Earnings, Revenue Beat Rates Remain the Same (Bespoke)

Sunday, August 5th, 2012

by Bespoke Investment Group

Since last Thursday, roughly 800 companies have reported earnings, which is nearly half of the total amount of reports we’ve seen since earnings season began on July 9th.  While we’ve seen a ton of reports over the last week, the overall percentage of companies that have beaten both earnings and revenue estimates has stayed the same.  As shown below, the earnings beat rate currently stands at 59.9%, which is just a tenth of a percent below where it was a week ago.  The revenue beat rate is currently at 48.2%, which is a tenth of a percent above where it was a week ago.

The earnings beat rate has been right around 60% for six consecutive quarters now.  The revenue beat rate, however, is well below its historical average this earnings season.
We’re now at the back end of the second quarter reporting period, so we don’t expect these readings to change much from here.

Copyright © Bespoke Investment Group

Tags: Consecutive Quarters, Copyright, Earnings Estimates, Earnings Season, Investment Group, Last Thursday, Nbsp, Revenue Estimates, Second Quarter
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Pivotal Point for Bonds…and Friday Rallies

Sunday, August 5th, 2012

The TLT ETF is one of the most watched in the market, since it’s the easiest way for institutions to quickly move in and out of U.S. Treasury bond exposure.   For many months during these rallies the fly in the ointment has been the U.S. dollar and Treasuries which constantly had a bid.  The TLT had not been below its 50 day moving average since early April which is just about the time the equity markets began weakening materially.  This instrument is now sitting on it for the second time in just over a week so it is at an important juncture.

As for the market as a whole you just have to tip your hat – I went back to review and 4 of the past 6 Fridays have seen monster moves up negating most/all of the moves down earlier in those weeks.  The Friday after the Euro summit, last Friday after Draghi’s comments, this Friday, and one other Friday that I don’t recall the reason for the big move.  Strangely each of the past 9 Mondays has seen markets close in the red.

However each time the market has been on a cusp like this of a breakout, the next few sessions have led to serious selloffs.  We’ll see if this time around it is for real.  This market is very similar to last summer/fall’s market in that the moves are violent and gaps are constant, but that market had a sideways to down bias whereas this one somehow has been going up with most of the gaps being to the upside instead of balanced between up and down (since June).  To put into perspective 15 of the past 22 sessions (68%) have been selloffs in the S&P 500 – but the 7 up sessions (4 of them on Fridays) have been so ferocious, the market is actually up 20 S&P points over those 22 sessions.  There is certainly little memory from day to day as each day’s headlines or rumors take everything with it.

Today the money is moving back into the pro cyclical areas which was another sign one would want for a sustained move.    The euro is also strong today and that inverse trade has been the key one for markets.

Copyright © Market Montage

Tags: Bias, Bonds, Breakout, Cusp, Draghi, ETF, Fly In The Ointment, Fridays, Gaps, Juncture, Last Friday, Moving Average, Pivotal Point, Rallies, S Market, Second Time, Selloffs, Trad, Treasuries, Treasury Bond, U S Treasury
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Technical Talk: Upside breakout for S&P?

Sunday, August 5th, 2012

The comments below were provided by Kevin Lane of Fusion IQ.

As seen in the chart below the S&P 500 Index (SPX 1390.99 �‘1.90%) held its 100-day moving average yesterday (green line) near 1,350 and today is bouncing on ECB news and better-than-expected-non-farm payrolls – does anyone smell election year mark-ups? That said, the Index is still setting higher lows since its June low, which is bullish; however it has also been capped near the 1,385 area (red line) for a while now. The Index continues to remain locked in a range, with resistance at 1,385, and near-term support at 1,350. [PduP: The closing level on Friday was 1,391.] Whichever way it breaks, momentum will surely follow. More meaningful support lies near the 1,330 – 1,325 band (purple-shaded lines and arrows) as this was the area where the S&P 500 double-bottomed recently. This is the area that is most critical in regard to keeping the market together.

There are conflicting data that could support a breakout (i.e. more consistent levels of news highs, low long exposure levels and low levels of bullish sentiment) or a breakdown (i.e. weak action in cyclicals and transports, especially truckers). However, if forced to choose, we are leaning towards an upside breakout. That said, we won’t be ashamed to pull the rip cord if key supports are broken as this would take the breakout call off the table. After all, being wrong once in a while is inevitable, however, ignoring an oncoming truck (i.e. a break of support) assuming you can swerve around it, is never a smart strategy!

This game is about knowing when to press forward, when to sit tight and watch, when to retreat and, most important, knowing when to change strategies if need be!

Source: Source: Kevin Lane, Fusion IQ, August 3, 2012.

Tags: Amp, Arrows, Bullish Sentiment, Consistent Levels, Cyclicals, Election Year, Exposure Levels, Iq, Lows, Mark Ups, Meaningful Support, Momentum, Non Farm Payrolls, Red Line, Rip Cord, Smart Strategy, Spx, Transports, Truckers, Ups
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What Democracy?

Sunday, August 5th, 2012

Submitted by James Miller of the Ludwig von Mises Institute of Canada

What Democracy?

A sacred cow is usually defined as that which is regarded as far too valuable or prestigious to even think about altering.  Any proposition that comes close to complete abolition is met with astounding ridicule.  In the realm of legalized harlotry (politics), careers are made out of defending sacred cows no matter how expensive, socially corroding, or intentionally dishonest they are.  Compulsory public education is one of the first to come to mind.  The various vote buying schemes that masquerade as a welfare safety net are another.  Whenever the political class or its apologists in the media find themselves in a bind trying to validate the government’s latest plot to fill its coffers or grind already-undermined liberties further into the curb, they often resort to evoking the greatest sacred cow of all: democracy.

Starting from the earliest years of basic comprehension, children in the Western world are propagandized into believing that without democracy, society would descend into unlivable chaos.  Schools, both public and private, perpetuate the fantasy to millions of forced attendees every year.  They are told that the government which has a hand in practically anything they encounter was formed with only the best intentions.  In America especially, the representative democracy constructed out of the collective genius of the country’s founding fathers is lauded as a gift to humanity.  And though its influence is waning in recent years, the Constitution served as a model for developing nation-states around the globe.  Back in 1987, Time magazine estimated that of the 170 countries that existed at the time, “more than 160 have written charters modeled directly or indirectly on the U.S. version.”

The Constitution is presented as the miraculous creation of divine individuals when, in fact, it was nothing of the sort.  Like any attempt to centralize state power, the Constitution was formed out of the economic desires of its framers.  Thomas Jefferson, John Adams, Thomas Paine, and Henry Adams weren’t even present at the Philadelphia Convention as it was drafted.  Many Americans at the time were suspicious at what ended up being a coup to toss out the decentralized Articles of Confederation in return for an institution powerful enough to be co-opted for the purposes of rent seeking.  As Albert Jay Nock noted:

The Constitution had been laid down under unacceptable auspices; its history had been that of a coup d’état.

It had been drafted, in the first place, by men representing special economic interests. Four-fifths of them were public creditors, one-third were land speculators, and one-fifth represented interests in shipping, manufacturing, and merchandising. Most of them were lawyers. Not one of them represented the interest of production

when the Constitution was promulgated, similar economic interests in the several states had laid hold of it and pushed it through to ratification in the state conventions as a minority measure, often — indeed, in the majority of cases — by methods that had obvious intent to defeat the popular will. Moreover, and most disturbing fact of all, the administration of government under the Constitution remained wholly in the hands of the men who had devised the document, or who had been leaders in the movement for ratification in the several states.

Unvarnished history like this is never taught in public schools and is hardly known by the public at large.  There is a reason for this of course.  When the rose tinted glasses are removed, the state appears as the organized criminal racket it really is.  Those entrusted as “representatives of the people” are really looking out for themselves and their financial well-being.  As government grows and regulatory bureaucracies flourish in size and scope, law formation becomes not just a job for the elected legislature but also of the executive enforcers.  In other words, the same people tasked with enforcing the law are also given discretion over what rules they wish to impose.  These unelected bureaucrats, in a constant effort to validate their positions of authority, will never seek to cut the tax money that is their lifeblood.  Instead, they will spend the whole of their budget every year as they live out their desire to have meaningful employment through crushing freedom.  The people’s will is sold off to ensure a new bloc of state-privileged voters.

Leviathan’s growth by bureaucracy has been occurring all over the Western world but it is accelerating at a worrisome rate in the United States and Europe.  In the 2012 edition of the Competitive Enterprise Institute’s 10,000 Commandments which provides a type of snapshot of the American regulatory state, it is documented that federal agencies were responsible for the implementation of 3,807 rules.  These economically destructive regulations were set in stone despite only 81 bills passing Congress and being signed by the President.  Representative democracy has been replaced by the rule of the unaccountable.  In an environment where the power players are shielded from public backlash, the opportunity for cronyism, corruption, and back room deals increases tenfold.  Revolving door politics becomes the norm as the regulators who write the laws end up being employed at the same firms that avoid their punitive nature.

Across the pond in Europe, unelected technocrats continue to try and save the floundering currency union.  Austerity measures, which amount to more tax increases than cuts in government spending, have been imposed by bureaucrats who have little to no identification with the people they are levied against.  It is centralized planning on continent-wide scale.  The person with the most sway in the crisis has been European Central Bank President Mario Draghi.  Though Draghi only has one vote in the body that controls the printing press, he is seen as its mouthpiece.  Last week as the Olympic Games kicked off, he infamously made the off-the-cuff remark on doing “whatever it takes to preserve the euro”.  The remark, whether Draghi admits it or not, carried with it the bought-and-sold notion that the printing presses would soon be put on overdrive in an effort to quell the crisis by buying sovereign debt.  Stocks in both the U.S. and Europe rallied on the news but sunk soon after the plan was revealed as a farce.  There was no trick up his sleeve; Draghi’s remark was pure posturing.

However the event was highly revealing of the reliance the global economy has on a constant injection of cheap, fiduciary currency.  Under central banking, consumer preferences which normally guide the free market’s structure of production take a backseat to the whims of the operators of the printing press.  Financial markets begin centering their operations around fresh batches of newly created digital currency.  Fractional reserve banking becomes even more emboldened.  Because money isn’t neutral and always enters the economy at specific points, the first receivers are able to spend and invest before overall prices are affected.  The last receivers must deal with prices rising prices as their wages stagnate; thus lowering their real income.

The free market economy is analogous to democracy because consumers vote with their wallets on who produces the best product.  Under central banking, few individuals are granted the monopolistic license to produce that which facilitates all transactions.   There is nothing democratic about central banking in practice; it is a system of top-down governance based on the fantastical idea that there exists an ideal amount of money that only a few intellectually gifted economists can determine.  With one hundred years of operation under its belt, all the central banker profession has learned through the various recessions which plagued the 20^th century is that money printing appears to solve everything.

From the beginning of the Eurozone crisis, anyone not quenching their thirst with the Kool-Aid of good, honest government recognized that the large banks were the true beneficiaries of the various bailout schemes.  Because commercial banks in Northern Europe are exposed to sovereign debt, it is in their best interest for default to be avoided even if it means receiving interest payments in a devaluing currency.  The people of the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) are told their governments are being bailed out as a benefit to them.  What’s really happening is the bankers are pulling the reigns of an unscrupulous political class looking to ultimately cash out by helping their friends in high places.  The rhetoric of preserving democracy by EU officials amounts to nothing but a childish ploy when contrasted with the brazen, systematic exploitation the state embodies.

To the ruling establishment, the approval of “we the people” matters insomuch that they don’t recognize their oppressors.  Democracy is a charade to convince the masses that they are in charge of their future when they are servants to authoritarianism.  Economist and philosopher Hans-Herman Hoppe was spot on when he recognized that

Democracy has nothing to do with freedom. Democracy is a soft variant of communism, and rarely in the history of ideas has it been taken for anything else.

Rather than give the people a voice, democracy allows for the choking of life by men and women of state authority.  When Occupy protestors were chanting “this is what democracy looks like” last fall, they wrongly saw the power of government as the best means to alleviate poverty.  What modern day democracy really looks like is endless bailouts, special privileges, and imperial warfare all paid for on the back of the common man.

None of this is to suggest that a transition to real democracy is the answer.  The popular adage of democracy being “two wolves and lamb voting on what’s for lunch” is undeniably accurate.  A system where one group of people can vote its hands into another’s pockets is not economically sustainable.  Democracy’s pitting of individuals against each other leads to moral degeneration and impairs capital accumulation.  It is no panacea for the rottenness that follows from centers of power.  True human liberty with respect to property rights is the only foundation from which civilization can grow and thrive.

Tags: Abolition, Apologists, Attendees, Best Intentions, Coffers, Collective Genius, Comprehension, Founding Fathers, James Miller, Ludwig Von Mises, Ludwig Von Mises Institute, Nation States, Public Education, Representative Democracy, Ridicule, Sacred Cow, Sacred Cows, Safety Net, Time Magazine, Von Mises Institute
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“Did Somebody Repeal The Laws Of Mathematics?”

Sunday, August 5th, 2012

From Grant Williams’ latest Things That Make you Go Hmmm

Remember late-2010? When Spain wasn’t a problem, but merely a potential problem? I do:

(FT, November 17, 2010): For some of the world’s biggest hedge funds, typically regarded as the savviest traders in the market, there is now one big question facing the eurozone: what is going to happen to Spain?

While Europe’s politicians are grappling with the crisis unravelling in Ireland, hedge fund managers are already turning their attention to the issue of how – and if – a peripheral crisis in Ireland could leap via Portugal and Spain to become a systemic crisis for the eurozone as a whole.

“The Irish problem will be contained,” says Guillaume Fonkenell, chief investment officer at Pharo, one of Europe’s biggest and most successful macro funds, which specialises in trading on macroeconomic events and trends. “For us contagion is the issue … If the market loses confidence in Spain, then all bets are off. Spain is too big to bail.”…

Back then, the general opinion was that if the contagion spread to Spain the game was over because there wasn’t enough money with which to bail out an economy the size of The Kingdom of Spain. I’m not sure exactly what happened— maybe I wasn’t paying attention—but suddenly, almost two years on and in an environment where even the rich nations of Europe are seeing an undeniable slide towards recession, there is no talk about Spain being ‘too-big-to-bail’ anymore.

Did somebody repeal the laws of mathematics?

Presumably, if the contagion reaches Italy that would be OK too now, I guess.

As it first hit the headlines as a potential problem, Spain made a presentation to potential investors that highlighted how strong the country actually was despite the conjecture amongst market participants. The presentation is highly educational and can be found in full HERE, but as a taster, here’s one particular slide that caught my eye:

Oh, to hell with it… here’s another:

Some opportunity.

* * *

Full letter:

Hmmm 05 Aug 2012a

Grant Williams
Portfolio & Strategy Advisor at Vulpes Investment Management Private Ltd
2 Battery Road #26-01, Maybank Tower Singapore 049907
http://www.vulpesinvest.com/

Tags: Bets, Chief Investment Officer, Conjecture, Contagion, Enough Money, Eurozone, Grant Williams, Guillaume, Hedge Fund Managers, Hedge Funds, Kingdom Of Spain, Macroeconomic Events, Market Participants, Mathematics, Paying Attention, Pharo, Politicians, Recession, Systemic Crisis, Taster
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The Race for Resources

Sunday, August 5th, 2012

The Race for Resources

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

The world watched in awe as American swimmer Michael Phelps became the most decorated Olympian of all time. I’ve read he’s been training in the pool for an average of 6 hours a day, 6 days per week, which equates to about 30,000 hours since age 13 and about 10,000 calories burned during a training day. It’s inspiring to see the incredible results of his tremendous sacrifice and commitment.

Investing in global markets requires the same sort of stamina, especially at times like this week, when the month’s reading on the manufacturing industry was not encouraging. The J.P. Morgan Global Manufacturing PMI of 48.4 for July was the lowest since June 2009.

However, I believe there are encouraging pockets of strength to energize and inspire investors.

For example, we’re coming up on the anniversary of the first stimulus move that kicked off the global easing cycle. On August 31, 2011, Brazil unexpectedly cut rates by 50 basis points, and since then, ISI says 228 stimulative monetary and fiscal policy moves have been initiated across several countries, including the Philippines, China, France, and Colombia.

In June and July alone, there were nearly 70 moves—the most since the world began this massive easing.

Generally, by the time central banks make a fiscal or monetary easing move, economic deterioration has already occurred. Even with these moves, it still takes several months for the stimulative measures to take effect and work their way through.

But while the world wades in the shallow end of the pool waiting for the economy to warm up, Asia has taken a deep dive into the energy space as they’ve recently announced acquisitions of Canadian resources companies.

In my presentations, I’ve discussed how resources companies have significantly underperformed their underlying commodities. During 2009 and most of 2010, the performance between oil and the S&P 500 Oil & Gas Exploration and Production Index was closely correlated. By the middle of 2011, oil and oil stocks started to separate, with crude continuing to rise while stocks deteriorated. Even with the recent drop in oil prices, oil stocks have continued to lag.

I’ve also discussed the strikingly similar trend occurring between gold and gold stocks. There’s been a spectacular pop in gold stocks recently, but it hasn’t been enough to catch up to gold’s performance.

The disparities mean that the cheapest resources are not found in the ground—they’re listed, and it’s been confirmed by recent energy company acquisitions.

Chinese oil company CNOOC put in a bid of $15 billion to purchase Canada’s Nexen. This was at a 61 percent premium to Nexen’s share price on July 20, according to Bloomberg. As you can see below, not only did the takeout announcement close the gap, now the company is outperforming the price of oil.

If CNOOC’s deal is approved, the state-run oil giant gets even bigger, gaining access to significant energy stores in several areas of the world, including Canada, the Gulf of Mexico, Colombia and West Africa, as shown below.

With a rapidly growing middle class and rising urbanization, Chinese leaders know they need to fill their country’s tremendous energy demands and are continually finding innovative ways to keep their country powered. CNOOC’s acquisition is one way China continues to acquire not only the resources needed to power the country, but also the technological innovations that come from countries with free markets and lower barriers to entry. According to The New York Times, China “has been garnering advanced production technologies to better draw oil and gas from nontraditional areas like deepwater fields and hardened rock formations.”

The other announcement came from Malaysia’s state-owned and natural-gas giant Petronas, which will purchase Canada’s Progress Energy Resources Corp. Petronas is one of the largest producers and shippers of supercooled LNG fuel in the world. According to the Vancouver Sun, the company is “anxious to increase its market share in Asia, where analysts expect demand to surge 75 percent by the end of the decade.”

After Petronas’ original bid was announced, Progress increased 74 percent—a record gain for the company, says Bloomberg. As shown below, Progress now dramatically outperforms the underlying commodity.

Ready to be a Buyer like Asia?
If you’re contrarian investor, there may be an additional reason to jump into the market today. According to research from J.P. Morgan, institutional investors have become extremely negative, as hedge funds “essentially short the market,” meaning that their expectation is that stocks will fall.

J.P. Morgan looked at the rolling 21-day beta of macro fund returns compared to the S&P 500 Index returns and found that the ratio is at an extreme level of -0.26. Research shows that the last two times the ratio fell this low—in September 2010 and February 2012—stocks rallied. In 2010, the S&P 500 climbed 26 percent in five months; in 2012, stocks rose 8 percent in two months.

These signs the market is sending out make it an especially attractive time to “mine” for investment opportunity. In July, we began to see energy stocks and oil get recharged, as the energy sector in the S&P 500 was the second best performer, increasing 4.17 percent and crude oil rose 3.68 percent. Unlike the start of an Olympic race, in investing, there isn’t a signal sounded to let you know when to dive off the starting block into the markets. Just make sure your portfolio is poised to participate in the race for resources.

Tags: American Swimmer, Basis Points, Canadian, Canadian Market, Canadian Resources, Central Banks, Chief Investment Officer, Deep Dive, Economic Deterioration, Frank Holmes, Global Markets, J P Morgan, Manufacturing Industry, Michael Phelps, Monetary And Fiscal Policy, Pmi, Policy Moves, Stamina, Stimulus, Training Day, U S Global Investors, Wades
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U.S. Equity Market Radar (August 6, 2012)

Sunday, August 5th, 2012

U.S. Equity Market Radar (August 6, 2012)

The S&P 500 Index rose 0.36 percent this week as the equity market shrugged off initially disappointing news from both the Federal Reserve and European Central Bank (ECB). The market rallied strongly on Friday to erase losses from earlier in the week. It appears the market also negatively reacted to the news that Knight Capital lost $440 million in a mini “flash crash” for the firm caused by a software glitch. By Friday, the company was able to secure short-term financing to continue trading and this appeared to be a relief to the market.

Strengths

• The technology sector was the best performer this week rising 1.52 percent driven by a stealth rally in Apple which rose by more than 4 percent this week, along with healthy performances from Teradata, Microchip Technologies and Cisco.
• The financial sector was once again near the top of the performance charts with solid performances from the insurance companies as Metlife, Lincoln National, Prudential and Allstate all reported earnings this week that were well received by the market.
• Frontier Communications was the best performer in the S&P 500 this week, rising by 18 percent on better than expected second quarter results and an improving outlook.

Weaknesses

• The healthcare sector lagged as managed care companies and healthcare distributors sold off sharply on disappointing quarterly results. Within the managed care industry group, Humana dropped more than 11 percent and in the distribution space, Cardinal Health fell by more than 7 percent.
• Utilities also underperformed this week, bucking a recent positive trend for the sector.
• Abercrombie & Fitch was the worst performer in the S&P 500 this week. The stock hit a three-year low as the company slashed its full-year earnings outlook by almost a third.

Opportunity

• The market shifted its focus from earnings to central bank policy last week and that shift will likely dominate the price action for the next several weeks.

Threats

• While policy makers in Europe have made strides to stabilize the economic situation, many risks remain and the situation remains very fluid.
• The head of the ECB, Mario Draghi, stated that the ECB will do whatever it takes to save the euro. However, it appears all is not under his control and policy makers in Germany may not allow for the policies the central bank believes the economy needs.

Tags: Allstate, Cardinal Health, Distribution Space, Financial Sector, Frontier Communications, Healthcare Distributors, Healthcare Sector, Industry Group, Insurance Companies, Lincoln National, Market Radar, Market Strengths, Metlife, Microchip Technologies, Performance Charts, Quarter Results, Quarterly Results, Short Term Financing, Software Glitch, Technology Sector
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The Economy and Bond Market Radar (August 6, 2012)

Sunday, August 5th, 2012

The Economy and Bond Market Radar (August 6, 2012)

Treasury yields were little changed this week as a tug of war continues between global central bankers and economic data. This week was all about the Fed and ECB announcements, which came in with a bang last week but went out with a whimper this week.  Neither central bank took action and, once again, tried to reassure the markets with words not action. Global economic data remains weak as can be seen in the JPM Global PMI chart below, which indicates a global contraction in manufacturing. Tempering this news was a better than expected employment report on Friday, potentially causing policy action indecision from the Fed.

Strengths

• July nonfarm payrolls grew 163,000 vs. the 100,000 that was expected and was the best showing since February.
• Retail sales posted surprising strength in July as same-store sales rose 4.4 percent.
• Consumer confidence unexpectedly bounced back in July, showing greater optimism about short-term business and employment prospects.

Weaknesses

• ISM’s July manufacturing index remained in contraction territory for the second month in a row.
• The Fed failed to take any action this week after it was widely viewed that the Fed planted those seeds in a widely disseminated story last week.
• The ECB also failed to follow through with any action and possibly lost some credibility with investors. The market has become used to a lot of talk from European officials but when the head of the Central Bank promises to do whatever it takes to save the euro and then is unable to articulate exactly what that entails, it raises credibility issues.

Opportunity

• The Fed and ECB are still talking about additional monetary stimulus and it may happen in the near future. Interest rates are likely to remain very low for the foreseeable future.

Threat

• Europe remains a wildcard with the markets shifting focus on a weekly basis.
• China also remains somewhat of a wildcard as the economy has slowed and officials appear in no hurry to take decisive action.

Tags: Bond Market, Consumer Confidence, Contraction, Credibility Issues, ECB, Economic Data, Employment Prospects, Employment Report, European Officials, Indecision, Market Radar, Nonfarm Payrolls, Shifting Focus, Stimulus, Term Business, Treasury Yields, Tug Of War, Whimper, Wildcard
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Gold Market Radar (August 6, 2012)

Sunday, August 5th, 2012

Gold Market Radar (August 6, 2012)

For the week, spot gold closed at $1,603.48 down $19.42 per ounce, or 1.20 percent.  Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 1.04 percent. The U.S. Trade-Weighted Dollar Index slid 0.48 percent for the week.

Strengths

• Central bank buying of gold continues to be a strong theme.  This week the Bank of Korea, which has the world’s seventh biggest foreign exchange reserves, announced it had purchased 16 metric tons of gold last month, increasing reserves to 70.4 tons. Central banks and the International Monetary Fund (IMF) are the largest bullion owners with 29,500 tons at the end of last year, or 17 percent of all mined metal, World Gold Council data shows.  Central banks have been net buyers for two straight years, the Council said.  Purchases this year will probably exceed the 456 tons added in 2011, the Council estimates.
• Although gold was down for the week we think the price action was positive.  Gold was down somewhat when the strong ADP jobs number came out on Wednesday morning, and then gold initially declined further after Federal Reserve Chairman Ben Bernanke held off on announcing new stimulus measures.  The selloff did not last long before buyers came back in and scooped up the metal.  The simplistic trade of shorting gold on no new Bernanke announcement for another round of quantitative easing has become quite crowded.
• Although global gold mine production has fallen -2.9 percent year-to-date and has registered year-over-year declines for eight months running may sound like bad news, and it has been for certain gold producers, this is certainly a positive for those companies that have maintained or grown their production.  Despite the 11 years of consecutively higher gold prices, gold production has been flat and this should bode well for higher prices in the future.

Weaknesses

• Kinross Gold replaced CEO Tye Burt this week.  This is the second senior gold company CEO to have been removed by their boards in the past month.  The replacement CEO is J. Paul Rollinson, a long-time associate of Mr. Burt. Mr. Rollinson is also a former investment banker, with a geology and engineering background.  In general, analysts lamented that they would have preferred a high profile manager with a proven track record of operating and/or building mines and/or turning companies around.
• Standard & Poor’s has downgraded Barrick Gold from “A-” to “BBB+” with a negative outlook.  The rating agency’s negative outlook on Barrick “reflects our view that the execution risks surrounding Pascua-Lama could potentially stretch the company’s credit measures and free operation cash flow generation beyond the levels we have assumed within our base case scenario.”
• The Indian market is still seeing no relief as the rupee remains weak, the arrival of the monsoon season has been disappointing and the multi-state electric grid collapse last week caused widespread blackouts across the region, obviously curtailing near-term economic activity.

Opportunities

• Nick Holland, CEO of Goldfields Ltd., recently addressed the Melbourne Mining Club and covered a 35-page presentation surveying all the things that gold miners have been getting wrong over the last decade and offering a few ways to solve some of them.   Nick Holland pointed out that one theme has run through the presentations of large gold producers at investor conferences over the last 15 years is that production is going to increase and this will result in the company increasing its earnings.  Nick notes that if the gold industry had actually met all its production promises over the last five years, then it would not have dropped output on a compound annual basis by 2 percent between 2006 and 2011.  Unfortunately gold miners have not met their production promises and investors have become skeptical.
• Nick also highlighted that gold miners need to think differently about costs.  “Who are we trying to kid?  We don’t kid the investors because they know how much cash we really generate after everything is accounted for.  The sell-side also understands this.  The only people we’re kidding are governments and communities, who, not surprisingly, say, okay, you’re making super profits, please pay up.  And before we know it we have windfall taxes, higher royalties and so on.  We’ve got to change the lens through which we and the world view this industry, and start talking about what it really costs to produce an ounce of gold.  I don’t care if we call it NCE or something else, but to talk about cash costs only is not telling the full story.”  We view this type of examination of the industry as a strong positive for management to take full notice of and start delivering on what the investor is expecting from gold mining companies.
• Bank of America Merrill Lynch noted that while the Federal Open Market Committee (FOMC) did not take any easing action at its current meeting, under its forecast, the economic data should weaken enough by the September 13 FOMC meeting to convince most Fed officials to support more QE and extend the forward guidance then.  But the call on further Fed easing remains very dependent on the path of incoming data.  We think only a small portion of recent gold buyers entered with the expectation of a Fed move this week but it is more likely a greater number are looking toward the Jackson Hole meeting at the end of August, and then the September FOMC meeting as key entry points into the gold market.

Threats

• While most governments are outright buyers of gold, Vietnam’s government has a different view on gold.  The problem is nobody wants to use their local currency, the dong but instead more and more rely on gold to settle transactions.  The Vietnamese people have a huge affinity with gold, but the country’s government is taking major steps to restrict the gold market and the practice of replacing the dong with gold in transactions.  These restrictions included banning gold as a medium of exchange and issuing seven directives which are designed to reduce “goldization” the practice of replacing the dong with gold in transactions.
• David Rosenberg, of Gluskin Shelf, pointed out that U.S. investors withdrew a net $11.5 billion out of equity funds in the prior week according to the Lipper data that includes ETFs, the sharpest outflow in two years.  Taxable bond funds attracted over $3 billion and that brings the year-to-date tally to $151 billion as the secular shift in investor behavior towards income-generation continues apace.
• Baby boomer investors looking forward to retirement have been burned by the tech bubble, the housing boom and ensuing credit crisis. Much of the shift in money flows has been to extreme risk aversion and government bonds have been the choice for the safety.  Unfortunately, the market has the uncanny ability to move in a direction that will disappoint the most investors.  It is unlikely, given the rising debt burden of governments, that the masses will be rewarded for seeking safety in bonds for the next five years. Under owned assets which are out of favor, such as gold, deserve some consideration for portfolio diversification.

Tags: Central Banks, Company Ceo, Dollar Index, Federal Reserve Chairman, Foreign Exchange Reserves, Gold Company, Gold Market, Gold Mine, Gold Miners, Gold Prices, Gold Producers, Gold Production, gold stocks, International Monetary Fund, International Monetary Fund Imf, Market Radar, Nyse Arca, Selloff, Spot Gold, World Gold Council
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Energy and Natural Resources Market Radar (August 6, 2012)

Sunday, August 5th, 2012

Energy and Natural Resources Market Radar (August 6, 2012)

Strengths

• Crude oil prices gained again this week to reach nearly $109 per barrel (Brent) on supply concerns in the North Sea and rising geopolitical premiums as the conflict in Syria intensifies.
• Copper slipped 7 cents this week to $3.35 per pound but it has been one of the better-performing commodities in 2012, despite global growth slowing. The price has been supported by a combination of global inventory draw down, now back to 2009 levels and global producers struggling to meet near-term expectations.  Analysts at Nomura note that in the short term, prices appear fundamentally supported and are likely to be range bound. On average, current producers are generating cash margins of about 50 percent, yet cost inflation sees new projects have a hurdle rate closer to $3 per pound.

Weaknesses

• U.S. natural gas prices fell back under $3 per mmbtu after the Department of Energy reported that weekly inventories of natural gas built larger than expected.
• Rio Tinto PLC is cutting some jobs at its regional headquarters in Melbourne and will close an office in Sydney as the Anglo-Australian mining giant moves to contain costs amid falling prices for key commodities such as iron ore, two people familiar with the matter said Tuesday.
• The latest round of PMI data released on Wednesday paints a weak picture for global growth, and suggests that Asian economies are starting to feel stronger headwinds from the eurozone crisis. China and India also recorded slower manufacturing growth for July, while Japan’s PMI fell to the weakest level since last year’s tsunami.

Opportunities

• Reuters reported that the Ecuador government is preparing mining reforms to attract investments, according to a top mining official. The proposed new bill would delay a windfall tax until miners recover their investments and set a ceiling on mining royalties, bringing more certainty.
• The Indonesian Coal Mining Association (ICMA) estimates the country’s coal production is now likely to be flat in 2012, compared with a 10-12 percent increase previously. Coal analysts with Macquarie Capital think this highlights that the falling thermal coal price has put pressure on producers, particularly at the smaller, low-energy end of the spectrum which should ultimately tighten seaborne coal supply and provide price support for falling coal prices.
• The Wall Street Journal reported that China has quietly increased its budget for railway investment this year by 16 percent, data from the Ministry of Railways showed. In its latest bond prospectus published on Chinabond, an official website for debt issues, the railway ministry said Monday it plans to spend 470 billion yuan ($73 billion) on infrastructure investment this year, up from the 406 billion yuan stated in a prospectus earlier this month. Spending on railway infrastructure in the second quarter slipped to 7.6 percent year-on-year, down from 8.1 percent in the first quarter, for its slowest pace in more than three years. Data from the railway ministry showed that it spent 148.7 billion yuan on infrastructure investment in the first half of 2012, down 39 percent from a year earlier.

Threats

• Reuters reported that Indian coal markets are seeing scattered defaults among end users and trade buyers in part because of a 20 percent slide in coal prices this year, though a vast majority are still honoring contracts.
• The Argentine government is moving to exercise further control over the country’s oil sector with a new initiative that will require companies to submit annual investment plans for approval. Dow Jones Newswires reported that the government is making it mandatory for oil companies to submit their yearly investment plans to Deputy Minister of Economy Axel Kicillof by September 30 of each year, according to new rules published July 27 in the Official Bulletin. The new rules are likely to further exacerbate the tension between the Argentine government and the private companies operating in the country’s hydrocarbon sector.

Tags: Asian Economies, Coal Mining, Crude Oil Prices, Ecuador Government, Global Growth, Global Inventory, Global Producers, Headwinds, Hurdle Rate, Indonesian Coal, Iron Ore, Market Radar, Mmbtu, Natural Gas Prices, New Projects, Nomura, Regional Headquarters, Reuters, Rio Tinto Plc, Supply Concerns, Windfall Tax
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