Saturday, 7 February 2015

Weekly Update - Week Ended 6 February 2015

Market Summary and Technical 
  • US equities still within  the broad range of the last few months
  • Some positive signs for further gains in equities 
    • HYG has held support so far
    • Market internals have improved
  • US dollar didn’t benefit from talk of faster than expected Fed rate hikes, which seems to indicate that risk is to the downside
[Market Summary]

 [Trend Watch]

[Selected Charts]


[Market Breadth] 



Readings and Trends 
  • Central Banks loosen monetary policy – Race to the Bottom?
    • People’s Bank of China cut the required reserve ratio for its banks 0.5 per cent (FT) (5 Feb 15); Official manufacturing PMI fell to 49.8 in January (FT) (1 Feb 15)
    • RBA cuts benchmark rate by 25 basis points to a record low of 2.25 per cent (FT) (3 Feb 15)
    • unexpected policy easing moves in Denmark, New Zealand and Singapore due to concerns over falling inflation
    • Negative bond yields in Europe - German bonds with maturities up to six years, as does Denmark. The Netherlands, Sweden and Austria all have negative yields on debt up to five years while Swiss bonds are now negative up to 13 years. Even Nestle bonds yields are negative. (FT) (3 Feb 15)
    • Will the Fed buck the trend?
      • US inflation trending away from the Fed’s target rate (Tim Duy) (2 Feb 15)
      • US growth slows to 2.6% in fourth quarter (FT)
  • Greece Drama
    • Right wing parties form government in Greece (FT)
    • Posturing going on as negotiations get underway
      • Greece proposes swapping outstanding debt for new growth-linked bonds (FT) (2 Feb 15)
      • ECB bans Greece debt as collateral for the European Central Bank’s cash (FT) (4 Feb 15)
    • Cam Hui believes there will be an eventual deal, with the debt being termed out (3 Feb 15)
    • Expect volatility ahead
  • US Equities
    • Barack Obama plans to tax overseas cash piles (FT) - Proposed 14 per cent “transition” tax on the estimated $2tn in earnings US companies have amassed overseas
    • Weak earnings for US bluechips due to strong US dollar (FT)
  • Global debt has risen since 2007 (FT)

Investment Implications and Opportunities 
  • The Greece situation bears watching as an exit from the EU could lead to contagion risk (FT) (1 Feb 15), though I believe the probability of Grexit is small at the moment
  • Low/negative interest rates seem here to stay
    • Deflation threatens to take hold
    • Deleveraging has yet to occur
    • This makes gold relatively more attractive (Peter Tenebrarum) (4 Feb 15)
  • If Obama’s proposed tax passes (which is not inconceivable), US equities and in particular bluechips can be expected to take a hit – something to monitor




Sunday, 25 January 2015

Weekly Update - Week Ended 23 January 2015

Market Summary and Technical 
·        Euro continues downtrend on larger than expected QE purchases
·        US equities remain in a narrow range
o   Some improvement in market internals, with intermediate trends turning neutral
·        Gold reaches $1,300 level!



[Market Summary]

[Trend Watch] 

[Selected Charts]


[Market Breadth]



 Readings and Trends 
·        QE in Europe begins
o   pace of €60bn a month from March until at least September 2016, higher than the €50bn a month expected
·        Long term bonds rise as inflation expectations get lower (FT)
o   rally in government bonds has pushed the yield on the 30-year US government bond to its lowest on record at 2.35 per cent last week
·        Fight against ISIS – funding difficulties with low oil prices (FT)


 Investment Implications and Opportunities 

·        How does the world get away from QE and low rate addiction?
·    Hold some gold – it looks relatively better compared to fiat currency which continue their perpetual loss of value 



Saturday, 17 January 2015

Weekly Update - Week Ended 16 January 2015

Market Summary and Technical 
  • Euro the big loser this week, especially against the Swiss  Franc
  • US equities down slightly – still ranging; smallcaps testing support
  • Gold on uptrend?
  • US dollar correction not yet in sight 

[Market Summary]


[Trend Watch]




[Selected Charts]






[Market Breadth]



Readings and Trends 
  • Possible trends which could drive gold higher (Hebba Investments)
    • Turmoil in eastern Europe
    • Turmoil in the middle east
    • Anti-EU shift in Europe
  • Risk of bank run in Greece as banks ask for emergency funds from ECB (NYtimes)
  • I previously noted that this year will likely see monetary policy continue to be loose – events this week reinforce this view
    • Asia’s central bankers lean towards looser policy (FT)
    • On Thursday the RBI announced a surprise25-basis-point cut to its repo rate, its benchmark interest rate. Raghuram Rajan, RBI governor, cited a sharp fall in inflation in India as the main reason for the cut. Analysts also pointed to weak demand and slowing growth
    • the Bank of Korea chose to leave rates on hold, but lowered its 2015 forecasts for both growth and inflation
    • QE likely to be announced by ECB next week (FT)
    • Swiss central bank gave up defending the ceiling of the franc against the euro in anticipation of QE by the EU
  • China completes Beijing-Shanghai electric car charging route (FT)
    • When the Chinese state is determined to do something, you don’t bet against it…
  • Kaisa Group Holdings, a Chinese property development firm, defaulted on $23 million in interest payments on offshore bonds (Diplomat)
  • Copper down significantly this week on Chinese hedge fund selling (FT)


Investment Implications and Opportunities 
  • Check your broker’s solvency!
    • Alpari entered bankruptcy; FXCM had to get an emergency loan from its parent (The Globe and Mail)
  • Watch for contagion risk in Eurozone due to Greece and in China property developers
  • Long gold position has paid off so far – expect the trend to carry on in 2014
  • Opportunity in copper?
  • Pure play on electric vehicles in China – Kandi (KNDI)
    • I have been long for a number of years
    • See these articles (Tom Harrison; Michael Nguyen)
    • high risk high reward stock
      • listed in US through a RTO
      • countless short attacks
      • however, I have been following the business for long enough to be comfortable that this company is the real deal
  • Just to clarify, despite a possible correction in US equities in the short to medium term, I tend to agree with Jeff Miller that a bear market is not yet in sight, in part because of continued central bank accommodation this year and lower oil prices

 [Disclosure: I am long KNDI]

Sunday, 11 January 2015

Weekly Update - Week Ended 9 January 2015

Market Summary and Technical 
  • S&P500 fell below 2000  in midweek but quickly rebounded on ‘buy the dip’ mentality
  • Gold again  shows strength despite dollar strength
  • FXE continues going down on expectations that QE is coming soon
  • My trend model indicates that US equities are bearish for the intermediate term while emerging markets, gold and silver indicate bullish behavior

[Market Summary]

[Trend Watch] 

[Selected Charts]


[Market Breadth] 


Readings and Trends 
  • Low oil prices trigger both demand and supply response – economics 101?
    • Demand side – higher US car sales, especially big guzzlers (FT)
    • Supply side - Rig numbers cut (FT)
  • A number of key events in the EU this January (Gavyn Davies)
    • ECJ preliminary opinion on legality of central bank bond purchases
    • ECB decision on size and type of “sovereign” QE
    • Greek elections
  • Tim Duy’s take on employment figures which showed solid job gains and decelerating wage growth
  • Spot the trend (FT)



Investment Implications and Opportunities 
  • Nobody predicting decline in S&P500 in 2015 – a warning sign? (Mish
  • Was Friday beginning of a dollar correction? Dollar ended lower despite good employment numbers

Saturday, 3 January 2015

Weekly Update - Week Ended 2 January 2015

Market Summary and Technical 
  • Looks like breakout in S&P 500 and Russell 2000 might have failed
    • Divergences apparent
  • Gold again  shows strength despite dollar strength – in Friday’s session, UUP up 0.96% and GLD up 0.44%
  • Euro down significantly on Friday as Draghi  hints that QE is coming soon

[Market Summary]

[2014 Performance]

[Trend Watch]

[Selected Charts]


[Market Breadth]


Readings and Trends
  • 2014 Trends (FT)
    • Winners include the US dollar, long dated US Treasuries, S&P 500, European bonds, Shanghai Composite
    • Major losers include the energy complex and Russia
  • China PMI slips in December
    • Official PMI - slipped to 50.1 last month from November's 50.3
    • HSBC PMI - 49.6 in December from 50 in November
  • Restrictions being eased in Chinese housing market (Forbes)
  • US Manufacturing PMI - fell to 55.5 in December from 58.7 in November (CNA)


Investment Implications and Opportunities 
  • Pace of US dollar rise is unsustainable
    • EU QE could be a case of sell the rumour,  buy on the news ie official launch of QE in EU could be turning point for dollar
    • Pace of growth in US unsustainable – Manufacturing PMI fell in December
  • Breakout in US equities seems to have failed – to maintain hedges
  • 2015 could be the turning point for metals and gold (see my recent article)
    • In particular – gold on Friday showed remarkable resilience despite US dollar being up significantly

Monday, 29 December 2014

Will 2015 be the Turning Point for Metals?


Summary
  • Commodities have been in a bear market for more than 3 years
  • Some possible catalysts for a turning point in metals in 2015
  • Some possible plays identified  - VALE, BHP, TCK, TGD


3+ Years Bear Market


  • Commodities have been in a bear market since the start of 2011 (See Diagram 1)
  • Amongst the worst performing metals are Gold, Silver, Copper and Iron Ore
  • Gold  (See Diagram 2)
    • Low of 1142 $/oz in November 2014
    • High of 1895 $/oz in September 2011
    • Peak to Trough of 39.7%
    • Current (26Dec14) – 1195.8 $/oz
  • Silver (See Diagram 3)
    • Low of 15.28 $/oz in November 2014
    • High of 48.70 $/oz  in April 2011
    • Peak to Trough of 68.6%
    • Current (26Dec14) – 15.77 $/oz
  • Copper (See Diagram 4)
    • Low of 2.81 $/lb in December 2014
    • High of approx. 4.6 $/lb  in Feb 2011
    • Peak to Trough of 38.8%
    • Current (26Dec14) – 2.81 $/lb
  • Iron Ore (See Diagram 5)
    • Low of approx. 66.8 $/dmt in December 2014
    • High of 187.18 $/dmt in February 2011
    • Peak to Trough of 64.3%
    • Current (26Dec14) – approx. 66.8 $/dmt
  • Apart from Iron Ore, the other metals mentioned above are attempting to find a base
  • Contrarian bullish view on the above metals in 2015 – possible catalysts for a turning point discussed below



[Diagram 1 – CRB Price Chart]


[Diagram 2 – Gold Price Chart]
Source: Kitco



[Diagram 3 – Silver Price Chart]
Source: Kitco


[Diagram 4 – Copper Price Chart]
Source: Kitco


[Diagram 5 – Iron Ore Price Chart]
Source: IndexMundi

Possible Bullish Catalysts

1) US Dollar Correction
  • UUP is up approximately 13% since May 2014 and 11% in 2014
  • Dollar strength has accounted for significant part of decline in metal prices, with the exception of Iron Ore
    • Since 30 Apr 2014, Gold is down approximately 7.2%, Silver 18.2%, Copper 9.1% and Iron Ore 41.7%
  • In fact, Gold and Copper have held up relatively well despite dollar strength
  • US dollar is due for a correction
    • US unlikely to maintain recent Q214 and Q314 growth rates which are above trend 
2) Oil price plunge to spur global growth and keep rates lower for longer

  • Lower oil prices to have net positive impact on the global economy (Gavyn Davies), and in particular China which is a net oil importer
  • Lower inflation expectations means policymakers to expand monetary stimulus or delay tightening monetary conditions (Europe and US, China, Japan
3) Supply destruction to push demand and supply to equilibrium

  • Mining capex has fallen significantly (See Diagram 6)
  • Mine closures and suspensions have been taking place; high cost miners burning cash
    • Iron Ore – though the big 3 (VALE, BHP and RIO) are still expanding production
    • Gold
  • New investments curtailed at current prices, providing the foundation for higher prices in the next 5 years
  • Admittedly, supply demand equilibrium might not be a 2015 event
[Diagram 6 – Mining Capex]

Source: Ernst & Young Mining equipment overview – June 2014

Possible Plays

  • Iron Ore – VALE/BHP
    • VALE is more exposed to iron ore while BHP is more diversified
  • Copper – TCK
    • TCK also has significant zinc and coal exposure
  • Gold – TGD
    • Small cap gold producer with little debt
  • Haven’t found a suitable play for silver yet.
  • I intend to do individual focus pieces at a later date. 

[Diagram 7 – Valuations]

Source: Reuters/Yahoo


Risks
  • Continued US dollar strength as divergence trade continues
  • China has a hard landing
  • Supply destruction takes longer as miners continue expanding production to generate cash
Disclosure: I am long VALE and TGD. This article should not be construed as investment advice. Investors are encouraged to do their own due diligence and research.

Saturday, 27 December 2014

Weekly Summary - Week Ended 26 December 2014


Market Summary and Technical 
  • US equities edged slightly higher
    • Divergences remain apparent in market breadth indicators
    • Divergence in HYG
  • Waiting for confirmation of whether breakout in S&P 500 and Russell 2000 is genuine
  • Gold again  shows strength despite dollar strength – chart suggests bottoming process 

[Market Summary]  

[Trend Watch]

[Selected Charts]



[Market Breadth]


Readings and Trends 

  • Saudi budget deficit for 2015 expected to widen to 5 percent of gross domestic product (Bloomberg)
    • Projected revenue will drop more than 30 percent next year to 715 billion riyals
    • Oil boom in recent years hasn’t resolved problems such as high youth unemployment, where the rate was almost 30 percent in 2012
  • US GDP growth in Q314 was an annualized 5 per cent (FT

 Investment Implications and Opportunities 

  • To remove TWM hedges if breakout in S&P 500 and Russell 2000 confirmed
  • Oil Price Rebound in the next 2 years likely
    • OPEC producers will have to watch their budgets and for social unrest at current oil prices
    • US producers have been announcing capex cuts
    • Some analysts are predicting a prolonged period of $20 oil
  • US growth when it returns to trend will not replicate the growth rates of the past 2 quarters
  • Global growth likely to benefit from supply induced lower oil prices as central banks ease further or delay tightening (Gavyn Davies)
  • 2015 could be the turning point for metals and gold
    • Interest rates to stay low
    • Global growth could benefit from lower oil prices
    • US dollar correction likely
    • Favourite Plays – to follow up with individual pieces (hopefully can find time)
      • Iron Ore – VALE and BHP
      • Gold – TGD
      • Copper – FCX 

 [Disclosure: I am long call options in TWM; long VALE and TGD]