And Now Back To Reality And The Impossible Earnings Season Stepfunction

Sunday, July 15th, 2012

Last week the S&P erased 6 days of consecutive losses in 30 minutes of trading on the back of news that JPMorgan lost at least 25% of its average annual Net Income in one epic trade, and stands to make far fewer profits in the future, even as the regulators are about to fire a whole lot of traders for mismarking hundreds of billions in CDS. This was somehow considered “good news.” This being the “new normal” market, where nothing makes sense, and where EUR repatriation as a result of wholesale asset sales by European banks drives stocks higher, we were not too surprised. Sadly, even in the new normal, things eventually have to get back to normal. And that normal will come as corporate earnings are disclosed over not so much over the next 3 weeks, when 77% of the companies in the S&P report Q2 results, but in the 3rd quarter. Why the third quarter? Simple: as Goldman’s David Kostin explains, “consensus now expects year/year EPS growth to accelerate from 0% in 2Q, to 3% in 3Q to 17% in 4Q.” Sorry, but this is not going to happen, and as more and more companies preannounce on the back of the global slowdown which many has seeing US GDP down to 1.3% in Q2, and sliding further in Q3 absent some massive QE program out of the Fed, it is virtually guaranteed that the unchanged Earnings precedent that Q2 will set (and there is a very high probability that Q2 2012 will mark the first YoY drop in earnings since the unwind Great Financial Crisis) will continue into Q3 and likely Q4. Because, sadly there simply is no catalyst that will drive revenues higher, even as margin contraction was already set in.

All of this also means that the only possible driver of S&P growth in Q3 (of which we are already 2 weeks deep into) and Q4 will be multiple expansion. This, however too, will be a disappointment. Again from Kostin:

We believe P/E multiple expansion is unlikely in 2H. Headwinds include the fast-approaching Presidential election, associated policy uncertainty, and the looming “fiscal cliff” that everyone outside the beltway decries but no one in Washington, DC seems willing to seriously address.

Not to mention the debt ceiling which is still on track from making US landfall sometime in the next 3 months.

So while short covering rallies are fast and furious, corporations -that traditional deus ex to justify US “decoupling” – now have only one fate before them: disappointment.

Which leaves the Fed. Sadly, not even the extension of Twist can do anything about the biggest concern that banks are currently facing, namely the accelerated decline in reserves, as a result of the prepayment of Maiden Lane obligations and the gradual drop in FX swaps (at least until the next time Europe needs a Fed-based bail out that is). As can be seen in the chart below, Adjusted Reserves have tumbled to level not seen since December, and then May of 2011, both times when the market was about to turn over if not for global coordinated central bank intervention.

Full note from Goldman:

Our 2012 investment thesis for the US equity market has three pillars: a stagnating economy, static P/E multiple, and minimal earnings growth.

First, weak macro data and three proprietary Goldman Sachs indictors support our view of a lackluster economy. The Goldman Sachs Current Activity Indicator (CAI) shows the US economy growing at an annualized pace of just 1.3%. The three-month moving average of our Earnings Revision Leading Indicator (ERLI) diffusion index, a measure of 29 separate micro-driven industry data points, remains below trend at 41, consistent with a softening of our Global Leading Indicator (GLI). On the macro front, the June ISM report slipped to 49.7, the first sub-50 print in three years.

Second, we believe P/E multiple expansion is unlikely in 2H. Headwinds include the fast-approaching Presidential election, associated policy uncertainty, and the looming “fiscal cliff” that everyone outside the beltway decries but no one in Washington, DC seems willing to seriously address.

The third leg of our three part framework will come into clarity during the next several weeks as firms report 2Q results and offer guidance on business activity for the second-half of 2012. 80% of S&P 500 market cap will report between July 16th and August 3rd. Firms to watch next week include: BAC, C, GE, IBM, JNJ, KO, MSFT, PM, SLB, and VZ.

We expect a modest quarterly earnings miss. A shortfall in sales rather than margins will be the primary culprit. Firms will struggle to meet revenue forecasts given weak global demand and a strong US Dollar. Consensus margin expectations are already flat or negative in most sectors.

Bottom-up consensus currently forecasts flat year/year EPS growth, driven by a 4% increase in sales and a 40 bp fall in margins to 8.9%.

Five sectors are expected to post negative earnings growth in 2Q 2012 compared with 2Q 2011: Energy, Materials, Utilities, Consumer Discretionary and Consumer Staples. Analysts forecast Materials and Energy will both post year/year EPS declines of 12% reflecting the sharp fall in commodity prices during 2Q, with Brent plunging by 16% and copper dropping by 10%. In contrast, Industrials and Information Technology will report EPS growth of 7% and 11%, respectively. Apple (AAPL) will again be a standout performer with year/year sales and EPS growth of 32% and stable margins of 25.6%. Including AAPL, the Tech sector is forecast to deliver sales and EPS growth of 9% and 11%, respectively. Without AAPL, the sector will post revenue and EPS growth of 6% and 7%, respectively.

2Q results will affect the market’s outlook for earnings in 2012 and 2013. Consensus now expects year/year EPS growth to accelerate from 0% in 2Q, to 3% in 3Q to 17% in 4Q. Consensus forecasts full-year EPS growth will double from 7% in 2012 to 14% in 2013. In contrast, we do not forecast a steep 4Q 2012 inflection and anticipate EPS growth climbing from 3% in 2012 to 7% in 2013.

Our full-year 2012 and 2013 S&P 500 EPS forecasts remain $100 and $106. Current bottom-up consensus equals $103 and $117. Consensus 2012 estimate has dropped from $107 in January and from $114 in August 2011.

Earnings season focus points: (1) domestic demand; (2) international weakness; (3) margins; and (4) losses from JP Morgan’s CIO unit.

Our ERLI Diffusion Index suggests US micro data improved in June but the three-month moving average remains below trend at 41. In May, our diffusion index of micro driven, industry-level data points fell to 29, the lowest reading since April 2009 (a reading of 50 implies “trend” growth). However, data rebounded in June producing a slightly above trend reading of 53, with 23 of 29 industry variables increasing at a trend or better pace. Examples include hotel occupancy, rail car loadings, and NY/NJ port activity. If this trend persists, it implies that the micro data points which inform equity analysts’ earnings projections may not be as poor on a near-term basis as an otherwise gloomy macro picture suggests. In contrast, our macro driven Global Leading Indicator of industrial production has been contracting at an accelerating rate for the last three months, which our research has shown augurs poorly for S&P 500 returns.

Margins will once again be source of scrutiny. Margins have stabilized at 8.9% for more than a year after having surged by 300 bp from a cyclical low of 5.9% in 2009. Differing margin forecasts explain 80% of the gap between our top-down EPS estimate and bottom-up consensus for 2012. Consensus expects margins to remain flat during the first three quarters of 2012 before rising sharply starting in 4Q and expanding to 10% by year end 2013. In contrast, we forecast margins will hover around 8.9% for the next two years.

JP Morgan CIO trading losses. This morning JPM reported 2Q EPS of $1.21, 59% above consensus expectations of $0.76. Of course, analysts had cut estimates by 38% since May after the bank disclosed large trading losses in its chief investment office. The JPM CIO losses of $4.4bn reduce 2Q 2012 EPS for the S&P 500 by $0.49. For the Financials sector, year/year EPS growth in 2Q is anticipated to be 8% including JPM and 12% without.

Tags: 2q, 3q, 3rd Quarter, Asset Sales, Consecutive Losses, Contraction, Corporate Earnings, Earnings Season, European Banks, Financial Crisis, Global Slowdown, Goldman, Kostin, Net Income, Nothing Makes Sense, Q3, Q4, Qe, Repatriation, S David
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Energy and Natural Resources Markets Radar (July 2, 2012)

Monday, July 2nd, 2012

Energy and Natural Resources Market Radar (July 2, 2012)

Strengths

• In reaction to an insurance embargo on Iranian oil vessels, effective this Sunday, South Korea will halt all oil imports from Iran. These vessels rely on insurance to protect them against any accidents they may encounter, and most companies that provide this type of insurance are based in the EU. South Korea, Iran’s fourth largest oil consumer, is currently in talks with countries such as Iraq, Kuwait, Qatar, and the United Arab Emirates to find a new route to meet their demand.
• Strikes in Norway regarding pensions and retirement age led to the closing of three more oil fields, restricting more than 15 percent of the country’s oil supply and 7 percent of its natural gas supply. Last month, Norway produced 1.63 million barrels of oil per day, and Statoil has already reported losses of up to 250,000 barrels per day. Brent Crude Oil prices saw a slight increase as a result.
• Vale received an environmental license to expand the biggest iron-ore mine in the world, estimating that about $1 trillion worth of reserves are to be found. They hope to double their iron-ore capacity at Carajas in Northern Brazil, and by 2017 hope to increase their output to 230,000 tons per year.
• Crude oil futures (West Texas Intermediate) gained nearly 6 percent this week with most of the gain on Friday following news that European leaders had agreed to allow struggling European banks to borrow directly from bailout funds.

Weaknesses

• Aluminum has dropped in value to $1,845 per ton, its lowest price since June 7, 2010. Because of these deteriorating prices, Rusal plans to curtail 8 percent of its smelting capacity by 2013. Furthermore, provincial governments in China have granted subsidies to smelters to increase aluminum production. This comes after the government faced a loss in tax revenue and higher unemployment from the reduction of output in Henan, a province that contributes 20 percent to China’s total aluminum capacity. After the news let out, aluminum prices dropped 3 percent on the Shanghai Futures Exchange.
• Arch Coal, in the midst of low natural gas prices and slowing electricity consumption, temporarily suspended mining operations across the country, resulting in 750 layoffs. SouthGobi Resources also has plans to halt its coal mining operations in Mongolia because of weak demand and an unpredictable future.

Opportunities

• Lennar Corp. is in talks and has signed a memorandum of understanding with China Development Bank Corp. regarding an approximate $1.7 billion loan. This loan would help transform two former naval bases into a $13 billion housing project and greatly benefit the timber industry.
• Within a year, Bangladesh is planning on boosting domestic natural gas supply by 63.25 percent to meet a demand that has been increasing by about 14 percent a year since 2003. Chevron and many state-owned companies have already prepared to increase supply to the country.
• In a slow diamond market, Botswana’s Minerals Minister believes the country can turn towards copper and silver, in addition to coal mining, to provide a more prominent source of revenue. This transition of focus may diminish the weight the diamond industry has on Botswana’s economy.

Threats

• Iraq’s oil output has reached a 20-year high, passing 3.07 million barrels per day for the month of June, as it seeks to overtake Iran in becoming OPEC’s second largest producer. Iraq plans on producing 70,000 barrels a day at Halfaya field during the first week of July and hopes to more than double its output by 2015. This increase in output will weigh heavily on global oil prices.
• Guatemala’s President, Otto Perez Molina, has proposed reforms to the constitution, essentially giving the government up to 40 percent ownership in mining and exploration companies in the area. Molina campaigned on increasing foreign investment, but there may be unintended consequences should these proposals be ratified.

Tags: Aluminum Production, Bailout, Brent Crude Oil, Brent Crude Oil Prices, Carajas, Crude Oil Futures, Crude Oil Prices, European Banks, European Leaders, Iranian Oil, Iron Ore, Market Radar, Northern Brazil, Oil Imports, Oil Supply, Provincial Governments, Retirement Age, Statoil, United Arab Emirates, West Texas Intermediate
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Emerging Markets Radar (July 2, 2012)

Monday, July 2nd, 2012

Emerging Markets Radar (July 2, 2012)

Strengths

• China may lower the bank reserve requirement ratio “soon,” China Securities Journal reports on its front page this week. It seems further reserve requirement ratio reduction is the market consensus.
• Singapore’s industrial production increased 6.6 percent year-over-year in May, rising for the first time in three months as increased production of pharmaceuticals and petroleum offset a decline in electronics.
• Korea’s industrial production rose 1.1 percent year-over-year in May, the most in four months as a weaker currency supported exports.
• The Philippines is spending more on roads and schools, though it resulted in a budget deficit of $469 million in May.

Weaknesses

• China’s benchmark power-station coal price at Qinghuangdao port declined the most in more than three years amid inventories that are almost a third higher than 12 months ago, which is probably pointing to weak power generation.
• Korean manufacturers’ confidence dropped to 84 for July, a four-month low.
• The Czech Republic’s central bank cut interest rates by 25 basis points from 0.5 percent from 0.75 percent previously, in an effort to spur the slowing economy.

Opportunities

• Indonesia has been able to attract increasing foreign direct investment (FDI) in the last decade, and the momentum may continue due to vast business opportunities in the country. The money inflow from FDI should help mitigate currency risk.

• Eurozone made a step toward genuine economic and monetary union by introducing a deposit insurance scheme for the European banks, sparking a strong positive response from the financial markets. Spanish and Italian yields contracted, while equities rallied.

Threats

• The cement sector was met with profit warning by H share listed companies due to a decrease of cement prices and a margin squeeze, indicating over capacity and weak construction demand in the first half of 2012.  For the cement price to rebound, it needs more infrastructure projects.
• Hungary is on the verge of replacing its special banking tax with a so called transaction tax, with the government sharing in banks’ income generated from fees and commissions.

Tags: Basis Points, Budget Deficit, Cement Prices, China Securities, Coal Price, Construction Demand, Currency Risk, Deposit Insurance, Economic And Monetary Union, Economy Opportunities, European Banks, Fdi, Foreign Direct Investment, Insurance Scheme, Korean Manufacturers, Last Decade, Market Consensus, Profit Warning, S Central, S Industrial
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Long Bonds Soar on Flight to Safety Due to Eurozone, Weak Employment Concerns (June 4, 2012)

Monday, June 4th, 2012

The Economy and Bond Market Radar (June 4, 2012)

Treasuries rallied this week, sending yields sharply lower across the long end of the curve. Europe was the focal point for most of the week. While Greece still makes headlines, Spain was more in focus as the government planned to borrow to pay for bank bailouts. At the same time, economic data is deteriorating very quickly. On Friday there were a slew of negative data points as May purchasing managers’ indices from around the world disappointed and nonfarm payrolls grew a meager 69,000.

Strengths

• On June 1, the 10-Year Treasury yield fell to 1.45 percent as investors sought perceived safety. This rate is lower than the Near-Term Tax Free Fund (NEARX)’s 30 Day SEC yield on a tax equivalent basis based on a 35 percent tax rate, even though the fund holds bonds that, on average, mature in less than five years. Click here to see returns.

• Retail sales were surprisingly strong in May with same store sales generally beating expectations.
• Brazil cut interest rates by 50 basis points to a record low 8.5 percent.
• European Central Bank president Mario Draghi supported the idea of a bank deposit guarantee. This would likely help prevent a “run” on European banks.

Weaknesses

• May nonfarm payrolls expanded by only 69,000, well below estimates of 150,000. The prior two months were also revised lower by 49,000. Overall it was a very weak report.

• Global purchasing managers’ data released late in the week also disappointed. China was a negative surprise relative to expectation, while European data just confirmed the weakness.

• April’s pending home sales unexpectedly fell 5.5 percent which casts a shadow on the recent strength in the housing market.

Opportunity

• Bonds continue to grind higher and appear to be forecasting benign inflation and slow growth.
• The Fed appears willing to increase monetary accommodation if necessary, which would be a boost to the bond market.

Threat

• China’s economy is slowing faster than expected and government policy makers appear comfortable with this dynamic.
• Europe remains a wildcard with austerity programs under pressure, creating significant uncertainty.

Tags: 10 Year Treasury, Bank President, Basis Points, Bond Market, Brazil, Deposit Guarantee, Economic Data, Employment Concerns, European Banks, Focal Point, Housing Market, Less Than Five Years, Mario Draghi, Market Opportunity, Market Radar, Nonfarm Payrolls, Purchasing Managers, Retail Sales, Slew, Tax Rate, Treasuries
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Draghi Straits – Money for Nothing

Wednesday, May 2nd, 2012

by Peter Tchir, TF Market Advisors

Economic data in Europe brought us back to our typical reality. The economic conditions are getting worse, unemployment is breaking records, and the stocks and banks of the periphery are in trouble again. The main support for the market is complete faith that Draghi and ECB will unveil some new plan that will make everything better.

LTRO was done on February 29^th. Just 2 months after the ECB flooded European banks with money and encouraged them to buy sovereign debt we are back in the midst of a crisis. How could LTRO fail so quickly? The better question is how could LTRO not fail? The premise that banks, already heavily exposed to their own sovereign’s debt would buy more, book the carry, and live happily ever after was flawed from the start. Carry takes a long time to work. Carry is a slow, dull, process, but mark to market and fear of default is fast and painful. Now banks are massively overexposed to the risk of their country’s debt, fund themselves through a variety of “non-traditional” methods, and face real risk of big losses as restructuring becomes the obvious conclusion.

There has been so much talk about growth versus austerity lately, that the true goal was lost in the shuffle – sustainable debt levels. The debt burden is too high both in terms of repayment, but just as importantly the cost of servicing it. Any legitimate plan to resurrect the economies of Spain and Italy will need targeted long term cuts, focused short term growth/productivity oriented projects, debt restructuring, and possibly a new currency. When every path leads to the same logical conclusion, it is time to accept the conclusion, and implement it now. As Greece clearly demonstrated, clinging to some false notion that default is “doomsday” and delaying true restructuring to appease foreign creditors (including the Troika) leads to a much worse collapse. Greece needs another round of restructuring already because it didn’t truly embrace default the first time. Default /Restructuring is a process. It needs to be planned for and carefully implemented, but it is now inevitable that it will be a part of the European “solution” and banks will bear the brunt of the cost.

In the meantime, the question for investors is how likely Draghi unleashes some new money and gives the market another brief relief rally? I’m not sure he is able to do anything meaningful and right now I believe the market will fade over the course of the day as realization sets in that not much can be done. I’m not quite ready to put this trade on, but am looking closely at going long Spanish stocks versus short German stocks. The belief that Germany will be fine while Spain is a disaster seems too common and priced in. I’m not quite there on that trade, but it is only that am looking at very closely.

While European PMI was a “clear” indicator of how deep the recession is in Europe, the Chinese PMI data seems to tell a different story? Chinese Manufacturing PMI was below 50 for the 6^th straight month. China is largely a manufacturing based economy, yet GDP growth is still in excess of 8%. Somehow this reminds me of high school physics when you are supposed to understand that sometimes light is a wave, and sometimes it is a particle, but never both at the same time. That was basically as far as I got in physics, as I just had a lot of difficulty comprehending that phenomenon. Similarly, I can see how PMI can continue to show slowdown, but GDP can be really high, but it is getting harder.

Copyright © TF Market Advisors

Tags: Austerity, Breaking Records, Debt Burden, Debt Fund, Debt Levels, Debt Restructuring, Doomsday, Draghi, Economic Conditions, Economic Data, European Banks, False Notion, Logical Conclusion, Obvious Conclusion, Oriented Projects, Periphery, Sovereign Debt, Sustainable Debt, Troika, True Goal
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U.S. Equity Market Radar (April 9, 2012)

Sunday, April 8th, 2012

U.S. Equity Market Radar (April 9, 2012)

The S&P 500 Index fell 0.74 percent this week driven in large part by cyclical sectors as concerns mounted over a global economic slowdown.

Strengths

• Within the S&P 500 Avon Products was the best performer, rising by more than 20 percent as Coty, Inc. is seeking to buy Avon for $10 billion.
• Bed Bath & Beyond was the second-best performer this week rising by more than 9 percent on a better-than-expected fourth quarter earnings report.
• The technology sector eked out a small gain as Apple, Priceline and Mastercard were among the best performers in the S&P 500 this week.

Weaknesses

• The energy sector was the worst performer this week as global macro concerns dominated, even though oil prices were roughly flat for the week.
• The financial sector was also weak as macro concerns surrounding Europe and European banks resurfaced.
• First Solar was the worst performer this week, falling by more than 16 percent as the solar industry faces many obstacles.

Opportunities

• The market continues to grind higher irrespective of recent news. The “trend is your friend” until this pattern changes.

Threats

• The S&P 500 is arguably overbought in the short term and could be vulnerable to profit-taking.

Tags: Amp, Apple, Avon Products, Bed Bath, Coty Inc, energy sector, European Banks, Financial Sector, Fourth Quarter Earnings, Global Economic Slowdown, Global Macro, Market Radar, Obstacles, Oil Prices, Pattern Changes, Priceline, Recent News, Sectors, Solar Industry, Technology Sector
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LTRO 2: Goldman’s Take

Wednesday, February 29th, 2012

Goldman waited exactly 20 minutes to try to comfort the market, especially the EURUSD which is getting increasingly jittery, that €1 trillion in Discount Window borrowings is a “positive.” We beg to differ that trillions in more debt collateralized by candy bar boxes and condoms will cure an excess debt problem, especially with all the good collateral now gone, and we are confident that ongoing deleveraging needs will put a major cog in the system, especially since the only liquidity expansion move now is “fade”, at least until the next major crisis.

Banks take out ECB “funding insurance”

The ECB has today – through its long-term refinancing operation (LTRO) – fully allotted €529 bn of 3-year funds to 800 banks. Together with the first auction, the ECB has now injected €1 trn of 3-year funds into the system. This is an extremely high amount and equals, for example, 131% of total (249% unsecured) European bank bond maturities in 2012 and 72% (130% unsecured) for 2012 and 2013 combined. European banks are now effectively pre-funded through to 2014.

Funding stabilized, revenues supported

Large take-up is an important positive. Key reasons are: (1) banks are now largely insulated from shocks in the funding market, having prefunded through 2014; (2) consequently, the costs of bank and sovereign funding have now been detached; (3) pressures for forced deleveraging should reduce (first evidence of this is visible in the recent ECB loan data); (4) deposit pricing pressures should fall (this too is already taking place), resulting in a positive revenue effect.

Country aggregates in coming weeks

While the focus is on the aggregate take-up, we see country aggregates as arguably more important. Over the course of the next weeks, we will get disclosure of country aggregates where we expect the Spanish and Italian take-up figures to be high.

ECB’s actions expand the investable group

We derive our group of ‘investable’ banks by: (1) incorporating P&L effects of ECB action; and (2) overlaying these estimates with ‘extreme’ credit losses (as per the EBA stress test). Within this group, our Eurozone top picks are Erste Bank, BBVA, BNP Paribas (all Conviction Buy), and Intesa Sanpaolo (Buy).

We identify banks likely to be “disproportionate beneficiaries” of the ECB LTRO including: Banesto (Buy), Banco Popular Espanol (Not Rated), BancoPopolare, Banca Monte dei Paschi di Siena and UBI Banca (all Neutral).

Tags: Aggregates, Bn, Borrowings, Candy Bar, Cog, Condoms, Debt Problem, ECB, European Banks, Eurusd, Excess Debt, First Evidence, Goldman, Key Reasons, liquidity, Loan Data, Maturities, Shocks, Trillions, Trn
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Silver Surges 4.5% To Over $37/Oz On “Massive Fund Buying”

Wednesday, February 29th, 2012

From GoldCore

Silver Surges 4.5% To Over $37/Oz On “Massive Fund Buying”

Gold’s London AM fix this morning was USD 1,788.00, EUR 1,329.96, and GBP 1,120.79 per ounce..

Yesterday’s AM fix was USD 1,774.75, EUR 1,321.48, and GBP 1,120.42 per ounce.

Cross Currency Table – (Bloomberg)

Gold rose 1% in New York yesterday and closed at $1,783.90/oz. Gold rose in Asia to a high of $1,790.16 it’s highest since mid November then edged down.  Europe this morning saw sideways trading until unusually volatile trading around the London AM fix saw gold rise from $1785.oz to over $1790/oz at 1030 GMT and then fall quickly to $1783/oz.

Spot silver has gained another 0.5% to $37.05 an ounce, after surging 4.5% yesterday once it rose above resistance at $35.50/oz. Silver reached a 5 month high of $37.21 but remains more than 30% below its nominal high in of April last year of $48.44.

Silver Spot $/oz – (Bloomberg)

Over 800 European banks have taken €529.5 billion from the ECB today after taking €489 billion euros at the first tender in December. The ECB’s 3 year lending is now near 1 trillion euros ($1.35 trillion) and the ECB’s balance sheet looks increasingly precarious.

Although the flood of paper has been credited with fuelling a rally on Europe’s distraught bond markets and safeguarding the region’s banks, it is another exercise in kicking the beer keg down the road as it fails to address the fundamental issue which is the insolvency of many European banks and many European nations and the obvious risk of contagion from that.

The continuation of ultra loose monetary policies increases the risk of inflation which will benefit gold which is an excellent inflation hedge. Extremely low yields on deposits and “risk free” sovereign debt means the opportunity cost of carrying non yielding bullion remains very low.

Spot silver gained 0.4% to $37.05 an ounce, after surging 4% and hitting a 5 month high of $37.21 in the previous session.

Silver as ever outperformed gold yesterday and traders attributed the surge to “massive fund buying” and to “panic” short covering. Some of the bullion banks with large concentrated short positions covered short positions after the technical level of $35.50/oz was breached easily.

Massive liquidity injections and ultra loose monetary policies make silver increasingly attractive for hedge funds, institutions and investors.

This time last year (February 28th 2011) silver was at $36.67/oz. Two months later on April 28th it had risen to $48.44/oz for a gain of 32% in 2 months.

There then came a very sharp correction and a period of consolidation in recent months. Silver’s fundamentals remain as bullish as ever and the technicals look increasingly bullish with strong gains seen in January and February.

Very bullish is the fact that silver also remains more than 30% below its record nominal high 32 years ago in 1980 and more than 75% below its inflation adjusted high of $140/oz in 1980.

The gold-silver ratio dropped to its lowest level in 5 months, after silver rose more than 12% so far this month and an enormous 34% this year, outperforming other precious metals.

Rising holdings of silver-backed ETF’s also indicated growing investor interest in the metal. The overall silver Exchange Traded Funds holdings rose to 491.079 million ounces, the highest since last May.

Spot platinum gained nearly 0.5% to $1,722.24, as investors await the latest in Impala Platinum’s dealing with an illegal strike that has disrupted production at Rustenburg, the world’s largest platinum mine.

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OTHER NEWS
(AP) — Silver Prices Jump, Playing Catch-up to Gold
Silver prices shot up 4.5 percent Tuesday, playing catch-up to gold.

Silver is both a precious and an industrial metal. Traders can buy it to hedge against a volatile stock market, as they do with gold. But it can also be used to make products like computer chips, meaning prices can rise when traders expect demand from manufacturers to go up.

In March contracts, silver rose $1.616 to $37.14 per ounce. It’s up roughly 10 percent from where it was a year ago. Sterling Smith, senior market analyst at Country Hedging in St. Paul, Minn., said part of the reason silver is surging is that traders believe it’s undervalued compared to gold. Gold closed at $1,788.40 an ounce, up $13.50 for the day. It’s up about 26 percent compared to a year ago.

Copper rose 3.15 cents to $3.912 per pound, and platinum rose $9.20 to $1,723.50.

Energy contracts fell, partly because investors were pulling back after price gains last week. Oil prices remain close to nine-month highs because of concerns that Iran could cut shipments of crude to Europe and interfere with supplies elsewhere. The European Union and the U.S. are using sanctions against Iran because they fear the country is developing a nuclear weapon.

Benchmark oil fell $2.01 to finish at $106.55 per barrel on the New York Mercantile Exchange. Natural gas prices fell 8.5 cents to end at $2.627 per 1,000 cubic feet. Heating oil fell 6.28 cents to $3.2201 per gallon.

Smith said grains and other agricultural products have been enjoying a “winning streak” for the past week. Those movements are especially important now as farmers decide what to plant this year.

Soybean prices on Monday topped $13 a bushel for the first time in five months. That’s because traders think there will be greater demand for U.S. exports of the protein-rich beans because smaller harvests from South America are expected.

On Tuesday, soybeans for March delivery rose less than 1 percent, to $13.125 per bushel from $13.025. March wheat rose 15.5 cents to finish at $6.6825 per bushel. Corn ended up 8.75 cents to $6.5725 per bushel.

The price of orange juice also rose. Cocoa and sugar fell.

(Bloomberg) – Gold-Oil Correlation Rises to Eight-Month High
Gold’s strengthening correlation with oil means more gains for the metal as Brent near a nine- month high spurs demand for an inflation hedge, UBS AG said.

The CHART OF THE DAY shows Brent prices reached $125.55 a barrel in London on Feb. 24, the highest since early May, and are up 15 percent this year. Bullion has gained 14 percent in the period and reached $1,787.55 an ounce last week, the highest since Nov. 14. The 30-week correlation coefficient between the commodities rose to 0.61 today, the most since June. A figure of 1 means the two always move in the same direction.

Gold’s “rolling correlation with oil is slowly inching higher and we think this signals that some catching up lies ahead,” Edel Tully, an analyst at UBS in London, wrote today in a report. “To the extent that rising oil prices feed into higher inflation expectations, gold is bound to reap benefits.”

Some investors buy gold to hedge against accelerating consumer prices and as a protection from slowing growth and geopolitical risk. The metal, which generally earns holders returns only through price gains, rallied for an 11th year in 2011 as central banks in Europe and the U.S. kept interest rates near record lows. Oil advanced this year on concern the west’s dispute with Iran over the Islamic republic’s nuclear program may lead to a disruption in exports from the Middle East.

Investors are holding a record 2,398.2 metric tons of gold in exchange-traded products backed by the metal, valued at about $137.1 billion, according to data compiled by Bloomberg. The tonnage exceeds the holdings of all but four central banks, which are expanding reserves for the first time in a generation.

The Islamic republic has threatened to close the Strait of Hormuz, a transit point for about 20 percent of globally traded crude oil, if its exports are banned in sanctions. While UBS forecasts Brent at $110 a barrel in the second quarter, “any Iran-related headlines, military threats or small incidents in the Persian Gulf are likely to push oil prices sharply higher and potentially boost gold in turn,” Tully said.

(Bloomberg) – Oil Set for Best Month Since October on Recovery Signs, Iran
Oil rose, heading for its best month since October in New York, amid signs of economic recovery and concern that tension with Iran threatens global crude supplies.

West Texas Intermediate futures climbed as much as 0.6 percent after sliding yesterday the most in five weeks. Industrial output in Japan and South Korea beat estimates and U.S. consumer confidence rose to the highest level in a year. Oil has advanced 8.8 percent in February, its first monthly gain in three, as sanctions tighten against Iran, OPEC’s second- biggest producer.

(Bloomberg) – Impala Says Strike Halts 2 Billion Rand of Platinum Output
Impala Platinum Holdings Ltd. said 100,000 ounces of output, equivalent to sales of 2 billion rand ($265 million), was halted by a strike at its Rustenburg mine.

The company, based in Johannesburg, is working to resume output at the world’s biggest platinum mine after bringing back 9,800 of 17,200 staff fired during the illegal strike, Impala said today in a statement. About 15,800 didn’t join the strike.

“It is dependent on operational turnout of staff,” Impala said. Fired workers have until tomorrow to return on their prior terms after the walkout, which has entered a sixth week.

SILVER
Silver is trading at $37.14/oz, €27.64/oz and £23.30/oz.

PLATINUM GROUP METALS
Platinum is trading at $1,723.00/oz, palladium at $710.00/oz and rhodium at $1,475/oz.

NEWS

(Reuters)
Gold edges up ahead of ECB loan offer‎

(Reuters)
Silver up 4 percent, gold races toward $1800 on ECB

(Reuters)
Iran to accept payment in gold from trading partners

(The Financial Times)
Tehran considers trade payments in gold

COMMENTARY

(The Globe and Mail)
Don Coxe on Why Buffett Has Gold All Wrong

(MarketWatch)
Buffett rebuffs gold, but inflation says ‘buy’‎

(Chatham House)
Gold and the International Monetary System

(The Washington Post)
UBS’s Hickson Expects Gold Will Rise to $2025 in 2012‎

(Zero Hedge)
Silver Explodes As DJIA Closes Above 13,000

Tags: agricultural, Balance Sheet, Beer Keg, Bloomberg, Bond Markets, Bullion, Contagion, Currency Table, ECB, Eur 1, European Banks, Fundamental Issue, Gbp, Insolvency, Monetary Policies, Opportunity Cost, Ounce, Silver Spot, Sovereign Debt, Spot Silver, Trillion
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Outlook: Can Normalization in a Non-Normal Market Persist? (Alfred Lee)

Sunday, February 26th, 2012

Can Normalization in a Non-Normal Market Persist?

by Alfred Lee, Vice President and Chief Investment Strategist,
BMO ETFs and Global Structured Investments
alfred.lee[@]bmo.com

Without question, equity markets around the world are off to a good start in 2012 with a general rotation out of defensive areas and into more cyclical oriented themes. More impressive is the market’s ability to shake off a number of negative headlines already seen in the new year. These include credit rating agency Standard & Poor’s (S&P) recent move to downgrade a number of Eurozone countries including France and following that up with the downgrade of the European Financial Stability Facility (EFSF). Though lower credit ratings typically results in higher borrowing costs when bonds are auctioned, yields of the downgraded European sovereign bonds barely rose after the news. Moreover, credit default swaps (CDS), or insurance against a default on sovereign bonds, have actually been trading at lower prices since the news of the downgrades. This suggests that the moves by S&P were already priced-in, as the downgrades were largely considered to be telegraphed to the market months ago. In addition, the European Central Bank’s (ECB) Long-Term Refinancing Operation (LTRO)¹ and the co-ordinated moves by the six central banks in November to provide cheaper swap borrowing rates has largely removed the perception of tail-risk² in the short term. Through the newly revised rules of the LTRO, the ECB allows banks to borrow funds for three years by posting collateral, to which eligibility requirements have been relaxed significantly. Thus, the perception of solvency of European banks have been significantly improved, despite a number French, Italian and more recently Spanish banks having been downgraded.

From a fundamental perspective, we have considered that most equity markets around the world to offer attractive valuations over the last three months. Though we have reduced our “overweight bonds” recommendation introduced last August to “slightly overweight” last month, we were still overly defensive in our allocation in January. While we remained largely favourable to U.S. equities throughout 2011, which in hindsight proved to be the right call, we have been waiting for momentum to return to Canadian stocks to avoid being caught in a value trap. The Dow Jones Industrial Average (Dow), our top broad equity market pick in 2011, showed a return of positive momentum in October, breaking out of its range-bound pattern and also recently registering a “golden-cross”³ pattern, early January. The S&P/TSX Composite Index (TSX), on the other hand, remained in a clear downtrend pattern since last March and has only recently broken out of that trend. In our equity allocation over the last year, we favoured more defensive oriented themes such as utilities, REITs and low volatility strategies. We continue to favour these themes as longer term core investments but given the strong market rally, we would use equity market pullbacks to tactically rotate some equity exposure to higher beta⁴ areas, as defensive names may lag over the next several months.

What Lurks Beneath?

Last year, the U.S. Federal Reserve (“Fed”) announced they would pledge to keep record low interest rates until 2013. Several weeks ago, in a surprise move, the Fed extended its commitment to low rates to 2014, which was largely recognized as an overly aggressive move, particularly considering that U.S. economic data has been coming in better than expected in most cases. Nevertheless, the move showed that the Fed is willing to take significant measures to maintain a risk-rally and the market now believes that there is a higher likelihood for further quantitative easing should the improvement in economic data lose momentum. As a result, over the next several months we believe an equity market rally may be possible, despite risk assets looking very overbought over the short-term. From a fundamental perspective, global equity markets are attractive and short-term liquidity measures may lead to a multiple expansion in valuations. However, the many global macro-economic concerns that weighed on the market last year largely remain unresolved and any political responses questioned by the market could potentially cause a market sell-off. Sentiment indicators such as the
CBOE/S&P Implied Volatility Index (VIX) are currently below historical averages but are finally showed some reaction to negative news, several weeks ago. As a result, we recommend using pull backs and trailing stop-loss orders to reallocate to equity markets. Risk mitigation tools such as stop-loss orders are critical given margin debt levels remain excessive, which makes a deleveraging event possible should investor sentiment sour over the ongoing European sovereign debt saga.

Tags: Alfred Lee, Attractive Valuations, BMO, Canadian, Canadian Market, Central Banks, Chief Investment Strategist, Credit Default Swaps, Downgrades, ECB, Efsf, Eligibility Requirements, European Banks, Eurozone Countries, Financial Stability, Fundamental Perspective, Negative Headlines, Risk 2, Solvency, Sovereign Bonds, Spanish Banks, Structured Investments
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Three Supports for a Higher Equity Market (Ryan Lewenza)

Monday, February 13th, 2012

TD Waterhouse’s U.S. Equity Analyst, Ryan Lewenza, has just released his team’s latest outlook for U.S. equities, titled, “Three Supports for a Higher Equity Market.”

Here are the highlights from the report. The entire contents follow in the slidedeck below (fullscreen for the better read, or download):

· The recovery in the U.S. stock market since the March 2009 lows has been driven by three key supports: 1) liquidity injections by global central banks, 2) improving economic momentum, and 3) strong corporate profits. In our opinion, we are currently hitting on 2.5 of those 3 supports, which is why we see the potential for further upside in H1/12. While the technical backdrop and high level of investor complacency lead us to believe a short-term pause/pullback is likely, we continue to recommend investors “buy on the dips.”

· The European Central Bank (ECB) initiated a lending program in December 2011 to European banks that were facing an escalating credit crunch. The program, called the Long-term Refinancing Operation (LTRO), involved issuing €489 billion in 3-year loans to European Banks to: 1) help them address their short term liquidity needs, and 2) engender European banks to purchase sovereign bonds, in an effort to help drive sovereign bond yields lower. The LTRO program is expected to be expanded later this month, with another €1 trillion expected to be issued to European banks. As history has clearly shown, when central banks are injecting liquidity into the system, risky assets tend to benefit, which is one important reason we remain constructive on equities in the coming months.

· The second support is the ongoing economic reacceleration in the U.S. and global economy. In the U.S., the data continues to come in above expectations, with the probability of a U.S. recession declining materially in recent months. Obviously, the key question is whether the positive momentum will continue, especially since we saw similar strength in the H1/11, which then reversed in the second half of year. For now the data remains supportive, and another factor behind our more constructive outlook for H1/12.

· Finally, as we have outlined at length in past reports, U.S corporate profits have never been stronger, helping provide an important support to equities.

U.S. Equity Strategy (Three Supports for a Higher Equity Market) – February 10, 2012

Tags: Backdrop, Bond Yields, Central Banks, Complacency, Corporate Profits, Credit Crunch, Dips, Economic Momentum, Equity Analyst, European Banks, Global Economy, Injecting Liquidity, Lows, Pullback, Recession, Risky Assets, Sovereign Bonds, Td Waterhouse, Term Liquidity, U S Stock Market
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