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Expand your investment portfolio with commodities

A wide variety of different investments in commodities can help you diversify a long-term investment portfolio and will increase your returns if you recognize the difference between speculation and investments. The allocation really depends on how you plan on investing in them.

Commodities sentiment

 

A barrel of oil, bar of gold, truckload of corn or soybeans , bag of coffee or even a head of cattle are examples of the physical staples that are at the heart of commodity markets. Other than these physical assets, everything else that trades is a derivative- an instrument with a price that reflects the value of the underlying hard asset, the commodity.

Base metal price performance

Physical commodities vs. futures

Physical commodity trading generally occurs between producers, traders and the ultimate consumers in most commodity markets. However, it is in the derivative markets where speculators, investors, arbitrageurs and other interested parties bring liquidity to these assets. Prices will fluctuate in the short term, so it is not easy to make fundamental forecasts of commodities prices for short-term trades. It is even more difficult for new commodity traders to do this.
We recommend that traders use a long-term strategy when using fundamental analysis to forecast commodity prices. Commodities typically move in long-term cycles of 10 years. A buy-and-hold approach typically works very well when they're in a long-term bull market.
The investor should look for trends that are developing that will cause a shift in supply and demand factors.

Crude oil: Non-OPEC supply will grow

The global oil surplus is beginning to shrink due to stronger-than-expected European and U.S. demand growth, as well as production declines in OPEC and non-OPEC countries, the International Energy Agency said. The U.S. has 26.5 billion barrels in reserve, 12th in the world and far, far behind Venezuela (211 billion), Canada (174 billion), Iran (151 billion), Iraq (143 billion) and Kuwait (104 billion). The remaining countries ahead of the U.S. include some cordial ones (the United Arab Emirates, 98 billion), some antagonistic ones (Russia, 60 billion) and some whose friendliness is tentative (Libya, 47 billion.)

OPEC has done a good job in complying with their production cut deal. This stronger compliance, along with growing geopolitical concerns has proved bullish for prices. Now with OPEC set to extend the deal through to the end of 2018, some would think that the recent supportive environment is set to remain. Non-OPEC supply is set to exceed demand growth over 2018, which will see the global markets in surplus. This also assumes OPEC stick to their cuts. The risk is that the longer the deal continues, the more likely we see some producers falling short of their commitments, which would only push the oil market further into surplus. OPEC will keep the cuts in place, and the market will probably tighten well below the five-year average before that is reflected in the data. This is why the bank sees Brent going above $80 per barrel in the next six months.

OECD production

Copper: Deficit environment to remain supportive for prices

The tighter copper market over 2017 was predominantly driven by mine disruptions at the two largest copper mines in the world over 1H17. But on the demand side, improving global manufacturing numbers has proved bullish for prices.
It is highly likely that the copper market to remain well supported, with the previous low price environment doing little to attract investment in the sector. It may be a deficit market in the region of 150kt over 2018.

Coal: Downward pressure longer term

Thermal coal prices are likely to remain well supported in 1Q18 with Northern Asia reaching peak heating demand for the winter. Chinese domestic coal prices continue to trade above government target levels, and so as a result of this we expect them to take action to increase domestic supply. The stronger price environment may also increase global supply in the long term, which should mean weaker prices.

Nickel demand

Reasons why commodity prices move

Most professional commodity traders like to know what the big picture is with commodities using fundamental analysis and then they use technical analysis to time their entries and exits. That is the essence of a techno-metal approach to the commodities markets. There are three main reasons why commodity prices move higher or lower. The first is the fundamental state of a commodity market. Fundamentals deal with the supply and demand characteristics. If current supplies and inventories exceed demand, a condition of oversupply or a market glut exists and that tends to drive prices lower.
On the other hand, if demand is greater than supplies and inventories a deficit condition or shortage exists which tends to push prices higher.

OECD production
The second reason that commodity prices move up or down is the technical condition of the market. Price charts often drive the behaviour of investors, traders, and other market participants. Since everyone looks at the same price charts, the reaction of a pattern often causes a herd of buying or selling which tends to influence prices.
Finally, the prices of commodities are sensitive to changes in the global macroeconomic landscape. Therefore, an event that is either economic, political or caused by nature could influence the prices of commodities.

OPEC revenues

How can you make money from bond investing

Investors have several options for growing wealth, and bonds are a popular opportunity for those who need to live off of their investment income. While most of the investors are attracted to stocks because of the earnings opportunities they offer, some of them prefer the safety of bonds.

There are no guarantees in the financial markets, but U.S. Treasuries are the bond market segment most likely to perform well when stocks are in a bear market. While stocks can experience huge volatility in a short period, for example the crash of 2001-2002 or the financial crisis of 2008 , a diversified bond portfolio is much less likely to suffer losses. A bond is a debt instrument issued by a company or entity in order to secure financing and raise money.

WALDNER BLOG 207 chart

Bonds, a reliable stream of income

Bonds typically make regular interest payments, and they are a good way to generate a reliable stream of income. When you buy bonds, you are agreeing to lend your issuer a certain amount of money for a certain period of time. In return, the issuer promises to make regular interest payments until the bond matures. The money that investors earn is called yield.

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 There are two ways to make money from bond investing:

1. Hold bonds until they mature. You will collect regular interest payments (typically twice a year)
2. Buy bonds at a price and then sell them for a price that's higher than what you initially paid

You could also buy bonds, hold them and collect interest payments for several years, and then sell them when their market value increases. If we hold our bonds till ‘maturity’ and the company or government doesn’t fail, we will get back what we put in, plus the interest rate promised.
Prices of bonds are prone to fluctuation. This is not an issue if investor plans on holding on to his capital investment bonds to maturity. In the event of investor selling his bonds before maturity, there are chances that he might have to sell them at a lower price than he had initially purchased them for. Therefore, we can sell our bonds early and the return we receive may not be exactly the same as the ‘coupon’ rate. How much we get back will depend on how desirable the bond’s interest rate is at the time we sell.

The most important types of bonds

In fact, there are several types of bonds you might choose to buy:

Corporate bonds are those issued by companies to raise money for things like capital improvements and research. The interest you receive from corporate bonds is taxable at both the state and federal level. Corporate bonds will also include a 'spread' over government bonds to reflect the greater risk involved in investing in a company. The company must rely on earnings and cash flow to repay the bond. This spread will highlight the riskiness of the corporation. For example, Apple is very highly rated, so the credit spread is low.

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Municipal bonds are those issued by cities, states, and other localities to finance public projects and increase public services. The interest you receive from municipal bonds is always tax-exempt at the federal level. Also, if you buy bonds issued by your home state, you can avoid state and local taxes as well.

Treasury bonds, or T-bonds, are those issued by the U.S. government to finance its budget deficits. The interest you receive from T-bonds is exempt from state and local taxes, but taxable at the federal level.
A rise in the price of a bond means a fall in the yield and vice versa.

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Six key factors that affect bonds prices

Higher interest rates

Coupons need to be higher to encourage people to lend. If investors can get, say, 5 per cent on their savings, they have less incentive to invest in a bond.

Inflation

The income becomes less valuable if inflation rises. This is because bonds pay a fixed income, which won't rise with inflation. When bond prices fall, yields rise.

inflation

Deflation

Bonds' fixed coupons become much more valuable in a time of falling prices.

Quantitative easing

The central bank is a price-insensitive buyer of higher-quality corporate and government bonds. This pushes up demand, so prices remain high and yields low. QE has the effect of creating more demand for certain types of bonds.

Credit ratings

In the opinion of the rating agency, the higher the credit rating, the more likely an issuer is to meet its payment obligations. If the issuer’s credit rating goes up, the price of its bonds will rise. If the rating goes down, it will drive their bond prices lower.

SG US corp credit yields attractive vs USTs

Recession

This is the best environment for bonds. A recession is usually accompanied by falling interest rates and potential deflation. Yields fall and prices rise.

How to buy bonds
Individual bonds are traded on bond markets. Bonds can be bought through an online service or a bank who offers this service. Managed fund providers also offer bond funds. These fund managers spread buyers’ money across a number of different bonds. A bond fund allows us diversify our money rather than putting it all into one single bond holding, so all our eggs are not in the same basket. Many financial institutions today will provide their clients with the service of transacting government securities. If your bank or broker doesn't provide this service, you can purchase government bonds directly through a government agency. In the U.S. you can buy bonds directly from the federal government through its service, TreasuryDirect.

 

 

Investing in Biotechnology: risk and rewards

 

Biotechnology is an exciting industry, the future of healthcare, where technology creates medicine tailored to individuals. Over the past decade, progress in biotechnology has accelerated rapidly. It ranks among the most attractive of all fast growing industries with an estimated annual growth rate of more than 10% p.a.
However, Investing in biotechnology faces many types of risks. Most of the biotech companies are generally small enterprises that engage solely in Reaserch&Development (R&D) of medicines. These companies use biotechnology to revitalize the function of cells for a specific purpose. The R&D process involves many clinical testing trials. In fact, neither the companies nor the investors, have any knowledge of the outcomes. The length of time from research and development is extremely long, averaging 10-15 years. In most cases, these companies can live or die based on that results.

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The volatility of biotech stocks
The decision to invest in pharmaceutical or biotech stocks is a confusing one unless you have an in-depth knowledge. Biotech stocks trade based on drug data including trial failures. The competition and regulatory obstacles are also important features. If the data misses its expected result, a biotech's stock can lose most of its value that day. On the other hand, if a drug meets its endpoint, a stock can soar by triple digits that day. An investment in a biotech company might suit your style if you are a risk taker and willing to wait for drug development while facing the potential volatility generally associated with biotech stocks.
While biotech companies engage solely in R&D of medicines, pharmaceutical companies engage in many activities from research and development (R&D) to manufacturing and marketing medicines. Biotech companies tend to find partners for financial support, usually through venture capital, universities, pharmaceutical companies or the government. For examples, researchers show recently that infection by Zika caused the death of cells from glioblastoma, the most common and aggressive kind of malignant brain tumor in adults. Scientists foresee the use of genetic engineering to neutralize Zika virus' infectious while preserving the viral particles which induce the death of tumoral cells. This discovery was made byresearchers at the University of Campinas's School of Pharmaceutical Sciences (FCF-UNICAMP) in São Paulo State, Brazil. One of the greatest achievements of our civilization is higher life expectancy. The United Nations estimates that the global population will rise by one-third between 2010 and 2050 to a total of 9.1 billion people. The proportion of people over 60 will rise from 760 million to 2 billion. Unfortunately, the population aging is associated with an increase in age-related diseases.

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Important deals in Biotechnology
There is also a higher demand for treatment of age-related neurodegenerative conditions such as Alzheimer’s disease. AbbVie, a research-based biopharmaceutical company, has announced a new drug research collaboration with Voyager Therapeutics, which will focus on the creation of new therapies for neurodegenerative diseases. This important deal consists of developing gene therapies for Alzheimer’s disease and includes a $69 million upfront payment to Voyager and more than $1 billion in potential milestone payments.
AbbVie is looking at ways to tackle Alzheimer’s beyond tau, one of the two main proteins implicated in Alzheimer’s. The firm already has an anti-tau antibody in Phase II clinical trial. Voyager will test encoding different versions of the antibodies into the DNA of an adeno-associated virus (AAV), a delivery vehicle used in many gene therapy trials to shuttle DNA into cells. In October, the firm invested $225 million in South San Francisco-based Alector, which is designing antibodies that modulate the activity of immune cells found in the brain called microglia. Tau is one of the most common Alzheimer’s drug targets, along with amyloid-β, a protein that clumps into plaques that clog up the spaces between brain cells. But no one has successfully developed a drug based on reducing the buildup of amyloid-β or tau.

Charles River Laboratories (NYSE: CRL), a contract research company that supports the development of a significant percentage of drugs that the FDA approves (70% in 2016, according to the company's website), announced the acquisition of MPI Research in February for around $800 million in cash.
The acquisition is expected to be accretive to non-GAAP EPS by about $0.25 this year and $0.60 in 2019. It is expected to be financed through an expansion of Charles River’s existing credit facility and cash.
The purchase price implies multiples of 11.7x non-GAAP EBITDA for 2017 and 10.5x non-GAAP EBITDA for 2018 based on estimated results for MPI including operational synergies. The transaction, expected to close early in Q2, is expected to add $170 to $190 million to Charles River’s 2018 consolidated revenue and $260 to $280 million to 2019 consolidated revenue. The company had 11,662 employees as of last fall, including 1,466 in Massachusetts. It is the ninth largest life sciences employer in the state

 

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