Growth Falters, with Exception of Japan – Global PMI Scorecard (Oct 2011)

Monday, November 7th, 2011

Growth in global economic activity faltered in October after accelerating in September. The global manufacturing sector slipped into recession territory while growth in the services sector slowed markedly.

The JP Morgan Global Composite Index fell to 51.4 after rising to 52.0 in September from 51.5 in August. The drop in the composite PMI is mainly attributed to a significant drop in my calculated GDP-weighted PMI for the Eurozone to 46.6 from 48.7 in September. Germany’s composite PMI at a 27-month low indicates that economic activity in the private sector has virtually stagnated while economic activity in France, Italy and Spain at 28 to 30-month lows has contracted severely. Growth in the U.K. weakened considerably to stagnation levels.

My GDP-weighted Composite ISM PMI for the U.S. in October eased to 52.4 from 52.7 in September, indicating continued but below-par growth.

Growth in China also eased on a non-seasonally as well as a seasonally adjusted basis.

Japan was the exception to the rule among developed economies. According to Markit, Japanese private sector activity rose for the first time since February as the composite output index breached the neutral 50.0 threshold. The composite PMI jumped from a contracting 47.0 to a highest reading of 52.4 since data were first compiled in September 2007.

Economic activity in emerging economies improved somewhat. Brazil has returned to growth again. Growth in India and Russia edged up marginally while the contraction in Hong Kong eased markedly.

Sources: Markit; CFLP*; ISM**; US Business Activity Index***; Plexus Asset Management.

The JP Morgan Global Services PMI for October eased to 51.8 from 52.6 in September on the back of a significant deepening in the contraction in the Eurozone and especially France, Italy and Spain. The Germans are holding out, though, and have managed to eke out some growth from contracting in September. The services sector in the U.K. continues to exhibit some growth but at a reduced rate, while growth in Ireland accelerated slightly. Australia’s services sector is under the water again while growth in the services sector in China is weakening. The U.S.’s ISM non-manufacturing PMI continued its slightly weaker trend with the PMI marginally lower at 52.9 from 53.0 in September. However, it surprised the market on the downside as the consensus was for a rise to 53.5. The Business Activity Index fell sharply from a robust 57.1 to 53.8.

Among the BRICS countries Brazil made a huge turnaround as its services PMI jumped to 53.6 from 50.5 in September. Russia experienced a slight acceleration in growth but the contraction in India’s services sector has deepened.

  Latest AdvisorAnalyst Stories

Tags: Activity Index, Adjusted Basis, Brazil, Business Activity, Composite Index, Composite Output, Contraction, Emerging Economies, Eurozone, Exception To The Rule, Global Economic Activity, Global Services, India, Ism, Jp Morgan, Lows, Manufacturing Sector, Output Index, Private Sector Activity, Scorecard, Services Pmi, Stagnation
Posted in Brazil, India, Markets | Comments Off

3 Drivers, 2 Months, 1 Gold Rally?

Sunday, November 6th, 2011

3 Drivers, 2 Months, 1 Gold Rally?

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

Federal Reserve Chairman Ben Bernanke announced this week that the Federal funds rate will stay near zero for now. He reasoned that the “low rates of resource utilization and a subdued outlook for inflation over the medium run” would likely “warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

This will likely translate to the real interest rate (which is the rate of interest an investor can receive on a U.S. Treasury bill after allowing for inflation) remaining negative for at least another year and a half.

For gold investors, a low-to-negative interest rate has been associated with a powerful historical trend. Going back four decades, gold has experienced positive higher year-over-year returns whenever the real interest rate tipped below 2 percent.  And the lower the rates drop, the stronger gold tends to perform.

Marc Faber, editor of the Gloom Boom & Doom Report, believes the Fed will keep rates near zero even longer than 2013. In his November commentary, he points to the opinion of Chicago Federal Reserve Bank President Charles Evans, who wants the Fed to “commit itself to keep short-term rates at zero until the unemployment rate falls below 7 percent or the outlook for inflation over the medium term goes above 3 percent.” If Evans has his way, Dr. Faber extrapolates that rates could “stay at zero for five or even 10 years (and negative in real terms).” Based on Dr. Doom’s prediction, one could infer that gold could continue its bull run for several years to come.

This rate-cutting trend is not only an American phenomenon, as other countries have been slashing their interest rates. In surprise moves, the central banks of Europe, Brazil, Indonesia and Turkey have all recently cut rates. This week, the European Central Bank surprised markets when it cut its key interest rate by 0.25 percent. Brazil has cut rates twice over the past two months, and Turkey cut its benchmark interest rate a few months back as part of an unorthodox move to keep its economy from overheating.

Many investors follow the Fed’s decisions, but to see countries’ rate changes in action over the years, The Wall Street Journal put together an interesting interactive showing how countries around the world have increased or decreased their interest rates over the past several years. Check it out now.

The other strong action central banks have been taking is loading up on gold. In “Perfect Storm Creates Tidal Wave of Gold Demand,” we discussed how the trend of gold buying by central banks in the East has been increasing while the Western central banks have ceased selling their gold. Now Turkey’s central bank is trying to manage liquidity in the banking system by allowing banks to keep up to 10 percent of their required reserves against lira liabilities in gold.

Bloomberg News reported that if Turkish banks fully allocate that 10 percent, it will free up $3.1 billion in liquidity.

This has followed a similar move by Turkey’s central bank to allow private banks to hold an increased percentage of their reserves against foreign-currency liabilities. Since that change, 21.6 tons of gold were added. According to Bloomberg News, another 55 tons of gold could be added after the new adjustment goes into effect on November 11. This would bring the total gold reserves in the Turkish central bank to a value of $10 billion.

‘Tis the Season for Gold
Combine the central bank purchases of gold with the fact that we are now entering the strongest months of the year for gold. The chart from Bank of America Merrill Lynch (BofA) below shows how gold and gold equities have performed on an average monthly basis over the past 10 years. While the spot gold price has differed from the S&P/TSX Composite Index of gold equities during the first 10 months of the year, their historical pattern is very similar during the last two months. November has historically been the strongest month of the year for gold equities, with mining stocks increasing 8.1 percent.

Combined with equity valuations at historically low levels, BofA believes, “gold equities could follow the historical pattern in late 2011.”

The argument for a rally in gold and gold equities this time of year is strengthened when we compare the seasonal patterns over different time frames. I often show gold’s historical patterns when I present my Goldwatcher Presentation to emphasize how strong these last months of the year have been over every time period.

The 5-year pattern has strayed from the longer-term historical patterns, particularly before the October timeframe. For the past five years, the gold price has started the year weak, and then moved considerably higher than its 15- and 30-year historical average from February through September.

However, over the 5-, 15- and 30-year patterns, the trends in November and December have mimicked each other.

BofA says a key driver of this late-year gold trend has been increased jewelry demand for the Christmas buying season. We agree wholeheartedly, as the gift giving season around Christmas drives many consumers to purchase gold jewelry for their loved ones. And despite consumer sentiment remaining near a record low, the National Retail Federation anticipates holiday sales rising a modest 2.8 percent this November and December.

In India and China, people are especially amorous of the metal and buy gold out of love. It is customary in most developing countries to give gold as a gift to friends and relatives for birthdays, weddings and to celebrate religious holidays. And this time of year, gift giving in the form of gold is especially strong in India. Indians recently celebrated Diwali, which spurs gold buying during a five-day celebration of good over evil, light over darkness, and knowledge over ignorance (Read the Frank Talk post on Diwali).Diwali is followed by the main Indian wedding season where many Indians will be buying golden gifts for the bride and the groom. In China, 2012 is the “Year of the Dragon” and retailers expect to sell gifts in the form of gold dragon jewelry, pendants, statues and coins.

Gold investors should remember that volatility swings both ways. If you look at 10 years of data, gold bullion has had 10 percent price swings about 7 percent of the time. These ten percent swings are more common for gold equities, as the NYSE Arca Gold BUGS Index has had 10 percent swings over 20 trading days about a third of the time.

With three drivers—1) negative real interest rates propelling investors to seek gold for it’s perceived “safe haven” qualities, 2) the Love Trade in full bloom, and 3) central banks increasing their holdings in the yellow metal—happening over the next two months, gold is one commodity that could benefit.

  Latest AdvisorAnalyst Stories

Tags: American Phenomenon, Brazil, Central Banks, Charles Evans, Chicago Federal Reserve Bank, Chief Investment Officer, Dr Doom, Federal Funds Rate, Federal Reserve Bank, Federal Reserve Chairman, Federal Reserve Chairman Ben Bernanke, Frank Holmes, Gold, Gold Investors, Gold Rally, India, Marc Faber, Negative Interest, Outlook, Real Interest Rate, Treasury Bill, U S Global Investors, U S Treasury, Unemployment Rate
Posted in Brazil, Gold, India, Markets, Outlook | Comments Off

Gold Market Cheat Sheet (November 7, 2011)

Sunday, November 6th, 2011

Gold Market Cheat Sheet (November 7, 2011)

For the week, spot gold closed at $1,754.65, up $10.90 per ounce, or 0.63 percent. Gold stocks, as measured by the NYSE Arca Gold BUGS Index, rose 1.40 percent. The U.S. Trade-Weighted Dollar Index surged 2.46 percent for the week.

Strengths

• Both gold and the gold stocks tacked on more gains this week despite a surge in value of the U.S. dollar.  The strength in the dollar was not fundamentally driven but came in response to Japan’s policy of currency manipulation to weaken the yen and thus boost the earnings of its companies which are heavily dependent upon export markets.
• A number of companies recorded strong weekly performance driven by quarterly updates on earnings.  Dundee Precious Metals, Inc. rose 9.5 percent, Royal Gold gained 9.3 percent, and Yamana Gold moved 4.6 percent higher.  In addition, Lake Shore Gold Corp. jumped 11.8 percent on high volume and Agnico-Eagle Mines bounced back 3.8 percent on an upgrade to buy from Dalman Rose & Co.
• Ongoing M&A activity continues in the mining industry, with Anglo American announcing its plan to pay $5.1 billion for Oppenheimer’s 40 percent stake in De Beers, increasing the company’s stake to 85 percent in the diamond producer.  This also ends the family’s links to the diamond business almost after a century.  De Beers recorded a 55 percent increase in first-half earnings attributable to record sales in a price increase, driven by China, India and the U.S., which maintains the record for being the world’s largest consumer of diamond jewelry.  Anglo American has been working on the acquisition “for years,” after being the company’s largest shareholder since De Beers became a private company in 2001.  De Beers is tied for the title of the world’s largest diamond producer with Russia’s Alrosa.

Weaknesses

• Alamos Gold fell 11.5 percent on updated earnings which fell 73 percent to $5.4 million, dented by a tax charge related to a weaker Mexican peso, a delayed timeline for development of its properties in Turkey and a shortage of cyanide during the quarter.  Overall, the senior North American gold stock outpaced the junior tiered gold stocks by about 250 basis points which tended to dampen our performance for the week.
• ETF redemptions have picked up recently with investors reducing their holdings in silver ETFs by 320 tons in October.  They now hold 14,182 tons which is down from the peak of 15,633 tons in mid-April.  This 9.3 percent reduction in holdings coincides with a 3.8 percent drop in the gold ETF position.
• The U.S. Department of Justice has been asked to investigate Freeport McMoRan and whether or not the company has violated the Foreign Corrupt Practices Act through alleged bribery of Indonesian security forces.  Currently, Freeport McMoRan continues to be involved in an ongoing strike with Indonesian union workers at the Grasberg operations, one of the world’s largest copper and gold mines.

Opportunities

• The Royal Canadian Mint announced the IPO of Exchange Traded Receipts (ETR) under the Mint’s new Canadian Reserves program, taking the gold ETFs head on.  The new ETR is aimed at eliminating the middleman in direct gold ownership; the owner of the ETR will own the actual gold rather than a unit or share in an entity that owns the gold.  ETR holders will be able to redeem their ETRs for physical gold products in the form of 99.99 percent pure gold bars or coins, or for cash based on the future gold price or market price of the ETRs.  Not to be outdone, Australia unveiled the world’s largest gold coin, weighing 1000 kilograms, or one ton, to mark the visit of Queen Elizabeth II.  The coin is 99.9 percent pure and has a nominal value of $1 million, but the gold itself is worth over $50 million Australian.  Previous to this coin, the Royal Canadian Mint held the record for the largest coin.
• This week central bankers in Europe, the U.S., Canada and Australia all emphasized the potential for further downside risk to the economy given the current uncertainty in economic growth.   Don Coxe highlighted in a recent call that investors will continue to seek safety in gold, where it is increasingly viewed as reliable source of value, as economic concerns persist.
• Rio Tinto’s Chairman Jan du Plessis remains confident about China’s economy and emphasized that despite the country’s economic growth visibly slowing; it would remain fairly resilient to a correction, albeit a sharp one, in developed economies.  Du Plessis went on to say to an audience of business leaders in Sydney that despite signs of a slowdown and softening demand for industrial commodities, domestic demand remains strong.

Threats

• Community and political issues afflicting mining projects have been making headlines more often in recent months.  One of the latest news to hit headlines was Newmont Mining Corp. having to halt its Peru mine works on fears of protestor invasion.  Local community and political leaders worry that Newmont’s project, which would be the biggest investment in the history of Peruvian mining, would cause pollution and sap water supplies used by farmers.  Although protestors are urging the government to issue a decree that would ban the $4.8 billion gold project, this seems unlikely as the new gold mine is projected to generate hundreds of millions of dollars in taxes and royalties to the central government.
• Although Susan Shabangu, South Africa’s Mineral Resources Minister, is traveling to Australia and Britain with the goal of soothing investors’ worries of nationalization within the country, other constraints are affecting investors’ feelings towards South African mining investment.  In addition to fears of nationalization, soaring electricity and labor costs, power shortages and rail and port restrictions are still weighing on the industry.
• Speculation around Australia’s 30 percent mining profits tax is said to hurt the junior minors.  Andrew Forrest, founder of Fortescue Metals Group, says that the tax will force junior miners to shoulder the tax burden while global miners pay nothing. Australia’s small and mid-tier miners made a plea to the government and presented modeling claiming the planned tax would see small and mid-tier miners pay an effective tax rate of 46 percent, while BHP Billiton and Rio Tinto would pay no tax due to the large deductions they are able to claim.

  Latest AdvisorAnalyst Stories

Tags: Agnico Eagle Mines, Alamos Gold, Alrosa, Anglo American, Canadian, Canadian Market, Commodities, De Beers, Diamond Business, Diamond Jewelry, Diamond Producer, Dollar Index, Dundee Precious Metals, Gold, Gold Bugs, Gold Corp, Gold Market, gold stocks, India, Lake Shore Gold, Largest Diamond, Metals Inc, Nyse Arca, Royal Gold, Spot Gold
Posted in Canadian Market, Commodities, ETFs, Gold, India, Markets | Comments Off

Energy and Natural Resources Market Cheat Sheet (November 7, 2011)

Sunday, November 6th, 2011

Energy and Natural Resources Market Cheat Sheet (November 7, 2011)

Strengths

• The Global Resources Fund performed in line with the benchmark for the week.  The NYSE Arca Gold Miners Index, Oil Exploration & Production and the Metals and Mining index were among the few indices positive for the week.  With continual uncertainty around the state of the Eurozone, despite some clarity earlier on this week, investors sought refuge in gold.  The fund’s exposure to the precious metal helped to reduce downside risk.  The indices were up 1.4 percent, 0.86 percent and 0.9 percent respectively.
• Roubini Global Economics highlighted that oil prices rallied in October, narrowing the Brent-WTI spread, with WTI appreciating over 24 percent to $94.2 per barrel and Brent rising by 11 percent to nearly $111 per barrel.  Oil and oil product inventories drew down to below their five-year average, as did growth, which was surprising on the upside at an annualized adjusted rate of 2.5 percent for third quarter.
• Bloomberg reported that the number of India’s power stations with coal stockpiles of fewer than four days’ normal use has tripled in two months, prompting electricity-supply cuts and threatening to curb growth in Asia’s third-biggest economy.  Coal output in India was disrupted with monsoon rains flooding mines and a workers’ strike.  The country’s stockpiles dropped from 70.9 million metric tons of coal on October 18 to 8.1 million tons on November 1, also representing a 33 percent decline from the first of September.

Weaknesses

• Considerable weakness relative to other indices was seen among construction materials, alternative energy and the Baltic Dry Shipping Index, all down 4.39, 4.82 and 4.17 percent, respectively for the week.
• Freeport-McMoRan Copper & Gold’s Grasberg mine in Indonesia is operating at only 5 percent of its capacity of 230,000 tons of ore per day, according to the director general of mineral resources and coal at the Energy Ministry. This works out to a loss of over 1,600 tons per day of copper-in-concentrate. Freeport recently declared force majeure on shipments of copper concentrates as a result of an increasingly acrimonious strike over pay and conditions that is now into its sixth week. Grasberg is the world’s second-largest copper mine equal to around 4 percent of global output and is also one of the world’s largest gold mines.
• A Bloomberg report highlighted that Brazil’s industrial sector has been the hardest hit by Europe’s debt crisis and slowing growth in the U.S.  The economic activity index, a proxy for gross domestic product, contracted 0.53 percent in August, its biggest monthly drop since the global financial crisis of 2008.  It dropped further for the month of September, posting its second steepest decline since the financial crisis, sparking the central bank’s argument for more interest-rate cuts in Latin America’s largest economy.

Opportunities

• Global copper supply remains challenged.  Xstrata estimates 2011 global copper mine output growth to be the weakest since 2002, with mine production to rise by only 40 kilotons this year.
• McKinsey Quarterly published a piece examining the oil industry and whether or not supply growth could accelerate to meet global demand.  The report highlighted that despite high oil prices for much of the past decade and surging investment outlays by many major private and national oil companies alike, capacity has only risen by more than 1 percent a year during that time.  The company’s current projection suggests that the world could reach a realistic supply capacity of around 100 million barrels a day by 2020, which is an increase from 91-92 million barrels per day today.  This number, however, would barely satisfy the roughly 100 million barrels of liquids the world would consume each in day in such a scenario, which is up from 88-89 million today.

Threats

• Bloomberg reported that Brazil plants to limit the expansion of mining companies with concessions in sizeable areas as part of new mining rules.  It has been speculated that this may affect companies, such as Vale SA, negatively.  Vale is a Brazilian diversified mining multinational corporation and one of the largest logistics operators in the country.  It is the largest producer of iron ore, pellets, and second largest of nickel.
• Roubini Global Economics is assigning a 60 percent probability to a recession in developed markets in 2012.  The firm believes this will cap the recent surge in crude prices despite OPEC output tightening in the wake of Libyan supply entering the market.
• ArcelorMittal SA, the world’s number one steelmaker, said that a summer dip in demand is now extending into a second-half slump, with even lower steel shipments and prices in the fourth quarter, leading it to scrap some investment plans.  ArcelorMittal globally supplies between 6 and 7 percent of steel.  It is attributing this to economic uncertainties, the risk of recession in developed markets, and policy tightening in China, and is causing customers to be increasingly cautious.

  Latest AdvisorAnalyst Stories

Tags: Barrel Oil, Brazil, Coal Output, Crude Oil, Downside Risk, Electricity Supply, Eurozone, Freeport Mcmoran, Freeport Mcmoran Copper, Global Economics, Global Resources, Gold, Gold Miners, Grasberg Mine, Index Oil, India, Million Metric Tons, Monsoon Rains, Nyse Arca, Oil Product, Product Inventories, Resources Fund, Shipping Index, Wti
Posted in Brazil, Gold, India, Markets, Oil and Gas | Comments Off

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.

  Latest AdvisorAnalyst Stories

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

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.

  Latest AdvisorAnalyst Stories

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
Posted in Brazil, Canadian Market, India, Markets | Comments Off

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.

  Latest AdvisorAnalyst Stories

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
Posted in Commodities, Gold, India, Markets | Comments Off

Sprott: Investment Outlook (October/November 2011)

Friday, October 28th, 2011

Oil or Not,
Here They Come

By Kevin Bambrough
Contributing Author: Paul Dimitriadis
Sprott Asset Management

Oil has been markedly absent in the financial headlines lately. While the recent clamor over EU solvency and weak global growth has temporarily displaced its media attention, oil’s crucial importance to the world economy has not dwindled in the slightest. Oil remains the world’s greatest single energy source today, providing over 1/3 of our energy supply. Although it is well understood that the oil price is critical to the global economy, we sometimes neglect to appreciate how tightly oil supply is correlated to global growth. By historical standards, the world has been coping with constrained oil production and high oil prices for most of the past six years. This tightness in oil supply has been a significant factor limiting global growth, and it would appear that no matter what financial solutions are eventually engineered by our politicians, global growth will remain significantly restricted by the real economy’s ability to produce oil. Limited global supply growth means that the Western world now faces significant competition for oil from emerging markets whose citizenry are willing to work much harder for far less. This will continue to result in a narrowing gap of per capita consumption between emerging and developed economies as the emerging economies continue to gain relative economic strength, wage growth, currency appreciation and purchasing power. We believe strategic investments in oil producers and service companies will offer an effective way to profit from this trend.

Production – Where’s the Growth?

We begin with a review of global oil production. We first wrote about Peak Oil back in 2005; and speculated that we were approaching the pinnacle of global crude oil production.1 As Figure 1 below illustrates, since that time, global oil production has grown very little, appreciating by a mere 2% in total production. This production plateau generated the 2008 oil price spike to nearly $150 per barrel. Subsequently, despite the economic stagnation experienced by developed economies, the price of Brent Crude Oil has averaged over $78 per barrel, four times higher than the ~$18 average that Brent traded at in the 1990s.2

Despite this extremely large and sustained increase in price, oil production has failed to grow meaningfully. Over the past ten years, most experts have consistently overestimated future production growth and have continually revised their forecasts lower as a result. Figure 2 from the U.S. Energy Information Administration (“EIA”) below charts production forecasts made in 2000, 2005 and 2010. Over the last decade the EIA has revised its global oil production estimates lower for 2015 and 2020 by 14% and 18%, respectively. In light of these downward revisions, it still seems extremely optimistic that supply will increase significantly in the coming years.

Figure 3 above illustrates that the International Energy Agency (“IEA”) estimates have been just as inaccurate, forcing it to reduce its global oil production estimates year after year.

  Latest AdvisorAnalyst Stories

Tags: Author Paul, Canadian, Canadian Market, Commodities, Crude Oil, Crude Oil Production, Dimitriadis, Economic Strength, Emerging Economies, Energy Supply, Financial Headlines, Global Economy, Global Growth, Global Oil Production, Global Supply, India, Investment Outlook, Oil Producers, Oil Supply, Outlook, Peak Oil, Solvency, Sprott Asset Management, Strategic Investments, Trend Production, World Economy
Posted in Canadian Market, Commodities, India, Markets, Oil and Gas, Outlook | Comments Off

From Russian Rubles to the Chilean Peso, EM Debt Goes Local (Tucker)

Friday, October 28th, 2011

by Matt Tucker, Managing Director, iShares

A decade ago, buying a local currency emerging market (EM) bond fund would have been nearly impossible. In the “old” days emerging market governments primarily issued bonds that were denominated in foreign currencies, like US dollars, Japanese Yen or Euros, when they wanted to raise capital.

Issuers like Brazil, Poland and Indonesia used to target this external debt at foreign investors. Their local currency debt was targeted at local investors, like pension plans, insurance companies and private individuals within the country. Many of these countries directly restricted foreign investors from buying local currency bonds through capital controls, punitive taxes or regulations. A US investor looking to access a Brazilian bond denominated in reals would have been facing an uphill battle.

Some issuers, like China and India, still restrict foreign investors from purchasing their local currency debt. Others have taxes on foreign investors, which are designed to limit the amount of foreign capital, like Brazil’s 6% IOF (Imposto sobre Operações Financeiras) tax.

But times are changing and many EM issuers are relaxing such restrictions. Some countries are now issuing bonds that are denominated in local currencies but targeted at international investors. These “global” bonds trade in global clearing and settlement systems, like Euroclear or the Depository Trust Company (DTC), instead of local clearing systems. The Philippines, Russia, Colombia, Chile, Brazil and Egypt have all issued global local currency bonds.

Last week, my colleague Russ blogged about using emerging market debt as a long-term option for investors worried about a deterioration of credit quality in the developed world.

Local currency emerging market bond ETFs can offer investors exposure to emerging markets without the same type of potential volatility that is typically associated with equities. Adding an allocation to local currency EM debt can also help an investor diversify out of the US dollar or away from developed market currencies, like the Euro or the Yen.

Additionally, because yield levels are higher than for developed market bonds, local currency EM debt can increase the yield of a fixed income portfolio.

Emerging market debt is a relatively new asset class for many investors, especially bonds that are denominated in local currencies, but it offers another tool with which to manage fixed income exposure.  (Potential iShares solution: LEMB)

Diversification may not protect against market risk.

Bonds and bond funds will decrease in value as interest rates rise. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Securities focusing on a single country may be subject to higher volatility.

Narrowly focused investments typically exhibit higher volatility and are subject to greater geographic or asset class risk. Bond funds may be subject to credit risk, which refers to the possibility that the debt issuers will not be able to make principal and interest payments.
Copyright © iShares

  Latest AdvisorAnalyst Stories

Tags: Bond Fund, Bonds, Brazil, Chilean Peso, Credit Quality, Currency Bonds, Currency Debt, Depository Trust Company, Emerging Market, Euroclear, External Debt, Foreign Currencies, Foreign Investors, Global Bonds, India, International Investors, Japanese Yen, Matt Tucker, Pension Plans, Punitive Taxes, Russian Rubles, Settlement Systems, Term Option
Posted in Bonds, Brazil, ETFs, India, Markets | Comments Off

Backing Brazil and Avoiding Indian Inflation (Koesterich)

Friday, October 28th, 2011

by Russ Koesterich, Chief Investment Strategist, iShares

In his latest video installment, iShares Chief Investment Strategist Russ Koesterich takes investors to Latin America and explains why Brazil is his favorite spot in the region. But for investors who might be interested in India, Russ has some words of caution.

For more from Russ on this topic, listen to the November Market Perspectives podcast.

  Latest AdvisorAnalyst Stories

Tags: Brazil, Chief Investment Strategist, Favorite Spot, India, inflation, Investors, Ishares, Latin America, Market Perspectives, Russ, Words Of Caution
Posted in Brazil, India, Markets | Comments Off