Posts Tagged ‘Acquisition Activity’
Saturday, August 11th, 2012
Gold Market Radar (August 13, 2012)
For the week, spot gold closed at $1,620.20 up $16.42 per ounce, or 1.04 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 5.05 percent. The U.S. Trade-Weighted Dollar Index edged higher, gaining 0.22 percent for the week.
- Merger and acquisition activity is picking up. On Monday, Australia’s Silver Lake Resources said it will acquire Integra Mining in an all-scrip deal to create a gold miner with a market value of nearly $1 billion. The combined companies would create a gold producer with a 6.6 million ounce resource base, with current production of 200,000 ounces projected to more than double in 2014.
- Endeavour Mining’s announcement that it plans to acquire Avion Gold sent Avion’s shares up 20 percent.
- Overall, few companies have reported positive dynamics with their second-quarter updates. However, Randgold is certainly the exception and reported group gold production of 210,534 ounces of gold in the quarter, a 27 percent increase over the first quarter and a 14 percent rise over the second quarter of 2011, and with a pleasant decline in total cash costs to boot. Randgold Resources, under the leadership of Mark Bristow, is well on its way to becoming a Tier 1 gold miner and its latest milestone is the official opening of its Gounkoto mine in Mali. Capital cost to develop the mine was repaid in less than a year.
- Roy Sebag of Natural Resource Holdings compiled a report showcasing the rarity of +1 million ounce gold deposits. Of the 439 mines or deposits identified, 189 were identified as producing mines owned by companies. This left only 250 undeveloped deposits but the declining quality of available resources was also shown. There is a 37 percent drop in grade between that of producing mines as compared to undeveloped deposits. Higher gold prices will be needed to bring these projects into production.
- In a story published Sunday, the Financial Times stated, “A four-year investigation into the possible manipulation of the silver markets looks increasingly likely to be dropped after U.S. regulators failed to find enough evidence to support a legal case, according to three people familiar with the situation.” One analyst we spoke to commented that regulators in the U.S. are much more interested in prosecuting foreign banks for any misdoings. Potential charges against Goldman Sachs in relation to the mortgage-backed securities scandal were also dropped this week as the Justice Department backed off the case. However, HSBC, Barclays, and now Standard Bank are being pursued on changes ranging from money laundering of the drug trade, fixing interest rates, to allowing illegal trade with Iran.
- Sentiment towards the junior miner space is still weak, at least for the roughly 1,000 prospectors attending the Diggers and Dealers conference in Australia, which has made its industry uncompetitive with taxes and regulation.
- Silver stocks outperformed their golden peers this week. The catalyst was likely the recent fully subscribed $200 million offering of new units by the Sprott Physical Silver Trust and with the associated green shoe being fully taken up by the underwriters. What this means is Sprott will be in the market looking to acquire some 8 million plus ounces of physical silver to fulfill the mandate of the trust. When Sprott launched the Physical Silver Trust securing 15 million ounces, it took a full three months before delivery of the metal was received and, according to Sprott, some of the delivery had not even been mined when the order was put in.
- Draft Russian legislation could facilitate foreign mining of gold and other precious metals within its borders. Undoubtedly, the Russians have realized their overly protective restriction of excluding foreign companies from mining significant gold deposits means that the gold is unlikely to get mined. The draft bill would allow foreign-owned businesses to mine deposits of up to 250 tons (about 8 million troy ounces) of gold, five times the existing cap of 50 tons set in 2008, without facing additional regulation from the state, the documents showed. Another important measure is the suggestion that a discoverer of a strategic deposit could proceed to mine development without the threat that the government could withdraw the license. This should spur more mineral exploration.
- Jamie Sokalsky, the new CEO of Barrick Gold, showed some confidence on his expectations of a turnaround at the company when he acquired 50,000 shares of his own stock through open market purchases recently.
- Niall Ferguson recently penned an essay on the “Stationary State” of the U.S. economy. The mood disorder is especially bad for investors. Only seven out of 47 national stock markets around the world have posted gains in the last 12 months. Ferguson noted that the U.S. economy has created 2.6 million jobs since June 2009. In the same period, 3.1 million workers have signed up for disability benefits. Back in 1992 there was one person on disability benefits for every 36 people in employment. Now the ratio is 1 to 16. Unemployment is being concealed—and rendered permanent—in ways all too familiar to Europeans.
- Nikos Kavalis, an analyst at RBS, noted he was struggling to see where the kind of volumes of investment in gold that we got in 2009 and 2010 are going to come from. Even if there is another round of quantitative easing he feels we are getting close to game over for gold as a lot of investors are reluctant to expand positions. Analyst Robin Bhar of Societe Generale shares Nikos’ disillusionment. “What’s the upside to gold with more QE? Maybe $1,800 – certainly not new highs,” he commented.
- More trouble for the platinum miners were hinted at this week as the Department of Mineral Resources in South Africa is said to be contemplating having the miners re-up the ownership stakes that were lost by certain Black Economic Empowerment partners that had margin calls, due to being financially extended, and were forced to sell down their ownership stakes.
Tags: Acquisition Activity, Combined Companies, Endeavour Mining, Gold Deposits, Gold Market, Gold Miner, Gold Miners, Gold Prices, Gold Producer, Gold Production, gold stocks, Lake Resources, Mali Capital, Mark Bristow, Market Radar, Merger And Acquisition, Nyse Arca, Randgold Resources, Resource Holdings, Russia, Spot Gold, Sprott
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Saturday, October 22nd, 2011
Mosaic K1 potash mine near Esterhazy, Saskatchewan, Canada. Underground, one kilometre beneath the surface. During approximately 45 years of mining activity, around 4700 km of tunnels have been bored. Specially adapted off-road vehicles are used to move around in the tunnels. photo: Martin Mraz
Energy and Natural Resources Market Cheat Sheet (October 24, 2011)
- The Global Resources Fund performance this week bested its benchmark and was in the middle of its peer group in another volatile week of trading. Our energy sector bets generally contributed to the outperformance as energy stocks (S&P 500 Energy) gained over 1 percent for the week while the S&P Materials sector fell nearly 3 percent.
- Weak equity markets since early August have created bargains in the oil patch but these may not last long as merger & acquisition activity in the energy sector remains active with two notable deals announced early in the week. Houston-based Kinder Morgan agreed to buy El Paso Corporation for $38.8 billion, creating the largest natural-gas pipeline network in the U.S., and marking the biggest energy deal in over a year. Also on Monday, Statoil of Norway announced an all-cash bid of $4.4 billion for Brigham Exploration which has a large land position in the oily Bakken shale play.
- Chinese coal imports in September rose 25 percent year-over-year to 19.1 million metric tons and set a new record for import volumes. The coal imports were said to have risen as import prices became cheap compared with the domestic prices. China’s National Coal Association said that China’s net coal imports may reach 150 million tons this year while output may exceed 3.5 billion tons, according to a report by Bloomberg news.
- Emerging markets remain the key driver for global oil demand. The latest Indian oil demand increased by 169 thousand barrels per day (6.1 percent) year-over-year in September to 2.935 million barrels per day, the highest September reading ever. The growth rate, in turn, was the strongest pace seen since January this year, and was supported by a very strong reading in diesel demand, which was higher year-over-year by 9.8 percent. Floods and political protests in various coal producing states and strikes at Coal India, the largest and primary coal producer, have adversely impacted coal supplies in the country, thereby leading to higher diesel usage in power.
- Base metals prices suffered this week from worries over slowing growth in China and the eurozone debt crisis. Copper fell 5 percent and made a 52-week low of $3.05 per pound on Thursday while aluminum also hit a 52-week low price on Thursday and closed the week down 4 percent. Metals and mining stocks generally underperformed the market this week due to the commodity price headwinds.
- Precious metals and related equities also fell this week as haven buying of gold and the dollar eased. Markets generally warmed up to the idea that European leaders will make progress in dealing with the eurozone debt crisis in meetings this weekend and sold the U.S. dollar and gold, which both fell this week.
- The U.S. Architecture Billings Index declined to 46.9 in September, compared to 51.4 in August (a mark of 50 bifurcates the indication of expansion and contraction). The positive reading in August appears to have been an isolated occurrence rather than a trend, as further evidenced by the decline in the new project inquiry index to 54.3 in September from 56.9 in August. The weak readings remain a threat to domestic construction activity and materials construction demand.
- We came away from PIRA Energy Group’s annual client seminar in New York quite constructive on the crude oil markets. Demand expectations are a bit softer in 2012 on assumptions of slower global economic growth; however, supply challenges remain prevalent. Inventories in the largest OECD countries are drawing rapidly, OPEC spare capacity is fairly tight, and non-OPEC supply outages are running nearly 2x the level of last year. Political tensions remain high in the oil supplying Middle East and relative stability seems fleeting which could throw the oil markets into even more disarray.
- Roubini Economics highlighted that Colonel Muammar Qadhafi’s death is unlikely to have any significant effect on the oil markets. In fact, it was noted that the removal of uncertainty over his whereabouts may encourage international oil companies to step up their plans to return to the country. Oil production in Libya has been rising in recent weeks to an estimated 350,000-390,000 bpd.
- The International Energy Agency has said that the Arab Spring has disrupted investment plans in oil and gas projects as governments have had to use the funds and resources for social purposes. As a result prices will have to go higher over the next 5 years to get the supply to meet demand. The IEA estimates that the world needs to spend US$38 trillion to meet projected demand over the next 24 years (US$1.58 trillion a year), up 15 percent from their 2010 forecast of US$33 trillion.
- The US Federal Reserve Bank of Philadelphia’s general economic index rose to 8.7 from minus 17.5 in September, the biggest one-month rebound in 31 years. The weak reading a month ago contributed significantly to the market sell-off seen at that time.
- Mineweb reported that Freeport-McMoRan Copper and Gold, the world’s biggest copper-gold mining operation, continues to be affected by ongoing strikes. The unrest at the company’s Grasberg operation in Indonesia could have an impact affecting global production of both copper and gold. Beginning in September, the strike is currently showing few signs of being resolved.
- Should the U.S. dollar strengthen, we could see downward pressures on commodity prices. Capital Economics published an article highlighting the inverse relationship between the value of the dollar and commodities when traded in dollars. Based on a chart illustrating the relationship using the U.S. currency’s broad trade weighted index and the CRB index of 19 commodity prices, it appears that a 5 percent appreciation in the dollar is associated with a 25 percent decline in commodity prices. Investors have recently sought safety in the dollar with the recent global financial crisis, and weakening industrial and consumer demand for commodities. Should global sovereign debt uncertainties persist, this could threaten commodity prices further.
- BHP Billiton said a slump in demand for iron ore from European steel mills has hurt prices while orders from China have so far been unaffected. “In Europe, many steel companies have, or are in the process of, reducing their steelmaking capacity and I think that that is what’s played through on the sentiment in the iron ore business,” Marius Kloppers, CEO of BHP said. “In China overall, which will over the long run be the driver of prices, we have not seen anything really happening there yet” he added.
- The U.S. derivative regulator voted 3-2 to curb commodity trading levels and restrict the numbers of contracts that can be held by a single firm. The rule limits traders to 25 percent of deliverable supply in the month nearest to delivery. Caps will go into effect 60 days after the agency defines the term “swap”, and agency declined to estimate when that will be. Limits outside the spot month are likely to go into effect in late 2012.
Tags: Acquisition Activity, Bakken Shale, Brigham Exploration, Canadian Market, Coal Association, Coal Imports, Coal India, Coal Producing States, Commodities, Crude Oil, El Paso Corporation, Energy Deal, energy stocks, Esterhazy Saskatchewan, Gas Pipeline Network, Gold, Import Volumes, India, Kinder Morgan, Land Position, Materials Sector, Million Metric Tons, National Coal, Natural Gas Pipeline, Oil Patch, Political Protests, Resources Fund, Saskatchewan Canada
Posted in Canadian Market, Commodities, Gold, India, Markets, Oil and Gas | Comments Off
Tuesday, January 4th, 2011
Byron Wien, Vice Chairman of Blackstone Advisory Partners, yesterday issued his list of “The Ten Surprises for 2011″. This is the 26th year Byron has given his predictions of a number of economic, financial market and political Surprises for the coming year. Byron defines a “surprise” as an event which the average investor would only assign a one out of three chance of taking place but which he believes is “probable”, having a better than 50% likelihood of happening.
Byron started the tradition in 1986 when he was the Chief U.S. Investment Strategist at Morgan Stanley. He joined the Blackstone Group in September 2009.
The surprises for 2011 are as follows.
1. The continuation of the Bush tax cuts coupled with the extension of unemployment benefits has put all working Americans in a better mood. Real Gross Domestic Product rises close to 5% in 2011 driven by improved trade and capital spending in addition to stronger retail sales. Unemployment drops below 9%.
2. The prospect of increasing Federal budget deficits and rising government debt finally begins to weigh on the bond market. The yield on the 10-year U.S. Treasury approaches 5% as foreign investors become more demanding. Spreads with corporate fixed income securities narrow.
3. Encouraged by renewed economic momentum the Standard & Poor’s 500 rises close to its old high of 1500. A broad range of sectors participate, but telecommunications and utilities lag. With earnings improving, valuations seem low and individual investors return to equities for the first time since the financial crisis. Merger and acquisition activity becomes intense and the market reaches a blow-off euphoria. Stocks correct in the second half as interest rates rise.
4. Although inflation remains benign, the price of gold rises above $1600 as investors across the world place more of their assets in something they consider “real.” Sovereign wealth funds of countries with significant dollar reserves also become big buyers. Hedge funds keep thinking the price rise is becoming parabolic and sell their positions and some even short the metal but gold keeps climbing and they scramble back in.
5. Worried about inflation and excessive growth, the Chinese decide to use their currency as a policy tool. They manage the value of the renminbi aggressively to keep the growth of the economy below 10% and to prevent consumer prices from increasing above the 4%–5% range. The move is viewed as a precursor to the world-wide adoption of a basket including the renminbi as an alternative to the use of the dollar as the principal reserve currency.
6. Rising standards of living in the developing world seriously increase the demand for agricultural commodities. The price of corn rises to $8.00, wheat to $10.00 and soybeans to $16.00. Commodities become a component of more institutional portfolios.
7. The housing situation improves. Although the inventory of unsold homes remains high, the oversupply is drawn down substantially, contrasting with an increase in 2010. The Case-Shiller gradually heads higher and housing starts exceed 600,000.
8. Continuing demand from the developing world and a failure to bring onstream new supply causes the price of oil to rise to $115 per barrel. The higher price at the pump fails to discourage driving, increase sales of hybrid vehicles or cause Congress to initiate conservation measures.
9. Frustrated by the lack of progress against the Taliban and the corruption of the Karzai government, President Obama concludes that whenever American troops return home, Afghanistan will once again become a tribal state ruled by warlords. He accelerates the withdrawal of most military personnel to the end of 2011. Coupled with the pullout of forces in Iraq, this will leave the Middle East without a major Western presence in the face of rising fears of terrorism.
Tags: Acquisition Activity, Blackstone Group, Bond Market, Byron Wien, Commodities, Currency, Economic Momentum, Emerging Markets, Euphoria, Federal Budget Deficits, Fixed Income, Foreign Investors, Gold, Government Debt, Gross Domestic Product, Income Securities, Individual Investors, Investment Strategist, Merger And Acquisition, Morgan Stanley, Russia, U S Treasury, Unemployment Benefits, Valuations, Wea
Posted in Commodities, Energy & Natural Resources, Gold, Infrastructure, Markets, Oil and Gas | Comments Off
Monday, October 4th, 2010
Equities took a break from their four-week run and consolidated gains last week, posting very slight losses. The Dow Jones Industrial Average was off 0.3% to close at 10,829, the S&P 500 Index dropped 0.2% to 1,146 and the Nasdaq Composite fell 0.4% to 2,370.
Over the past several weeks, economic data has shown signs of improvement, suggesting that the risks of a double-dip recession are lessening. Last week’s good news included the Chicago Purchasing Managers’ Index for September, which showed increases in both production levels and new orders. Additionally, initial unemployment claims declined, a positive for the beleaguered labor market. Outside the United States, data from Germany pointed to a stronger-than-expected recovery and we also have been seeing reasonably firm data from China.
Looking ahead, we expect to see some continued back and forth in economic data. The Federal Reserve is likely to continue to support growth through its policies of ensuring that liquidity remains ample. On the other hand, however, the slowing of the rebound in business inventories, constraints from private-sector deleveraging and balance sheet contraction from the banking system will act as headwinds. On balance, we believe that modest (but positive) levels of economic growth will continue, and in the United States, our 12-month forecast is for real gross domestic product growth of somewhere between 2% and 2.5%.
If this forecast is accurate, these growth levels should be enough to maintain strength in corporate earnings. Corporate balance sheets remain healthy, as most companies have remained very conservative in terms of managing their debt and spending levels. Corporate confidence remains somewhat shaky, but should economic growth continue to improve, companies will likely become more aggressive in deploying their high levels of cash on such activities as dividend increases, share buybacks, capital expenditures, merger-and-acquisition activity and (hopefully) hiring. Over the course of the next year, we expect to see continued improvements in corporate earnings and believe the earnings per share for the S&P 500 could be around the $90 level in 2011, which would represent a roughly 8% increase from the $83 level we are forecasting for this year.
For several months, we have been highlighting the increasing disconnect between the S&P 500 earnings yield and investment grade bond yields. That disconnect has now spread to the high yield bond sector as well. Treasury yields have declined over the past several months as both recession risks and the likelihood for additional Fed bond purchases increased. At the same time, corporate bond spreads have remained relatively unchanged, which has brought investment grade corporate bond yields to record lows and high yield bond yields to lows they last reached in the pre-credit-crisis environment of 2007. As a result, the S&P 500 Index is offering an earnings-per-share yield that is as high as high yield bonds, a very unusual scenario and one that speaks to the attractive relative value of stocks.
At present, there are a number of crosscurrents affecting financial markets and many investors lack conviction about how to position their portfolios in the current environment. Some are playing “catch up” from the recent rally, while others are maintaining a defensive posture. In the short-term, we believe continued caution is warranted given the high levels of uncertainty, especially considering the rebound in investor sentiment we have seen, coincident with equities’ 10% rise from their lows about a month ago. Still, assuming the United States does avoid a double-dip recession (which is our view), and that Europe continues to avert a renewed financial crisis, we believe investors with long-term horizons should look past the short-term tactical issues and focus on the fact that equity valuations appear attractive, especially relative to bonds.
About Bob Doll
Bob Doll is Chief Equity Strategist for Fundamental Equities at BlackRock® a premier provider of global investment management, risk management and advisory services. Mr. Doll is also Lead Portfolio Manager of BlackRock’s Large Cap Series Funds. Prior to joining the firm, Mr. Doll was President and Chief Investment Officer at Merrill Lynch Investment Managers.
Sources: BlackRock; Bank Credit Analyst. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 4, 2010, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
Tags: Acquisition Activity, Banking System, Business Inventories, Capital Expenditures, China, Contraction, Corporate Balance Sheets, Corporate Confidence, Corporate Earnings, Dividend Increases, Double Dip Recession, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Data, Gross Domestic Product, Headwinds, Initial Unemployment Claims, Merger And Acquisition, Nasdaq Composite, Purchasing Managers Index
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Saturday, September 4th, 2010
Gold Market Diary (September 7, 2010)
For the week, spot gold closed at $1,246.75 per ounce, up $8.65, or 0.70 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, rose 1.45 percent. The U.S. Trade-Weighted Dollar Index fell 1.09 percent for the week.
- According to a Citi report, the downtick in equity flows isn’t just a cyclical trend but a secular shift into fixed income. The average investor only has an ultra low 6 percent weighting in fixed income. Gold would certainly be even less. Incremental shifts toward safer investments should continue to be supportive of gold.
- The gold trade appears to be still early. If the seeds of inflation are being properly planted, gold can continue to do very well. From 1970 to 1980, adjusting for inflation, the S&P 500 only compounded at 0.80 percent rate per year for the decade while the Toronto Gold & Precious Minerals Index (adjusted to U.S. dollars) compounded at 25.1 percent return per year.
- On Friday, the acquisition activity jumped in gold stocks as a friendly and a competing hostile bid were launched for the owner of a high-grade gold discovery—one of the top discoveries of the decade.
- The risk of owning the wrong gold stock—one with low-grade reserves—is heightened. Some popular companies have been cited as the next take-out targets over the past month and their share prices have been bid up to levels which would be commiserate with an $8,500+ gold price. In a competitive environment, you cannot buy low-grade ounces for top dollar and expect to earn a return on capital that is above peers.
- Although South Africa’s gold production rose in the second quarter, it was still down 7 percent in the first half of 2010 compared to last.
- According to the Royal Bank of Scotland, we are now in the second phase of the mining cycle with sideways movement and volatility becoming the trend.
- Bloomberg surveyed 29 analysts about expected gold price highs in 2011; the median price for the survey was $1,500.
- Gold held by ETFs in India, the world’s largest buyer of bullion, may surge as much as 17 times in the next three years as investors seek refuge from financial turmoil and inflation.
- Ernst and Young forecasts that the value of deals in the global mining and metals sector is set to soar as competition to secure raw materials heats up.
- Nouriel Roubini recently said, “If there was a double-dip recession, increasing risk aversion, some assets are going to be preferred, and gold will be one of them. But in that situation, things like the dollar, the yen, the Swiss franc have more upside in a situation of rising risk aversion because they are much more liquid than the gold market.” A counterpoint to Mr. Roubini’s thought: what is the currency of failed policies worth after such a massively failed stimulus effort?
- The National Union of Mineworkers is meeting to decide whether to expand its strikes to all operations of multiple diversified miners in South Africa.
Tags: Acquisition Activity, Bank Of Scotland, Dollar Index, ETF, ETFs, Gold, Gold Bullion, Gold Discovery, Gold Equities, Gold Market, Gold Price, Gold Production, Gold Stock, gold stocks, Gold Trade, Grade Gold, Hostile Bid, India, Market Diary, oil, Philadelphia Gold, Precious Minerals, Return On Capital, Royal Bank Of Scotland, Silver, Silver Index, Spot Gold
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Tuesday, August 31st, 2010
- Market volume continues its traditional August swoon, making it difficult to gauge much from stock market action. Economic data continues to tell a mixed story, as growth slows and risks rise.
- Confidence is key to consumer spending, business investment and stock market performance. The Federal Reserve and the government are attempting to instill that confidence in the American public, but so far have had little success.
- Emerging markets continue to show signs of growth and China’s market has been performing well. Germany also has posted some nice numbers lately, but Japan remains a concern.
With the Dow Jones Industrial Average posting triple-digit gains and losses during the past couple of weeks, it can be easy to get caught up in overreaction. However, these market moves have occurred on some of the lowest trading volume days of the year, meaning that they’re hardly a referendum on the overall consensus of market participants.
In fact, during the past month, there’s been little consensus as the overall market indexes are roughly flat. Bears have pointed to deteriorating economic data as a sign of an impending double-dip recession, while bulls have directed attention to a good earnings season, increasing merger-and-acquisition activity and continued accommodative monetary policy.
This again illustrates the folly, in our opinion, of trying to time the market. Where the market goes in the near term is virtually impossible to predict. Following the recent Federal Open Market Committee meeting where the Fed demonstrated its commitment to continued extremely accommodative monetary policy, the market initially responded relatively well, only to sell off during the next trading day.
Additionally, we want to again caution investors about reading too much into so-called technical indicators. While they can be a tool in your overall market analysis, there’s little evidence that the majority of indicators can be consistently relied upon.
Recent attention has been paid to the “Hindenberg Omen,” a relatively complicated set of technical conditions which has preceded every market crash since 1987 that was recently breached. However, it’s important to note—but is rarely reported—that this indicator has flashed multiple times during the past 20+ years when there hasn’t been a crash. In fact, more than 75% of the time the Omen has been a false signal, according to The Wall Street Journal.
We continue to advocate a long-term view on equity investments. If you need money in the near term, don’t invest it in equities—short-term performance can be too volatile.
That doesn’t, however, mean to just buy and ignore your investments. It’s important to use dips and rallies to add or subtract to positions as necessary and to monitor your investments to track changes in approach, style or performance and adjust as necessary.
Economic growth slowing, but remains positive
Although rhetoric surrounding a double-dip recession has increased throughout the summer, we remain relatively optimistic that economic growth will remain positive (albeit low) and that from a sentiment and valuation perspective, the stock market appears relatively attractive. While volatility will continue, alternatives to stocks are relatively unattractive.
Yields on bonds are near all-time lows, while interest rates on cash deposits remain at virtually zero. Meanwhile, the dividend yield on the Dow is approximately 2.9%, greater than the 10-year Treasury yield of approximately 2.5%. Maintaining a balanced, diversified portfolio is important and we believe that for most investors, it makes sense to keep some of your portfolio in stocks.
While we don’t think we’re slipping back into recession, risks are rising and warrant watching. Initial jobless claims remain stubbornly high, with a recent reading again hitting the 500,000 mark, the highest level since November of last year.
Housing also continues to languish, as housing starts were up 1.7% in July, but more forward-looking building permits were down 3.1%. Adding concern, existing home sales fell 27.2% in July to the lowest level in 15 years, as inventories surged to 12.5 months worth of supply.
These results should be taken with a grain of salt, however, as the April expiration of the Federal tax housing credit continues to distort numbers. We continue to believe that historically low mortgage rates and record affordability will help support the housing recovery—but that it will be a slow process and could bounce along the bottom for some time.
Positive news also exists (though it’s getting less attention) as both Institute for Supply Management surveys remain in expansionary territory and the recent industrial production reading gained a surprisingly strong 1% month over month. We still believe positive economic growth is the most likely course, as we turn to the Index of Leading Economic Indicators (LEI), which posted a 0.1% gain in July and are still in territory indicating economic expansion.
Leading economic indicators still signaling expansion
Click to enlarge
Source: FactSet, US Conference Board, as of August 24, 2010.
In fact, according to BCA research, of the 10 underlying components that make up the LEI, six are either flat or rising, indicating some decent underlying strength.
And we don’t want to overlook the historically best predictor of recessions, the spread in the yield curve. There’s been talk lately that the low end of the curve has been held artificially low through the actions of the Fed, thereby rendering the predictive power of the yield curve mute.
We caution against the “this time is different” mentality—we’ve heard it many times in the past, and rarely has it truly been different. As of now, the yield curve (though flattening modestly as economic growth has weakened) remains relatively steep, indicating low probability of an impending recession.
Yield curve not signaling recession
Click to enlarge
Source: FactSet, Federal Reserve, as of August 24, 2010.
Confidence is key
One of the major keys to improving the housing and labor markets, as well as boosting economic growth, is for confidence in the economic system to return. There are small signs that it’s slowly returning, although they remain tenuous.
The recent Federal Reserve Senior Loan Officer Survey on Bank Lending Practices showed that lending standards eased somewhat during the past three months. In fact, for the first time since 2006, big banks’ standards for small businesses eased, potentially freeing up credit for the all-important small-business sector.
However, loan demand remains roughly unchanged, indicating continued uncertainty. Businesses wary of economic prospects, political policy and tax status are extremely hesitant to invest in capital or hire new workers—and if your competitors aren’t hiring or investing, there’s less incentive for you to do so.
The Fed is still trying to reassure markets that it will remain stimulative for the foreseeable future. In fact, during its last meeting, the Fed made the largely symbolic gesture of reinvesting proceeds from paid-off agency securities rather than let its balance sheet decrease by even that small amount.
While we don’t know if this is the best course of action, and worry that the Fed has stayed at the well too long (rendering low rates somewhat ineffective) the Fed is undoubtedly committed to doing its best to avoid a repeat recession.
Confidence in the economic policies of the government, both federal and local, seems to be near its lowest levels in recent memory. States and municipalities continue to struggle with large budget deficits, requiring the cutting of services and laying off workers, while the federal government can’t seem to decide on its best course of action.
On the one hand, talk continues of another stimulus package, while, according to The Wall Street Journal, approximately $164 billion of the $230 billion allocated toward infrastructure projects during the last round of stimulus remains unspent.
The Obama administration is searching for ways to entice businesses to hire more workers, while at the same time issuing new regulations and policies that make it more expensive to do business. Meanwhile, talk of raising taxes on many small businesses continues.
While we’ve always tilted toward the side of free markets, it appears to us that the government needs to provide some certainty going forward, whatever its approach may be. Businesses can adapt to many things, but they need to know the ground rules before they feel confident enough to move forward—confidence they apparently don’t have right now.
Emerging markets buoy global growth
Confidence is also an issue internationally, with increasing concerns about the prospect of a global double-dip recession. However, we look to the strength of emerging-market economies to help keep global growth positive. Emerging-market economies have grown in importance, advancing 2.5% in 2009, almost enough to offset the 3.2% decline during the developed-economy recession, as the world economy fell 0.6% in aggregate in 2009.
Growth in advanced economies will likely be at low levels in 2010 and 2011, and while a global double dip is a growing risk, we believe it’s still a low-probability event.
Meanwhile, emerging markets are forecasted to grow faster, as they’re largely unburdened by the high levels of government and consumer debt that exists in much of the developed world, and banks tend to be healthier. Additionally, consumers have become an important part of the growth in many emerging countries as household incomes rise, as we’ve discussed in articles on Brazil and India.
China slowing, but no hard landing
Many emerging markets tend to have their growth tied to economic prospects in China, which has been a primary source of global growth. While exports are an important part of the Chinese economy (but could slow in coming months), fixed investment is the highest percentage of China’s gross domestic product (GDP) at nearly 50% in 2009, propelled by property construction and government stimulus spending on infrastructure.
We expect infrastructure and property construction in China to slow over the near term as government stimulus levels off and the housing market is affected by measures intended to cool speculation. Encouragingly, steep property price declines have catalyzed sales, but we expect additional supply in coming months, further suppressing prices. The Chinese property market benefitted from rapid loan growth and wealthy individuals’ speculative investments, as there are few investment options in China.
With property prices falling, the government ordered bank stress tests. Chinese banks lack transparency, but we don’t think a collapse in the banking system is likely. Banks announced plans to raise $96 billion this year to strengthen their balance sheets, and a majority are state-owned, boosting their viability.
China’s economy is slowing, but the government strives to maintain 8% growth to keep employment high and to avoid civil unrest. Unlike many developed countries, China has the pocketbook to issue new stimulus if growth slows too much.
It’s probably too soon for China to restart stimulus, but we continue to believe further tightening has been delayed. The outperformance of the Shanghai Composite relative to the S&P 500® index during the past the six weeks is notable, as this market has led in recent years.
China outperforms as tightening delayed
Click to enlarge
Source: FactSet, Shanghai Stock Exchange, Standard & Poor’s, as of August 25, 2010.
We remain constructive on emerging-market equities, as their higher growth outlook and below-average multiples gives them the ability to continue to outperform developed-market stocks.
A tale of two exporters: Japan’s dominance slips, Germany surprises to upside
Businesses allowed inventories to plunge so they could conserve cash given high uncertainty during the recession. As a result, the global recovery was driven by manufacturing and exports, benefitting from inventory building, as well as low levels of positive demand.
However, now that inventory building appears to be leveling off and with global growth slowing, many economies can no longer rely solely on exports for growth. Many countries need internal consumption to take the economic baton and help make the recovery self-sustaining.
As such, the lack of consumer spending by Japan’s aging population, amid a deflationary environment wherein spending is postponed, reduces Japan’s outlook. Additionally, the surging yen has reduced exporters’ prospects.
In fact, Japan ceded the position as the second-largest economy in the world to China during the June quarter, and China’s higher growth implies that this situation is likely to persist.
Japan loses no. 2 position to China
Click to enlarge
Source: FactSet, International Monetary Fund, as of August 25, 2010. Note: 2010 figures are estimates.
While Japan seems poised to benefit from China’s growth, and China accounted for 20% of the Japan’s June exports, Japan imports more from China than it exports. For the time being, the two countries appear to be working as partners to produce goods destined for consumption elsewhere.
On the other hand, Germany’s economy has been surprisingly strong, with its prominent export sector benefiting from a declining euro. The pace of GDP growth is likely to slow from the 9% quarter-over-quarter (q/q) annualized pace in the second quarter, which also benefitted from a construction rebound after being held back by poor weather in the first quarter.
However, German private consumption in the second quarter rose 2.4% q/q annualized, the first increase since the second quarter 2009. In contrast to the near-term outlook for Japan, if German consumers continue to spend, the recovery could enter a self-sustaining phase and boost Europe overall, as Germany constitutes about a quarter of the region’s economy.
Central bank action influences currency outlook
The Fed’s move to maintain the size of its balance sheet effectively delays its exit strategy. Additionally, comments from the Bank of England’s chief, Mervyn King, indicate that the BoE appears to be considering the possibility of extending further stimulus.
Meanwhile, the European Central Bank (ECB) remains opposed to providing stimulus, barely budging even in the face of a market riot over government debt in the second quarter.
However, the Bank of Japan’s lack of action has confounded market watchers. Japan may have entered a liquidity trap amid a deflationary environment, wherein injections of money fail to catalyze lending and spending as purchasing decisions are postponed. A surging yen increases the probability of action by the BoJ, using either unconventional monetary stimulus or currency intervention.
Double-dip recession fears have created demand for the safe-haven status of the US dollar. Additionally, the euro worked off some of the sharp rebound after plunging amid the euro-area debt crisis this year. With the euro comprising 58% of the US Dollar Index (which measures the performance of the US dollar against a basket of currencies), we expect the index to fall as the dollar weakens, as the Fed could exit monetary stimulus later than the ECB.
The MSCI EAFE® Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States and Canada. As of May 27, 2010, the MSCI EAFE Index consisted of the following 22 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.
The MSCI Emerging Markets IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of May 27, 2010, the MSCI Emerging Markets Index consisted of the following 21 emerging-market country indexes: Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.
The S&P 500® index is an index of widely traded stocks.
Indexes are unmanaged, do not incur fees or expenses and cannot be invested in directly.
Past performance is no guarantee of future results.
Investing in sectors may involve a greater degree of risk than investments with broader diversification.
International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.
The information contained herein is obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation or a recommendation that any particular investor should purchase or sell any particular security. Schwab does not assess the suitability or the potential value of any particular investment. All expressions of opinions are subject to change without notice.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
Tags: Acquisition Activity, Brazil, BRIC, BRICs, Canadian Market, Charles Schwab, China, Double Dip Recession, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Earnings Season, Economic Data, Federal Open Market Committee, India, Liz Ann Sonders, Market Indexes, Market Moves, Market Participants, Market Volume, Merger Acquisition, Merger And Acquisition, Open Market Committee, Overreaction, Russia, S Market, Stock Market Action, Stock Market Performance, Technical Indicators, Volume Days
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Saturday, April 10th, 2010
Gold Break Out
We continue to be encouraged by the price action of gold in the face of a strengthening U.S. dollar. Typically, gold and the dollar move in opposite directions, but so far this year gold is up 6 percent, and at the same time the dollar has appreciated 4 percent.
Gold has also been appreciating against other major currencies in the developed world, as the chart above shows. The Eurozone, Britain and Japan are all struggling with rising fiscal deficits and the after effects of the global financial crisis.
In fact, the price of gold in euros made another record high as the threat of a sovereign debt default by Greece and other indebted countries in Europe continues to threaten the stability of the continent’s primary currency.
In our view, this gold “breakout’ against the world’s primary paper currencies highlights gold’s growing allure as a store of value against further currency debasement caused by governments spending with little restraint. Gold appears to be reassuming its role as an alternative currency unencumbered by political liabilities.
For the week, spot gold closed at $1161.10 per ounce up $34.30 or 3.04 percent. Gold equities, as measured by the XAU Gold & Silver Index climbed 3.34 percent. The U.S. Trade-Weighted Dollar Index rose 0.16 percent.
- Acquisition activity has picked up lately in the gold mining sector.
- Australia’s largest gold miner recently offered to buy the second largest gold miner listed on the Australian Stock Exchange. This transaction would allow the acquirer to raise their gold exposure, as a percent of assets, which has been diluted somewhat by their recent increase in copper production
- In Canada, the Meliadine gold property will be acquired in a friendly takeover by their largest shareholder. This acquisition will help to consolidate the acquirer’s strategic position in Nunavust region where they have just commissioned the Meadowbank Gold Mine.
- The unemployment rate remained unaltered at 9.7 percent
- In the month of March, 162,000 jobs were gained. This is the largest monthly gain within the past 3 years, but may not be a trend reversal.
- The total unemployment rate actually rose for the second month in a row, hitting 16.9 percent, as 238,000 unemployed people were re-classified as “not in the labor force”.
- As a follow up note to the Memorandum of Understanding between the Industrial & Commercial Bank of China and the World Gold Council highlighted in the prior week concerning new initiatives in gold marketing to their general population, it should be noted that in this region individual wealth is likely rising faster than anywhere else in the world. Some analysts project this trend to yield a gold price of $1,500 by year end and potentially $2,000 to $3,000 per ounce in the next several years.
- One of the world’s largest producers of copper recently noted that if predictions of demand growth for copper by China and India proved to be even remotely true it would be hard for global suppliers to meet demand. Next year the copper market is expected to see a meaningful supply deficit.
- The Credit Suisse stock basket of highly leveraged equities has outperformed even the most risky assets such as banks, homebuilders, and small cap stocks since the March 2009 post crisis lows. While this certainly reflects improved credit conditions there may also be speculative elements to this which could trigger a correction with a movement to higher rates in the U.S.
- Morgan Stanley has argued there are substantial risks to the medium-term inflation trajectory. Their rationale centers on their belief that central banks may decide to opt for a bit more inflation now, rather than find oneself in a more precarious position a few years down the road because of unsustainable debt levels.
- Protest turned to riots and then an overthrow of the government in Kyrgyzstan this week. At least 65 protestors were killed after government forces opened fire on their citizens upon their objection to over a 200 percent increase in electric and heating bills. Some 5,000 protestors installed a new interim government.
Tags: Acquirer, Acquisition Activity, Australian Stock Exchange, Canadian Market, Copper Production, Debasement, Debt Default, Dollar Index, Fiscal Deficits, Friendly Takeover, Global Financial Crisis, Gold, Gold Equities, Gold Market, gold market diary, Gold Miner, Gold Property, gold update, golds, Indebted Countries, India, Market Diary, Paper Currencies, Price Of Gold, Silver Index, Spot Gold
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Tuesday, April 6th, 2010
Bob Doll, Vice Chairman of BlackRock (BLK) appeared at CNBC on March 29 sharing his latest views with Ken Langone.
BlackRock (BLK) became the largest money manager in the world last December after acquiring Barclays Global Investors, and now has about $3.35 trillion asset under management.
Doll’s Macro Views
- The pace of global economic recovery will be slower than normal due to the lingering credit problem
- Credit conditions are improving
- Inflation is expected to remain tame as deflationary pressures have not vanished
- Employment will be the most widely watched key economic variable
- Job shedding phase seems to be have ended
- Job growth could be right around the corner as many companies have been discussing increasing employment
- Corporations are ramping up merger and acquisition activity
- The real GDP is likely to turn from recovery into expansion maybe in the Q2, but more likely in Q3
Housing & Auto – Check Back in 3-5 Years
Meanwhile, Langone is of a more pessimistic view citing profits at Home Depot, though improving, is till 30% down from pre-crisis, and the grim outlook of the housing and autos sectors. (Langone is a financial backer of Home Depot.)
While Doll agrees with Langone that it could take 3 to 5 years for housing and auto to fully recover, he thinks exports and business capital expenditure should continue to do well, and consumer spending should also continue the current uptrend.
Equity Risk Factors
Doll thinks in the current low interest and low inflation environment, earnings should continue to improve, but he also cautions that equity markets continue to face some downside risk:
- Money supply – Growth has been very weak, consistent with a lack of credit demand and availability
- Interest rate – A surge above a 4% yield for the 10-year Treasury would “present problems.” On the other hand, lingering weakness in credit markets and the absence of inflationary threats should prevent the Fed from prematurely raising rates.
- A serious shift toward trade protectionism would be a negative for the economy and bearish for risk assets.
Short-term Technically Stretched
Investors are concerned about premature policy tightening, but recent stock price run-up has caused sentiment to become overly bullish.
Doll thinks in the short-term, there is a possibility that stocks may have been overpriced, as some technical indicators are looking stretched. Nevertheless, he says,
“On balance, we expect that stocks will see double-digit gains at some point in 2010, but we foresee a slow grind upward rather than a continued powerful advance.”
BlackRock Is Buying …
Doll said BlackRock’s current strategy remains largely based on market fundamentals and is looking at industrial and consumer cyclicals, and defensive high quality names.
He also mentioned health care bill should benefit the health sector. The technology sector is gaining market share worldwide. Emerging markets and the U.S. are showing strong signs of growth with Europe and Japan lagging somewhat.
My Take – Downside Risk Aplenty
No economies can stage a meaningful recovery without the backing of a healthy financial and housing market. Housing is the single largest component of the U.S. economy and its positive and negative impacts reach into every market sector.
We know housing is pretty much out of the growth equation as agreed upon by the two gurus in the clip; however, with commercial real estate lurking as the next implosion, one really cannot put that much faith in the financial sector either.
In addition, the U.S. is still a long way off replacing the 8.4 million jobs erased in the Great Recession and more than 11 million people are drawing unemployment insurance benefits.
On that note, stocks most likely have gotten ahead of themselves near term as indicated in my last post, I am also skeptical there’s sufficient top-line growth to propel the U.S. stocks into “double digit gains” in 2010 as predicted by Doll.
So, from a portfolio allocation standpoint, developing economies would seem to be better bets than the U.S. for now.
Note: Complete market commentary by Doll is available at BlackRock web site.
Quote Du Jour:
“I’m not going to hang my hat on recovery on housing and autos.” ~ Bob Doll
Video Source: CNBC
Tags: 10 Year Treasury, Acquisition Activity, Auto Check, Barclays Global Investors, Bob Doll, Credit Markets, Deflationary Pressures, Downside Risk, Emerging Markets, Equity Risk, Financial Backer, Grim Outlook, Home Depot, Ken Langone, Macro Views, Merger And Acquisition, Money Supply Growth, Path Of Least Resistance, Pessimistic View, Real Gdp, Risk Money
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