The message from Toronto and the direction of world markets
The G20 summit in Toronto just added to the confusion, says this U.S. advisory, which keeps a grip on its Canadian precious metals stocks.
They had a meeting in Toronto back on June 27.
Those who got past the TV images of burning police cars, smashed windows and marching demonstrators may have picked up some of the resolutions that came from the G20 summit.
But what really emerged from these meetings that we can get a grip on? Are the leaders really going to follow through on their resolutions — and will it do any good if they do?
One U.S. advisory paints an unflattering picture of the whole process. The global economic policies we see today are a case of “waxing the downhill skis.”
If we pay attention to what world governments are saying, we discover that they are going (or promising to go) in different directions. And like the signposts in Alice in Wonderland, it’s not clear that they lead anywhere.
In short, Review & Outlook warns its readers, get ready for even more uncertainty as we head into the second half of 2010, with no assurance that anyone is in control of the situation.
This advisory comes to us from a money management firm in Boston that also has offices in Montreal and Zurich. It studies world markets carefully and can be relied on for a thoughtful view of the big picture.
As we usually do with this advisory, we will begin by looking at its holdings in precious metals, which include two Canadian stocks.
Ample opportunities
In June, gold set new highs as it rose above US$1,250 an ounce on several occasions. Later of course, it has come down below $1,200 — today it’s at $1,178.
Depending on which policymakers one listened to at the G20, says the advisory, one could believe that gold might fall off to $1,000 an ounce — or rise to $2,000 in the next eighteen months.
“We remain convinced that a gold equity market is comprised of ample opportunities to literally sell at huge strength and buy weakness.”
Its largest gold holding, Newmont Mining (NYSE-NEM), underperformed for some time and then rose to the point that it was “certainly over bought.” It is down more than $2 so far today, at $56.71 and yields 0.7 per cent on its 40-cent dividend.
This advisory continues to like Canada’s IAMGOLD (TSX-IMG). This is a stock that “one can trade in order to capture some profits while waiting.” Trading just over $19 a month ago, the shares are now at $16.23 and yield 0.4 per cent on the modest $0.06 dividend.
It also continues to believe its favourite smaller producers “will grow substantially in the years to come.” Canada’s Orvana Minerals Corp. (TSX-ORV) trades at $1.35, about where it was last month. Australia’s Intrepid Mines (TSX/ASX-IAU) has risen slightly, to $0.49. Neither pays a dividend.
Very different messages
The editor of the advisory, Dr. Hans P. Black, returns to Toronto to take the pulse of the world’s economic bigwigs. The first half of 2010, he notes, ended on a decidedly negative note.
Most global stock indexes were sharply down for the year to date as we moved into July. Not just in North America and Europe, but also in Asia.
And what do global leaders propose in the midst of this uncertainty? “I was certainly struck, as undoubtedly others were, with the very different messages emanating from the recent G8 and G20 meetings.”
From Dr. Black’s vantage point, the organizers “relied heavily on economic data that was released months ago and paid very little attention to some of the recent and sudden changes.”
Phrases like “we’ve turned the corner” ring hollow in this analyst’s ears. Perhaps even more surprising was the European assertion that it was time for “some serious fiscal tightening.”
Wealthy European nations like Germany intend to tighten their belts in order to fund the shortfalls of defaulters like Greece, Spain and Portugal and calm the bond markets. A perfect prescription for deflation, says the analyst.
Spend, spend, spend
But why be consistent? While Europe talks tough, North American leaders like U.S. Treasury Secretary Timothy Geithner and Federal Reserve chair Ben Bernanke are basically saying, “Keep spending.”
The Obama administration, Dr. Black surmises, doesn’t want to repeat the errors of the 1930s by cutting back on stimulus too early.
Mixed messages? Europe says, save, save, save. America says, spend, spend, spend.
But the most puzzling case of all may be that of Japan.
More reliable husbands
Japan is a “special situation,” says the official communiqué of the G20. Indeed, it is. Its growth has been stunted for two decades.
Despite its attempt to ease the economy to health over the past two years, Japan appears to be weakening again. The new prime minister, Mr. Kan, is proposing German-style tax increases to deal with the debt.
Indeed, Dr. Black notes a remarkable attempt to induce the Japanese to pitch in and buy debt. “To this effect, very visible billboards in Tokyo are telling Japanese women that husbands who are owners of Japanese government bonds are somehow more reliable and trustworthy.”
World leaders clearly “fear insolvency for the third most important industrial economy in the world,” says the analyst. Prospects are grim in Japan, and it will have to rely on international capital markets to bail it out. There just aren’t enough “reliable husbands” to pay off the debt.
In conclusion, Dr. Black has this assessment of the situation for American investors.
“Growth for most countries, and indeed for many large companies, will be extremely muted and the decline in price earnings ratios is already a very good indication that many stocks, particularly large caps, will be headed lower.
“Dividend yields for many large companies will be driven up by necessity as it is the only way they will remain competitive given the uncertainties of the environment.”
We’re in for a messy second half of 2010, he says. And even if the G20 leaders could figure out which direction they wanted to take, it’s not likely they could clean up that mess in a hurry.
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