Energy and Natural Resources Market Radar (July 23, 2012)

Saturday, July 21st, 2012

Energy and Natural Resources Market Radar (July 23, 2012)

Strengths

• The yield on 10-year U.S. Government Treasury Notes dropped 2 percent from last Friday, closing the day at 1.4576 percent, below the June Consumer Price Index of 1.7 percent. Currently, the average dividend yield of stocks in the Global Resources Fund portfolio is 3.64 percent.
• Bloomberg reported that coal workers have gone on strike at a Glencore mine in Northern Colombia, and output is expected to be cut by half. The workers are demanding higher wages to compensate for the increases seen in production. The National Federation of Coal Producers has forecasted that Colombia, the largest supplier of coal in South America, will increase output by 16 percent this year.
• Copper futures reached their highest level this past Thursday at $3.534 per pound after about two-and-a-half weeks. This came after China’s Premier, Wen Jiabao, commented that China’s employment situation is “severe” and that China will make job creation the number one priority when undertaking plans of economic restructuring.
• OPEC will begin cutting shipments as oil sanctions continue to be imposed upon Iran. Exports are estimated to drop by 0.9 percent per day until August 4 (excluding Angola and Ecuador). Brent increased 4.3 percent through the week before dropping slightly on Friday.
• Clarkson reported that Chinese oil demand is up about 15 percent for this year, 10 percent more than expectations, demonstrating that China’s slowing GDP growth rate does not translate into a slowing energy demand.

Weaknesses

• Rio Tinto is beginning to cut an undisclosed number of jobs at its Clermont mine in Australia due to low thermal coal prices. Output at the Clermont mine was down 200,000 tons year-over-year from January to June.
• Spot iron ore prices dropped to 8-month lows this week, hovering at $125 per metric ton. The last time prices were this low was in November 2011, when iron ore was recovering from a year-low of $116.90 in October. Mining companies such as Anglo American and BHP continue to increase output despite weaker demand from China, which may contribute to a global surplus in 2013, according to Reuters.
• Worldsteel’s June crude steel output data shows that global crude steel output decreased 0.2 percent year-over-year for the first time since January. Western Europe’s output is down 5.3 percent year-over-year, however, second quarter production was up 0.9 percent year-over-year.

Opportunities

• Italy is aiming to attract $18 billion in investment from oil and gas exploration companies in an effort to decrease government expenditure and put an ease to its debt situation. Mario Monti, the Prime Minister of Italy, wants to soften the oil and natural gas exploration ban that was imposed after the Gulf of Mexico spill in 2010. Ninety percent of Italy’s oil and gas demand is currently being imported.
• Codelco is seeking rights to the Junin Deposit in Ecuador that has enough copper and molybdenum reserves to make it a strong competitor with top mining companies in Peru and Chile, two countries that are dominant in the global supply side of these metals. Reuters reported Santiago Yepez, President of Ecuador’s Mining Chamber, as saying that “Junin could be one of the most significant copper deposits in South America.”
• HSBC reported that demand for coking coal is expected to grow by 4 percent per year through 2016. Australia will look to gain from this as it is likely to remain the dominant producer of coking coal through 2030, with control of more than half of the market share.
• Barclays highlighted that the biggest four Chinese banks have increased lending in July, as new loans in the first half of July are double the amount given out in the same period last month. These loans account for about 35 percent to 50 percent of total new loans.
• Clarkson reported that China’s demand for Very Large Crude Carriers (VLCC) has risen 75 percent since 2008. China’s oil demand represents one-fifth of OECD per capita demand, and if that demand increases to Mexico levels (representing 50 percent of OECD per capita demand), China will need 225 new VLCC tankers.

Threats

• Zambia, Africa’s largest coal producer, has proposed a new regulatory act requiring foreign mining companies to place the revenue generated from export sales in local banks for 30 days. Deputy Finance Minister Miles Sampa said this will go into effect within the coming weeks.
• Reforms of increasing nationalism are evident in Bolivia’s recent possession of one of Glencore’s tin and zinc mines. The government wants to take more control over the mining industry. According to Bloomberg, Vice President Garcia Linera said in an interview that “We’re not going to hand our country to foreigners who destroyed Bolivia and left it stagnating for 20 years.”

Tags: Chinese Oil, Coal Prices, Coal Producers, Coal Workers, Consumer Price Index, Copper Futures, Dividend Yield, Economic Restructuring, Employment Situation, Gdp Growth Rate, Iron Ore Prices, Market Radar, Northern Colombia, Oil Sanctions, Premier Wen Jiabao, Resources Fund, Rio Tinto, Thermal Coal, Treasury Notes, Undisclosed Number
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Energy and Natural Resources Market Radar (July 16, 2012)

Saturday, July 14th, 2012

Energy and Natural Resources Market Radar (July 16, 2012)

Strengths

• The yield on 10-year U.S. Treasury Notes closed at 1.488 percent on Friday, below the May Consumer Price Index of 1.7 percent, giving investors a negative real return. Comparatively, the Global Resources Fund’s portfolio currently has an average dividend yield of 3.75 percent.
• China’s GDP grew 7.6 percent for the second quarter year-over-year, slightly lower than expected, leading to a gain in copper and crude oil futures toward the end of the week. It seems that the market is expecting a stimulus to come about from China to offset all the pressures of slowing growth. The global financial crisis was the last time China’s demand slowed this much, having a GDP increase of only 6.2 percent during the first quarter of 2009 year-over-year.
• Corn prices hit 52-week highs this week after the U.S. Department of Agriculture estimated a drop in crop yields of 12 percent, the largest month-over-month drop in nearly a decade. Jerry Norton, chair of the Interagency Commodity Estimates Committee, stated that “It’s a very unusual situation.” Only 40 percent of the nation’s corn crop is in good to excellent condition, significantly lower from last year’s 69 percent rating.
• Oil prices (Brent) gained over 4 percent this week to close at a six-week high of $102.76 per barrel as hopes for additional stimulus from the Chinese government boosted sentiment.

Weaknesses

• Statoil was set to shut down operations until the government of Norway intervened on the 16-day oil strike, putting an end to the restriction of supply that was driving up oil prices. The workers were forced back to work and the National Wages Board will attempt to resolve the conflict.
• Although China imports were up year-over-year in June, they increased by only 6.3 percent, less than half of forecasts, contributing further to an already stressed demand with regard to commodities. One factor of the increase in China’s trade surplus can be attributed to the excess stockpiling measures China took before Indonesia’s export tax on metals went into effect in May.
• China’s main coal mining provinces have plans to cut back on output in an effort to alleviate market conditions. According to Platts, a number of Shanxi-based miners have already cut output by 20 to 30 percent since May.
• U.S. net new aluminum orders fell sharply in June, according to data released from the Aluminum Association. Aluminum orders (less can stock) fell 4.4 percent year-over-year in June.

Opportunities

• China Copper Mines has applied to exploit five mineral waste dumps in Zambia which may have a yield of 600 metric tons of copper cathode per year. This project will increase China’s presence in Zambia, Africa’s largest producer of copper.

• Julio Velarde Flores, President of the Central Reserve Bank of Peru, commented this week on the growth prospects of the country. He is optimistic and believes they can exceed the economic growth targets for the year. Peru, the world’s second largest producer of copper, is in the process of seeking investment from wealth funds in Singapore.
• Anglo American has reached a deal with the government of Moquegua to build a $3 billion Quellaveco copper mine, according to Oscar Valdes, Prime Minister of Peru. 220,000 tons of copper per year is estimated to come out of Quellaveco, which is close to one-fifth of Peru’s 2011 total output.

Threats

• By 2016, the Democratic Republic of Congo hopes to triple its current output of copper to 1.5 million, according to Mines Minister Martin Kabwelulu. The Congo has about half of the world’s cobalt reserves, and is aiming to boost output by 65 percent. The government, however, plans on increasing the state’s stake in mining operations which will be used to promote the growth of industry, the country, and its people.
• According to Reuters, Baoshan Iron & Steel, China’s biggest listed steelmaker, will cut August prices of its main products by 4.6 percent as seasonal demand slows. Global Times recently reported that China’s domestic steel prices hit two-year lows during the first week of July. Until we see more quantitative easing in China, we will be unlikely to see any large gains in steel prices in the near future.
• The U.S. Energy Information Administration lowered its 2013 forecast of global oil demand to 730,000 barrels per day. The International Energy Agency however took a contrarian viewpoint with their forecast, estimating that oil demand would rise by one million barrels per day, 1.1 percent higher than in 2012, but still lower than levels seen prior to the financial crisis.

Tags: 52 Week Highs, China Imports, Consumer Price Index, Copper Futures, Corn Crop, Corn Prices, Crop Yields, Crude Oil Futures, Department Of Agriculture, Dividend Yield, Gdp Increase, Global Financial Crisis, Global Resources, Government Of Norway, Market Radar, Oil Strike, Resources Fund, Time China, Treasury Notes, U S Treasury
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Bernanke: Request for urgent business relationship

Thursday, November 18th, 2010

Just in case you have not seen “Bernanke’s letter” that was posted by a guest writer on the FT Alphaville site, here goes:

Dear Sir,

Good day and compliments. I am Dr (Mr) Benjamin Bernanke, Chairman of Federal Reserve of United States of America. This mail will surely come to you as a great surprise, since we never had any previous correspondence. My aim of contacting you is to crave your indulgence to assist us in securing some funds abroad to prosecute a transaction of great magnitude.

Due to poor banking system in America, many subprime borrowers are not paying back mortgages and banks have lost ONE TRILLION TWO HUNDRED BILLION UNITED STATES DOLLARS ($1,200bn) so far. This calamity has caused much suffering in my country. To help remedy this situation, our president, Mr Barack Obama, has authorised to be spent a sum of EIGHT HUNDRED NINETY SEVEN BILLION DOLLARS ($897bn) on stimulus plus many other good deeds like cash for clunkers. Unfortunately, since that time, we are being molested and constantly harassed by bond vigilantes who do not care that their reckless and vicious behaviour could ruin our hopes and plans.

To this effect, last year I authorised the printing of ONE TRILLION TWO HUNDRED AND FIFTY BILLION ($1,250bn) of United States currency to purchase government securities. To my great shock, this was not enough so I am now buying another SIX HUNDRED BILLION DOLLARS ($600bn).

If you forward a modest sum to purchase Treasury notes then I can buy many more of them with my unlimited printing press and their price will rise. I am absolutely positive that this arrangement will be of mutual benefit to both of us. I can offer you generous interest rate of EIGHT TENTHS OF A PERCENT after taxes.

I want you to immediately inform me of your willingness in assisting and co-operating with us, so that I can send you full details of this transaction and let us make arrangement for a meeting and discuss at length on how to transfer this funds.

Yours Faithfully,

Dr (Mr) Benjamin Bernanke

N/B: Please contact Mr Timothy Geithner on this e-mail address for further briefing and modalities.

Source: FT Alphaville, November 12, 2010.

Tags: Alphaville, Banking System, Barack Obama, Benjamin Bernanke, Chairman Of Federal Reserve, Dear Sir, Ft Alphaville, Generous Interest, Good Deeds, government securities, Guest Writer, Mail, Mr Barack Obama, Mutual Benefit, Printing Press, Subprime Borrowers, Treasury Notes, United States Currency, Urgent Business Relationship, Vigilantes
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Hersh Cohen: “There’s a powerful opportunity that is generally being ignored”

Wednesday, August 4th, 2010

This article/transcript is a guest contribution from Consuelo Mack’s Wealthtrack, of last week’s interview with legendary fund manager, Hersh Cohen, of Clearbridge Advisors.

CONSUELO MACK: This week on WealthTrack’s Great Investor series, ClearBridge Advisors’ Hersh Cohen discovers a treasure trove of income streams in some of the best known names of business. Where to find income is next on Consuelo Mack WealthTrack.

Hello and welcome to this “Great Investor” edition of WealthTrack. I’m Consuelo Mack.

Interest rates in the U.S. are near historic lows. Yields on ten year Treasury notes have been falling for the last decade, recently hovering around 3%. But despite diminishing income payments, investors have been piling into bond funds. For the second year in a row, bond funds are attracting record amounts of cash. Last year, net inflows into U.S. taxable bond funds hit $384 billion versus a mere $5 billion for stock funds. So far this year, bonds are bringing in $152 billion versus only $24 billion for stocks. The desire for return “of” capital has replaced the old return “on” capital focus for investors.

So far that switch has paid off. Bonds are outperforming stocks. The S&P 500 declined nearly 7% in the first half of the year, while ten year Treasury notes have provided a total return- that is price appreciation plus interest- of 9.36%. And a widely followed bond index has returned more than five percent. One fascinating factoid brought to our attention by the research mavens at Bianco Research is that the S&P 500 has not outperformed three-month Treasury bills since May 27th of 1997- that is 13 years! Which brings up the question: how long can low yielding bonds deliver better returns than some of America’s highest quality blue chip companies which have dividends offering competitive yields and a history of increasing dividends every year?
That is the question this week’s Great Investor guest Hersh Cohen will answer. Hersh recently retired as the co-manager of the Partners Appreciation Fund which he ran for 31 years, first at Smith Barney, then at Legg Mason ClearBridge Advisors. The fund was named to the exclusive Forbes Honor Roll eight times and Hersh was a finalist for Morningstar’s Equity Fund Manager of the Year in 2008. He is now chief investment officer of ClearBridge Advisors and co-manages its Equity Income Builder and Dividend Strategy funds. Now Hersh rarely appears on television and only does so when he feels he has an important story to tell. I asked him why now is one of those times.

HERSH COHEN: I think that there’s a powerful opportunity that is generally being ignored, and that is in these high-quality, I’ll call them blue chip stocks, but high-quality companies with high returns on equity, low debt levels, where the dividends are not only currently high in relation to all other asset categories, but we think, sustainable and possibly growing. Many of them have a history of growing, for long periods of time. And, I’ve not seen a period when these stocks are as cheap as they are, relative to fixed income securities, relative to other kinds of securities, since probably the early 1980s.

CONSUELO MACK: One of the benchmarks that you’ve mentioned to me earlier was the fact that a lot of these stocks have dividend yields that are higher than the yield, the interest rate yield, on the 10-year Treasury note.

HERSH COHEN: Many of them. Many of them.

CONSUELO MACK: And that is an unusual occurrence, correct?

HERSH COHEN: In my memory, the last time I saw that, and I wasn’t in the market yet, although some people would say I would, I wasn’t in the market yet, it was the mid-’50s. And from the Depression until the late 1950s, stocks always yielded more than bonds, because they were thought to be a riskier asset category. And when the great bull market of 1949 began, finally it dawned on people that stocks maybe weren’t as risky, and so you had this crossover of the stock-bond yield spread, and it never looked back. And, now you actually have it again. Now, you could argue, are Treasuries artificially depressed–

CONSUELO MACK: Well, are they?

HERSH COHEN: I don’t know. I don’t know.

CONSUELO MACK: Yeah. But does it matter?

HERSH COHEN: No. Because, you ask yourself, would you rather own a 10-year Treasury, yielding, call it 3% even though as we’re recording this, it’s under that, for the next 10 years, where you know you’re going to get your money back and you get 3%, would you rather own Exxon? Would you rather own Johnson & Johnson? Would you rather own Wal-Mart? Would you rather own Travelers Insurance? Would you rather own Procter & Gamble? Would you rather own 3M? All of whom have increased their dividends on a consistent basis, and are yielding anywhere from 2.5 to 4.25%. Kimberly-Clark, 4.25% dividend; Heinz, 4% dividend. Are they going to be here 10 years from now? Yeah. Are the dividends going to be higher? I strongly believe so. There’s a history of raising dividends there. Kimberly-Clark just raised its dividend 10% this year. I mean, there’s a whole list of these things. Companies have raised their dividends. I have a little cheat sheet in my pocket, in case I forget, but Procter & Gamble, 10%; Johnson & Johnson, 10%, all within the last few months. That’s not a bad story.

Tags: Bianco Research, Blue Chip Companies, Bond Index, Clearbridge Advisors, Consuelo Mack, Gold, Income Payments, Income Streams, Investor Edition, Last Decade, Lows, Mavens, oil, Price Appreciation, Return Of Capital, Return On Capital, Stock Funds, Taxable Bond Funds, Treasure Trove, Treasury Bills, Treasury Notes, Wealthtrack
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The Gold Bulls Are Right – U.S. Inflation is on the Up

Friday, April 9th, 2010

Is the rising gold price conveying a particular message about higher inflation ahead? Glancing over a number of economic charts (while I am waiting for a connecting flight at Sao Paulo airport), showed up rather interesting results, as reported below.

Firstly, the March ISM manufacturing and non-manufacturing PMI’s for prices indicate further upward pressure on prices.

A graph combining the manufacturing and services indices on a GDP-weighted basis, also points higher.

The GDP-weighted PMI for prices has historically been an excellent indicator of inflation. It would seem that the drop in the year-on-year headline CPI inflation rate from 2.7% in January to 2.2% in February was temporary phenomenon as the PMI indicator indicates inflation of closer to 3% over the next month or two.

However, when factoring in the absolute change in the oil price from a year ago, CPI could overshoot to a number in excess of 3%.

Back to the initial question about the gold price and inflation: Bullion leads the GDP-weighted PMI for prices by approximately two months and is currently indicating that this index measure could be heading higher still over the next few months.

The above “airport analysis” quite convincingly points to higher headline inflation. While this augers well for inflation hedges, the news for Treasuries is not good. Considering the relationship between the GDP-weighted PMI for prices and Treasury Notes, it looks likely that the 10-year yield could test long-term resistance at 4.5%.

That’s the way it looks from a buzzing Guarulhos Aeroporto, probably pointing to a strong Brazilian economy. But I will save my thoughts on Brazil and other South American countries for another day as I need to board my flight to San Diego.

Note: All the charts in this post are courtesy of Plexus Asset Management (based on data from I-Net Bridge).

Tags: Absolute Change, Augers, Brazil, Brazilian Economy, Connecting Flight, Cpi Inflation, Economic Charts, Gold, Gold Bullion, Gold Bulls, Gold Price, Guarulhos, Headline Cpi, Headline Inflation, Inflation Hedges, Inflation Rate, Initial Question, Ism Manufacturing, Sao Paulo Airport, South American Countries, Treasury Notes, Upward Pressure
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