afford.

Find it hard to believe that the largest economy and banking system in the world is collapsing even as you read these words? Then, read on for the evidence …

Trauma #1. Governments in Big Trouble
Debts out of Control
Tax Revenues Plunging

Interest Costs Surging

Some people seem to think the European Union’s sovereign debt problems are limited to just a few countries that have been in the news.

Others seem to assume that the debts are relatively static and unchanging.

But the hard data shows that, in reality …

Europe’s debt troubles are widespread, making almost every country vulnerable to the contagion now spreading across the continent.

Of course you already know about the countries in the headlines:

Greece with gross government debt of $315.8 billion … Spain with more than double that amount ($839.9 billion) … and Italy with debts that are SIX times larger than Greece’s (nearly $2 trillion)!

But what about the countries that have so far been viewed as "stronger"? Are they debt free?

Absolutely not!

France’s debts are almost as large as Italy’s — $1.8 trillion. And Germany’s debts are actually larger than Italy’s — nearly $2.1 trillion.

Plus, don’t forget others in the European Union, including Austria ($230.1 billion), Belgium ($374.3 billion), Finland ($101.1 billion), Ireland ($180.3 billion), the Netherlands ($427.6 billion), Portugal ($188.5 billion) and more!

Needless to say, not all countries are equal. Relatively speaking, some are stronger and others are weaker.

But here’s the key: They all belong to the same economic entity (the EU) and they’re all entangled in the same financial mess (the sovereign debt crisis).

That’s why it’s so important to note that TOTAL government debts owed by EU countries are now $8.6 trillion dollars — all based on the data from official sources compiled by Weiss Ratings.

Worse, despite all the sworn promises of austerity and all the solemn pacts to control deficits, the hard evidence also demonstrates that these debts are growing by leaps and bounds.

Official data shows that EU countries have added nearly $1 trillion in new debts just since the sovereign debt crisis began! And that doesn’t even include the massive new obligations of the EU institutions providing bailout funds!

And what’s most shocking is that nearly every effort to cut deficits has resulted in even larger deficits.


The main reason: Government cutbacks have slammed the economy. They have strangled the finances of the people. And they have bankrupted their businesses. So when all that happens, the end result is inevitable — they can’t pay their taxes!

Spain is a classic example. In fact, right now, the collapse in Spanish tax revenues is replicating the pattern in Greece, where fiscal revenues have fallen 4.8% in the past 12 months and Value Added Tax (VAT) revenues have plunged 14.6%.

The Daily Telegraph of London says "Spain is in the gravest danger since the end of the Franco dictatorship."

Spain’s former premier Felipe Gonzales calls it "a total emergency, the worst crisis we have ever lived through."

And just remember: Spain is NOT alone!

Surging Borrowing Costs

Spain’s borrowing costs have soared to 7%, widely considered the dividing line between stability and chaos.

Italy’s short-term borrowing costs have jumped wildly, as much as 164 basis points in a single day!

Other European interest rates are on a similar path.

This means that …

On top of collecting a lot less in revenues, they now have to pay a lot more for the money they desperately need to borrow.

But sinking government finances and financing is just one of the traumas striking Europe today. Also consider …

Trauma #2. Banks Under Siege 
Drowning in Massive Losses
Swamped with Withdrawals
Lining up for Bailout Money

In addition to America’s banks and thrifts, Weiss Ratings now issues Financial Strength Ratings on all of Europe’s large banks.

And among the largest EU banks (with $200 billion or more in assets), there are now SIXTEEN institutions receiving a Weiss Rating of D+ or lower:


What does our rating of D+ mean?

According to a landmark study by the U.S. Government Accountability Office (GAO), it’s the equivalent to "speculative grade" (junk) on the rating scales of Moody’s, S&P and Fitch.

And also according to the GAO, Weiss was the only one that consistently warned ahead of time of future financial failures.

Indeed, if track record is any guide, our tougher grades — based strictly on the facts without any conflicts of interests — are consistently the most accurate.

Like Moody’s, S&P or Fitch, we look at each bank’s capital, earnings, bad loans, liquidity, and other factors.

But unlike the other rating agencies, we have never accepted — and WILL never accept — any compensation from the banks for their ratings.

Nor do we give big banks special credit based on the "too-big-to-fail" theory. We’ve said all along that, when push comes to shove, governments will have to save their own necks first and let failing banks fail.

Or, alternatively, they will have to print money and devalue the banks’ liabilities (YOUR deposits) in order to keep the banks alive.

Either way, depositors are at risk!

In Spain, we first gave Bankia its E+ rating (meaning "very weak") three months ago — well before its massive losses were revealed, setting off the latest phase of Europe’s debt crisis.

But despite its $396.3 billion in assets, it’s not the largest Spanish bank in jeopardy:

Banco Santander is FOUR times larger with over $1.6 trillion in assets and merits a rating of D-, also deep into junk territory; while Spain’s BBVA bank, with nearly $775 billion in assets, gets a D.

And based on our metrics, Spain’s Caixabank (a $350 billion bank) is just as weak as Bankia with a rating of E+.

In Italy, Unicredit SpA gets an E+, despite its $1.2 trillion in assets; Intesa Sanpaolo merits a D-, and Banca Monte Dei gets an E.

What most people don’t seem to realize, though, is that most of the largest weak banks in the EU — and in the world — are headquartered in …

France! Crédit Agricole (with a massive $2.2 trillion in assets) is a candidate for failure with a rating of E and Societé Générale is not far behind with a D-. Plus, there are two other large French banks in jeopardy — Natixis and CIC.

But here’s the biggest — and most important — surprise of all:

Germany is NOT the safe haven most people think it is, especially when it comes to banking: In fact, the largest weak bank in the world is Deutsche Bank with $2.8 trillion in assets and meriting a D.
Commerzbank, with $857.6 billion in assets, is even weaker, getting an E rating.

All based on the same kind of objective, conflict-free analysis that helped us name nearly all the major failures of the last debt crisis well ahead of time! (See "The Only Ones Who Warned Ahead of Time.")

Bottom line:

The total assets of just these 16 banks alone is $15 trillion, or about $1 trillion more than the total assets of ALL commercial and savings banks in the United States!

Who Saves Whom?

Late last year, the bonds of major European governments were sinking fast and Europe seemed on the brink of a meltdown.

So the European Central Bank (ECB) decided to come to the rescue with the aid of the largest banks.

The plan was simple:

The ECB hands the money over to the banks via special loans.

The banks hand the money over to sovereign governments by buying their bonds.

And everyone’s happy, right?


The plan has backfired: The government bonds have sunk anyhow. And the banks are stuck with even greater losses.

Now, a "new" old plan is hatching. Instead of banks helping to bail out their governments by buying their bonds … the idea is for governments to bail out their banks with money borrowed from the stronger governments of the European Union.

So one day they talk about banks saving the sovereigns. Next day, it’s the sovereigns savings the banks. They can’t seem to make up their minds as to who will save whom.

But …

Now the Public Is Beginning 
To See Through This Charade!

They remember how many times the authorities have vowed that "the crisis is over."

They know, first hand, how unemployment has gone through the roof.

They see the crisis feeding on itself.

So they are beginning to ask the real question of the day: Who sinks whom?

Will the sovereign debts sink the banks?

Will the banking crisis tear down the sovereign governments?

Or will they both go down in a spiraling cycle of bond market collapses and bank failures?

Our Suggestions …

1. Keep most of your liquid funds in cash, ready to be deployed on a moment’s notice, but as safe as can be right now. The best way: A short-term Treasury-only fund in the U.S., or equivalent.

2. Hold on to all long-term gold holdings. You do not want to let go of those. We feel gold could be headed to $5,000 an ounce over the next few years.

In the short term, however, we would not be surprised to see gold — and silver — move lower.

3. Consider prudent speculative positions to grow your wealth.

But no matter what you invest in — stocks, bonds or commodities — always be open to playing both the declines and the rises.

Even gold, silver and oil, despite major long-term bull markets, are bound to suffer further declines before turning higher.

And never forget this critical fact: As we’ve demonstrated here repeatedly, the U.S. government and U.S. financial institutions have made many of the same mistakes and are vulnerable to most of the same dangers.

Best wishes,

Martin and Larry

Larry Edelson has over 34 years of investing experience with a focus in the precious metals and natural resources markets. His Real Wealth Report (a monthly publication) and Power Portfolio provide a continuing education on natural resource investments, with recommendations aiming for both profit and risk management.

For more information on Real Wealth Reportclick here.
For more information on Power Portfolioclick here.


Gold & Precious Metals

Rise of the Gold Price Machines

Posted by Adrian Ash: BullionVault

on Monday, 18 June 2012 07:31

Electronic platforms & automated, algorithmic trading are hiding the cause of Gold Pricemoves. Apparently...

EUROPE might be facing deflation, and Greece might go on firesale after this weekend's vote. But €1.1 trillion doesn't buy what it used to, writes Adrian Ash at BullionVault.

Last winter, the European Central Bank poured money onto the currency union's commercial lenders, lending them cash to lend in turn to their domestic governments by buying government bonds. Now Spain's 10-year bond yields are at a fresh Euro-era highof 6.73%. Italy's borrowing costs are back where they were before the second chunk of El Tro in February.

The cheapest 3-year money in history – lent for just 1% per year – has proven itself worthless in short, and faster than even we expected here at BullionVault. Any wonder people keep Buying Gold?

The recent swoons and jumps in the Gold Price, however, have the market scratching its head. Both of this week's pops came just as New York got to its desk, but with barely a ripple in the Gold Futures market – where US traders typically throw their weight around. So it seems most likely to be simply a heavy gold buyer, bidding up prices for a chunk of physical metal in the wholesale market.

Whoever it is, they're spoilt for reasons to Buy Gold – Greek elections on Sunday, record-high Spanish bond yields, or a weakening US recovery. Take your pick. Massive money inflation, either before, during or after a major credit default, isn't a risk you can discount to zero or nearby today.

Yet still the finance business demands cause and effect. The obsession with tick-by-tick reasoning – the relentless search for "This because that" – goes far beyond financial journalists. The classic example, cited in Daniel Kahneman's recent Thinking: Fast & Slowby way of Nassim Taleb citing it in The Black Swan, was when a Bloomberg headline writerfirst blamed the capture of Saddam Hussein for a rise in US Treasury bond prices, and then, minutes later, rewrote the headline to blame the very same event for T-bonds falling when the price dropped.

"The two headlines look superficially like explanations of what happened in the market," says Kahneman. "But a statement that can explain two contradictory outcomes explains nothing at all."

And so in gold, some market participants saw this Tuesday's $30 jump, says one bullion-bank salesman, coming from Fitch's downgrade of Spanish banks. Others players we spoke to saw Wednesday's rise – which then reversed – coming off the weak US retail sales data. Yet more traders saw both moves as just noise spat out by automated traders, those algorithms run wild on electronic platforms which mean even market-makers can't see quite what is happening with physical flows.

"The Electronic Platforms, or 'machines' or 'toys'," says one, "already installed at clients' desks and currently marketed by commercial banks for precious metals trading [mean] that market-makers are lacking a bit of view of what is happening on the spot [market in gold] from time to time."

Moving a little flow away from the biggest banks might sound a "good thing" to some. But blaming the electronic machines and toys for nonsense moves in the Gold Price is becoming a popular pastime in the professional market, especially for traders caught the wrong side of what feels like volatility.

Truth is, however, the violence of Gold Price swings has been easing since last summer's 3-year highs. And if London's market-making bullion banks feel they can't hang a story on what's driving the price tick-by-tick, few journalists or private investors will spot the "true" cause either. So save your energy. Because what matters, as with any home for your savings, isn't whatever breaking headline might or might not be driving other people (or machines) to buy, only to sell – and buy again – before the next newswire update. It's the core reasons you do or don't identify for your own decision to buy or sell.

With Gold Investing, we'd suggest, those reasons to consider start and end with the threat to your own savings from the ugly twins of default and devaluation. Still lurking round the corner, what odds would you put on them mugging your money in the next month, year or half-decade? Five years and $900 per ounce after the start of the financial crisis, it still looks a long way from finished yet. And hoping that you won't need uninflatable, indestructible gold isn't the same as not needing it.

Get the safest gold at the lowest prices using world #1 online, BullionVault...

Adrian Ash13 Jun '12

Adrian Ash runs the research desk at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites includingForbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern andFT Deutschland; Italy's Il Sole 24 Ore, and many other respected finance publications.


Stocks & Equities

The New Reward for Risk Tool Plus 2 Hot Stocks

Posted by Tyler Bollhorn StockScores

on Monday, 18 June 2012 00:00

perspectives commentary

We added a simple but very important feature to the Stockscores charts this past week. In the charting tab you can control the settings of the Stockscores charts and you will now find the ability to draw reward for risk lines on the chart.

This is a simple tool but it is based on one of my core philosophies about the market. While most investors are focused on buying or shorting the right stock, what everyone should focus on is risk management. Understanding the relationship between reward and risk is essential to being successful in the market, whether you are a short term trader or a long term manager of a retirement portfolio.

When most people judge a stock trade, they do so by looking at how much money they made. A trade that makes $2000 is better than a trade that made $200.

What would you say if we expanded our judgment of these trades to include some reference to the risk taken? If you risked $5000 to make $2000, is that a good trade? What if you risked $100 to make $200?

With this in mind, the second trade now looks like the better one. You may be wondering, however, how we measure the risk of the trade.

Risk is not about how much of the stock you buy. You can buy $100,000 of a stock and only have $1000 of risk. Risk is controlled by limiting the downside with a predetermined stop loss point. If you buy a stock at $10 with a stop loss at $9, you are risking $1 a share. If you buy 1000 shares, your risk is $1000.

This assumes that you have the discipline to hit the sell button if the stock falls to $9 and that it does not gap down through your stop loss price to give you a bigger loss. As long as we keep our discussion simple, this is a good definition of risk.

Reward is the difference between your exit price and your entry price. Sell this stock at $13 and you have made $3 of reward for $1 of risk giving you a reward for risk of 3. Essentially, this means that this winner pays for 3 losers.

You might be thinking about this concept with the idea that using a tighter stop loss point can really improve the reward for risk metric. If so, you are right, a stop at $9.50 rather than $9 now gives $0.50 a share of risk and $3 of reward for a reward for risk ratio of 6. By tightening the stop you have doubled your reward for risk.

Of course there is cost to using a tighter stop. As you narrow the difference between your entry price and your stop loss point you also lower your chance for success. The trick is to find the best point for that stop where you can maximize your reward for risk without sacrificing your probability of making a profit.

To help you with understanding reward for risk, we have added a tool to visualize it on the Stockscores charts. If you go to Stockscores and call up any chart, you will see a Charting tab either beside the small format charts or below the large format. At the bottom of the Charting tab are places where you enter the Entry and Stop Loss price. Then click on Create Chart and you will see those lines drawn on the chart, showing the reward for risk multiples. I use these lines to measure my success on trades but also to help me pick exit points. That method is something I teach in my trading courses.

The most important takeaway from this new tool is the importance of planning your losses. You should always pick a stop loss point and stick to it to limit downside when you make a failed trade. Holding on to losing trades is the greatest failing of investors.

Stop your losses when you are wrong and let your profits when you are right. Hopefully this new tool will help to emphasize the importance of this simple but often overlooked concept.

perspectives strategy

The markets made some positive steps toward an end of the weak and uncertain markets that we have endured for the past few months this week. Performance on Thursday and Friday were a good show of optimism in to next week. I am cautiously optimistic that we are in the early stages of a summer rally that can hopefully get started once the psychological overhang of the Greek election has passed Monday.

Trading on Monday will be critical to determining whether the buyers can take back control of these markets. Investors were speculating this week that they would but I think owning a lot of stocks in to Monday was too risky for most.

If the market is able to remain stable, I think we can start to accumulate stocks again after being mostly in cash for some time. Here are a few stocks that made decent showings on Friday and have some potential.

perspectives stocksthatmeet

1. T.ECA
Long a dog among the Canadian large cap companies, T.ECA is starting to turn around. The stock has a lot of work to do still and I consider a trade on this stock having about a 50/50 chance of working. However, if it works the upside is far greater than the downside, making it a stock worth considering. Has a nearly 4% yield. Support at $20.50.

Picture 2

2. PVA
PVA is another Energy stock, a sector that was a leader on Friday. This stock has a similar chart to T.ECA and I would not take a trade on both as they will be highly correlated to one another. An inspection of the chart shows that this stock has had a sub 60 Sentiment Stockscore for many months but has moved up and through that important threshold in the last couple of weeks. Today, the stock broke out through resistance with abnormal volume, a positive sign that it wants to go higher. Yield just above 4%. Support at $5.50.

Picture 1


  • Get the Stockscore on any of over 20,000 North American stocks.
  • Background on the theories used by Stockscores.
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    This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don't consider buying or selling any stock without conducting your own due diligence.



Stocks & Equities

Focussed Diversification – Building Your Simple Small-Cap Growth/Value Stock Portfolio + Two BUY Recommendations

Posted by Ryan Irvine: Keystocks

on Saturday, 16 June 2012 00:00


Focussed Diversification – Building Your Simple Small-Cap Growth/Value Stock Portfolio & Two BUYs

Most financial advisors recommend that you diversify for your own protection. What they fail to tell you is that it is also for their protection. For someone starting out, or with a relatively small portfolio, a broad based ETF or combo of ETF’s may be a good idea. Indeed, a personal stock portfolio must be diversified to some degree. After all, none of us wishes to “put all our eggs in one basket” and expose ourselves to the inherent risk of holding only one stock.

But if you want to beat the market, you cannot be the market.

The problem we see often today is that many funds and other investment products on the market hold between 50 and 300 stocks. According to the modern portfolio theory, you come very close to achieving optimal diversity after adding about the 20th stock to your portfolio.


So why do fund and investment managers operate this way (practice over-diversification) and create below average returns for your portfolios overtime? Well, we think the following quote from the world’s greatest investor, Warren Buffett sums it up.

“Wide diversification is only required when investors do not understand what they are doing.” - Warren Buffett

To give you an idea of how little Buffet himself believes in over diversification, recently a study of his portfolio over the last 25 years was completed. Within his multi-billion dollar portfolio he averaged only 33 stocks per year. Perhaps more astonishingly, his top 5 holdings, on average, comprised 73% of his portfolio - so much for diversification.

While we do not advocate under-diversification, to beat the market long-term we recommend a strategy of “focussed diversification”, within the growth segment of your portfolio.

“Why not invest your assets in the companies you really like? As Mae West said, ‘Too much of a good thing can be wonderful. ” - Warren Buffett

Remember, when building your Small-cap Growth Stock Portfolio, we suggest you follow the following simple steps.

    1. Purchase between 10-12 Small-Cap Stocks and equally weight each selection initially. For example; $100,000 portfolio with 10 stocks would allocate $10,000 per stock.
    2. Construct your portfolio over at least a year period – ensuring you do not buy at a market peak within a year or cycle.
    3. Buy companies from a diverse set of industries within our recommendation list to achieve appropriate diversification.
    4. Review and pay careful attention to our updates and use our continuing research to guide your decisions to BUY, HOLD, or SELL given your time horizon and tolerance for risk.

If 1 stock performs very poorly , 3 average, 2 above average, 2 very well, and 2 excellent, it has been our experience that the overall return of a Small-Cap Growth Stock Portfolio constructed in this manner can significantly outperform the market overtime. We do our research and focus our buy recommendations on the companies that rank highest within our growth and value criteria. By investing with conviction and with a realistic time horizon, this strategy allows our winning recommendations to truly affect the value of your portfolio over time.

Mini Portfolio In-Action

For those that attended the 2012 World Outlook Conference this past February 10th and 11th, we gave your 10-12 stock portfolio a kick start with 4 recommendations. While the recommendations are designed to perform over a 1-5 year period, we thought it might be at least mildly instructive to see how the stocks have performed in the 4 months following the conference.

In theory, Small-Cap Growth Stocks are considered “riskier assets” than your average mid or large cap stock and in the risk-off, down market that we have been again exposed to for at least 3 months now, they are prone to under-performance.

Since the Outlook Conference, the S&P TSX Composite Index is down -8.25%, the S&P/TSX Venture Composite Index (smaller Canadian stocks) is down a whopping -25% and yet, 3 of the 4 companies KeyStone recommended at the conference are up in price. In fact, the top gainer of the 4 has added 24.53% in the past 4-months, followed by gains of 21.20%, and 17.42%, with the single losing stock of the group down only -3.66%. The average gain over the 4 months was 14.87%, besting the TSX by 23.12% and the TSX-Venture exchange by around 40%.

So how can this be? Should not these so called risk assets underperform in a down market? Conventional financial theory will answer in the affirmative, but in the current market conditions, we do not think you should apply this wisdom with such broad strokes. At present, we are in a zero to minimal growth environment making “stock selection” paramount in your search for above average returns.

For those not burying their collective heads in the sand, there is positive news out there in select pockets from good companies in solid niche markets. In fact, the very basic rationale behind why our selections from the World Outlook Conference (and in our Small-Cap & Income Stock Recommendations at www.keystocks.com) have significantly bested the market to date is because they continue to individually perform well financially. In the past 4 months, two of the companies have increased their dividends (one of them twice) and all have managed to report record quarterly earnings. Each company continues to deliver solid cash flow and hold limited debt positions. Long term, this is a recipe for success.

While the volatility is not pretty, the correction over the past 3 months is not a surprise to us as the gains of the preceding 4-5 months came in the face of the same challenges we are starring at now. In fact, we had commented on numerous occasions that the strong upturn seem to fly in the face of the zero to low growth environment that much of the globe was facing for the mid to long-term as austerity become a reality.

But in the near term, markets will do what they will do. Expect investors, particularly inexperienced ones, to continue to support the volatility over the next several years – piling in to push markets too high once a rally is going and jumping out without careful reflection when the markets chart a downward course. In a perfect world, we would like to see rational thought guide the day, with a view to the long term. This type of thinking is Pollyannaish as we are dealing with human beings at the switch for the most part in the investing world and if I can guarantee one thing, they will certainly be irrational in the near term – particularly in these uncertain times.

Of course, without this irrational behaviour, we would not find great bargains in a sell-off as the proverbial babies are thrown out with the bath water. Once again, we will take advantage of this over the course of the summer and likely make more BUYs over the next 6 months than we have made in the preceding 8 months. From panic comes opportunity - we will be greedy when others are fearful. While the fear may not have reached a tipping point, bargains are appearing and we are looking at a number of companies that have seen their share prices drop from 5-35%, despite posting strong to record earnings and giving solid outlooks.

Recent BUY Recommendations Updated

Finally today, I will update two companies from our 2012 World Outlook Small-Cap Portfolio that continue to rank highly in our coverage universe to illustrate why they have shown solid gains and why they could continue to outperform.

The first, Exco Technologies Limited (XTC:TSX), is a global supplier of innovative technologies servicing the die-cast, extrusion, and automotive industries. Headquartered in Markham, Ontario, and with roots that date back to 1952, Exco, through its ten strategic locations, employs 2,169 people and services a diverse and broad customer base. Exco’s Casting and Extrusion division accounted for 63.33% of sales in Q2 2012 and its Automotive Solutions division accounted for the remaining 36.67%.


After many years of underfunding and false starts, Exco’s customers (North American, European, and Asian OEMs ) are now committed and investing heavily in the launch of more fuel efficient powertrain architecture. North American auto manufacturers simply have to develop more fuel efficient vehicles to compete. From the new generation of engines to the latest nine speed transmissions, Exco plays a critical role in the tooling up of many of these projects for numerous OEMs worldwide. From early 2011, the market for its services has been robust, but Exco had difficulties handling the volume with efficiency which hurt profitability. Management now believes the company is well positioned to cope with these pressures in 2012 and going forward, producing further profitability gains – we saw this already in Q1 and Q2 2012.

On April 25, 2012, Exco announced its Q2 2012 revenue rose 16.5% to $63.2 million from $54.23 million in the same period of last year. Year-to-date sales increased 22.3% to $121.6 million. Net income for the second quarter was $6.5 million, or $0.16 per share, compared to consolidated net income of $4.9 million, or $0.12 per share, in the same quarter last year. Year-to-date, consolidated net income was $11.8 million, or $0.29 per share, compared to consolidated net income of $6.9 million, or $0.17 per share, last year.

Cash provided by operating activities increased to $8.1 million in the second quarter from $1.3 million last year and $14.8 million year-to-date compared to $823 thousand last year. These increases are primarily the result of improved earnings. Exco’s cash position at the close of the second quarter ended March 31, 2012, increased to $22.4 million, or $0.55 per share, from $15.4 million at the beginning of the year, reflecting continuing improvement of earnings in the current year. This appears to demonstrate that the build-up in working capital caused by climbing sales over the last numerous quarters has begun to level off. Management has stated that Exco will continue managing its business conservatively with a low overall cost structure, strong margin, and a very strong balance sheet with no bank debt. The company’s strong balance sheet positions it well to expand internationally and weather a downturn (although a downturn does not appear imminent as business in its segment remains robust).

The company’s solid outlook, strong balance sheet, and strong cash generation allowed management to increase Exco’s quarterly dividend 25% from $0.03 per common share to $0.0375 per common share. The dividend will be paid on June 29, 2012, to shareholders of record on June 13, 2012.

Despite the strong rise we have participated in since late January of this year (shares jumping over 50%), fundamentally, Exco remains relatively attractive in its current range. We have now upped our earnings estimate from $0.54 to $0.56 for 2012. This leaves the company with a forward looking PE of 8.30 based on fiscal 2012 earnings. Our increase in the estimate is based on strong Q1 and Q2 2012 numbers, which beat estimates and management’s “conservative” outlook for 20% revenue and 50% profit growth in 2012. Book value also continues to increase and currently stands in the range of $3.34 per share. Add in the company’s 25% dividend increase, which signals strong cash flow and a positive outlook, and currently this gives the stock a yield 3.2% and the story continues to be reasonably compelling.

With the stock in the $3.20 range, we found it to be an excellent value. In our latest update, with the stock in the $3.98 range, we found it to be a very good value. At present, despite the 17% rise, we continue to see the stock as good value given that it is heading into a historically strong Q3 and the fact that the company continues to have room for operational improvement. Exco has been a solid winner and valuations remain reasonable.

The second company we will look at is a true micro-cap. Athabasca Minerals Inc. (ABM:TSX-V) is a management and exploration company developing and exploring industrial minerals in Alberta, providing aggregate management for the construction, oil sands, and infrastructure industries of the province. The company is the operator of one of the largest aggregate operations in Canada and holds a significant land position in the Athabasca region of Alberta. On November 20, 2008, the company completed the non arm’s length acquisition of Aggregates Management Inc. (AMI). The acquisition resulted in Athabasca holding management contracts with the Alberta government for the management of the Susan Lake aggregate operation and Poplar Creek aggregate operation. The Susan Lake management contract is in the fourth year of a second ten-year contract.


Historically, all of the company’s revenue has been derived from management contracts – but this is changing in 2012. The company is advancing its wholly-owned aggregate projects in this region including its Kearl, Logan, Pelican Hill, and House River operations. We expect the three to be operational and generating higher margin income in 2012.

Sand and gravel aggregates are the most common construction materials used in the world. Since the invention of cement, aggregates in the form of concrete have become the building blocks of civilization. Yes, they are not as sexy as gold or silver, platinum or lithium, but they are basic, boring materials that are in high demand in Alberta’s vast and ever expanding oil sands. Perhaps most importantly, they provide strong cash flow for Athabasca, which is well positioned to service this market for the next several decades.

Athabasca derives the majority of its revenues from producing various types of aggregates in Northern Alberta. The ability to remove gravel from its gravel pits is hampered by cold and wet weather conditions. As a result, winter and spring are traditionally the slowest time for the company. However during Q1 2012, Athabasca reported its record high sales volume, with unusually increased demand for aggregates. As various oil sands companies have announced plans to increase their production, strong continuing demand for aggregate is anticipated by management. In Q1 2012, Athabasca announced total tonnage sales of aggregate increased by 123.6%, with 1,966,979 tonnes sold compared with 879,613 sold in the three months ended February 28, 2011. Aggregate sales on which management fee revenue is earned (Susan Lake) rose 101.0% on sales of 1,768,326 tonnes for the quarter compared to 879,613 tonnes during the three months ended February 28, 2011. The remaining 198,653 tonnes were sold from the House River pit, for which there were no sales made during the comparative period.

Q1 2012 revenues jumped to $4.45 million, comprised of $2.85 million aggregate management fee revenue and private pit gravel sales of $1.61 million. This compared to Q1 2011 total revenue of $1.35 million, comprised entirely of aggregate management fee revenue, as sales from private pit gravel operations had not yet commenced. During the quarter, total revenue had increased by 230.2% and aggregate management fee revenue increased by 111.0%.

Q2 2012 net income jumped to $784,408, or $0.029 basic income per common share, from a net loss of $1,890, or $0.000 per basic income per share, during Q1 2011. Due to a solid outlook and the fact that fiscal 2012 sales have begun at a strong rate, management now anticipates that aggregates sales for this fiscal year will surpass the 7,758,612 tonnes sold in fiscal 2011.

Despite its rise of 65% since our recommendation earlier in the year at $0.40, on a valuation basis, at $0.66, the stock continues to appear cheap long term. On a trailing basis (over the past 12 months), the company has now posted earnings-per-share of $0.131 giving it a PE of around 5. With an improving balance sheet, better liquidity, strong cash flow, the potential for further wholly-owned pit sales in Q3 and Q4, and strong near to long-term demand forecasted for its managed operations, the stock remains attractive.

Remember, these are just two ideas to look over, see if they fit with your strategy and potentially begin the construction of your Profitable Small-Cap Growth Stock Portfolio. While we continue to like each company, they are part of an overall “Focused Diversification” portfolio strategy (detailed above). As such, if you are planning to utilize this strategy, we urge you to follow the complete process and not just take the proverbial “flyer” on two individual stocks – this creates too much company specific risk.

Remember, in the current environment, we anticipate patiently adding to our Focus Buy List over the next 6 months, so there is no rush to purchase your entire Small-Cap Portfolio at one time in the market cycle. We expect two new BUYs for upcoming release.

Thank-you ladies and gentlemen – profitable investing.

Disclosures: KeyStone Ownership: XTC, ABM. Employee Ownership: XTC, ABM.

Ryan Irvine,

President & CEO

KeyStone Financial

Growth Stocks: www.keystocks.com

Email:      rirvine@keystocks.com">rirvine@keystocks.com

Phone:  6 0 4 - 2 7 3 - 1 1 1 8


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