The Crisis Indicator: Which countries are at risk?

Every investor dreams of making that one big financial hit which sends him right into luxurious retirement. The quickest way to do so is by shorting a financial crisis, but how to recognize impending economic breakdowns? A study by the European Central Bank in 2012 distinguishes 6 major indicators which are likely to predict financial turmoil. These are 1) domestic credit to the private sector, 2) increase of government debt, 3) current account deficit, 4) Foreign Direct Investment (FDI) Inflow, 5) a fall in housing prices and 6) a fall in stock prices. They distinguish domestic credit to the private sector as he key indicator for financial crises. The other indicators are very short-term indicators and may come too late such as the fall in stock prices, which is what you want to play into in advance. So let's take a deeper look into the domestic credit indicator.

The main advantage of the domestic credit indicator is that it can predict crisis almost four years in advance, whereas the other indicators are very short-term indicators. So let's see which countries have seen a slump in domestic credit to the private sector (as % of GDP) in the past years and which countries saw some growth. It should be noted that every mentioned country had a stable trend where year on year growth was either always positive (table 1) or always negative (table 2).

 

As you can clearly see, it's Europe that is in danger. Other regions seem to do just well. Let's take a deeper look to those countries that experienced more than a negative 20% change. Two indicators, high Debt-to-GDP and high FDI inflow indicate crises will be more severe. The table below shows scores for these indicators and shows Ireland is in major danger of severe crisis.

So, we've established Ireland as a potential danger. For completeness sake let's also take a look at the Irish housing market and stock market development. The housing market seems to be rising in Ireland, with a 7.4% change year on year during the first quarter of 2016. The Irish ISEQ Index marks -9.88% Year-To-Date, which can be somewhat troubling. However, over the last 5 years the index has seen a significant rise. 

In conclusion, we've been looking at crisis indicators and Ireland is one of the most vulnerable for a financial crisis. The most important indicator, domestic credit to the private sector, looks very troubling. Also, debt-to-GDP and FDI inflow are worrying aspects for Ireland. There is also some light for Ireland, as the housing market is quickly recovering. Still, the danger for a financial crisis in Ireland looms.

The TomTom Opportunity

TomTom is desperately trying to overcome its major problem: market saturation. Initially TomTom stock soared sky high up to €64, but when sales fell down, simply because everyone who wanted a navigation system already bought one, the stock collapsed below €3. Today, the stock is on the way to recovery as it is trading at €8.65.

So, what is it that makes TomTom stock interesting? First of all, the short-term technicals are looking great. TomTom stock is showing an uptrend with higher bottoms and higher tops, indicating the trend is likely to continue on the short term. Second, TomTom's yearly revenues have increased for the first time since 2010, which might indicate a turning point and therefore it could be a great entry moment while the stock price is still cheap. A third reason why TomTom is now an interesting investment again is their change of business strategy. TomTom is switching focus from single navigation system unit sales towards big contracts with car manufacturers, such as Jeep and BMW, to sell built-in navigation systems. Also, TomTom now has deals with Apple and Uber for selling digital maps. Finally, TomTom has all characteristics for a typical take-over target: a large client base, profits, expertise and a cheap stock price. So if you like to gamble on a takeover, you may want to consider TomTom.

Of course, there is no such thing as a free lunch, so let's also take a look at the risks of this stock. One of the biggest problems for TomTom might be Google. Google is gaining users of Google Maps simply because it's free and every Android user gets Google Maps for free. This is further harming TomTom's single unit sales and hence there is little chance of recovery for TomTom in this market segment. Then there is also the case of the insane P/E ratio of 115.97. The rules of thumb concerning P/E tell us that high P/E ratio's indicate either the stock is overpriced or high expected growth. Since the forward P/E ratio is lower, it is more likely the case that the market expects high growth (as earnings should be higher in the future, which lowers P/E ratio). Nevertheless, one should be aware of the risk of failing to realize that growth. Finally, there is also the possibility of global recession, which could significantly harm car sales and in effect also TomTom sales. On the other hand, US car sales are at the highest point in 10 years, hence the fear of recession could be exaggerated.

Weighing all the pros and cons, we think it is a great moment to enter in TomTom stock. The new business plan should increase revenues and profit over the coming years. Buy it while it is still cheap!

The Twitter Fatality

Twitter's fourth quarter results should set off the alarm bells, so if you are proud owner of Twitter stock, you may want to reconsider your investment choices.The number of active users remained at the same level as in the third quarter, bringing Twitter's main problem to the surface. Without new active users it is hard for Twitter to realize higher revenues through advertising. Now, it seems the time of easy growth is over and bigger investments will need to be made to make the user base grow, but this is costly. Also, since Twitter is a fairly focused company, it will be hard for Twitter to grow when their current market becomes (or is) saturated. As we've seen with multiple tech companies, once the market is saturated, stocks tend to plummet (e.g. TomTom). Moreover, it is historical fact that total advertisement income declines in times of a recession. The possibility of a new recession in the United States could therefore put another strain on Twitter's performance.
Let's take the simple investing rule of thumb into account that: 1) You don't want to buy unless the stock is going up, and 2) You don't want to sell unless the stock is going down. Since Twitter stock has lower tops and lower bottoms, this one is definitely going down. The second rule of thumb goes nicely along with our idea of Twitter being a bad investment. Sell or go short, don't keep this stock.

Stock Smash Performance Review & Outlook 2016

Since the launch of Stock Smash in September 2014 a lot of stocks have been discussed, but how well is our advise? The Stock Smash portfolio gained a return of 5.93% since our start, whereas the S&P500 realized a return of -2.93%, which means we outperformed the market by 8.86%.

Top 5 trades*:

1. Short Imtech:   +84.62%
2. Short GoPro:    +84.26%
3. Long Huawei:   +53.34%
4. Short Twitter:   +53.26%
5. Long Nike:       +37.82%

Worst 5 trades*:

1. Short Amazon:       -92.65%
2. Long Alcoa:           -50.65%
3. Long Tata Motors:  -40.40%
4. Long Shell:            -36.22%
5. Short Facebook:     -35.28%

Our short positions on Imtech and GoPro have been a particular highlight. On the other hand, going short on Amazon cost us dearly. Yet, as we gained a positive overall return and outperformed the market, we are fairly satisfied with our stock advices.

Outlook 2016
We become more conservative concerning stocks for 2016. Higher volatility in the markets and growing concerns about global economic growth can severely harm stocks in 2016. Yet, we also believe that this might also create golden opportunities for stock picking, so we won't write off stocks as a whole. Furthermore, we believe Europe still creates enough opportunities to keep investing in this region due to economic recovery and expected stimuli by the ECB. Due to the recent downfall in stocks in Emerging Markets we keep an eye on entry moments, because economic indicators in for example India are still on point. We also continue to look for other investment opportunities such as sugar and real estate. 
 
*Based on 12 January 2016.

Canadian Solar Inc.

Canadian Solar Inc. a manufacturer of solar cells and other solar related products, experienced a turbulent 2015 with stock prices ranging from $16 to $39. 2016 starts no less turbulent as Canadian Solar lost 20% of its value over the past 5 days. It is not just Canadian Solar that experiences a downfall in stock price, but rather it's the whole solar power industry that tumbles. One of the two major reasons is the current oil crash. When oil becomes cheaper, the solar industry loses its competitive edge since there is less incentive to innovate for financial reasons. Consequently, people will generally postpone solar power related acquisitions. The other reason is fear of China. Slowdown in the Chinese economy, which is the largest buyer of solar related goods, may cause a fall in demand of solar cells and could put profit margins under pressure.
Yet, the fundamentals remain strong for Canadian Solar. Net income and earnings per share have increased outstandingly over the recent years and with a Price/Earnings ratio of 4.97 the stock price is very attractive at the moment. It seems that due to the current downfall in stock price, the market has already accounted for worse sales in quarter one, but the correction may have been too strong as sales in markets as US and Saudi-Arabia are gaining momentum. Moreover, fear of China could be exaggerated, because the need to reduce pollution in China will remain. Besides, the Chinese government has always been stimulating their economy and will likely try to turn the tide by stimulating even further. This is another reason why solar cell demand does not necessarily have too fall as much as the market anticipates.
United States regulation could further boost Canadian Solar performance, as the US extended subsidies on solar projects to 2017.  Moreover, industry experts expect the US market for solar products to triple from 2015 to 2020.
In conclusion, the current oil price crash that caused solar stocks to plummet creates a great entry moment for the solar market.  Furthermore, looking at fundamentals of Canadian Solar, this firm looks like a raw pearl within this industry. Strong buy for the long term.

Euro/Dollar: How low can you go?

Government stimulation, Eurozone troubles and even China worries. Not a day goes by without speculation about how this will influence the Euro/Dollar exchange rate. The exchange rate is trading at $1.061, following a downward trend since 2014 and one might wonder where the bottom lies.

The exchange rate experiences the heaviest shocks if either the ECB or the FED has a press conference, but even mere speculation on implementations causes the exchange rate to react heavily as markets have trouble to make up their mind. A clue on whether the downward trend may continue can be found in the probabilities of central bank actions. A survey by The Economist finds that 92% of economists expect a rate hike in December. This still leaves some margin for the Euro/Dollar rate to drop even further. Of course, the exchange rate will also react to the actual amount of the rate hike, but overall, one might expect a drop in the exchange rate if the FED does indeed hike the rate.

And then there is the ECB. The ECB is thinking about extending and intensifying its Quantitative Easing (buying government bonds) and introducing a negative interest rate in December. Every day, the intensifying of QE becomes more probable which also pushes the Euro down. The realization of  the ECB plans could see the Euro drop sharply.

There remains some uncertainty about the underperforming European countries, which might cause trouble for the Eurozone as a whole. For example, a Grexit may cause other countries to leave the Eurozone as well, which harms Euro stability. This is another reason why European Central Bank stimulation is more likely than FED stimulation.

In effect, the stimuli by the FED creates a higher demand for dollars, while stimuli by the ECB creates Euro supply. These factors both drive the Euro/Dollar exchange rate down. As these stimuli are not yet implemented there is still some margin for the Euro/Dollar to go even lower. Since the probabilities, which are not 100%, are priced into the market, there will be some shock if new policy implementation will actually be announced and realized. The Euro/Dollar rate might well go below $1, even hitting $0.90.

December will see lots of action, one way or the other, from central banks. We expect the Euro/Dollar exchange rate to go even lower and we will probably see some downward shock within a month as a result of Central Bank policy making.

How to profit from El Niño; The sweet future of sugar

One of the first rules of investing is diversification across asset classes (as well as within asset classes). The exemplary well balanced portfolio should consist of stocks, bonds, commodities, real estate & currencies, just to name a few. But with interest rates at all-time lows, bonds are very unattractive and Real estate prices have already recovered substantially since the recent crisis. So one might look for chances in commodities.

Yet, the commodity segment is also facing hard times over the recent years. The Bloomberg Commodity Index lost more than half its value since 2011. The decline in oil weights heavily on this index, but also precious metals such as gold and silver lost significant value. So what are the opportunities in the commodity market? The answer is El Niño.

El Niño is an irregular recurring climate event, where ocean water temperatures in the Pacific Ocean near South America get unusually high. The effects of El Niño are immense as water in Western South America contains less nutrients due to warmer water. Moreover, it causes drought in Asia and Australia. And finally it also causes extremely heavy nonseasonal rains in South America. All these effects have a negative impact on agriculture as harvests fail (or at least harvests are worse than usual). Brazil (~40% of worldwide production), India (~18%), Thailand (~5%), Mexico (~3%), Colombia (~2%) & Indonesia (~2%) are all among the largest global producers of sugarcanes and these countries are all heavily affected by El Niño. As The US National Weather Service stated that this year's El Niño is on its way to become the biggest El Niño ever recorded (since 1950), we may expect that harvests will be bad, cutting sugar supply and driving sugar prices up.

Another trend that makes sugar an interesting investment is the growing ethanol fuel production in Brazil, worlds largest sugarcane producer. Sugarcanes can be used in the process of creating ethanol fuel and recently more sugarcane grinding mills in Brazil start to prefer ethanol over the production of sugar. As a larger part of sugarcanes is processed into ethanol instead of sugar, supply of sugar will go down, increasing the price of sugar.

The sugar price has been going down since 2011, but there are signs that the bottom has been reached as sugar prices recovered a little in September 2015. The recovery is an indication that the bottom might be reached, yet sugar is still trading at half its value from 2011. For that reason, we think it is sensible to step into the market while entry is still cheap and future prices look bright.

In conclusion, the effects of El Niño worldwide and Brazilian trends in the ethanol industry makes sugar related investments especially attractive as we expect sugar prices to rise.

ABN AMRO; go or no-go?

Tomorrow is the big day for ABN AMRO. After the bail-out in October 2008, ABN AMRO is now going back to the market again in an IPO ranging between 17-19 Euro. Which makes us wonder: did ABN AMRO overcome their problems? If so, what issues might still arise? Is it time to buy the stock during their IPO?

First, we note that ABN generates most of its revenues in The Netherlands, a staggering 80%. It is worth noting that the Dutch financial markets experienced stagnation since 2008. Yet, there is light at the end of the tunnel as the Dutch financial market is expected to grow with 2.4% next year. Moreover, the company reported a quarterly net profit increase of 13%, amounting €509 million. Second, the IPO premium seems on the low side compared to one of its major competitors, ING Bank, which is currently trading at 15% of its book value, whereas ABN is expected to trade for a premium of 6% of its book value. It would not be surprising if ABN reached this premium too if we take the fundamentals into account. Third, ABN is generous when it comes to dividend. After its IPO, ABN is planning to pay 50% of net income as dividends (up from 40%).

Yet, not all that glitters is gold. ABN engaged in some dubious interest-swap activities, where clients did not receive the proper instructions and explanations concerning these financial products. Recently, the verdict by a court in The Netherlands resulted in ABN paying back the money lost on interest-swaps by one client, a total sum of €2 million. This verdict may cause other victims to also issue a claim against ABN and could result in a total claim of €2.5 billion as estimated by Pieter Lakeman, specialist in financial market claims, which is not even the worst case scenario. There are also some long-term threats to keep an eye on. Companies like Apple and Google are entering pay-transaction markets, which increases competition and may harm profits for ABN in the long run. The innovative nature of these companies could mean that they are able to emerge in this market fairly quick and establish themselves well in a relatively short amount of time.

Overall, we consider this stock reasonably defensive as growth opportunities are present, but limited. Looking at competitors it seems to be a valuable investment, especially if dividends are taken into account. If you are a value investor, this stock is a definite buy.

Africa; A Goldmine Collapsing

Major export product

Almost 7 years after the financial crisis the African stock markets are back at their crisis levels. Since July 2014 the value of the Dow Jones Africa Titans 50 Index, the index investing in the 50 largest African companies, has nearly halved. One might wonder whether now is the right time to jump into the African frontier market again. To answer that question we'll take a look at the fundamentals of the African markets.

The African continent contains the most raw materials in the world. It is therefore no surprise that African economies are strongly dependent on the mining and exporting of these materials. All African countries, except for a few, even have a commodity as their most important export product. Moreover, these countries' exports is badly diversified. For example, iron ore amounts to 40% of total export of Mauritania and more than 94% of total exports of Angola is oil. These export numbers are also an indication of the African problem. If commodity prices rise, the African economies will flourish, if the opposite occurs, African economies are in trouble. So what's troubling? Commodity prices have been declining recently. Gold prices keep on falling and recent rate hike probabilities by the FED are likely to push the gold prices down further. The oil price also remains sluggish between 40-60 dollar a barrel. Moreover, the International Energy Agency prognoses 80 dollars a barrel, but only in 2020, thus recovery of the oil price seems far away.

Falling commodity prices are not the only reason why the African malaise is not over yet; this is where China joins in. African economies expose themselves heavily to China. For example, Zimbabwe, Zambia and Congo export respectively 33%, 43% and 53% of their total export to China. The cooling down of the Chinese economy, and with it the falling Chinese demand for resources, raw materials and other commodities, is thus creating major problems for the African export.