So Now What?

Sunday, October 31st, 2010

Schwab Market Perspective: So Now What?
Charles Schwab & Co. Inc.

Liz Ann Sonders
Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.,
Brad Sorensen
CFA, Director of Market and Sector Analysis, Schwab Center for Financial Research, and
Michelle Gibley
CFA, Senior Market Analyst, Schwab Center for Financial Research
October 29, 2010

Markets have been so focused on the potential for more Fed action and the outcome of the November 2 elections that the question becomes: What now? We believe we may start to see a shift in sentiment. During the past couple of months, stocks have rallied on somewhat weak economic data that was perceived as increasing the odds of another round of quantitative easing (the Fed injecting cash into the economy through the purchase of assets). Lately, the economic news has been at least marginally more positive.

Going forward, investors likely want to see fruit from any further Fed action and see more consistent improvement in economic data, especially jobs and housing. Similarly, markets were boosted heading into the elections on hopes that a new mix in Congress would lead to some tax and regulatory certainty—now it will be important to see that optimism fulfilled.

It will take some time to see the effects of these long-awaited events, and we believe some near-term consolidation in the stock markets is likely. We saw a hint of that following the very modest interest-rate increase out of China, but that was quickly reversed. As repeatedly noted, the market is a forward-looking mechanism, and we wouldn’t be surprised to see some “buy the rumor, sell the news” action.

Investor sentiment has gotten a little stretched on the optimistic side (a contrarian indicator) and some technical indicators have reached levels that indicate stocks are somewhat overbought.

We again remind you to use this potential volatility to adjust your asset allocations as needed. Stocks should be viewed as a long-term investment (three to five years or longer) and short-term gyrations should be viewed as opportunities to align your investments with that in mind.

Economy back in focus
After a brief respite to focus on third-quarter earnings reports, full attention likely now turns back to the broader economy. After a couple of months of cheering tepid data due to its perceived influence on the Fed, more traction is likely needed to continue recent momentum.

The first read on third quarter GDP was in-line with expectations at 2%, up from 1.7% in the second quarter. Industrial production surprisingly declined 0.2% in September, while capacity utilization remained unchanged at 74.7%—5.9% below its 1972-2009 average, indicating continued cautiousness in the corporate sector. Companies have vast amounts of cash on their balance sheets. Unfortunately, for now, that money is largely just sitting on balance sheets.

Money Needs to Move

Click to enlarge
Source: FactSet, the U.S. Bureau of Economic Analysis, and the Federal Reserve, as of October 25, 2010.
*M2 velocity = GDP divided by M2 money supply.

We believe that cash will be soon put to work. With more certainty likely following early November’s Fed meeting and elections, companies seem likely to look to deploy more of that capital.

Tags: Brazil, BRIC, BRICs, Canadian Market, Charles Schwab, Chief Investment Strategist, China, Consistent Improvement, Consternation, Earnings Season, Economic Data, Economic Expansion, Economic News, Global Growth Markets, India, Liz Ann, Market Analyst, Market Perspective, November 2, Protectionism, Rate Increase, Russia, Sector Analysis, Senior Vice President, Stock Markets, Upcoming Elections, Will Take Some Time
Posted in Brazil, Canadian Market, China, India, Markets, Outlook | Comments Off

Retirement Disaster Ahead?

Sunday, October 31st, 2010

Brett Arends of the WSJ reports, Warning: Retirement Disaster Ahead:

Don’t let the rally in the stock and bond markets fool you. Many Americans are still hurtling towards a retirement disaster. Few realize it. Even many of those running the big pension funds don’t know.

That’s the conclusion of John West and Rob Arnott at Research Affiliates, an investment management firm, in Newport Beach, Calif. In their latest report, “Hope Is Not A Strategy,” they have some numbers to back it up.

“I worry a lot about people reaching their golden years and discovering, ‘Oh, I should’ve saved more,’ and ‘Oh, I don’t qualify for Social Security any more because it’s means tested’,” says Mr. Arnott, a widely respected market strategist. “We’re headed for a retirement train wreck,” he adds, “and it’s going to get really ugly over the next 15 years.”

Alarmist? Perhaps. But follow the math.

The returns you will get from your stock funds can only come from four things, they note: Dividends, earnings growth, inflation and changes in valuation.

Right now the dividend yield on U.S. stocks is about 2.2%, they note. Historically, earnings have only grown by a surprisingly low 1% a year in real, inflation-adjusted terms. Mr. Arnott tells me the average since 1900 is only about 1.2%, and in the last half century just 0.6%. Will we get more in the future? With the U.S. population ageing and heavily in debt? It’s hard to imagine.

Throw in a 2% inflation forecast–more on this later–and Research Affiliates forecasts a long-term return of 5.2%.

What about changes in valuation? Some generations are lucky. They invest in the stock market when it’s depressed and shares are cheap in relation to earnings. This was the case in the 1930s and the 1970s. Then they retire and cash out when the market is booming and shares are expensive in relation to earnings–such as in the 1960s and 1990s.

People today are not so lucky. The stock market’s latest rally has lifted shares already to pretty high levels in relation to average cyclically-adjusted earnings. This so-called “Shiller PE” (named after Yale professor Robert Shiller, who popularized the notion) has been an excellent indicator of market value. Right now it’s at about 22–well above its historic average of 16. The only time the market has boomed from these levels, was in the late 1990s bubble–an atypical moment unlikely to be repeated any time soon.

Now look at bonds. Thanks to the recent boom, the picture for investors here looks even worse. And there is less room for ambiguity, because bond coupons and the repayment of principal are fixed.

Based on the yields of prices across all investment grade bonds, Mr. West and Mr. Arnott calculate likely long-term bond returns from here of about 2.5%.

So an investor with 60% of his portfolio in stocks and 40% in bonds, a standard, if conservative, allocation, can expect a weighted average return from here of only about 4.1%.

To put this in context, they notice that the typical big pension fund is still expecting to earn about 7% to 8% a year.

When you strip out 2% inflation, that means pension fund managers are expecting 5-6% percent a year in real, inflation-adjusted terms.

But by Mr. West and Mr. Arnott’s numbers, investors can only expect about 2.1%.

Gulp.

Here’s what this means for you.

Someone who saves $10,000 a year for 30 years and invests the money at 5.5% a year will end up with $760,000.

Someone who only manages to earn 2.5% on their investments: Just $420,000.

If you’re running a pension fund, this kind of shortfall leads to a funding gap that must be made up by the plan sponsor. For a private investor trying to build their own savings, it leads to a dismal retirement.

Is there any hope?

I asked Mr. Arnott about two possible sources of higher returns.

The first: Stock buybacks. Will they help? Many companies are trying to return more money to investors, on top of dividends, by buying back stock. In theory, at least, this ought to boost returns, because it reduces the number of shares, and therefore increases the value of those that remain. But Mr. Arnott cautions against relying on it. We don’t know how big these buybacks will be, and we don’t know if they’re sustainable, he says. Furthermore, the gains are usually offset by the issue of new stock and options to management. “Most buybacks are done to facilitate the exercise of management stock options,” he says.

The second possible source of better returns: Emerging markets.

Investors have been throwing money into emerging market funds recently like a hail mary pass–a last, desperate bid to snatch a decent retirement from the jaws of defeat.

But they may be substituting hope for reason. By Mr. Arnott’s math, even the most heroic calculations cannot plausibly predict that earnings growth in emerging markets will be more than a couple of percentage points faster than in developed countries. And there are plenty of people who argue it won’t be markedly higher, over time, at all. Why? Where economies grow more quickly, new capital flows in. Current investors find their returns diluted by new enterprises and new stockholders.

Meanwhile, look at the valuations. Stock markets in emerging economies have skyrocketed in the past two years. Hot markets like Brazil and India have nearly recovered their 2007 manic peaks. As a result, your dividend income is even worse than in the U.S. The yield on the Indian stock market is down to about 1%, according to FactSet. Brazil has dipped below 2% and China, 1.6%.

Bottom line? Neither pension funds nor private investors seem to have fully absorbed the grim lessons of the past decade. Returns are going to be much lower. People need to save more, much more, for their retirement. If the market rally this year has given them false hope, it will have turned out to be a curse more than a blessing.

I went over West and Arnott’s latest report, “Hope Is Not A Strategy,” and found it quite interesting. I urge you to read this report carefully, and pay particular to attention to this:

Many investors, keenly aware that returns will be lower than the past 30 years, have turned to alternative categories like hedge funds, private equity, infrastructure, emerging markets, timberland, and so forth, in a quest for equity-like returns and diversification of risk. This eclectic group has a relatively short history, dubious data (i.e. survivorship bias), and a heavy reliance on the most difficult metric of all to forecast—manager alpha. Thus, Polly simply took the 75th percentile 10-year return for the HFRI Hedge Fund of Fund Composite, which equated to 9.4%.9 Even with the boost from survivorship bias, this gets us no better than the top-quartile stock market return. Still, her 8% return assumption does seem within reach.

…

Table 3 illustrates that Polly can “get there” only by assuming top quartile results for stocks, bonds, and alternatives. Furthermore, all three must produce these lofty results simultaneously over the same span! What are the odds of that? Assuming these projections are representative, this works out to 25% �– 25% �– 25%, or about a 1.6% chance. Yikes!

This is exactly what the overwhelming majority of the U.S. retirement market—pension funds, state budgets, IRAs, 401(k)s, etc.—is not only hoping for but depending upon. That’s $16 trillion of assets expecting a decade of sunshine to achieve the 7–8% targeted returns used for planning and budgeting purposes.

This report highlights the problem pension funds and individuals face when they “hope” their rosy investment forecasts come true. They’re setting themselves up for a fall. The only way they can achieve these results is by taking on more risk, but this can backfire if disaster strikes like it did in 2008. Hope isn’t a strategy, and even though the Fed keeps pumping tons of liquidity into the financial system, it won’t make a difference in averting the major retirement disaster that lies ahead.

Tags: 1930s, 1960s, 1990s, Bond Markets, Brazil, China, Dividend Yield, Dividends, Earnings Growth, Hope Is Not A Strategy, India, inflation, Investment Management Firm, Market Strategist, Newport Beach, Pension Funds, Population Ageing, Research Affiliates, Rob Arnott, Stock Funds, Stock Market, Train Wreck, Wsj
Posted in Brazil, China, Gold, India, Infrastructure, Markets | Comments Off

Marc Faber: Fed’s QE2 Could Trigger Market Correction

Sunday, October 31st, 2010

Marc Faber, publisher of the Gloom, Boom & Doom report, discusses the potential impact of further quantitative easing (QE2) by the U.S. Federal Reserve in a Bloomberg interview on Oct. 36 (clip below).

Correction Triggered by QE2?

Faber sees Democrats–”sadly enough”–would get a shot at still retaining the majority, which would mean the monetary and fiscal policy will most likely stay on its current course.

Equity has done well in Sep. and Oct months; however, Faber thinks the markets are stretched in the inflation trade, and weak dollar, high commodity and precious metal prices, along with high equity valuations, all suggest a correction is overdue.

Now, with QE2 being largely priced in, anything less than $1 trillion from the Fed would disappoint the markets and may trigger a correction in U.S. stocks, which could result in more quantitative easing.

But the correction should provide a buying opportunity for investors leading to an up cycle, instead of another bear market.

Equity Better for the Next Decade

Looking at investing for the next ten years, equities, emerging economies in particular, would be a relatively better place to invest than U.S. government bonds, and cash.  However, Faber advises against financial, auto, and aircraft.  He’s been in the high tech sector and likes Microsoft (MSFT).

Precious Metals Due for Pullback

Faber is currently recommending agriculture commodities, and the accumulation of precious metals.  On precious metals, he thinks they are overdue for “some kind of correction” by year end, and expect the next leg up in 2011.

Dollar Near An Inflection Point

Faber says dollar is oversold, while in contrast, some of the foreign currencies such as Yen and Franc are overbought.  So, an inflection point could be near for a short-term dollar rally which could temporarily push down asset prices.

He warns investors to be very careful about shorting dollar and long assets as the trade has become quite crowded.

Expect a Strong Pullback of Chinese Economy

Although not quite gloom and doom, Faber does expect a “strong pullback” on the Chinese economy due to its many imbalances.

According to Faber, the 0.25% interest rate hike effective Oct. 20 by the PBoC is “meaningless,” because of skyrocketing property prices, and the cost of living inflation has gone up much more than the official figure.

He notes food prices have seen high inflation, and because of low GDP per capita where food would account for a high percentage of total expenditure, Faber estimates that the typical consumer inflation rate in countries like China, India, and Vietnam should be around 8 to 18 percent per year.

My Take on China Inflation

The inflation rate in China was last reported at 3.60 percent in September of 2010, climbing at the fastest pace in two years.  However, there are some hidden rampant inflation such as 50% on apparel, 20% on food, as reported by BusinessWeek.

Many analysts as well as academics also question how China could have such relatively moderate inflation rate given its double-digit growth and upward pressure on wages.

There’s also another indicator–growth of money supply–which historically has strong correlation with inflation.  China’s money supply, M1 and M2, has expanded by 56 percent and 53 percent respectively over the past two years. Currently, with the various tightening measures, both measures are still growing at an annual growth rate of about 20 percent.

Furthermore, the continuing massive rural-to-urban migration will likely keep pushing up rents and food prices, and wages are expected to rise around 8 percent this year.

As consumer inflation is typically a lagging indicator, China may experience continuing higher CPI.  That means Beijing is facing an increasingly difficult task of containing inflation, while maintaining sufficient growth to prevent a mass civil unrest.  As such, there will likely be more tightening measures, which would put the markets on a few roller coaster rides in the next two years or so.

Nevertheless, since Chinese policymakers seem keenly aware of the risk involved and are already taking actions (which is the key), I believe China is heading towards more sustainable growth.  However, if China’s “on a treadmill to hell” as Jim Chanos says, you can bet that the United States will be dragged along for the ride as well.

Video Source: Bloomberg via YouTube

Tags: Accumulation, Agriculture Commodities, Asset Prices, Bear Market, China, Commodities, Emerging Economies, Federal Reserve, Foreign Currencies, Franc, Gloom, India, Inflection Point, Marc Faber, Market Equity, Monetary And Fiscal Policy, Msft, Precious Metal Prices, precious metals, Pullback, Qe2, U S Government Bonds, Valuations
Posted in China, India, Markets | Comments Off

Niall Ferguson: Chinese more Committed to Capitalism than U.S.

Sunday, October 31st, 2010

In a panel about getting America back from the depths of economic despair at The Daily Beast’s Innovators Summit – Reboot America in New Orleans, Niall Ferguson, historian and Harvard Business School professor, told Sir Harold Evans that “the Chinese are more committed to capitalism than we are”.

Source: The Daily Beast (via YouTube), October 22, 2010.

Tags: Beast, capitalism, Economic Despair, Harold Evans, Harvard Business School, Historian, Innovators, New Orleans, Niall Ferguson, Reboot, School Professor, Sir Harold, Summit, Youtube
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Good Looking Junk?

Saturday, October 30th, 2010

by Bespoke Investment Group

While the S&P 500 has yet to take out its bull market highs, the high yield junk bond market has been making new highs for weeks now.  A six-month chart of the high yield bond ETF (HYG) is shown in the first chart below.  HYG has now been in a nice uptrend for the past five months, and within the last few weeks it made a new bull market high.  The less risky investment grade ETF (LQD) has struggled recently and can’t seem to break away from its 50-day moving average.  Since the March 9th, 2009 financial crisis low, the junk bond market (HYG) is up 47%, while investment grade corporates (LQD) are up 24.1%, and this doesn’t even include dividends (interest payements).  With junk breaking out to new highs recently, the equity market shouldn’t be far behind, right?

Copyright (c) Bespoke Investment Group

Tags: Stocks
Posted in ETFs, Markets | Comments Off

U.S. Equity Market Diary (November 1, 2010)

Saturday, October 30th, 2010

U.S. Equity Market Diary (November 1, 2010)

The figure below shows the performance of each sector in the S&P 500 Index for the week. Four sectors gained and six declined. The best-performing sector was materials, up 1.39 percent. Other better-performing sectors included technology and consumer discretionary. The three worst-performing sectors were industrials, utilities, and financials.

Within the materials sector, the best-performing stock was Allegheny Technologies Inc, up 13 percent. Other top-five performers were International Paper Co., Ball Corp., Titanium Metals Corp., and FMC Corp.

Strengths

• The photographic products group was the best-performing group for the week, up 20 percent, led by the group’s single member, Eastman Kodak Co. The firm reported a smaller loss in the third quarter than the analyst consensus loss estimate. The results were helped by a 26 percent jump in sales of inkjet printers and ink, and by a technology licensing deal with an undisclosed digital camera business which added about $250 million to gross profit in the quarter.
• The special consumer services group was the second-best performer, gaining 9 percent. The stock of the group’s single member, H&R Block, Inc., had sold off sharply during the prior two weeks on concerns over possible mortgage repurchase obligations and limited availability of funding for tax refund anticipation loans to its customers. Investor sentiment on the stock appeared to improve this week.
• The industrial real estate investment trust (REIT) group outperformed, rising 8 percent, led by the group’s single member, ProLogis. The large owner/developer of industrial warehouses expects to receive approximately $2.3 billion from its recently announced equity issuance and asset sales. These cash inflows, plus the company’s intention to reduce some of its debt, appeared to allay concerns over a possible debt-rating downgrade.

Weaknesses

• The tires & rubber group was the worst-performer, losing 13 percent, led by its single member, Goodyear Tire & Rubber Co. The firm’s third quarter adjusted earnings exceeded the consensus estimate, but investors may have been disappointed by guidance for increased raw material costs in the fourth quarter.
• The personal products group underperformed, down 5 percent. Avon Products, Inc. reported third quarter revenue and earnings below the consensus estimates.
• The office real estate investment trust (REIT) group lost 5 percent, led by its single member, Boston Properties, Inc. The owner of office properties reported quarterly earnings above the consensus estimate, but a brokerage firm downgraded the stock’s rating to “market perform,” saying that Boston Properties’ strengths are already baked into its share price.

Opportunities

• There may be an opportunity for gain in merger and acquisition (M&A) transactions in 2010. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• Should investors’ expectations for an improving economy not come to fruition on a reasonable time frame, it could be a threat to stock prices.
• As governments around the world begin to wind down the monetary and fiscal stimulus programs put in place during the economic crisis, it will likely present a headwind for stocks.

Tags: Allegheny Technologies, Allegheny Technologies Inc, Analyst Consensus, Camera Business, Consumer Services Group, Eastman Kodak, Eastman Kodak Co, Estate Investment Trust, Fmc Corp, Industrial Warehouses, International Paper Co, Investor Sentiment, Loss Estimate, Market Diary, Real Estate Investment, Real Estate Investment Trust, Real Estate Investment Trust Reit, Refund Anticipation Loans, Tax Refund Anticipation Loans, Titanium Metals Corp
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The Economy and Bond Market Diary (November 1, 2010)

Saturday, October 30th, 2010

The Economy and Bond Market Diary (November 1, 2010)

Treasury bond yields were mixed this week as the yield curve steepened and focus remains on the Federal Open Market Committee (FOMC) meeting next week. Economic data was mixed to in line and was not a big driver of the market overall. Consumer confidence continues to be stuck in a rut as both the Conference Board Consumer Confidence Index (below) and the University of Michigan Confidence Index remains subdued.

Strengths

• Third quarter GDP grew 2 percent, right in line with expectations. Concerns are that 2 percent growth is right around “stall” speed for the economy and likely indicates that the Federal Reserve will act next week.
• Weekly initial jobless claims hit a 3-month low—claims fell 21,000 last week and the four week average is trending lower.
• Housing news was generally positive this week as September new home sales rose 6.6 percent and September existing home sales rose 10 percent.

Weaknesses

• Consumer confidence has not returned and consumers’ view of job conditions are at the lowest levels since February.
• Durable goods, ex-transportation orders, fell 0.7 percent in a possible sign that inventory accumulation is slowing.
• China’s central bank warned that inflationary pressures must be monitored closely. This comes a week after the central bank raised interest rates for the first time in three years.

Opportunities

• Inflation is unlikely to be a problem for some time, giving central bankers and other policymakers around the world room for expansive policies.

Threats

• Inflation expectations as measured by TIPS spreads have risen sharply this month. Inflation expectations will be key data points to drive Fed policy changes going forward.

Tags: Bond Market, China, Consumer Confidence Index, Durable Goods, Existing Home Sales, Fed Policy Changes, Federal Open Market Committee, Housing News, Inflation Expectations, Inflationary Pressures, Initial Jobless Claims, Key Data, Market Diary, Open Market Committee, Quarter Gdp, S Central, Stall Speed, Transportation Orders, Treasury Bond Yields, University Of Michigan Confidence, Yield Curve
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Gold Market Diary (November 1, 2010)

Saturday, October 30th, 2010

Gold Market Diary (November 1, 2010)

For the week, spot gold closed at $1,359.40 per ounce, up $30.95, or 2.33 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 3.80 percent. The U.S. Trade-Weighted Dollar Index fell 0.36 percent for the week.

Strengths

• Meng Qingfa, a researcher with the China Chamber of International Commerce, was quoted by the International Business Daily as saying that China should eventually boost its gold reserves to a level equal to that held by the United States. “Doubtlessly, if the yuan is set to become an international currency like the dollar or the euro, China has to get a huge gold reserve to support it, and a reserve of 1,054 tonnes is far from being enough,” Meng said. U.S. reserves stood at 8,133 tonnes as of the end of June, significantly higher than China’s current level of 1,054 tonnes.
• David Levenstein, a respected commodity analyst, recently noted his belief why gold has a strong future. Levenstein stated, “…no matter what your local politician tells you, the world is in a shambles. Most industrialized countries have slow GDP growth, high unemployment, huge sovereign debt as well as major budget deficits and interest rates at practically zero. Furthermore, around the world we are seeing rising commodity prices and major currency fluctuations. All this is going to lead to further currency debasement, and possibly both collective and unilateral government intervention in the forex market.”
• Commerzbank said Indian jewelry demand is currently accustomed to higher gold price levels. Commerzbank’s research indicated that India could very likely reach last year’s level of gold imports

Weaknesses

• With respect to the recent decline in the price of gold, Dennis Gartman, editor of the Gartman Letter, noted that “the inevitable correction has taken and may still be taking place in gold and we welcome that correction. It was and is much needed and the process of correcting has taken gold from being materially…perhaps even egregiously…overextended back toward long-term technical health.”
• As an investigation of the silver market by the top U.S. commodity regulator entered a third year, a member of the Commodity Futures Trading Commission (CFTC) said that there have been “repeated attempts” to influence prices. A five-member commission began investigating allegations of price manipulation in the silver futures market in September 2008.
• The CFTC said in a 2008 report that it had received “numerous letters, e-mails and phone calls” during the last 2 years alleging silver prices were being manipulated . The day after the release, JP Morgan Chase Bank and HSBC Holdings were hit with lawsuits accusing them of conspiring to drive down silver prices.

Opportunities

• Investor, mathematician and former fund manager Michael Berry, is bullish on gold, which he expects will double to around $3,000 per ounce within the next five years.
• Paul Horsnell, managing director of Barclays Capital, predicted that gold will first correct to $1,310 – $1,325 in early 2011, before rising steadily toward $1,450 by the middle of the year, based on support from central banks in Asia which are looking to diversify more of their reserves into gold. Horsnell predicts that gold will subsequently climb to his $1,850 target by the end of the following year, based on strong demand from emerging markets and factors limiting the supply of gold.
• John Embry, chief investment strategist of Sprott Asset Management, recently noted that the world remains in a financial bind, the likes of which it has probably never seen, and those people calling for corrections or bubbles in the gold market are flat out wrong. Embry added, “…everything I look at suggests much higher prices over the next 12 months.”

Threats

• In a recently released research report, based on two studies of South Africa’s energy future, RBC Capital Markets analyst Leon Esterhuizen highlighted “the very real possibility of the country running short of power for the most part of the next five years.” This could threaten platinum production in the region.
• A Bloomberg survey of traders, investors and analysts showed that the majority expect gold to decline next week, following this week’s negative reversal. Ten of 19 respondents were bearish on the yellow metal, while seven were bullish and two were neutral. The survey has been running for six years, and has correctly predicted the following week’s movement in 193 of 333 weeks, or 58 percent of the time.
• The aggregate S&P pension deficit was $264 billion at the end of 2009, and currently is around $380 billion, according to Bank of America Merrill Lynch. This would be the largest current deficit for all indexes. In another transfer of wealth, General Motors announced a $6 billion injection into its pension and health care plans versus a repayment to taxpayers.

Tags: China, China Chamber Of International Commerce, Commodity Prices, Currency Fluctuations, Dennis Gartman, Emerging Markets, Gartman Letter, GDP Growth, Gold Equities, Gold Imports, Gold Market, Gold Price, Gold Reserve, Gold Reserves, India, Indian Jewelry, International Currency, Levenstein, Market Diary, Philadelphia Gold, Price Of Gold, Rbc, Silver, Silver Index, Spot Gold
Posted in China, Gold, India, Markets, Silver | 1 Comment »

Energy and Natural Resources Diary (November 1, 2010)

Saturday, October 30th, 2010

Energy and Natural Resources Market Diary (November 1, 2010)

Strengths

• China’s imports of copper concentrate climbed to a record in September as smelters ramped up production in response to rising treatment charges. Inbound shipments jumped to 683,523 metric tons last month, up 22 percent year-over-year, the customs office said.
• World refined copper was in a deficit of 356 thousand metric tons year-to-date through July, compared with a deficit of 164 thousand metric tons in the same period in 2009, according to the International Copper Study Group.
• September imports of coking coal into China hit their highest levels since January of this year. China imported 4.17 million metric tons, up 7.5 percent sequentially according to Customs data.

Weaknesses

• Vietnam’s coal exports in 2011 are projected to drop 5.6 percent from this year to 17 million metric tons, a state-run newspaper said on Tuesday, as the country seeks to save more for domestic consumption. Coal exports would drop gradually to between 3 million and 4 million tonnes by 2015, the Rural Today newspaper said, citing an Industry and Trade Ministry report.
• China’s daily crude steel output fell further to 1.56 million metric tons in the second ten days of October, down 3.9 percent from early October, according to the China Iron & Steel Association.

Opportunities

• Russia, the world’s top oil producer, will need over 8.6 trillion rubles ($280 billion) to keep pumping oil at current record levels until 2020, Prime Minister Vladimir Putin said on Thursday. “This is not an easy task,” Putin told a meeting of oil industry top managers and government officials. Putin was chairing a government meeting on a new 10-year energy strategy, which seeks to stave off output declines and encourage investment as the heartland of the Russian oil industry, the Soviet-era fields of West Siberia, goes on the wane.
• India, Asia’s second-fastest-growing major economy, may face a shortage of 60 million metric tons a year of power-plant coal by the year ending March 2012, as domestic output falls short of demand, Enam Securities Ltd. said.
• India, the world’s third-largest iron-ore exporter, should ban shipments overseas to ensure that local steelmakers have adequate supplies of the raw material, according to Steel Minister Virbhadra Singh. The country will need increased quantities of iron ore to meet domestic demand from steel producers, so there was a need for a ban, Singh said at a seminar in New Delhi this week.
• South Africa opened public hearings on a $125 billion energy plan to shift from dependency on coal while avoiding major price increases and a repeat of paralyzing blackouts in 2008. The draft plan proposes nearly halving the share of coal in the country’s energy mix to 48 percent by 2030, down from about 90 percent, using nuclear power and renewable energy such as wind and solar to make up the difference.

Threats

• Halliburton Co. may face increased liability in the Gulf of Mexico oil spill after the staff of a U.S. presidential panel said the contractor knew cement it mixed for BP Plc’s well was unstable. The staff of the National Commission on the BP Deepwater Horizon Oil Spill said documents provided by Halliburton showed at least three tests of the mixture, in February and April, found the recipe wasn’t stable. BP received data in March from at least one of the tests, the commission staff said in a letter this week.

Tags: Association Opportunities, China, Coal Exports, Commodities, Crude Steel, Customs Office, Domestic Consumption, energy, Inbound Shipments, India, India Asia, International Copper Study, International Copper Study Group, Market Diary, Million Metric Tons, Ministry Report, Natural Resources, oil, Output Declines, Refined Copper, Russia, Russian Oil Industry, Steel Association, Steel Output, Treatment Charges, Vladimir Putin, West Siberia
Posted in China, Energy & Natural Resources, India, Markets, Oil and Gas | Comments Off

Emerging Markets Diary (November 1, 2010)

Saturday, October 30th, 2010

Emerging Markets Diary (November 1, 2010)

Strengths

• Singapore’s unemployment rate fell to a better-than-expected 2.1 percent in the third quarter, the lowest in two and a half years, from 2.2 percent in the second quarter, as its services industry continued to expand thanks to the city-state’s two casino resorts launched earlier this year.
• Thailand’s central bank raised its 2010 GDP forecast for a third time this year from 7.3 percent to 8 percent year-over-year, from July’s estimate of 6.5 percent to 7.5 percent, encouraged by surging exports despite an appreciating local currency. Moody’s also raised Thailand’s credit rating outlook to stable from negative this week.
• Barring last minute surprises, the indications are that Dilma Rouseff will emerge victorious in the second round of presidential elections in Brazil on October 31. The markets will await with great interest the news about the composition of the next government for cues about the policies to be pursued in the post-Lula era. The broad consensus is that the next government is not likely to drastically change market-friendly policies that would jeopardize the favorable status that Brazil has achieved over the last eight years.
• Credit growth in Brazil in September reached 1.8 percent month-over-month, led by mortgage lending.
• Robust revenue growth in Turkey (19.0 percent year-to-date) should be sufficient to narrow the deficit by more than 2 percent this year to 3.2 percent of GDP. Performance is similar in Russia, where the budget deficit should narrow by almost 3 percent this year to 5.7 percent of GDP, though rapid increases in expenditure over recent years leaves the underlying budget situation very vulnerable to a downturn in oil prices.

Weaknesses

• South Korea’s GDP growth slowed to a worse-than-expected 0.7 percent sequentially in the third quarter from 1.4 percent in the second quarter, as a 7.2 percent local currency appreciation during the quarter weighed on exports, in addition to U.S. unemployment and European austerity.
• Although America Movil’s third quarter results were slightly higher than expected at the Revenue/EBITDA level, the reported EPS of $0.90 came around 20 percent lower than anticipated, leading to pressure on share prices.
• In Poland the central government deficit for the eight months ending in August more than doubled, while Prime Minister Donald Tusk now admits that this year’s deficit will be in the region of 7 percent to 8 percent of GDP, largely unchanged from last year. Strong foreign demand for bonds has supported the fixed income market to date, but such fiscal policy slippage risks EU wrath as well as a sharp decline in investor confidence at some stage.

Opportunities

• China has extended its total length of high speed rail to 7,431 kilometers (4,617 miles) with this week’s launching of the Shanghai-Hangzhou line, which cuts the travel time to only 45 minutes for a distance of 202 kilometers (126 miles). The length of high speed rail is planned to reach 13,000 kilometers (8,078 miles) by 2012. By dramatically increasing the speed of travel, China’s high speed rail may benefit sectors such as retail, restaurants and tourism because of the “one-city effect,” and in the long run, may have profound implications on labor mobility within the country.

• After a period of mourning following the death of Argentina’s former President, Nestor Kirchner, we expect a period of political instability in the short term, but a more market-friendly policy in the longer term, particularly after the election scheduled for October 2011. It remains to be seen if Christina Kirchner will run for president next year, a scenario that market participants might fear. However, we believe that a more conciliatory candidate, Carlos Reutemann (former governor of Santa Fe), might emerge and provide more stability for the country.

• After a period of mourning following the death of Argentina’s former President, Nestor Kirchner, we expect a period of political instability in the short term, but a more market-friendly policy in the longer term, particularly after the election scheduled for October 2011. It remains to be seen if Christina Kirchner will run for president next year, a scenario that market participants might fear. However, we believe that a more conciliatory candidate, Carlos Reutemann (former governor of Santa Fe), might emerge and provide more stability for the country.
• LAN, Chile’s airline, will purchase a controlling stake in Aires, the second largest airline of Colombia, where it has a 22 percent market share. We expect more competition in Colombia which should be advantageous for airline travelers.
• The acquisition streak by emerging market companies in the developed markets continues – Grupo Bimbo of Mexico is considering a purchase of Sara Lee’s baking assets in the U.S. for $1.3 billion.
• Emerging markets have historically exhibited very strong fourth quarter seasonality, according to Credit Suisse research. Since 1988 the fourth quarter has, on average, delivered a price return for the overall MSCI Emerging Markets Index of 6.0 percent, versus 4.7 percent for the first quarter, 3.7 percent for the second quarter and just 0.2 percent for the third quarter. Even during the 2008-2009 global financial crisis, the index returns were negative for all the months from June 2008 through February 2009, with the sole exception of December 2008 which posted a positive return of 7.6 percent. Strong fourth quarter seasonality is exhibited particularly by Turkey, Hungary and Russia.

Threats

• Rising prices for industrial metals and reaccelerating local currency appreciation in recent months may squeeze profit margins for export-oriented Chinese manufacturers going forward.
• The Czech Republic opposition Social Democrats won 12 seats in Senate elections, securing a majority in the chamber that may threaten the coalition government’s steps to cut the budget deficit, according to Bloomberg. The government had pledged to cut the budget deficit to the EU limit of 3 percent of economic output by 2013 from 5.8 percent last year.

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