Q2 2016 Saw The Greatest Corporate Earnings Gains Of All Time

I believe instead that the real estate (and auto-buying) trough of today will just as likely become the bonanza of tomorrow….

How to Profit In an Over-Heated market?

In a market that has begun moving up from a decline all the way until that market reaches the point where, historically, it begins to tire (based upon length of time, an unusual event, black swan or valuation parameters like PE, PB and PS ratios) stocks and bonds of non-commodity producers make the most sense.

I remain 100% bullish on America long term. But there comes a time when secular bull markets pause for awhile or even lay down for a rest. I believe those advocating a fully-invested position 100% of the time might find themselves crushed when the old fella decides to get off his legs and roll over.

We have begun the process, in concert with the steps taken in the previous section, of also adding some hard assets now, in order to protect the wealth we've accumulated by owning stocks that rise with the market. When most people consider investing in hard assets, they typically think about silver or gold coins or bullion, physical real estate or mattresses with secret security pockets in them.

That's unnecessary. Today we have securitized hard assets so we can own tangibles like silver or land via common stocks, mutual funds, ETFs and REITs. (There will always be those who believe the government will confiscate everything not held in their own personal home, vault or apocalypse shelter. I won't try to disagree; we all have our tinfoil hat moments and they may be proven right. But if they are we have problems far more immense than owning a gold bar or two will solve!)

When I determine hard assets are appropriate, I look to buy stocks of or funds (open-, closed- and exchange-traded) comprised of companies in the agricultural, energy, basic materials, chemicals, metals and precious metals, and real estate sectors.

I apply the same rigorous standards to each of these that we would to buying any stock in any sector or industry. If they are too expensive we stay in cash. But I don't think they are too expensive right now. Even gold and silver, which have had quite a run, may have some companies that are cheap if history is our guide. For instance, Goldcorp (GG) is up only about a third as much as many of its peers. So what's the problem here?

The knock against Goldcorp is that they have grown by acquisition and, favoring North American reserves, they have often had to pay up to outbid other firms to add mines in what we consider relatively safe areas geopolitically. And because of planned-in-advance maintenance at one of their biggest properties, their 12-week earnings were lower than a year ago. Also, they cut their dividend at the beginning of the year.

I don't see any of these as deal-killers. Most gold miners don't pay any dividend so even the current paltry .05% yield is something. And I'd rather, personally, pay up for safety so Goldcorp's decision to avoid Ghana, Papua New Guinea, China, et al makes sense to me. Some 40% of GG's production comes from the US and Canada with another 30% from Mexico and only 30% from Argentina, Guatemala and the Dominican Republic.

The result is that Goldcorp has paid up for better quality, lower-operating-cost mines. Its all-in sustaining cost (AISC) to produce an ounce of gold is typically under $900, with the occasional outliers on either side. In the current environment, that translates to strong free cash flow. Since they also produce silver, zinc and lead as by-products of the gold-mining business, their actual cost is even lower.

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Disclosure: I am/we are long GG, GROW.


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