Stephanie Pomboy: Here Comes QE3

Monday, October 31st, 2011

Stephanie Pomboy, president of MacroMavens, a macroeconomics research firm, says (at Barron’s 2011 Art of Successful Investing conference) that the Federal Reserve needs to keep huffing and puffing until the wealth effect starts to create jobs.

Source: Barron’s, October 29, 2011.

Tags: Barron, Federal Reserve, Jobs, Macromavens, Qe3, Stephanie Pomboy, Wealth Effect
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Bill Gross: Investment Outlook (October 31, 2011) – “Pennies From Heaven”

Monday, October 31st, 2011

Pennies from Heaven

by William H. Gross, PIMCO

• Once interest rates inch close to zero and discounted future cash flows are elevated in price, it’s difficult to generate much more return if economic growth doesn’t follow.
• Equity markets should be dominated by dividend yields and the return of capital via share buybacks, as opposed to growth.
• In fixed income assets, we suggest that portfolios should avoid longer dated issues where inflation premiums dominate performance.

Ranking right up there with the myths about Santa Claus and the tooth fairy is the legend that pennies fall from heaven. This can’t be true, a priori, because God wouldn’t save pennies – nobody does! I know this for a fact because every weekend when Sue and I walk the neighborhood there is a fresh supply just waiting to be picked up on the blacktop. Here a penny, there a penny, everywhere a penny penny. Perhaps, I figure, it rained copper last night instead of H2O but no, they’re just on the street, lying there like a bunch of cigarette butts that someone obviously didn’t want to bother with. I will. As a matter of fact Sue and I compete for them. “Just think,” she said after beating me to the first on a three penny walk the other day, “there might be twenty or thirty thousand of these just lying around the street in this country right now. Think of all the good luck someone could be having.” And that of course is why someone should believe in pennies instead of the tooth fairy. They bring good luck: more than horseshoes, four-leaf clovers, or even betting on birthdates when you’re playing Lotto. Very, very lucky!

​There’s a theory that your luck depends on whether the penny is found heads or tails up. I’ve never been able to actually correlate that statistically. The competition is so fierce between Sue and I that the position of the penny goes unobserved as we push each other out of the way to be the official finder and therefore dispenser of the day’s good luck. When Sue gets there first she rather smugly hands the penny to me for safe keeping – her shorts having no pockets and all. I accept it reluctantly, all the while scouring the area for what might have been a “shower” of copperheads from some nonbeliever the night before.

This brings up an interesting question. If someone throws away a penny, is it bad luck? I’m not sure but I’m not risking it in any case. Those “Give a Penny, Take a Penny” containers near your local merchant’s cash register should be totally avoided. Giving a penny comes so close to throwing away a penny on the street that it ranks right up there with black cats, cracked mirrors and walking under ladders. In addition to pennies, I have advice on nickels, dimes and quarters that you might find lying along the road. Don’t touch ‘em. First and foremost, they don’t bring you any luck, and second of all they have billions of germs all over them. I’ve never been keen on cooties in any form or fashion. I might risk it for pennies, but I’m not about to pick up quarters no matter how profitable. Besides, how could any of you think that silver coated coins would be lying in the street in the first place? According to the efficient market theory, someone must already have picked them up. Find and save pennies. Very…very lucky!

Speaking of luck, the investment question du jour should be “can you solve a debt crisis with more debt?” Penny or no penny. Policymakers have been striving to answer it in the affirmative ever since Lehman 2008 with an assorted array of bazookas and popguns: 0% interest rates, sequential QEs with a twist, and of course now the EU grand plan with its various initiatives involving debt write-offs for Greece, bank recapitalizations for Euroland depositories and the leveraging of their rather unique “EFSF” which requires 17 separate votes each and every time an amendment is required. What a way to run a railroad. Still, investors hold to the premise that once a grand plan is in place in Euroland and for as long as the U.S., U.K. and Japan can play scrabble with the 10-point “Q” letter, then the markets are their oyster. Not being one to cast pearls before swine or little Euroland PIGS for that matter, I would tentatively agree with one huge qualifier:
As long as these policies generate growth.

Growth is the elixir that seems to make every ache, pain or serious ailment go away. Sovereign debt too high? Just grow your way out of it. Unemployment rates hitting historical peaks? Growth produces jobs. Stock markets depressed? Nothing a lot of growth wouldn’t cure. But growth is the commodity that the world is short of at the moment, as shown in Chart 1. No country has enough of it – not even China – and many of the developed countries (specifically in Euroland) seem to be shrinking into recession.

The lack of growth, as explained in prior Outlooks over the past few years, is structural as opposed to cyclical, and therefore relatively immune to interest rate or consumption stimulative fiscal policies. 1) Globalization, 2) technological innovation, and 3) an aging global demographic have all combined to dampen policy adjustment post Lehman and will inexorably continue to work their black magic going forward. To defeat this misunderstood structural voodoo, countries would have to mint pennies by the billions, pretend to lose them, and then incredibly find them strewn all across their city streets like some global Easter egg hunt. Not gonna happen.
The situation, of course, is compounded now by high debt levels and government spending that always used to restart capitalism’s private engine. However, as economists Rogoff & Reinhart have shown in their historic text, This Time Is Different, sovereign debt at 80-90% of GDP acts as a barrier to growth. Because debt service and interest rate spreads start to rise at these debt levels, a greater and greater percentage of a nation’s output must necessarily be diverted to creditors who in turn become leery of reinvesting in a slowing economy. The virtuous circle becomes vicious in its reflexive counter reaction, spiraling into a debt/liquidity trap á la Japan’s lost decades if not stopped in time.

Tags: Bill Gross, Birthdates, Blacktop, Bonds, Cash Flows, Cigarette Butts, Dividend Yields, Fixed Income, Gross Investment, Growth Doesn, Horseshoes, Investment Outlook, Leaf Clovers, Matter Of Fact, October 31, Outlook, Pennies From Heaven, Penny Penny, Return Of Capital, Santa Claus, Tooth Fairy, William H Gross
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Monetary Policy: Week in Review (October 30, 2011)

Monday, October 31st, 2011

The article below comes courtesy of Central Bank News, an authoritative source on monetary policy developments.

The past week in monetary policy saw 15 central banks announce interest rate decisions. Those that increased interest rates were: India +25bps to 8.50%, and Mongolia +50bps to 12.25%, while those that decreased interest rates were: The Gambia -100bps to 14.00%, Sierra Leone -300bps to 20.00%, and Georgia -25bps to 7.25%. Also announced was Angola’s central bank setting its new benchmark interest rate at 10.50%. The central banks that held interest rates unchanged were: Israel 3.00%, Canada 1.00%, Hungary 6.00%, New Zealand 2.50%, Japan 0-0.10%, Russia 8.25%, Namibia 6.00%, Sweden 2.00%, and Colombia 4.50%. Also in the news was the Bank of Japan announcing a 5 trillion yen addition to its quantitative easing program.

With just two months left in the year this week’s summary chart shows a good representation of monetary policy this year. The key word of course is diversity. On the one hand there is developed markets with unusually low interest rates (and low growth and low inflation pressures). While on the other hand is the emerging and developing markets with much higher interest rates (and relatively higher growth rates and inflationary pressures). Even within developing economies there is diversity in the trajectory of interest rates as some begin to feel the pinch of policy tightening, paired with the deteriorating outlook in western economies, and in particular the ongoing sovereign debt issues in Europe (short-term crisis-containment measures notwithstanding).

Some of the key quotes from the monetary policy makers are included below:

• Reserve Bank of India (increased rate 25bps to 8.50%): “both inflation and inflation expectations remain high. Inflation is broad-based, and is above the comfort level of the Reserve Bank. We expect these levels to persist for two more months. There are potential risks of expectations becoming unhinged in the event of a pre-mature change in the policy stance. However, reassuringly, momentum indicators, particularly the de-seasonalised quarter-on-quarter headline and core inflation measures, indicate moderation. This is consistent with the projection that inflation will decline beginning December 2011.”
• Bank of Japan (added 5 trillion to QE): “some more time will be needed to confirm that price stability is in sight and due attention is needed for the risk that the economic and price outlook will further deteriorate depending on developments in global financial markets and overseas economies. While steadily implementing its decision in August to enhance monetary easing, especially through the purchase of financial assets, the Bank deemed it necessary to further enhance monetary easing so as to ensure a successful transition to a sustainable growth path with price stability.”
• Central Bank of Russia (held rate at 8.25%): “Considering recent domestic and international macroeconomic developments and the effect of the monetary policy measures, implemented in recent months, the Bank of Russiajudged that the current level of money market interest rates is appropriate to balance the inflationary risks and the risks of economic growth slowdown in the nearest future”
• Bank of Mongolia (increased rate 50bps to 12.25%): “The rapid expansion of budget expense, cash hand-out from the Human Development Fund and the high increase in loans are contributing to higher demand. This sharp increase in demand builds the pressure on core inflation even the total supply and the real capacity of economy have not added on yet. The consecutive growth in prices of non-food products from the beginning of 2011 and the current stand in yoy 11.3% prove that the increase of total demand is bringing the growth of core price.”
• Riksbank (held rate at 2.00%): “The difficulties in resolving the public finance crisis in Europe has led to increased uncertainty regarding the future. In Sweden, growth is expected to be slightly weaker in the coming period. At the same time, inflationary pressure is low. The Executive Board of the Riksbank has therefore decided to hold the repo rate unchanged at 2 per cent and to wait to increase it until sometime next year.”
• Bank of Canada (held at 1.00%): “The global economy has slowed markedly as several downside risks to the projection outlined in the Bank’s July Monetary Policy Report (MPR) have been realized. Financial market volatility has increased and there has been a generalized retrenchment from risk-taking across global markets. The combination of ongoing deleveraging by banks and households, increased fiscal austerity and declining business and consumer confidence is expected to restrain growth across the advanced economies. The Bank now expects that the euro area—where these dynamics are most acute—will experience a brief recession.”
• Reserve Bank of New Zealand (held rate at 2.50%): “Given the ongoing global economic and financial risks, it remains prudent to continue to keep the OCR on hold at 2.5 percent for now. However, if global developments have only a mild impact on the New Zealand economy, it is likely that gradually increasing pressure on domestic resources will require future OCR increases.”

Looking at the central bank calendar, next week will be a very interesting week in central banking with the very important US Federal Reserve and European Central Bank both announcing monetary policy decisions. All eyes will be focused on whether the US FOMC announces or hints at any further quantitative easing; meanwhile people will be watching to see if the new ECB president, Mario Draghi, decides to cut the interest rate or provide any other supportive measures to aid the faltering Eurozone economies.

Source: Central Bank News, October 29, 2011.

Tags: Bank News, Bank Of India, Bank Of Japan, Benchmark Interest Rate, Canadian Market, Central Banks, Containment Measures, Debt Issues, Developing Economies, India, Inflation Expectations, Inflation Pressures, Inflationary Pressures, Interest Rate Decisions, Low Interest Rates, Outlook, Policy Developments, Reserve Bank Of India, S Central, Sovereign Debt, Sweden 2, Term Crisis, Western Economies
Posted in Canadian Market, India, Markets, Outlook | Comments Off

“Risk-On” is the Flavour of October

Monday, October 31st, 2011

It is fascinating how financial markets moved from risk-off in September to risk-on in October. As shown in the chart below, courtesy of Arthur Hill of StockCharts.com, one can measure investors’ sentiment by comparing the line charts of four ETFs. “The S&P 500 ETF (SPY) and US Oil Fund (USO) rise when risk is ‘on’, while the 20+ year Bond ETF (TLT) and US Dollar Fund (UUP) rise when risk is ‘off’. SPY and USO bottomed and surged as TLT and UUP peaked and plunged,” shows Hill.

Source: Arthur Hill, StockCharts.com, October 28, 2011.

Tags: Amp, Arthur Hill, Dollar Fund, ETF, Financial Markets, Flavour, Hill Source, Investors, Line Charts, risk, Sentiment, Spy, Stockcharts, Stocks, Tlt, Uso, Uup
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Whipsaw Traps (Hussman)

Monday, October 31st, 2011

Whipsaw Traps

October 30, 2011

by John P. Hussman, Ph.D., Hussman Funds

Last week was a scorching “risk-on” week for the markets, as a putative “solution” to Europe’s debt problems and a positive print for third-quarter GDP convinced investors that all pressing economic concerns have vanished. We observed very little expansion of trading volume, which is characteristic of markets where short sellers are forced to cover while existing holders raise their offers and reduce their size. For our part, Thursday was difficult, as our largely defensive holdings were clearly out-of-favor, bank stocks (which we continue to avoid) shot higher on short covering, and option volatility declined as investors abandoned the desire to defend against losses.

I suppose it’s needless to say that we shared neither the market’s enthusiasm nor its confidence in the sudden view that everything has been fixed (more on that below). At the same time, as I noted last week, speculation can take on a life of its own when there is a pause in fresh concerns, so we’re not inclined to “fight” the recent advance by raising our line of defense (which would expend option premium on higher-strike put options). The benefit of holding the existing line is that we won’t get another crush in near-the-money option premium if the market advances further (which has contributed to a few percent of discomfort in recent weeks). The downside is that a sharp reversal lower won’t benefit us much until the market loss exceeds about 3-5%. So we remain defensive here, but as a concession to the speculative inclinations of investors, we are not putting up a contrarian fight.

Beyond that, however, we don’t have the evidence here to establish a material positive exposure or “go long” – at least not at present. Current market conditions cluster among a set of historical observations that might best be characterized as a “whipsaw trap.” Though last week’s rally triggered several widely-followed trend-following signals (for example, a break through the 200-day moving average on the S&P 500), the broader ensemble of data suggests a high likelihood of a failed rally. In this particular bucket of historical observations, less than 30% of them enjoyed an upside follow-through over the next 6 weeks. Some recent examples from this bucket include the weeks ended 11/3/00, 12/7/01 and 2/1/08. These were points that followed snap-back rallies that were actually good selling opportunities in what turned out to be violent bear market declines.

That said, about 30% of the observations in the current bucket did enjoy a positive follow-through. So while the expected return/risk profile of the market remains negative here, we have to be somewhat more tentative about taking a “hard” defensive position. As always, we’ll respond to new evidence as it arrives.

On the questionable benefits of a leveraged EFSF

With respect to Europe’s perceived “solution” to its debt crisis, the 50% write-down of Greek debt is appropriate, but it’s not clear that this includes a writedown of Greek obligations to “official” holders such as other European governments and agencies. If not, it’s unclear whether the writedown is really deep enough to allow Greece to avoid further debt problems several years out.

Likewise, I suspect that investors are celebrating various “headline” figures (such as “1 trillion euros”) without much understanding of what they are cheering about. The European Financial Stability Facility (EFSF) is a Luxembourg corporation to which European states have committed 440 billion euros of backing, beyond which the EFSF must issue its own bonds to investors in order to make loans (not grants) to recipient countries or banks. There are two basic options that the EFSF contemplates for “leveraging” its 440 billion euros (which will actually probably be closer to 250 billion for all of Europe after amounts needed for Greece and bank recapitalizations). One is to issue “credit enhancements” or “partial protection certificates” that would be sold along with the new debt of European governments, where the certificates would provide first-loss protection of say, 20% of face value. Alternatively, the EFSF could construct a “special purpose vehicle” or SPV in each given country – basically an investment company formed to buy European debt – where the EFSF would “provide the equity tranche of the vehicle and hence absorb the first proportion of losses incurred by the vehicle.”

So to start with, the EFSF is not actually an operating “bailout fund” at present – it’s a shell corporation with a business plan and a certain amount of promised capital – not yet in hand – from European governments, in search of additional funding from private investors. Its intended business is to a) partially insure European debt, using capital from European governments, which these governments will obtain by issuing debt to investors, or b) to purchase European debt outright, by issuing EFSF debt to investors, leveraging capital obtained from European governments, which these governments will obtain by issuing debt to investors.

In effect, European leaders have announced “We have agreed to solve our debt problem, leveraging money we do not have, to create a fund, which will then borrow several times that amount, in order to buy enormous amounts of new debt that we will need to issue.”

As Jens Weidmann, the President of the German Bundesbank objected about this plan last week, “It is tied to higher risks of losses and to increased sharing of risks. The way they are constructed, the leveraging instruments are not too different from those which were partly responsible for creating the crisis, because they concealed risks.”

Moreover, the benefit to private investors is suspect. The basic idea of leveraging the EFSF is to provide enough “credit enhancement” to make European debt attractive. What is the value of that credit enhancement? Well, if the expected recovery rate is 80% or more, and the probability of default is fairly low, then the insurance (a promise to take “first loss” of 20%) isn’t really needed in the first place. If you do the math, the expected effect on yields is something on the order of 1-2% on 1 year debt, and a fraction of a percent for longer dated debt. Unfortunately, when the insurance really is needed (assuming more typical recovery rates around 50% and default probabilities higher than 15% or so), a 20% first-loss provision does little but reduce an extremely high interest rate to a lower, but still intolerably high interest rate. Given debt-to-GDP ratios of 100% or more, that protection does nothing to avoid certain default except to delay it for a small number of years.

Tags: Bank stocks, Bonds, Concession, Current Market, Debt Problems, Downside, Economic Concerns, GDP, Hussman Funds, Inclinations, Losses, Money Option, Option Volatility, Quarter Gdp, Rally, Short Covering, Short Sellers, Signals, Speculation, Traps, Whipsaw
Posted in Bonds, Brazil, Markets | Comments Off

How China Drives the Global Economy

Monday, October 31st, 2011

How China Drives the Global Economy

By Frank Holmes, CEO and Chief Investment Officer
U.S. Global Investors

Unless investors get spooked over the weekend, the S&P 500 Index will post its second-best month since the post-World War II era, according to a report published today by GaveKal Research. The last time markets rallied so strongly, Gerald Ford had recently moved into the White House and Muhammad Ali “rumbled in the jungle” with George Foreman.

A few weeks back, we noted that Citigroup’s Panic/Euphoria model signaled an extremely negative sentiment level, indicating that higher equity prices should follow. Read: Can Markets Find the Road Back to Positive Territory?

Other contrarian signals that can often be used as a guide when investor sentiment swings to extremes are cover stories reflecting bullish or bearish sentiment. A current example is the October 31 edition of TIME magazine, which features “The China Bubble” with a photo comparing China’s economy to the delicate nature of a blown-up piece of bubble gum. In addition to the European debt crisis and the “Occupy” movement, the media has latched onto the slowdown in China. However, many contrarian investors find these types of magazine covers signal a possible attractive entry point.

We’ve stated many times we don’t believe the Chinese economy is a bubble, but that does not mean a significant slowdown wouldn’t affect the global economy, especially natural resources. This is because China’s economic transformation over the past few decades has cast the country into the forefront of demand. PIRA Energy Group says that, in 1990, China’s share of oil and GDP was less than 5 percent; its share of world energy was just under 10 percent. Since then, China’s share of energy, GDP and oil has risen dramatically, with each expected to be approximately 28 percent, 21 percent and 16 percent, respectively, by 2025.

Despite the moonshot trajectory of China’s 20-year growth, Bernstein Research says the country still has a lot of catching up to do to reach the level of the developed world. Take oil consumption, for example, where China’s consumption of 2.5 barrels per capita in 2010 is still very low compared with the 22.1 barrels per capita that the U.S. consumed. Bernstein estimates the growth in consumption will increase to 3.6 barrels per capita in 2020, this amount is only a fraction of the consumption in the U.S. and half of Europe’s.

Looking out over the next five years, a portion of China’s oil demand will come from transportation fuels. Bernstein thinks the country is at an “inflexion point” and the demand for cars and the fuels necessary to make them go should grow “more quickly than GDP.” During the last 10 years, the number of vehicles has grown at an annual rate of 17 percent, and since 2007, more new vehicles are on the roads than “put on to the roads over the [previous] 30 years,” states Bernstein.

Although car sales have slowed in recent months because of the government’s monetary tightening policies and the ending of a stimulus program for car buyers, the long-term desire for auto-mobility remains. Bernstein expects the number of vehicles to double in China, from 78 million to 155 million units over the next five years.

While demand in China plays catch-up to the developed world, developed world companies are tapping this resource to find growth. These are companies such as Caterpillar, which reported a “record-breaking third quarter” this week, with sales and revenues increasing in every part of the world. Most notably, the industrial bellwether saw a 38-percent jump in sales and revenues in the Asia-Pacific region.

During the company’s conference call, CEO Doug Oberhelman said that he supported the actions taken by the Chinese authorities to slow its economy. In his view, this was “the best thing that could have happened to the construction equipment industry.” He thought China was previously growing at an unsustainable pace, and now this slowdown is “extremely healthy” in the long-term, he added.

Health can be a relative term when comparing equities. Right now, China appears to be a “healthy” place to invest compared to U.S. stocks. Bloomberg data shows that companies in the MSCI China Index had a higher revenue per share, a higher earnings per share, a higher dividend yield and a lower price-to-earnings ratio than the stocks in the S&P 500 Index.

China’s economy is expected to grow by 9.1 percent this year and 8.4 percent next year, according to Barclays Capital. This is quite significant when you consider that the global economy is anticipated to grow at a much slower pace of 3.7 percent in 2011 and 2012. While our investment team continues to closely monitor China’s economic health, it appears that the companies in the country still have some room to grow.

Tags: Bearish Sentiment, Bubble Gum, Chief Investment Officer, Chinese Economy, Contrarian Investors, Debt Crisis, Delicate Nature, Economic Transformation, Frank Holmes, Gerald Ford, Global Economy, Investor Sentiment, Muhammad Ali, Negative Sentiment, Pira Energy Group, Time Magazine, Time Markets, U S Global Investors, World Energy, World War Ii
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U.S. Equity Market Cheat Sheet (October 31, 2011)

Monday, October 31st, 2011

U.S. Equity Market Cheat Sheet (October 31, 2011)

The domestic stock market as measured by the S&P 500 Index was 3.78 percent higher this week, driven by improving investor sentiment as European leaders put forth a package of measures intended to rework their bailout fund, recapitalize European banks and reduce Greece’s debt.

All ten sectors of the S&P 500 increased. The best-performing sector for the week was materials, which increased 7.87 percent. Other top-three sectors were financials and energy. Consumer staples was the worst performer, up only 0.22 percent. Other bottom-three performers were utilities and consumer discretion.

Within the materials sector, the best-performing stock was Allegheny Technologies, up 23.79 percent. Other top-five performers were Cliffs Natural Resources, U.S. Steel Corp., Freeport-McMoRan Copper & Gold and AK Steel.

Strengths

• The real estate services group was the best-performing group for the week, up 24 percent on the strength of its only member, CBRE Group. The company, formerly known as CB Richard Ellis Group, reported earnings in-line with the consensus estimate and revenue above the consensus. The stock had been weak recently due to investor concern over potential weakness in commercial real estate due to a potentially slowing economy. However, the stock surged this week as investor sentiment improved.
• The coal & consumable fuel group gained 18 percent, with all three group members contributing to the gain. Consol Energy reported quarterly earnings and sales above the consensus estimates. Peabody Energy reported results roughly in-line with the consensus.
• The diversified metals & mining group outperformed, up 17 percent. The group was led by its largest member, Freeport-McMoRan Copper & Gold, which benefited from higher copper and gold prices during the week.

Weaknesses

• Household appliances was the worst-performing group for the week, down 10 percent on weakness of the group’s only member, Whirlpool. The appliances manufacturer reported earnings and revenue below the consensus estimate.
• The personal products group lost 7 percent on weakness in member Avon Products, which reported quarterly sales and earnings below the consensus estimate.
• The internet retail group underperformed, down 6 percent, led down by members Amazon.com and Netflix. Amazon reported earnings below the consensus estimate. Netflix, on the other hand, beat estimates on earnings, but disclosed that the company had lost 800,000 subscribers during the third quarter due to a price increase. The company also guided fourth quarter earnings well below analyst expectations.

Opportunities

• There may be an opportunity for gain in M&A (merger & acquisition) transactions in 2011. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• A mid-cycle slowdown in the domestic economy would be negative for stocks.
• An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.

Tags: Allegheny Technologies, Cb Richard Ellis, Consensus Estimate, Consol Energy, Consumer Staples, Domestic Stock Market, Ellis Group, Estate Services Group, European Banks, Freeport Mcmoran, Freeport Mcmoran Copper, Fuel Group, Gold, Gold Prices, Household Appliances, Investor Concern, Investor Sentiment, Materials Sector, Peabody Energy, Performing Group, Quarterly Earnings
Posted in ETFs, Gold, Markets | Comments Off

The Economy and Bond Market Cheat Sheet (October 31, 2011)

Monday, October 31st, 2011

The Economy and Bond Market Cheat Sheet (October 31, 2011)

Treasury yields were higher this week as European leaders reached an agreement in principle to recapitalize the region’s banks, address the Greek debt situation and expand the European Financial Stability Facility. This agreement largely removed the threat of another full-blown financial crisis and money shifted back toward riskier assets.

Another piece of good news that supported riskier assets this week was the release of third quarter GDP data. GDP rose 2.5 percent in the third quarter, matching expectations but also quieting some critics expecting the U.S. to fall back into a recession.

Strengths

• The resolution of the immediate crisis in Europe was the most significant positive event this week.
• GDP rose 2.5 percent in the third quarter as consumer spending rose 2.4 percent.
• September durable goods orders, excluding the volatile transportation sector, rose 1.7 percent. This is the largest rise six months.

Weaknesses

• Consumer confidence fell to the lowest level since March 2009, which was the bottom of the global financial crisis. Concerns surrounding jobs and real incomes drove the survey down.
• Global news flow continues to point toward an economic slowdown as U.K. factory orders fell to the lowest level this year, the Bank of Canada sharply reduced its fourth quarter GDP forecast and expectations are for growth to slow below four percent in Brazil next year.
• Inflation risks remain as the Reserve Bank of India raised interest rates by 25 basis points due to stubbornly high inflation.

Opportunities

• With the European news behind us for the time being, investors will refocus on economic data such as next week’s ISM manufacturing report, the Federal Reserve Open Market Committee (FOMC) meeting and October unemployment data.

Threats

• While the current European plan to deal with the crisis is a positive step forward, many details still need to be worked out. Moreover, the plan does not deal with potential problems in other European countries such as Portugal, Spain and Italy.

Tags: Bank Of Canada, Bank Of India, Brazil, Canadian Market, Consumer Confidence, Debt Situation, Durable Goods Orders, Economic Slowdown, European Leaders, European News, Gdp Data, Gdp Forecast, Global Financial Crisis, India, Inflation Risks, Ism Manufacturing, K Factory, Open Market Committee, Quarter Gdp, Real Incomes, Reserve Bank Of India, Treasury Yields, Unemployment Data
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Gold Market Cheat Sheet (October 31, 2011)

Monday, October 31st, 2011

Gold Market Cheat Sheet (October 31, 2011)

This visual shows the rise of dividends in the gold sector. Both Newmont and Eldorado have sweetened their dividends recently by linking them to the gold price. Newmont will pay an extra $0.35 per share should the gold price rise above $1,700 an ounce. Similarly, Eldorado has promised to increase its dividend by 50 percent should the gold price average $1,500 to $1,649 an ounce.

For the week, spot gold closed at $1,743.75, up $101.37 per ounce, or 6.17 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 12.18 percent. The U.S. Trade-Weighted Dollar Index slid 1.71 percent for the week.

Strengths

• With another eventful week, the performance for our gold-oriented funds was in line with the benchmarks and peers. Silver led the precious metals up 17 percent for the week, while gold gained 6 percent. In the silver space, Sabina Gold & Silver surged 38 percent and Silver Wheaton gained 24 percent. Gold stocks gained about 12 percent on average, roughly twice the lift in bullion, which reflects positively upon putting money to work in the stocks.
• Other noteworthy gains for the week among stocks were seen from CB Gold, up 172 percent, and Jaguar Mining, which gained 41 percent. CB Gold recently announced positive drill results and sold a 10 percent stake in the company to Lumina Capital for $10 million on Thursday. CB Gold was not alone in the news for the Colombian space, with IAMGOLD announcing that it would spend around $23 million buying minority stakes in three Colombian-focused exploration companies: Bellhaven Copper & Gold, Tolima Gold, and Colombia Crest Gold.
• Indian demand for gold remains strong despite increasing prices for the precious metal. India’s festival of lights brought a healthy amount of buying into the market while traders noted that people preferred to purchase gold coins this time instead of spending on jewelry.

Weaknesses

• Agnico-Eagle’s share price this week continues to reflect a negative sentiment from last week’s write off of Goldex, Agnico-Eagle’s lowest-grade operating mine. The stock is down 27 percent over the past 20 days despite reporting a record nine-month gold production of 757,668 ounces compared to 731,138 ounces in 2010.
• Agnico-Eagle’s production growth per share has outpaced both Barrick Gold and Newmont Mining for the most recent quarter while its peers both have negative production growth per share over the trailing year. In addition, Agnico-Eagle’s average gold equivalent grade relative to Barrick and Newmont is 192 percent and 230 percent higher, respectively. This implies there is more certainty that a dollar of revenue will fall to the bottom line as profit with Agnico.
• Argentina issued a presidential decree on Wednesday stating that the country will require all oil, gas and mining companies to repatriate export revenue. For the most part, share prices for companies with Argentinean exposure were punished more than the news would justify. This provided an opportunity to buy on the perceived bad news and take a handsome profit the following day. President Cristina Fernandez won a landslide re-election days earlier and has initiated a strong move to put a brakes on dwindling central bank reserves. Freezing money from leaving the country would also stop any new investment from coming in, thus compounding the problem.

Opportunities

• With clarity coming from a debt agreement reached at the EU summit this week, commodities surged with the good news and the U.S. dollar continued to lose ground against the euro. The trend of a weaker dollar is likely to be a continued theme over the next month as the market begins to focus on debt issues here in the U.S. The Congressional super committee, which is charged with figuring out how to cut $1 trillion or so from the federal budget over the next decade, appears to be at an impasse.
• In the middle of earnings season, MiningWeekly highlighted that mining M&A activity could pick up in the fourth quarter, as companies have been reporting higher levels of cash than in the past. This is mainly attributable to the increase in the price of gold. Ernst & Young says that, “cashed up companies [may] take advantage of recent declines in valuations.” M&A activity dropped 6 percent during the first three quarters of 2011, as markets were reacting to speculation regarding China’s slow economic growth. Recently announced takeovers include: Agnico-Eagle buying Greyd Resources, New Gold acquiring Silver Quest Resources, and Endeavour adding Adamus Resources to its portfolio. With recent evidence of M&A activity in the industry, there may well be more to come.
• Barrick and Newmont announced on Wednesday a dividend increase for the fourth quarter as the price of gold increased cash levels for both of the world-leading gold producers. Barrick and Newmont increased their dividends by 25 and 17 percent, respectively. Newmont recently unveiled its plan to link dividend payments to the gold price in April (see chart above), and has since increased it in September. The company has pledged a $0.20 per share increase for each $100 an ounce rise in the realized price of gold. Eldorado Gold has also announced an enhanced dividend policy that links its payout to the gold price and the number of ounces sold. It is anticipated that its next payout will be 67 percent higher.

Threats

• Julius Malema led hundreds of South African young black youth on a march to the Johannesburg Stock Exchange on Thursday to petition for the government to do more to tackle chronic unemployment stifling the continent’s biggest economy. The Youth League demanded the State take 60 percent control of the mines and all mineral processing plants situated close. The nationalization of South African mines was one of the group’s requests handed over in a memorandum to the South Africa’s Chamber of Mines.
• Australia finalized details of its anticipated 30 percent mining tax and aims to introduce legislation into parliament as soon as possible, Mineweb reported. The tax is to be imposed on large iron ore and coal mines, which principally export their products to China. It has been forecasted that the mining tax will raise $7.7 billion (Australian) in its first two years and $535 billion by 2035 for the government’s pension system.
• The failure of socialistic policies in Europe, whereby countries borrow to finance government payrolls, is still falling on deaf ears. In the U.S., Senator Harry Reid noted that it is more important to protect government jobs versus private sector jobs. This is quite ironic considering that the U.S. Bureau of Labor Statistics shows government workers currently have the lowest unemployment rate of any industry or class at 4.7 percent. Meanwhile, the national unemployment rate is running at 9.1 percent.

Tags: Bullion, Cheat Sheet, Commodities, Dollar Index, Exploration Companies, Festival Of Lights, Gold, Gold Coins, Gold Market, Gold Miners, Gold Price, Gold Sector, gold stocks, Iamgold, India, Lumina, Minority Stakes, Newmont, Nyse Arca, Precious Metal, precious metals, Silver Wheaton, Spot Gold
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Energy and Natural Resources Market Cheat Sheet (October 31, 2011)

Monday, October 31st, 2011

Energy and Natural Resources Market Cheat Sheet (October 31, 2011)

Strengths

• The commodities complex, including industrial metals and crude oil, gained across the board as markets welcomed a deal by the eurozone leaders this week. West Texas Intermediate (WTI) crude oil gained nearly 7 percent and copper jumped more than 14 percent this week as investors’ risk appetite exploded. Commodity-related equities also rallied which drove gains in the Global Resources Fund (PSPFX).
• Macquarie Research highlighted that U.S. durable goods orders, excluding transportation equipment, rose 1.7 percent in September. This was greater than the consensus expectation and is the strongest reading in the last six months.
• Scotiabank noted that copper inventories in Asia are falling at a rate of 50,000 tonnes per week, creating upward pressure on the copper price. The rapid decline means there’s potential for zero inventories by Christmas.
• Rising oil prices have led to a rise in corporate earnings for energy companies. Major producers including Exxon Mobil, Royal Dutch Shell and France’s Total reported strong earnings results for the third quarter this week. Both Exxon Mobil and Royal Dutch Shell reported earnings 40 percent greater than a year ago, while Total’s profit rose 13 percent over the same time period, according to Resource Investing News.

Weaknesses

• Despite positive numbers across the board for the week, the Alerian MLP Index and the Baltic Dry Ships Index were laggards in the sector. However, each saw positive gains, up 3.1 percent and 3.8 percent, respectively.
• A Macquarie report this week noted that the latest SteelBenchmarker assessment by World Steel Dynamics has again highlighted the pressures facing the steel industry. The benchmark World Export hot rolled coil (HRC) price fell 4.2 percent over the past 14 days to $656 per tonne, the lowest since December 2010.
• Non-OPEC oil supply outages have been running twice the level seen in 2010. Further evidence of the supply-side deterioration was seen in the extremely poor set of August numbers for U.K. domestic production. At 808,000 barrels per day, total production is at its lowest levels since 1978.

Opportunities

• Data compiled by Bloomberg this month shows that traders have rising bullish expectations for the agriculture sector. Options traders are snatching up protection against declines in agricultural stocks at the fastest rate in four years. Puts to sell the Market Vectors Agribusiness ETF outnumber calls by more than 2-to-1, the largest discrepancy in almost a year. Over the past month, $2.7 million has been invested in the agribusiness ETF, second-most among all U.S.-listed global equity ETFs.
• China will be reporting its October HSBC Manufacturing Purchasing Managers Index (PMI) on Monday, October 31. The flash PMI announced this past Monday showed expansion in the Chinese manufacturing sector for the first time since mid-summer and the country contributed more than half of global incremental oil demand for the month of September, according to the Financial Express. An accelerated PMI could have a meaningful effect on commodities.
• A shortfall in diesel fuel supply is spreading across China. The Xinhau news agency is reporting that private gas stations are scouring the country for diesel supplies and lines are growing longer at filling stations in major cities. Diesel fuel shortages are common in the winter but longer and heavier-than-usual refinery maintenance mixed with a reduction in retail prices could create the perfect recipe for a squeeze once again this year. PetroChina imported 120,000 tonnes of diesel fuel in October to meet the increasing demand while China National Petroleum Corp. (CNPC) is running its refineries at full capacity. Refinery runs have increased 5.7 percent on a year-over-year basis and the company has encouraged refineries to reduce naphtha output to allow for higher diesel production. Further, CNPC has said that it will raise refinery runs to the second-highest level on record next month in order to maximize diesel output.
• Resource Investing News says rising production costs are putting downward pressure on fertilizer profits. Fertilizer production is very energy intensive, with production requiring significant amounts of sulfur, ammonia and natural gas. Analysts worry that rising input costs and shrinking margin profits may negatively impact the entire industry. However, Potash Corporation of Saskatchewan anticipates improving margins over the near future due to “economy of scale” in terms of potash production. According to Potash, “with demand expected to rise, we believe our expanding potash capability provides a unique growth opportunity. The powerful levers of selling more volumes at higher prices, with the potential for lower per tonne operating costs, offer significant gross margin potential in the years ahead. Beyond the opportunity for margin expansion, the potential for lower per-tonne mining taxes and improved earnings from our equity investments provides significant growth potential.”

Threats

• September PMI data across Emerging Europe will be released on November 1. Roubini Global Economics (RGE) is forecasting further weakening in manufacturing conditions, reflecting a decline in export orders and weakening growth outlook in the eurozone.
• On Wednesday, Freeport McMoRan declared force majeure on shipments of copper concentrates from its Grasberg copper mine in Indonesia as an increasingly acrimonious labor strike over pay and conditions continued into its fifth week. Mineweb suggested that this would mean that the company is not anticipating a protracted period of disruption at the mine.
• In the midst of earnings reporting season, Resource Investing News reported that many analysts are skeptical about producers being able to reach their production targets. As an example, Exxon Mobil will need to pump out 5 million barrels a day to reach its 4 percent growth target for 2011. For the September quarter, Exxon Mobil reported producing 4.28 million barrels a day. Analysts have speculated that one problem for the producers is that companies must sign production-sharing contracts with local governments in some countries. This means oil producers receive a smaller output when countries cash in on rising crude prices. Such agreements are prevalent in Africa, which accounts for 20 percent of Exxon Mobil’s crude oil supply.

Tags: agricultural, Alerian Mlp Index, Commodities, Copper Price, Corporate Earnings, Crude Oil, Durable Goods Orders, Earnings Results, Exxon Mobil, Hot Rolled Coil, Industrial Metals, Laggards, Opec Oil, Outlook, Rapid Decline, Resources Fund, Rising Oil Prices, Risk Appetite, Royal Dutch Shell, Same Time Period, Steel Dynamics, West Texas Intermediate, World Steel Dynamics, Wti Crude Oil
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