7/31/2014

Mawer Second Quarter 2014 Investment Newsletter

The Q1 GDP data released in April seemed to indicate a stall in U.S. economic growth. Subsequent data revealed a much steeper economic contraction of 2.9%. Was this evidence that the U.S. economy was losing steam and requiring more aggressive intervention by the central bank? Or was this merely a statistical anomaly that was not indicative of the true state of the economy?

Based on additional economic data released during the quarter, it appears that the U.S. contraction in Q1 was indeed an anomaly, mostly attributed to the crippling winter weather that wreaked havoc on much of the country. Q2 data revealed that strong employment growth helped to push the unemployment rate to its lowest level since 2008, consumer confidence improved and the housing market continued to strengthen. Growth has clearly reaccelerated in Q2. The positive momentum in the U.S. economy is welcome news to Canada, as our export economy remains heavily reliant on American consumers. Rising export volumes in Canada have helped underscore the recent strength of the Canadian dollar relative to most major global currencies.

Elsewhere, the economic recovery in Europe appears more precarious as the region continues to struggle with stagnant growth and a banking system that has not fully addressed past indiscretions. But authorities remain vigilant in their efforts to stimulate growth, with sub-zero interest rates representing the latest attempt by the ECB to encourage lending and consumption. Japanese authorities remain equally committed to restoring growth in their economy, while China continues to unwind its credit bubble and transition to a more sustainable pace of growth.

Amidst this mixed macroeconomic backdrop, global equity markets marched higher this quarter, with the MSCI World Index (C$) rising 1.2%. This marks the eighth consecutive quarter that global equities have risen, a period in which cumulative returns have exceeded 50%. Chart A outlines the quarterly performance, expressed in Canadian dollars, of some of the notable equity indices around the world.

The stellar performance in Canadian equities is visually obvious, with both the S&P/TSX Composite Index and BMO Small Cap Index noticeably outpacing their global peers. This can largely be attributed to the strong performance of Canada's influential energy sector, as the energy sub-sector in the S&P/TSX Composite Index gained 10.5% this quarter while its small-cap peer rose 15.2%. Violence and turmoil in oil-producing nations such as Iraq, Libya, and Russia have led to concerns about ongoing oil supplies, prompting a rise in oil prices and a rally in energy companies. Companies mining for gold and other precious metals also delivered solid returns this quarter, a reversal from the steep losses many endured during 2013.

While the gap between Canadian equity returns and those from other major regions can be partly attributed to the strong results from the resource sectors, another significant factor this quarter was the strength in the Canadian dollar. Chart B illustrates the appreciation in the Canadian dollar relative to some of the major world currencies.

This currency effect erased much of the equity returns generated outside of Canada and exacerbated the gap between Canadian equity results and those of its global counterparts. For example, the S&P 500 Index gained 5.2% in U.S. dollars, but after accounting for the strong appreciation of the Canadian dollar, the return in Canadian dollars was reduced to just 1.6% as noted in Chart A.

Meanwhile, after the FTSE TMX Canada Universe Bond Index gained 2.8% in Q1, it delivered another 2% this quarter.

Fixed income markets in the U.S. have experienced comparable returns. These results have taken some economists and investors by surprise. The general consensus is that bond yields in recent years have been artificially suppressed by the intervention of central banks, such as the ongoing bond-buying program conducted by the U.S. Federal Reserve. When the Fed announced last year that they would gradually scale back this intervention, the belief was that bond yields would rise and bond investors would suffer. While this did occur to some extent in the latter part of 2013, so far in 2014, bonds have experienced a healthy rally despite the waning presence of the Fed.

To understand why this is occurring, it is helpful to recall that a bond is simply a loan to a company or government, and its yield is simply the return that an investor demands on that loan. Naturally, a bond investor wants to be compensated for the risks they take with any bond they purchase. And since inflation is arguably the biggest risk for a bond investor, a premium for inflation is typically demanded.

How does this relate to the low level of yields? From a traditional viewpoint, the low level of yields implies that inflation expectations are low. Yet this flies in the face of what many believe is an economic recovery in North America; if the economy is truly recovering, then inflation expectations should be higher—as should yields, all things being equal. So is the economy actually recovering and yields are wrong? Or are bond investors just not seeing inflation in North America? Is there something else going on?

One possibility is that investors are demanding a lower real rate of return on bonds, which is the portion of return an investor demands after the risks of inflation over time have been subtracted. It is possible that investors do have inflation expectations but are, for whatever reason, willing to accept a lower overall real rate than they have in the recent past.

There is another possible explanation for low yields. It could simply be a case of structure in the fixed income market and the current state of supply and demand. In general, the net new issuance of fixed income securities by governments has decreased as fiscal deficits have improved following the financial crisis. Typically, if there are fewer securities to buy, the price of those securities will rise to reflect that scarcity.

From a demand standpoint, there are market participants that appear to be stepping to the forefront to replace the waning demand of the Federal Reserve. These participants include pension funds and insurance companies, who must match long-term liabilities with long duration assets, as well as certain institutional investors, who may also have strict guidelines to maintain a minimum allocation to fixed income. Many participants may not have the luxury to wait for more attractive yields. With a declining supply of new issuance and a steady demand from numerous categories of investors, the real rate of return demanded may simply be lower than what it has been in recent decades.

In Canada, the supply and demand dynamics noted above contributed to the bond rally, as did a robust credit environment. Provincial bonds were especially rewarding this quarter as noted in Chart C below:

How Did We Do?

Mawer's relative performance this quarter was mixed. In some asset classes we trailed the performance of our respective benchmarks, whereas in other asset classes we outperformed. Overall, we had positive contributions from fixed income and equities, helping our Balanced Fund to deliver a quarterly return (net of fees) of 2.1%. The year-to-date gains in our Balanced Fund now stand at a healthy 6.5%. Chart D on the following page highlights the quarterly performance (net of fees) of various Mawer funds relative to their benchmarks.

The International Equity Fund returned 2% this quarter, exceeding the MSCI EAFE Index (C$) return of 0.4%. Our emphasis on European companies and underweight exposure to Japan proved to be unfavourable as Japanese equities noticeably outperformed European equities. Having less than 2% of the Fund invested in the energy sector was also detrimental as this was the strongest performing sector within the MSCI EAFE Index (C$). Fortunately, we overcame this positioning with strong security selection. For example, the Japanese companies we own had an average return of over 18% this quarter, compared to the 2.9% gain within the Japanese component of the MSCI EAFE Index (C$). Nihon Kohden, the largest Japanese medical equipment provider, led the way with a quarterly return of approximately 21%. Security selection was also particularly strong within the consumer discretionary sector. Multiplus, a Brazilian consumer loyalty program operator, gained approximately 46% and helped carry the average return within this sector to over 10%, noticeably greater than the 0.3% decline among consumer discretionary companies in the MSCI EAFE Index (C$).

While the International Equity Fund outperformed its benchmark by 1.6%, our U.S. Equity Fund lagged the S&P 500 Index (C$) by the same margin. Energy represented the strongest sector within the S&P 500 Index (C$) with gains of over 8% this quarter, while financials were the weakest sector with losses greater than 1%. The U.S. Equity Fund's underweight in energy and overweight in financials contributed to a lag in performance. Security selection among a number of sectors also detracted from performance, particularly within the technology sector where Oracle, IBM, and Visa all posted losses greater than 4%.

The Global Equity Fund lagged its benchmark by approximately 1% this quarter. The same factors noted above – an underweight position in Japan, an underweight position in the energy sector, and security selection, particularly among U.S. equities – contributed to this slight underperformance.

The Global Small Cap Fund earned 1% this quarter while its benchmark, the Russell Global Small Cap Index (C$), shed 0.2%. This outperformance was almost entirely attributed to security selection. Performance in the financials sector was particularly strong with our selections earning over 4% while the financials within the Russell Global Small Cap Index (C$) lost approximately 0.7%. Some of our real estate companies and mortgage lenders also performed well. For example, Alony Hetz Properties, an Israel-based real estate holding company, gained approximately 11% this quarter and Eurocommercial Properties, a Netherlands- based commercial property manager focusing on markets in Italy, France, and Sweden, added approximately 8%.

Energy represents nearly 27% of the S&P/TSX Composite Index and rising oil prices helped the sector surge over 10% this quarter to carry the overall benchmark to a 6.4% gain. Although the energy investments within the Canadian Equity Fund gained approximately 13%, our allocation to the sector was approximately 15%, noticeably lower than the 27% allocation within the benchmark. This proved to be the primary drag on relative performance. Weakness in the telecommunications sector, particularly a loss of approximately 5% in Rogers Communications (TSX:RCI.B), also contributed to the relative underperformance. Overall, the Canadian Equity Fund gained 5.3% compared to the 6.4% rise in the S&P/TSX Composite Index.

The New Canada Fund trailed its benchmark by 1.7% this quarter. This was almost entirely attributed to security selection within the materials sector, as our companies in this sector declined by approximately 6% while those in the index gained 8.5%. This wide divergence is attributed to the fact that our companies in the materials sector operate in industries such as packaging (Winpak and Intertape Polymer) and treated wood products (Stella Jones) whereas performance was driven primarily by the gold and precious metals sub-sector that surged over 14%. While there are times when this lack of gold mining exposure has hampered our relative performance in Canadian small caps, some of our historical added value in this asset class can be attributed to emphasizing higher quality businesses outside of the mining sector.

Finally, in fixed income, our Bond Fund gained 1.8% compared to the 2.0% gain in the FTSE TMX Canada Universe Bond Index. Given the relatively strong performance from longer-duration bonds this quarter, our decision to target a lower duration than the index was the most significant factor to our relative performance. Security selection within the Federal sector was beneficial whereas the overall sector allocation and security selection within the Provincial and Corporate sectors modestly detracted from returns.

ETFs and Liquidity Risk

Despite signs of investor complacency, we see no shortage of potential risks lurking on the horizon. Such risks include the threat of rising interest rates, waning growth, excessive asset valuations, and the potential for current geo-political conflicts to draw in other nations and escalate into full-fledged wars. Many of these risks have been discussed in past quarters. Another risk that has emerged on our radar pertains to Exchange Traded Funds (ETFs).

The first ETF was launched in the U.S. in 1993. The premise was quite straightforward—the ETF (named the S&P 500 Depository Receipt) would simply hold all 500 companies in the S&P 500 Index, at their respective weights. There would be no attempt to outperform the benchmark, only to match it. As such, there was no need to hire a team of professional money managers or incur significant research costs. Investors, with just a single purchase, would enjoy immediate exposure to the S&P 500 Index, at a lower cost than most professionally managed mutual funds. Their performance would mirror that of the underlying index — less the fees of course.

This inaugural ETF was appealing to some investors, particularly institutional investors. So ETF providers began to offer a wider array of products, dissecting the equity markets by size, sector, and country. By 2002, there were approximately 100 ETFs trading in the U.S., although the net amount of assets was relatively insignificant.

In recent years, the proliferation of ETFs has exploded. After equity markets were sufficiently dissected into every imaginable niche, ETF providers then expanded into fixed income products, commodities, and currencies. Some ETFs offer double or triple leverage to an underlying asset and allow one to go long or short virtually any segment of the market. Latest estimates suggest there are over 1,300 ETFs in the U.S. alone, and worldwide assets exceed $2 trillion.1

While many have debated the merits of ETFs relative to actively managed portfolios, this is not our purpose today. Instead, we simply note that ETFs have increasingly become a topic in our discussions on risk. We worry that as the size and complexity of the market has exploded, there is growing potential that an "ETF accident" could occur.

For example, when an investor buys $100,000 of an ETF, the ETF provider deploys this cash into securities that replicate its benchmark.

Remember, there is little or no opportunity for a portfolio manager to exercise discretion in this process. If the benchmark is the S&P 500, then those 500 securities are purchased. Likewise, when an investor sells, the ETF sells across those 500 securities. But what if a herd of investors decides to sell billions of dollars simultaneously? The sales commence, again, with little human supervision. In the case of a market like the S&P 500, there would likely be sufficient liquidity to execute these sales without much turmoil. But since ETFs have now carved financial markets into such tiny niches, sometimes enhanced with leverage, executing the sales in these narrow segments could prove difficult.

Imagine a scenario in which the Fed surprises the markets with a rate hike (after all, U.S. unemployment is at 6-year low). Maybe it's accompanied with language about further rate hikes. Fixed income investors conclude, en masse, that it's time to get out of bonds. A surge of selling ensues including leveraged ETFs that may be concentrated in a narrow segment of the fixed income market. But without warning, bond dealers show little interest or ability to purchase these securities. ETFs have created an illusion of liquidity when little exists. But the trade must take place in order to meet investor redemptions, even if it prompts bond prices to gap down considerably. A minor market surprise (e.g., rising interest rates) has suddenly been transformed into a market shock because of both the automated nature of ETFs, and their newfound market prominence.

Do we think that an "ETF accident" will definitely occur? Do we know when? Of course not. But the notion that the ETF market could exacerbate a liquidity crisis and lead to heightened volatility is a real risk in our view and worthy of close attention.

Portfolio Positioning

In light of a heightened liquidity risk due in part to the growing presence of ETFs, we have continued to build more liquidity within our portfolios. Having identified our Canadian and Global Small Cap asset classes as having the least liquid securities, we have modestly reduced our exposure to both asset classes this quarter. De-emphasizing small caps in favor of larger businesses has been a recurring theme for several quarters now.

We've highlighted valuation risk in previous quarters and this continues to persist. The aforementioned reduction in small caps helps address this risk, but we also remain very active within each asset class in repositioning capital from businesses that we believe are more fully valued towards those that are more reasonably priced. Some notable examples of businesses that we have trimmed this quarter based on valuation concerns include: Constellation Software, Nike, Smith & Nephew, and Aspen Insurance. Examples of companies that we believe warranted a higher weight due to more appealing valuations include: CI Financial, Intuit, Visa, and China Mobile.

Our emphasis on global equities relative to Canadian equities has added a significant amount of value in recent years, but this positioning worked to our detriment this quarter. Nonetheless, our belief that diversification outside of Canada aids tremendously in managing overall portfolio risk has not changed. To that end, we also shifted a modest amount of capital from Canadian equities to U.S. equities this quarter.

We encourage investors not to become complacent regarding their asset allocation strategy. For our discretionary clients, we have been disciplined throughout this multi-year equity rally by rebalancing portfolios to maintain an allocation to cash equivalents, bonds, and equities that we feel is prudent.

In the absence of disciplined rebalancing, the relative outperformance in equities will have caused equity weights to rise considerably, and potentially to levels that are no longer congruent with investor risk tolerance levels. Now is an opportune time to measure your current asset mix relative to your longer-term objectives and rebalance if needed.

Mawer Investment Management

Total Net Returns

For periods ending June 30, 2014†

3-Mo

YTD

1-Yr

2-Yr

3-Yr

4-Yr

5-Yr

10-Yr

Equity Funds

Mawer International Equity Fund

2.0

7.0

23.4

21.7

12.1

14.9

12.5

7.6

MSCI EAFE Index (Net)

0.4

5.0

24.8

23.8

11.7

13.3

9.9

4.5

Mawer U.S. Equity Fund

0.0

4.1

22.8

25.1

19.5

18.3

14.3

4.6

S&P 500 Index

1.6

7.5

26.6

25.5

20.6

20.2

16.8

5.4

Mawer Global Equity Fund

0.2

5.9

25.3

24.3

16.8

18.7

-

-

MSCI World Index (Net)

1.2

6.4

25.3

24.0

15.5

16.3

13.0

4.8

Mawer Global Small Cap Fund

1.0

8.7

40.6

35.3

24.1

26.4

23.3

-

Russell Global Small Cap Index (Gross)

-0.2

6.2

25.3

24.2

13.3

15.4

14.4

7.0

Mawer Canadian Equity Fund (Trades, Portfolio)

5.3

11.2

29.4

23.7

13.9

17.0

15.7

11.1

S&P/TSX Composite Index

6.4

12.9

28.7

17.8

7.6

10.8

11.0

8.8

Mawer New Canada Fund (Trades, Portfolio)

6.8

15.6

51.9

39.9

25.2

26.0

27.1

15.7

BMO Small Cap Index (Blended, Weighted)

8.5

18.2

36.2

17.8

5.3

11.3

16.3

8.5

Balanced Funds

Mawer Global Balanced Fund*

-

-

-

-

-

-

-

-

Internal Global Balanced Benchmark**

1.4

5.6

16.7

14.9

11.1

11.5

9.7

5.1

Mawer Balanced Fund

2.1

6.5

19.6

17.1

12.2

13.3

12.1

8.1

Internal Balanced Benchmark ***

2.6

7.3

18.1

13.9

9.7

10.5

9.6

6.6

Mawer Tax Effective Balanced Fund

2.1

6.6

19.7

17.2

12.1

13.2

12.1

7.9

Internal Tax Effective Balanced Benchmark***

2.6

7.3

18.1

13.9

9.6

10.3

9.5

6.5

Income Funds

Mawer Canadian Bond Fund

1.8

4.6

4.7

1.9

4.2

4.2

4.5

4.7

FTSE TMX Canada Universe Bond Index

2.0

4.8

5.3

2.6

4.8

4.8

5.2

5.6

Mawer Canadian Money Market Fund

0.1

0.2

0.4

0.4

0.3

0.3

0.3

1.2

FTSE TMX 91 Day T-Bill Index

0.2

0.4

1.0

1.0

1.0

1.0

0.8

2.0

†Mawer Fund returns are calculated after management fees and operating expenses have been deducted. In comparison, Index returns do not incur management fees or operating expenses.

*Due to regulatory restrictions, we are unable to report performance of the Fund during its first year. The Mawer Global Balanced Fund was launched July 2, 2013.

**5% FTSE TMX 91 Day T-Bills Index, 35% FTSE TMX Canada Universe Bond Index, 60% MSCI World Index (Net)

***5% FTSE TMX 91 Day T-Bills Index, 35% FTSE TMX Canada Universe Bond Index, 15% S&P/TSX Composite Index, 15% S&P 500 Index, 15% MSCI EAFE Index (Net), 7.5% BMO Small Cap Index (Blended, Weighted) and 7.5% Russell Global Small Cap Index (Gross)

Mutual funds are not guaranteed, their values change frequently, and past performance is not indicative of future performance. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. (Money market fund: Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per share at a constant amount or that the full amount of your investment in the fund will be returned to you.) Please read the prospectus before investing.

Performance returns for the Mawer Mutual Funds are calculated by Mawer Investment Management Ltd. These returns are historical simple returns for the 3 month, YTD and 1 year periods, and annualized compounded total returns for periods after 1 year. They include changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.

Also check out: Mawer New Canada Fund Undervalued Stocks Mawer New Canada Fund Top Growth Companies Mawer New Canada Fund High Yield stocks, and Stocks that Mawer New Canada Fund keeps buying
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Advisors: Don’t Sell Your Practice!

Selling your advisory practice — a move stressed in a ceaseless torrent of industry advice — may be hazardous to your wealth.

Broker-dealers, roll-up firms and others who benefit from keeping or acquiring managed assets usually frame the necessity of succession planning in terms of the risk that clients won’t commit to a firm whose principal is aging.

Therefore, the reasoning goes, advisors ought to sell for the good of the clients and to cash out their equity.

A new white paper and advisor survey by CLS Investments, an ETF-based third-party money manager, has a different take altogether on advisor succession planning, arguing that advisors lose out financially through an outright sale of the business.

As a third-party money manager, CLS’ interests are perhaps at odds with roll-up firms, as it stands to lose business, potentially at least, from an acquiring advisor who might have different plans for investing client assets.

But advisors should consider its case for advisors not selling their practices, together with other interesting findings in its survey of 117 of its affiliated advisors.

The CLS survey found that 41% of advisors expected the sale of their practice to fund 25% to 50% of their retirement, with another 14% expecting such a sale to fund 50% to 100% of their retirement.

Thus, a majority (55%) of advisors expect the sale of their business to fund a significant portion of their retirement.

Given that the two largest segments of advisors surveyed expect to need between $750,000 and $1.5 million (27.7% of respondents) or between $1.5 million and $3 million (also 27.7% of respondents) to retire comfortably, do succession sales make economic sense?

Not according to CLS, which says that current industry norms value advisory business at from 2 to 5 times free cash flow, which is typically 20% of annual revenues.

So for $400,000 business — slightly higher than the average veteran advisor, CLS says — free cash flow would be $80,000. Using an optimistic multiple of 5, the advisor should get $400,000, equal to the annual revenue for his business.

While that seems like a decent payout to advisors, the whitepaper cautions that earnout provisions typically spread payments over a number of years (after a typical 40% down payment).

So the advisor would receive a $160,000 lump sum, followed by five years of $48,000 payments under these somewhat optimistic assumptions, which pales in comparison to an advisor’s salary, which is typically 40% of revenue ($160,000 a year in the hypothetical business discussed here). And after the sale is completed in five years, the advisor has no asset left.

Aside from the faulty deal logic, the CLS survey highlights another strong reason to resist traditional succession planning: advisors like what they do.

A bare majority (50.5%) of respondents don’t want to retire till age 71, if ever.

So not only is the sale of their business inadequate to fund their retirement, but it would deprive them of a personal and professional role they’ve invested their careers in.

The report approvingly quotes Michael Kitces saying “financial planning is a classic example of a profession that is not exactly a physically intensive business, and as long as the mind is able and the body allows for meetings with clients, planners can continue to work.”

To that end, the CLS white paper, through case studies of its affiliated advisors, seeks to “reframe” succession planning away from an outright sale of the business and toward keeping advisors happily involved in a growing business.

One such case study concerns Robert Harrell, an RIA now in his 70s, who followed a classic approach to continuity planning by bringing in his son Will, who, now serving as senior vice president, handles many of the firm’s day-to-day responsibilities.

That not only allows his father’s active role in the business, but avoids a rash of potential problems that could occur with an outright sale, such an exit date that coincides with a severe market downturn.

As Harrell, quoted in the report, puts it:

“There are so many variables that you can’t control, such as if the market corrects, and your valuation is dependent on the asset base in your firm; you could leave yourself exposed to not being able to fund your retirement.”

Harrell also cautions against waiting too long to plan succession, thus exposing one to the risk that younger staff with their own ambitions “may grow antsy and want to leave, perhaps taking clients with them.”

Throughout the white paper, CLS emphasizes the role a third-party money manager can play in assisting advisors with succession — one primary example of which is simply handling the management of client assets so that advisors can focus on client acquisition and retention.

That approach is illustrated in the case of its affiliated advisor David Van Rask, who credits “outsourcing the investment management component to CLS and a couple of other managed account platforms” as a key part of his strategy to build up the equity in his financial planning firm.

Like Harrell, but in reverse, Van Rask has sought to capture the value of the firm through family, having worked side by side with his father, who founded the firm, gaining the trust of established clients.

Looking toward the firm’s future, Van Rask has brought on a junior advisor — and far from contemplating a sale of his business, Van Rask is looking to buy, networking with older advisors to explore M&A opportunities.

The CLS white paper suggests numerous other ways for advisors to avoid becoming a “hostage to attrition” that is par for the course of aging advisors presiding over assets dwindling as their own aging clients withdraw money, die, transfer wealth to heirs or because advisors themselves fail to reinvest in their businesses.

These include buy-sell agreements with other advisors, partnering or merging with other firms, building up the capabilities of staff, but especially employing junior advisors.

CLS cites research by FA Insight that firms employing junior advisors report 44% greater income and 15% asset growth compared with firms not hiring them.

That approach is exemplified by Larkspur Financial Advisors, one of whose principals, Rick Arellano, is 81 and still actively involved in the business.

“What if I live to be 100 or more? I really like my lifestyle and don’t particularly want to change it. As long as my mind is still strong, I want to continue working with my clients,” says Arellano, who relies on staff for day-to-day operations, maintains a home office and continues to work on his terms and timetable.

His partner Ron Murphy, though only in his 60s, can similarly enjoy a greater than ordinary degree of flexibility, having developed the capabilities of his staff and invested in technology.

Murphy will bringing on a new advisor from a large wirehouse and will start to cut back, focusing mainly on “A clients.” He credits his ability to do so on the investment his firm has made in staff and infrastructure.

Dave Huber, whose Huber Financial is another case study in the paper, integrated both family and junior advisor approaches to succession, having once made the mistake of selling to an aggregator. When the firm experienced difficulty, he bought back its stock.

By hiring his son, 28, and a junior advisor, 42, the 57-year-old has signaled to clients that their firm is in it for the long haul.

“It is definitely a competitive advantage to be able to show to new clients that you have stability and a strategic plan to continue the firm, particularly as many advisors don’t,” he is quoted as saying.

With those personnel assets in place, Huber now takes long vacations “without having to talk to the office at all.”

The bottom line may be that the best time for an advisor to sell his business is…never.

CLS Investments CEO Todd Clark, in an e-mail exchange with ThinkAdvisor, affirms this possibility.

“Even though the advisor may have passed on, the culture of the firm can live on,” says Clarke. “This culture can continue to provide value to the clients and ensure their financial success for generations to come.”

7/29/2014

Australia’s Rising Exposure to Emerging Asia

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Our interest in Australia is not only driven by the country's abundance of natural resources, but also by its proximity to fast-growing Asian emerging markets.

And a new report from HSBC forecasts that Asian markets will absorb roughly 80 percent of Australia's exports by 2020, an increase of about 7 percentage points from current levels.

Trade ties between Australia and Asia have been on a dramatic rise since 2000, when Asian demand accounted for a still substantial though far lower 50 percent of Australian exports.

In 2013, developing Asia was the destination for USD126.6 billion in Australian exports, or 48.6 percent of the country's total exports. Naturally, China is Australia's largest trading partner by far, accounting for USD91.6 billion, or 35.2 percent of the country's total exports last year.

Meanwhile, slow-growing Japan came in second, consuming nearly USD51 billion in Australian exports, or 19.6 percent of the total.

Together, China and Japan are projected to absorb 60 percent of Australia's exports by 2020, an increase of 5.2 percentage points from 2013.

South Korea rounds out the top three, with USD20.8 billion in Australian exports, or almost 8 percent of the total.

In addition to the three aforementioned countries, HSBC believes that India and Indonesia, which currently absorb just 4.3 percent and 1.9 percent of Australian exports, respectively, could figure more prominently among the country's export destinations.

Though these two countries are largely self-sufficient on the resource front at present, their continued growth could eventually prompt demand for imported commodities. After all, the same economic evolution occurred in China, where prior to 2004 demand for commodities was largely satisfied by domestic resources.

But even with Australia's already strong penetration of Asia's largest export markets, HSBC says the region's! burgeoning middle class will spur incremental gains, thanks to rising demand for high-quality food, as well as education and leisure opportunities.

Of course, the resource sector will also continue to be a big beneficiary of Asian demand over the long term. HSBC projects iron ore exports will rise more than 50 percent by 2020, while liquefied natural gas (LNG) exports will more than quadruple from current levels as projects come on line.

The emerging Asian middle class is expected to increasingly demand the more protein-rich diet that becomes more affordable with higher incomes.

And Chinese consumers still harbor suspicions of the quality of domestic food products as a result of the country's melamine-tainted baby formula scandal. As such, many Chinese are willing to pay a premium for food products sourced from Australia, New Zealand and other developed-world countries in the region.

Then there are services, particularly in areas such as education and tourism, that are benefitting from the influx of Asian students and tourists. The number of Chinese tourists visiting Australia has doubled since 2010, for instance.

In the nearer term, Australian companies aren't simply waiting for demand to come to them. They're actively expanding their operations into Asia in pursuit of game-changing growth.

HSBC reported that its survey of small and medium-sized enterprises (SMEs) shows that 46 percent of these businesses plan to further grow their existing international operations over the next 12 months, with 49 percent identifying China as their top destination.

Of these firms, 32 percent operate in services industries, up from 8 percent a year ago.

According to Australia's Department of Foreign Affairs and Trade, the export of goods and services is projected to account for 21.9 percent of gross domestic product (GDP) in 2014, up 1.4 percentage points from last year.

So export activity is not just an investment theme, but a crucial component of the Austr! alian eco! nomy. And the country's success in this arena should flow through to other sectors of the economy.

7/26/2014

Affluent Investors Put Their Hobbies Into Their Portfolios

Many Americans have a hobby. If they are well off, they are likely to combine this activity with investing.

A study released last week by BMO Private Bank found that more than half of affluent Americans engaged in some form of hobby investing—sometimes called passion investing.

This involves adding collectible assets to an investment portfolio as both a means of diversification and a way to have and hold things investors love most.

BMO Private Bank found that wealthy Americans surveyed in the study were most passionate about investing in the following items:

“We’re finding that an increasing number of our clients are engaging in some form of hobby investing,” the bank’s chief investment officer, Jack Ablin, said in a statement.

“People who choose to invest in their hobbies often do so because it allows them to feel a sense of engagement without having to spend a lot of time on them. Many hobby investors are keen to create a legacy to pass on to their heirs — one that is unique to them and reflects their interests.”

BMO Private Bank said the study was the last in a series examining trends among high-net-worth Americans. It was based on an online survey conducted by Pollara in the spring of 2013 with a sample of 482 American adults who had at least $1 million in investable assets.

‘Fun,’ with a Caution

Sixty-two percent of respondents said they engaged in hobby investing simply because it was “fun,” while 54% said they did so to combine their interest with investing, and 40% wanted something unique to pass on to their heirs.

Thirty-nine percent considered such investments sound, and expected them to grow in value.

Vanity motivated others respondents, with 38% saying that their hobby investing allowed them to show off their investments to others.

Albin said that regardless of why people combined their hobbies with investing, investors at all income levels needed to be aware of certain cautionary factors, the same as with any form of investing.

Antiques, for example, can be very illiquid, he said. As such, they are not suitable for those who may need to convert them to cash in a short period of time.

Likewise wine and art. These are long-term propositions, so not appropriate for those with a short-term investing horizon.

According to Albin, a robust counterfeit market exists for stamps and coins. Investors in these collectibles need to be careful about the authenticity of their purchases and well educated about the risks.

As for comic book collecting, it is trendy today, Albin said, but the market may not be so strong in the long or even the medium term.

7/23/2014

Chuck Akre Comments on Colfax Corporation

Colfax Corporation ("Colfax") (NASDAQ: CFX)

Market Cap: $9.2 billion (as of 6/30/14)

Company overview:

Colfax (CFX) is a multi-platform industrial engineering and manufacturing company with a focus on two product areas: (1) gas & fluid handling, and (2) welding. The company was founded in 1995 by Steven and Mitchell Rales, best known as the founders of Danaher Corporation, and it has grown to its current size through a combination of acquisitions and organic growth. In 2012, Colfax completed the transformative acquisition of Charter International PLC, a UK-based industrial conglomerate many times its size, increasing revenues overnight from $700 million to $4 billion.

Akre Focus Fund Investment:

The Fund purchased its first shares of Colfax in July 2012 and continues to add opportunistically. Colfax is a core portfolio company for the Fund and as of June 2014 represents 10.4% of the portfolio.

Investment thesis:

We believe the heart and soul of Colfax is a set of operational and management tools known as the Colfax Business System (CBS) which stresses continuous improvement in all aspects of the business. Danaher fine-tuned the use of these tools, compounding shareholder capital at a 20%+ Compound Annual Growth Rate, (CAGR) since 1984 by acquiring underperforming businesses, improving revenue, margins and cash flow, and employing that cash flow to fund the next acquisition. Colfax has borrowed the Danaher playbook.

Colfax specializes in non-commoditized, niche industrial end- markets, in which they are the dominant competitor, selling highly technical, often mission-critical, products with significant aftermarket sales and service potential (>50% CFX revenue currently), with an attractive geographic footprint (>50% CFX revenue is in emerging markets, 80% non-US). All of Colfax's acquisitions are evaluated based on anticipated ROE which includes the expected benefits of the CBS.

This playbook forms the basis for the business and reinvestment legs of our "three-legged stool." The business leg is a combination of the CBS and the high-quality, highly efficient businesses Colfax owns. The "people" leg of the stool is comprised of the Rales brothers and the fact that the majority of Colfax's senior executives were formerly employed by Danaher, including CEO Steve Simms, CFO Scott Brannon, and EVP Strategy & M&A Dan Pryor.

The Investment Examples included herein have been selected based on objective, non-performance based selection criteria, solely to provide general examples of the research and investment processes of the Fund. The Investment Examples should not be construed as an indicator of the future performance. The information presented above should not be considered a recommendation to purchase or sell any particular security. There can be no assurance that any securities discussed herein will be a part of the Fund's portfolio or, if sold, will not be repurchased.

From Chuck Akre (Trades, Portfolio)'s 2014 Q2 Fund Pitchbook .

Also check out: Chuck Akre Undervalued Stocks Chuck Akre Top Growth Companies Chuck Akre High Yield stocks, and Stocks that Chuck Akre keeps buying
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7/20/2014

IRA Rollovers Face Scrutiny by ERISA Panel

The volume of retirement assets rolling out of defined contribution plans has gotten the Department of Labor’s ERISA Advisory Committee’s attention. 

IRAs, along with other investment vehicles that fall outside the jurisdiction of ERISA’s oversight, are growing more popular as boomers retire and move their retirement savings out of employer-sponsored plans. 

In response, the ERISA Advisory Council this week said it plans to examine some of “the factors leading participants to leave their assets in or move them out of a plan.” 

Its inquiry also will look into the habits of retirees moving out of defined benefit plans. IRAs often impose fees that are higher than those seen in 401(k) plans. 

The council’s notice suggests that the Department of Labor wants to know whether the existing regulatory structure governing employer-sponsored plans is affecting how retirement assets are rolled over. 

As part of its work, fees on assets, the range of investment options offered to enrollees, the ultimate extent of investors’ personal control, and the consequences of sponsors’ fiduciary obligations on investment decisions will all be explored, according to a statement from the Advisory Council. 

The council also wants to better understand how existing regulations affect asset movements when workers change jobs, and, ultimately, how the choice to liquidate employer-sponsored retirement plans is weighed by individuals.

Understanding when asset rollovers are in the best interest of individuals — and when they are not — will shed light on whether there are “positive steps that can be taken to further encourage individuals to stay in the system if it makes sense for them to do so,” the council said in its statement. 

The council said it will examine what employer are communicating to workers when they leave their jobs and “whether the quality of the participant’s decision-making can and should be enhanced by communication or other plan design features from the plan sponsor.”

“While the plan sponsors may (or may not) have an interest in keeping participants’ assets in the plan ...  they may be reluctant to provide meaningful communication to the departing participant out of concern for potential fiduciary liability,” it said.

According to Boston-based research firm Cerulli Associates, $324 billion was rolled into IRAs last year, an increase of 17 percent over the previous year and up about 60 percent over the past decade.

IRAs today hold $6.5 trillion, more than the $5.9 trillion in 401(k)-style accounts.

A recent Bloomberg investigation found that former employees at major companies such as Palo Alto, California-based Hewlett-Packard Co. and United Parcel Service Inc., as well as AT&T, have complained that sales representatives lured them into rolling over their 401(k) nest eggs into unsuitable IRA investments. The investigation was based on interviews with retirees and brokers, confidential arbitration records and other documents, Bloomberg said.

---

Related on ThinkAdvisor:

Can this British designer save Coach?

coach split Coach has hired Stuart Vevers to try to revive a brand that has been around since 1941. NEW YORK (CNNMoney) Stuart Vevers' job qualifies as stressful.

The British designer was hired last year to revive the Coach brand, a comeback that may be even harder to pull off than Martha Stewart's.

Coach (COH) stock is down almost 40% this year. The bad weather that kept many American shoppers out of stores this winter only exacerbated the company's problems. The brand is stale.

Known for its leather handbags, Coach doesn't have a clear identity anymore.

The company, founded in 1941, really hit its stride in the 1990s under the dynamic duo of CEO Lew Frankfort and head designer Reed Krakoff. They popularized the concept of "luxury for the masses."

They found the sweet spot in the retail market where customers wanted a bit of brand cache but at a cost that was a lot less than Prada (PRDSF) and Gucci had to offer.

Coach 1 year stock chart

The company went public in 2000 (as a spin-off of food company Sara Lee no less) and the stock rose steadily for a few years with the introduction of products like the "Hampton bag." Wall Street pushed for growth, and Coach responded by opening a lot of outlet stores, which diluted the luxury brand notion.

It also didn't help that competition increased from Michael Kors (KORS), Kate Spade (KATE)and Tory Burch, among others.

Coach's turnaround plan: Enter Vevers. The company is aiming for the higher-end consumer again now that Vevers is Executive Creative Director.

He has the track record. He was named Accessory Designer of the Year by the British Fashion Council several years ago and has worked at other brands trying to reinvent themselves -- such as Calvin Klein and Mulberry.

Thanks to Vevers, Coach held its first New York Fashion Week show earlier this year, garnering largely positive reviews.

But Wall Street is not convinced that the runway success will lead to higher sales just yet.

"Some of his designs will be in full-price stores in the fall. You're not going to see it in the outlet channel until probably 2015! , which is the majority of sales" says Evan Staples, a senior analyst at Nuveen Asset Management. He argues any turnaround will be a long time coming.

"Only if you're a very risky value investor would you be stepping in here," he says.

It's also not clear if this is even the right direction for Coach.

"Can Stuart Vevers put good product on the floor? I don't know," says Paul Lejuez, who covers retail stocks for Wells Fargo Securities. "The more important question is even if the product looks good, does it matter? Will people buy it?"

Coach is in the process of closing some stores. After the latest round, it will have about 250 full-price stores and 200 outlet stores in North America, Lejuez says. That makes it difficult to re-cast the brand as a more up-scale "luxury-lifestyle" brand when its discount stores are still everywhere.

Buying opportunity? Robert Drbul, an analyst who covers the retail sector for Nomura, is more bullish. He has a "buy" rating on the stock, which currently trades around $34, a big drop from 2012 when it traded around $75. Drbul has a target price of $45.

"The company has a track record of brand re-invention and a strong team," Drbul says. "Coach clearly remains committed to their dividend, so from the investor standpoint, they are paid to wait and hold their shares." Coach's dividend yields nearly 4%.

Drbul also points out that many luxury and pseudo-luxury brands are fighting for traction in Europe and Asia. Bringing on a British designer with many European ties could also give Coach an edge internationally.

But the biggest "buying opportunity" may be for consumers. Many retailers are increasing discounts as they try to clear inventory after a slow winter and spring. Coach is also motivated to make room on its shelves for Vevers' designs.

So even if you aren't interested in the stock, Coach's current predicament is a good chance to pick up a nice handbag or pair of shoes at a cheap price! .

7/19/2014

Forbes sold to Asian investors

forbes magazine sold The Forbes family sold a majority stake in its business media group but Steve Forbes will remain as chairman and editor in chief. NEW YORK (CNNMoney) Forbes, the iconic U.S. business publication that follows the rich and powerful, is being sold to a group of Asian investors.

Terms were not disclosed. But a source familiar with the deal said that it values the company at $475 million.

The Forbes family, which has owned the company since its founding in 1917, will continue to "retain a significant ownership stake."

The buyer is Hong Kong-based investor group Integrated Whale Media Investments. It's composed of international investors, including Singapore-based Wayne Hsieh, co-founder of a leading PC vendor.

Exiting from the company will be Elevation Partners, an investment group that has held a minority stake for the last eight years. Its investors include rock star Bono.

Steve Forbes, the third generation of his family to run the magazine after founder B.C. Forbes and longtime editor Malcolm Forbes, will remain as chairman and editor in chief. Mike Perlis, who in 2010 became the first person outside the Forbes family to run day-to-day operations, will remain as president and CEO.

Forbes Media announced it was looking for a buyer last November.

With a circulation of 931,558, Forbes is the No. 3 U.S. business publication, behind Time Inc.'s (TIME) Money magazine and Bloomberg Businessweek. It is particularly well known for its lists such as the world's richest people. Forbes Media also has an online presence in Forbes.com, and a majority stake in the Real Clear group of Web sites, such as Real Clear Politics.

Like other print media, the flagship magazine has been struggling with a shift of readers and advertisers to online sources. Ad revenue for 2013 was down 5%, while ad ! pages fell 10%, both worse than magazine industry average.

The industry changes have led to a number of sales and spin-offs of traditional print media recently.

Murdoch denied Time Warner   Murdoch denied Time Warner

Time Inc., the nation's largest magazine publisher, was spun off by media conglomerate Time Warner, (TWX) the owner of CNN and CNNMoney, earlier this year. News Corp. (NWSA), owner of The Wall Street Journal, was spun off from 21st Century Fox (FOXA) a year ago.

7/18/2014

Why the iPhone 6 Will Have a Sapphire Display

GT Advanced Technologies (GTAT) looks set to go into Apple's (AAPL) approaching iphone. The rumors on the web demonstrate that Apple will be incorporating sapphire into the iphone 6, and this is extraordinary news for GT investors as the company appears to be in concurrence with the Cupertino-based company to supply sapphire. As a result, it may be a decent thought to investigate GT Advanced Technologies and check the moves that it is making to benefit from increasing sapphire selection.

Sapphire's prospects look brilliant

With sapphire interest rising at a faster pace than supply, prices are liable to increase. To date, GT has gotten around $440 million of the $578 million of aggregate prepayments that are to be gotten from Apple. The company expects absolute prepayments will be useful enough for sapphire supplies generation at the Arizona plant, which is liable to help in excess of 80% of the revenue this year.

Advanced Sapphire Furnace customers are running at high use rates because of interest, and the company has sufficient ability to take care of this surge in demand. The new Asf165 engineering increases the bunch size by in excess of 40% and reduces creation cost. This new ASF stage will be accessible to new customers as well which are going for the LED and the industrial markets. The Asf165 design is relied upon to increase revenue in the second quarter.

The company has also made progress in the polysilicon market with considerable increase in supply and valuing. Spot poly prices surpassed $20 per kilogram shockingly since 2012 in the first quarter. It is normal that the prices will keep on riing and will touch the characteristic of $24 per kilogram before this year's over. GT is really certain of its strong position in polysilicon innovation.

The cutting edge Sdr1k reactor, which targets a significant change, yield and lower vitality consumption than the SDR 600, is currently accessible economically. Also, the company is stretching its Merrimack operation by including sapphire creation limit in Merrimack to so as to proceed with its R&d initiatives and give pilot generation ability to the LED business.

Apple is a huge catalyst

The tie-up of GT with Apple to supply sapphire displays the developing interest in ASF, Polysilicon, Hicz and DSS solutions that have been helping the company's development.

In my previous article on GT Advanced Technologies, I highlighted Apple's patent filings which showed that the company has figured out how to beat the problems of a sapphire display. I stated,

"The two real problems with using sapphire in smartphones are high cost and oil liking. Then again, on the off chance that you examine Apple's late patent filings, you will be persuaded that the Cupertino titan has solved these problems. Apple as of late protected a procedure which involves fusing a dainty sapphire cover sheet with spread glass. This means that Apple won't need to produce immaculate sapphire displays for the iphone 6, which will at last cut down the cost of sapphire displays.

Be that as it may, Apple isn't carried out cutting down the sapphire assembling cost. The company as of late recorded two more patents called "continuous sapphire development" and "hotness exchangers in sapphire processing" patents. These new techniques offer a more capable and cost-viable method for creating sapphire. Apple is likely using these inventions in their new sapphire plant in Arizona. The Arizona sapphire plant will now misuse and amass geothermal vitality which will be used to operate the furnaces. Thus, the plant will now have the capacity to create bigger amounts of sapphire because of the increased high temperature productivity. Moreover, this method will also lessen the measure of waste delivered.

Proceeding onward, Apple has also dealt with the oil liking issue. Last month, Apple recorded an "oleophobic covering on sapphire" patent. As the name suggests, oleophobic means oil-repellent, and this system is relied upon to help the company produce smudge-verification sapphire screens."

Apple's late Liquidmetal Patent is again a strong marker of the way that the company will use sapphire in the iphone 6. Apple is wanting to use Liquidmetal and sapphire to make the screen of the iphone 6, which will make its glass shatter-verification. Also, last month, Apple was allowed yet an alternate patent called "Methods and systems for indispensably trapping a glass insert in a metal bezel." This means that Apple can now flawlessly enclose sapphire inside of Liquidmetal bezels. Different patent filings plainly show that Apple wants to use sapphire in its approaching devices and this should profit GT Advanced Technologies in the long run.

Conclusion

The development prospects of GT Advanced Technologies look truly strong. Truth be told, through the following five years, its earnings are relied upon to develop at a CAGR of 48%, which means that it is a solid development stock. Considering the company's tie up with Apple and the positive trends in the sapphire business, GT Advanced Technologies looks set to scale new heights.

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7/17/2014

2 Reasons BHP Billiton Could Get a Higher Price for These Assets

BHP Billiton's (NYSE: BHP  ) Nickel West unit in Australia has been on investors' radar ever since the mining giant announced that it may spin off or divest its non-core assets, which also include its manganese and aluminum mining businesses. It is expected that Andrew Mackenzie, who took over the reins of the company last year, plans to make a final call on these businesses by the year-end. For Nickel West, BHP Billiton couldn't have asked for a better time. According to Citigroup's latest survey, the nickel market is set to fall into a big deficit next year.

Also, Sirius, an Australian mining company based in Western Australia has supposedly found a mine with high-grade nickel concentrates. The company is on the lookout for smelters for their ore supplies. It is believed that if BHP Billiton could ink a supply deal with Sirius, then a steady flow of high-quality ores could substantially reduce smelting costs, and as a result Nickel West could fetch a higher valuation.

Nickel's rally
It has been a remarkable year for nickel, thanks mainly to the export ban placed on mineral ores by Indonesia. Indonesia's ban on mineral ore exports has helped many base metals, including nickel, to bounce back following last year's pounding. Indeed, nickel, which was the worst performing base metal in 2013, has now climbed about 40% year to date in the backdrop of a strengthening global economy and falling supplies. A surge in nickel prices should help miners such as Vale (NYSE: VALE  ) and Norilsk Nickel (NASDAQOTH: NILSY  ) , as well as BHP Billiton, which is looking to offload its nickel assets.

Last Thursday, though, nickel futures slipped 1.4% at the London Metal Exchange amid speculation that Indonesia might change its policy stance on the export ban following the presidential election. Since Indonesia accounts for about 20% of the world's nickel-ore exports, lifting the ban could flood the market with the key raw material required to manufacture stainless steel.

Additionally, expectations that global nickel supplies were adequate to last all through the year also weighed on prices last week. In a previous article on nickel, I was also doubtful of nickel's continued rally. Back then, I cited Mike Dragostis, a senior market strategist at TD Securities, stating that nickel demand ex-China was weak while the global inventory level was adequate.

Any weakness in the nickel market would be bad news for BHP Billiton as it would have a negative impact on valuations. However, the company can take heart from two important factors that could help it fetch a higher price for Nickel West.

Faster-than-expected depletion due to export ban
Earlier this week, Citigroup forecasted that global nickel supplies could deplete this year at a faster-than-expected rate. As a result, the nickel market, which was forecasted to end in a surplus this year, is now expected to fall into a deficit, the report says. Moreover, the nickel market is slated to go through a huge deficit in 2015, according to Citigroup.

As I mentioned in an article back in May, Macquarie Bank forecasted that global nickel supplies would be reduced by 25% or 482,000 tons due to Indonesia's decision to ban mineral ore exports.

Morgan Stanley estimated that the ban would bring down the nickel surplus to 70,000 tons in 2014 from last year's 173,000 tons. The bank also forecasted that the nickel market would fall into a deficit of 60,000 tons in 2015.

In its previous forecast, Citigroup expected a surplus of 30,100 tons in 2014 and a deficit of 132,200 tons in 2015.

But the supply squeeze of nickel ore caused by Indonesia's export ban has substantially reduced China's imports. Indeed, according to Citigroup, China's nickel ore imports from Indonesia plunged 99% in May, year-on-year.

Citigroup now expects that the nickel market will fall into a deficit of 3,000 tons this year while the deficit will widen to 134,000 tons, next year. The bank now estimates average nickel prices will climb by 12% to $18,550 a ton.

Moreover, the ban on ore exports is likely to continue. According to Australia & New Zealand Banking Group Ltd, expectations that Indonesia may relax its export ban should business-friendly candidate Joko Widodo defeat his rival Prabowo Subianto, is misplaced as none of the candidates have given any indication on removing export ban.

A deal with Sirius could boost interest in Nickel West
Australian miner, Sirius Resources NL, has seen its stock skyrocket after it found a high-purity nickel mine in Western Australia two years ago. The production is expected to begin in 2016, and the company can provide up to 26,000 tons of nickel ore annually. Earlier on Monday, Sirius revealed that its high-grade Nova deposit could produce nickel at $2.09 per pound, which is way below today's market price of $8.79 per pound. Thus sourcing nickel concentrates from Sirius could substantially bolster a smelter's margins. Sirius is in late-stage talks with many major nickel smelters.

This high-quality mine is not far away from BHP Billiton's Nickel West assets. It is believed that BHP Billiton does not have a steady supply of high-quality feed for its smelting facility located at Kalgoorlie. Although, BHP Billiton has declined to comment over the matter, it is believed that should the miner enter in a deal with Sirius, it could generate more buying interests for Nickel West as steady source of high-quality concentrates would offer economies of scale.

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7/15/2014

Fresh Data Suggest Economy Firing on All Cylinders

Retail Sales Toby Talbot/AP WASHINGTON -- A gauge of U.S. consumer spending rose solidly in June, in the latest indication that the economy ended the second quarter on a stronger footing. That momentum appeared to have carried into the third quarter, with another report Tuesday showing factory activity in New York state expanded sharply in July. "This is not a fragile economy," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. "The consumer continues to play their part in moving the economy forward." Core sales, which strip out automobiles, gasoline, building materials and food services, increased 0.6 percent last month after rising an upwardly revised 0.2 percent in May, the Commerce Department said. Core sales, which correspond most closely with the consumer spending component of gross domestic product, were previously reported as being flat in May. Economists had expected them to rise 0.5 percent in June. The report added to signs of the economy's strengthening fundamentals, which could buoy optimism the recovery is on a self-sustaining path, after output contracted sharply in the first quarter. Federal Reserve Chair Janet Yellen told lawmakers the economy continued to improve, but noted that the recovery wasn't yet complete because of still-high unemployment. Yellen, however, cautioned the U.S. central bank could raise interest rates sooner and more rapidly than currently envisioned if the labor market continued to improve faster than anticipated by policymakers. Labor market conditions are firming, with the unemployment rate falling to a near six year-low of 6.1 percent in June and job growth exceeding 200,000 for a fifth straight month. Prices for U.S. Treasury debt fell on the economic data and Yellen's interest rate comments, while the dollar gained against a basket of currencies. U.S. stocks traded lower. June's gains and May's upward revision to core retail sales suggested a pickup in consumer spending in the second quarter after growing at its slowest pace in more than four years in the first quarter because of weak healthcare consumption. Forecasting firm Macroeconomic Advisers raised its second-quarter GDP growth forecast by three-tenths of a percentage point to a 3 percent annual pace. Goldman Sachs (GS) upped its estimate for the quarter by two-tenths to a 3.4 percent rate. Upbeat Outlook A surprise drop in receipts for automobiles, however, held overall retail sales to a 0.2 percent increase in June after advancing 0.5 percent the prior month. "Consumers will likely gain more confidence to spend as the job market improves and summer travel season hits full swing," said Randy Hopper, credit cards vice president at Navy Federal Credit Union in Vienna, Virginia. "We are optimistic that the second half of the year will deliver stronger sales growth." From employment to manufacturing, the economy appears to be firing on nearly all cylinders, with even housing regaining its footing after slumping in late 2013 following a run-up in mortgage rates. Growth estimates for the second quarter top a 3 percent annual rate. In another report, the New York Fed said its Empire State general business conditions index jumped to 25.60 this month, the highest since April 2010, from 19.28 in June. New orders edged up, while factory employment and shipments surged. There were also signs of inflation pressures, with measures of both prices received and paid by manufacturers rising in July. Overall retail sales in June were restrained by a 0.3 percent fall in receipts at auto dealerships. The decline is surprising given automakers reported a surge in motor vehicle sales in June. Auto sales had increased 0.8 percent in May. Excluding autos, sales grew 0.4 percent after rising by the same margin in May. There were increases in sales at non-store retailers, which include online sales, as sales at clothing retailers. Receipts at sporting goods shops rose as did those at electronics and appliances stores. But sales at building materials and garden equipment suppliers fell 1 percent. -. Most of us spend a ton of time researching our options when we first sign up for a plan or policy, then forget all about it and make monthly payments like a robot. But this can cost you.

LPL losing a top recruiter

LPL Financial is losing one of its leading recruiters, Joseph Line, in the wake of three other recruiters resigning in the past year and a half.

A 12-year veteran of LPL, Mr. Line told the firm last week he was resigning, according to two industry recruiters outside LPL.

Mr. Line recruits 40 to 60 advisers to LPL annually, with those advisers producing $10 million to $15 million in annual fees and commissions, known as an adviser's “trailing 12” in the industry, recruiters said.

Mr. Line's territories for LPL included Kentucky, Tennessee and Ohio.

One of the recruiters with knowledge of Mr. Line's departure, Jonathan Henschen, said, “If he can be a top recruiter in those territories compared to major metropolitan regions of the country, that is impressive indeed.”

The other recruiter aware of Mr. Line's resignation asked not to be identified.

Mr. Line did not return phone calls on Monday to comment. His LinkedIn profile lists his current job as senior vice president of business development for Wells Fargo Advisors. Wells Fargo has an independent broker-dealer network, FiNet. Mr. Line joined LPL in 2002 and remained until this month, according to the LinkedIn profile.

Asked to confirm Mr. Line's resignations, Sallie Larsen, managing director and chief human capital officer at LPL, wrote in an e-mail, “At times, some employees will be targeted by other firms seeking to strengthen their own talent. ... We understand that from time to time our people will choose other career paths and we always wish them the best.”

The departure of LPL recruiters has been ongoing since the end of 2012.

In January 2013, former LPL recruiter Daniel Schwamb joined rival broker-dealer NFP Advisor Services Group as senior vice president of business development.

Another LPL recruiter, Jeff Draper, left the firm in April and joined NFP in May. Contacted via e-mail, Mr. Draper, now vice president of business development with NFP, did not respond to a question asking why he had resigned from LPL.

The LPL recruiter for Maryland, Virginia and the District of Columbia, Michael Brown, confirmed to InvestmentNews he resigned two weeks ago. He declined to comment about his resignation.

The industry giant of recruiting, LPL has 30 to 40 professionals involved in recruiting. The largest independent broker-dealer with 13,600 registered reps and advisers, LPL's annual goal is to gain 400 to 500 net new advisers. After the company stopped its acquisition binge of broke! r-dealers in 2010 prior to its initial public offering, recruiting and not acquisitions has been the lifeblood of the firm.

That strategy shifted a bit last week when LPL said it had an agreement to buy the assets of an independent broker-dealer, Financial Telesis Inc. LPL has an exclusive right to recruit the firm's 470 registered reps.

7/14/2014

Are We Running Out of Oil?

For many years, a number of industry experts have been sounding the alarm that America, and the world, are about to run out of oil.

This is nothing new. In 1914, the Bureau of Mines said that U.S. oil reserves would be exhausted by 1924. The Interior Department said global reserves would last 13 years... and that was in 1939. In 1956, Shell Oil geoscientist Marion King Hubbert advanced his peak oil theory, which said that world oil production had peaked and would begin to decline until all of the oil was gone.

Every expert who's predicted "the end of oil" has been wrong in the past. But with global energy consumption at an all-time high, and much of the world's economy dependent on oil, the question needs to be asked:

Are we running out of oil?...

The Peak Oil Theory

Are We Running Out of Oil?Hubbert (shown at left), whose distinguished career also included stints as a senior research geophysicist for the United States Geological Survey and professorships at Stanford University and UC Berkeley, believed that oil production looked like a bell curve.

Just as the production from an individual oil well will peak and then decline, so, he theorized, would global oil production. He called his bell curve "peak oil" - global oil production had peaked in the 1950s, he stated, and would begin a slow, but inevitable, decline to zero.

Most readers of Oil & Energy Investor know that I don't subscribe to the peak oil position. Hubbert argued that we were running out of crude oil and would be moving to bicycles in short order.

Let me explain why I disagree.

Now don't get me wrong, oil is a diminishing commodity. It has taken millions of years to provide what we are taking out of the ground. Aside from the occasional algae or biofuel farm, you can't just grow an oil alternative in a matter of weeks.

Even if we could, current technology can't provide more than a fraction of what would be needed if oil disappeared.

Yet that "disappearance" isn't going to take place anytime even remotely soon.

Granted, 10 years ago I might have been more sympathetic to the Chicken Little ("The sky is falling") approach when it came to the amount of crude oil remaining. In those days, I did say (and wrote) that we had about enough oil to possibly last one more generation.

But what I saw as the real issue back then was not the amount of oil remaining, but the reliability of the supply. I foresaw unpredictable disruptions, spot shortages, and a lot of uncertainty in the market.

One factor changed all of that.

Technology Changes Everything

The new "800-pound gorilla in the room" has been the arrival of formerly unconventional oil supplies, such as tight and shale oil. We're now able to extract huge amounts of oil from shale formations, a technology the late Hubbert never saw coming.

That oil is seemingly almost everywhere. According to the U.S. Energy Information Administration (EIA), 86% of those "new oil" reserves are located someplace in the world other than North America.

That translates into a broader availability of oil than we could have possibly foreseen a decade ago.

The problem now, as I see it, is not an outright decline in supply. Today, the stumbling block is the ability to meet the current spurt in demand.

Once again, I'm not saying that demand will be outstripping supply. I'm not saying there's an imminent worldwide conflict over remaining resources.

Look, there's plenty of oil to go around. It's just that from now until the first quarter of 2015 (or thereabouts), the global market will have trouble maintaining a balance between the available oil and specific regional needs.

This is what I call a supply constriction.

In other words, there's enough oil, but it isn't always going to be where it's needed in a timely fashion.

The ability to move new oil from where it's produced now (North America, primarily) to where the demand is growing quickest (developing areas, especially Asia) will be difficult in the short term.

The United States, for example, recently started lifting the ban on crude oil exports, but ramping up exports will take some time. Canada, on the other hand, is eager to export more oil, especially to Asia, but it needs new major pipeline spurs to the Pacific coast before that can happen.

Meanwhile, global demand is accelerating much quicker than anticipated, racing past just about everybody's earlier estimates (including mine). In a somewhat rare show of consensus, OPEC, the International Energy Agency (IEA) in Paris, and the EIA are all projecting daily crude demand internationally at more than 91 million barrels a day by the end of this year.

That's the highest total on record, and 4.5% more than the end of last year.

However, I believe that figure is a temporary spike, and not a "new normal." That's because the spike will translate into some hefty price increases in certain regions of the world, a quick way to put the brakes on continuing increases in consumption.

Unfortunately, unlike past periods, such a play between supply and demand will not end in a nice, neat Economics 101 fashion. I predict that price swings will be more rapid. The result will be greater overall instability in supply availability and pricing among regions.

You and I, at least, can usually drive past a number of gas stations looking for the best price. Countries and regions, especially those desperate for oil, don't have that same flexibility. In many parts of the world, oil transportation - such as pipelines, seaports, and railways - constrains oil sources and supplies.

You see, it used to be that the old adage of price encouraging or discouraging additional production would be sufficient to provide market equilibrium. At one time, the market price level was equivalent to the actual relationship between how much oil was available and who was prepared to buy it at what price.

No more. With the advent of "paper" barrels (futures contracts) now outnumbering "wet" barrels (actual oozing oil for sale) by 10 or 20 times, market traders' expectations now determine the price. When those expectations meet regions that are being challenged to quickly find additional supply to meet growing demand, market volatility just increases.

What Really Affects Crude Oil Prices

In other words, speculators, not supply and demand, are driving crude oil prices (and ultimately the price you pay at the pump).

Having said that, it's important to understand that temporary supply constrictions can remain localized and still have a broader impact. They also only have to occur intermittently to create problems.

The market hates uncertainty.

This is the situation that's developing around the world. If you only look at annual, quarterly, or even monthly figures of supply and demand, global energy supplies and consumption may appear to be in sync. But in reality, the market is experiencing a considerable amount of instability.

Determining the genuine impact of oil constriction on investments is difficult. In fact, it poses the same difficulties as volatility indices do when looking at the stock or bond market in general.

For example, many investors just glance at the VIX, which is the index used to measure market volatility. If the VIX number is low, most investors would conclude that market volatility is under control.

But this simplistic measurement is inaccurate, sometimes wildly so, if volatility is occurring rapidly. You see, the VIX is based on a 30-day cycle. Wide, rapid fluctuations won't be "weighted" as they should, making the market, or in this case the oil supply and demand equation, look much more stable than it is.

Think of this as throwing pebbles into a calm pond. Throw one pebble at a time and it's easy to measure the resulting ripple and judge its impact. But throw a handful of pebbles into a pond at different intervals and assessing the actual size and vectors of the resulting ripples gets tricky.

Right now, supply constriction is the issue moving the oil market, not oil shortages. And that makes estimating the actual situation more difficult.

The world isn't running out of oil. But at any given moment some country or region is almost certainly facing spot shortages or price spikes.

But you don't have to swap your car or truck for a bicycle just yet.

More from Dr. Kent Moors: After more than four decades, America is getting back into the oil export business again. And the end of the U.S. oil export ban is going to be a windfall for these companies...