Showing posts with label Ace Analyst / Investor. Show all posts
Showing posts with label Ace Analyst / Investor. Show all posts

Friday, November 21, 2014

Goldman's "Top Trade Recommendations For 2015"

Goldman's "Top Trade Recommendations For 2015"

  • Top Trade #1: EUR/$ downside via a one-year EUR/$ put spread.
  • Top Trade #2: 10-year US Treasuries above 3% but not below 2% in mid-2015, through cap and floor spreads at zero cost.
  • Top Trade #3: Long a Dec-2015 Eurostoxx 50 ‘bull’ call spread.
  • Top Trade #4: Long US High Yield credit risk via 5-year CDX HY junior mezzanine tranches.
  • Top Trade #5: Long an equity basket of EM crude oil importers (Taiwan, Turkey and India).
  • Top Trade #6: Short CHF/SEK.
  • Top Trade #7: Bearish Copper relative to Nickel, on supply divergence.
  • Top Trade #8: Long US Dollar against a basket of ZAR and HUF.
Some more detail:
Top Trade #1: EUR/$ downside via a one-year EUR/$ put spread
Position for EUR/$ downside via a one-year 1.20/1.15 put spread for around a 4.5 to 1 potential maximum payout.
We forecast that EUR/$ will fall to 1.15 over the next 12 months, in equal parts a reflection of our Dollar bullish view and Euro bearish outlook. In particular, given that HICP inflation is unlikely to rebound in coming months, there is a chance that additional ECB easing, including possibly sovereign QE, comes sooner rather than later, setting the stage for EUR/$ to move meaningfully lower in the short term.
Top Trade #2: 10-year US Treasuries above 3% but not below 2% in mid-2015, through cap and floor spreads at zero cost
Buy a constant maturity 10-year US Treasury 3.00-3.50% ‘cap spread’ at zero cost by selling a corresponding 2.24-1.75% ‘floor spread’, both expiring on June 30, 2015.
We expect 10-year US Treasuries (TY10), currently yielding around 2.3%, to trade at or above 3.0% next June – one quarter ahead of the market-implied lift-off date for the Federal Funds rate. Our Sudoku model indicates that TY10 are already trading ‘expensive’ relative to our Economics team’s global macro outlook, and puts yields in a 3.10-3.50% range in the second half of next year. TY10 outcomes higher than 3.5%, implying a 5-year 5-year forward rate of over 4.0%, are unlikely over this horizon, especially considering that German Bund and JGB yields are still capped by the respective central banks.
Top Trade #3: Long a Dec-2015 Eurostoxx 50 ‘bull’ call spread
Go long Dec-2015 Eurostoxx 50 3150/3450 ‘bull’ call spread (buying the Dec-2015 3150 strike call and selling the Dec-2015 3450 strike call), currently at 101.5 (Bloomberg: SX5E 12/15 C3100 Index vs. SX5E 12/15 C3400 Index).
The (nearly) at-the-money 3150 call costs 170.6, while selling the 3450 call costs 69.10 (both priced as of the close on November 19), giving this position a maximum potential 2-to-1 payout. There are two routes by which European equities could move higher. In our central case, we see scope for a pick-up in Euro area growth in 2015, which we think is not reflected in market prices. At the same time, our European economists see a significant risk of a downside case in which activity and inflation disappoint. And, in that case, the ECB would move to more forceful QE, so initial asset market pressure would subsequently be reversed.
Top Trade #4: Long US High Yield credit risk via 5-year CDX HY junior mezzanine tranches
Go long risk (sell credit protection) on the 5-year CDX HY Series 23 junior mezzanine tranche (the 15-25% portion of the loss distribution), at a running spread of roughly 495bp per year for a target of 440bp (implying a potential return of over 700bp) and a stop at 580bp.
We think the recent underperformance of the US High Yield (HY) market should prove transitory. Our current best understanding for this underperformance is that a portion of the HY investor base remains burdened by recent losses on a number of crowded trades. Our choice of the junior mezzanine tranche, which provides a reasonable level of subordination for default losses, is partly informed by our long-standing ‘up-in-quality’ view on the HY market.
Top Trade #5: Long an equity basket of EM crude oil importers (Taiwan, Turkey and India)
Buy an equally-weighted basket of Taiwan (TWSE), Turkey (XU030) and India (NIFTY) stock market indices, priced at 100, with an initial target of 115 and a stop at 93.
The decline in crude oil prices has the potential to boost activity growth, particularly for oilimporting countries in Emerging Markets (EM). We propose an equally-weighted basket of several of the biggest EM petroleum importers. Each of the basket’s constituent countries adds elements that, in our view, fit with our global baseline macro outlook. Taiwan is an exporting economy that is exposed to a growing US, and has lagged the recent move higher in US equities along with the broader EM complex.
Top Trade #6: Short CHF/SEK
Go short CHF/SEK at the current spot of around 7.70 with a target of 7.00 and a stop at 8.10.
Euro weakness has been reflected in EUR/$ and EUR/GBP this year, to name just two Euro crosses, but EUR/SEK is a notable exception. In large part, this reflects the fact that inflation in Sweden is almost as low as in the Euro area, with recent dovish surprises from the Riksbank reinforcing the view that Sweden and the Euro area are suffering from the same ‘lowflation’ problem. We do not agree with this. After all, low inflation in the Euro area has a heavy structural component, as the internal rebalancing in the monetary union involves lower prices/wages in the periphery and the opposite dynamics in the core markets. In contrast, we see low inflation in Sweden as temporary and think it will move higher in coming months, in line with the Riksbank's October forecast.
Top Trade #7: Bearish Copper relative to Nickel, on supply divergence
Position for Copper underperformance relative to Nickel via Dec-15 LME futures, using equal notional amounts, for a potential 20% upside.
The short Copper/long Nickel trade highlights some important features of our set of market views for 2015 in the commodities space, particularly the theme of ‘supply differentiation’. Copper has entered a once-in-20-year supply cycle, resulting in above-trend supply growth, while Nickel supply continues to be constrained by the Indonesian export ban. This should result in rising (falling) visible inventories of Copper (Nickel) in 2015.
Top Trade #8: Long US Dollar against a basket of ZAR and HUF
Go long USD against a basket of HUF and ZAR at 100, with a spot target of 113 and a stop at 94. The ‘cost-of-carry’ for the basket is around 3.75% per annum, which we will account for in terms of our stop-loss throughout the year.
Our global outlook is consistent with USD strength against EM currencies. The strengthening US recovery should see US yields pushing higher from current levels, while EM rates stay suppressed due to the broader commodity-driven disinflation trends in the first half of the year. The compression in interest rate differentials should ultimately result in USD/EM strength. Two buckets of EM currencies are most exposed. The first bucket includes countries facing persistent imbalances. South Africa stands out: its external imbalance has remained large despite a weaker currency, higher yields and softer activity performance.
* * *
To summarize: short bonds (this time will be different), go long a decoupling America, short Europe because Draghi will do "whatever it takes" to crush Europe's political capital, er, artificial currency, and then go long risk on both inflation and deflation because as showed yesterday, in the current idiotic period which historians will laugh at one day, both inflation and deflation are bullish.
The only thing that prevents us from issuing a "do just the opposite" recommendation is that unlike previous years, Tom Stolper is not part of the recommending crew, thus there is some risk Goldman may actually get some of these right...

Sunday, June 1, 2014

Dollar Going to Collapse 80% or 90%, Gold Can Touch $ 7000 To $ 9000 - James Rickards

Dollar Going to Collapse 80% or 90%, Gold Can Touch $ 7000 To $ 9000 - James Rickards
   You Can Buy This Book @ Rs 509 By Clicking On The Picture.
More about James Rickards Click HERE

“Massive Shortages” In Gold Coming and “Typical Investor” Will Not Be Able To Get Bullion - James Rickards

“Massive Shortages” In Gold Coming
   You Can Buy This Book @ Rs 509 By Clicking On The Picture.

Gold extended losses down over 4% this Week.  It fell to 16 week lows, possibly due to slightly weaker physical demand in top buyer China and technical selling.
In China, gold premiums ticked slightly higher to $2 to $3 per ounce. They have remained roughly the same since before the price drop, which suggests demand in China has not picked up on the price falls.
We are bearish in the short term and technically, gold is vulnerable to further falls. Potentially to test what appears to be a double bottom between $1,180/oz and $1,200/oz. Gold is particularly vulnerable in the very short term.

It is also worth considering seasonal trends and in recent years, June is one of the weakest months for gold. Gold's five year and ten year average performance in June is negative. We will look at this in more detail tomorrow.
While gold is vulnerable technically to further falls, it’s 14-day relative strength index (RSI) has dipped into very oversold territory.
This morning Russia, Belarus and Kazakhstan signed the historic Eurasian Economic Union which will come into effect in January 2015. "The just-signed treaty is of epoch-making, historic importance,"Russian President Vladimir Putin said.
The Eurasian Economic Union expects Armenia to join within a month, Kyrgyzstan within a year.
Cutting down trade barriers and comprising over 170 million people it will be the largest common market across the ex-Soviet states. The troika of countries will cooperate in energy, industry, agriculture, transport and monetarily.
“Massive Shortages” In Gold Coming and “Typical Investor” Will Not Be Able To Get Bullion - Rickards
Financial expert, Pentagon insider and bestselling author James Rickards has warned that “typical investors” may not be able to acquire physical gold when prices begin to surge hundreds of dollars a day as “massive shortages” will take place.
In another fascinating interview, this time with the always worth a watch Greg Hunter, formerly of ABC and CNN and now of USA Watchdog, Rickards said that gold will become the preserve of the “big guy” in the form of sovereign wealth funds and central banks.
This is something we have warned of since 2003. There is another risk in the form of ultra high net worth individuals (UHNWIs) in Russia, China and elsewhere also attempting to corner the physical gold and silver markets.
In the 1970’s, the Hunt Brothers made the mistake of not accumulating enough physical silver outside the reach of the U.S. authorities. Some billionaires today will likely not make the same mistake.
Rickards latest book, ‘The Death of Money’ predicts “the coming collapse of the international monetary system” and is being very well received. In recent days alone, Rickards has conducted a huge amount of media interviews with most leading financial networks. 
One of the signposts of the coming collapse of the international monetary system is countries like Russia declaring it will no longer use the U.S. Dollar as a reserve currency in international trade.
Rickards explains, “Putin said he envisions a Eurasian economic zone involving Eastern Europe, central Asia and Russia.  The Russian Ruble is nowhere near ready to be a global reserve currency, but it could be a regional reserve currency.”
Rickards is surprised at how fast the economic situation is unfolding.  Rickards says, “If you ask me what has happened since you finished writing the book that comes as a surprise, I would say a lot of the things I talk about in my book are happening faster than I would have expected. Things that I thought would happen in the 2015 or 2016 time frame seems to be happening now in some ways.  If anything, the tempo of events is faster than expected. “
“Therefore, some of these catastrophic outcomes may come sooner than I wrote about.”
Rickards told Hunter that “right now, we are on the precipice now”.
“When you are on the precipice, it doesn’t mean you fall off immediately, but you are going to fall off because you can see the forces in play.  What I tell clients and investors is it’s not as if we are going to make some mistakes and some bad things are going to happen.  The mistakes have already been made.  The instability is already in the system.  We’re just waiting for that catalyst that I call the snowflake that starts the avalanche.   You don’t worry about the snowflakes; you worry about the snow and that it’s unstable and it’s just waiting to collapse.  That’s what the system is right now; we are just waiting for a catalyst.  People ask me all the time, what could it be?  
Technically, my answer is it doesn’t matter because it will be something.  It could be a failure to deliver physical gold.  It could be an MF Global financial failure.  It could be a natural disaster.  It could be a lot of things.  The thing investors need to understand is the catalyst doesn’t matter.  It’s coming because the instability is already there.”
On gold manipulation and when it will end, Rickards says, “It will end when the physical shortage gets to the point that someone fails to deliver; which, at that point, there will be a buying panic.  There could be a buying panic or what some people call a demand shock.  One of the things I said about gold manipulation is if I was the manipulator, I would be embarrassed at this point.  The manipulation is obvious.  The evidence is coming in from all directions. . . . The manipulation is clear.  When will it end?  It will end when there is a physical shortage that pops up somewhere, or it will end with a short squeeze.”
“We are going to get a very large demand shock coming from China and India”, said Rickards.
“Let me explain those two cases.  We have a brand new government in India, and they are going to repeal the import tax on gold.  We also have the wedding season coming up. . . . So, India is set up for a very large surge in demand in the fourth quarter.  Now, over to China, this is one of the things that it’s happening faster than I originally thought.  The credit collapse story is happening in real time.  I said (in my book) this might be a 2015 event, but it looks like it is happening now.  Defaults are piling up.  We are seeing money rise.  We’re seeing people march down to the banks . . . trying to get their money back. . . . So, if they can’t buy foreign stocks, domestic stocks, don’t want to put their money in the bank and are getting out of real estate, then what’s left?  The answer is gold. . . . I see a demand shock coming from China. . . . You could see a scramble to buy gold.  It is going on anyway, but you could see it accelerate.  That will take down the manipulation.  Once the markets prevail over the manipulators, then watch out.”
Rickards, Washington and Wall Street insider, is certain the collapse will happen. He is just not sure when it will happen. 
“It is the thing you won’t see coming that will take the system down.  Things happen much more quickly than what investors expect.” 
“What will happen in gold is that it will chug along and then all of a sudden–boom.  It will be up $100 an ounce, and then the next day it will be up another $200 an ounce.  Then everyone will be on TV saying it’s a bubble—boom.  It’s up $300 an ounce, and before you know it, it will be up $1,000 per ounce.”
“Then people will say gee, I better get some gold, and they’ll find out they can’t get it because the big guy will get it.  You know, like central banks and sovereign wealth funds will be able to get the gold.  The typical investor will run down to the coin shop and they will be sold out, and the U.S. Mint will say sorry, we’re not shipping.” 
“You’re going to find out you can’t get it because the whole thing is set up for massive shortages in supply.”

More about James Rickards Click HERE In Video Chat with Mr Greg Hunter.

Monday, May 5, 2014

Edward Meir / INTL FCStone May 2014 Report - BASE METALS - Copper, Aluminium, Zinc, Lead, Nickel & Tin.

Edward Meir / INTL FCStone May 2014 Report - BASE METALS - Copper, Aluminium, Zinc, Lead, Nickel & Tin.
The following is an excerpt from monthly market overview for May 2014, written by Edward Meir, Indepent Commodity Consultant with INTL FCStone Inc.

Copper traded pretty much within our forecast range of $6400-$6800for much of April, with an upward bias evident. Nevertheless, the stronger tone was not as pronounced as some of the other metals, mainly because of copper’s less-than-inspiring funda-mentals. For one thing, China’s manufacturing activity remains lackluster – the latest flash HSBC PMI for April, out last week, came in at 48.3, slightly higher than March’s 48.0 reading but still in contraction mode.  This is the fourth month in a row that the number is below 50 and comes after China’s first-quarter economic growth (at 7.4%) clocked in at its slowest pace in six quarters. On the supply side, both Rio Tinto and BHP announced decent guidance for copper output this year; Rio expects to produce 830,000 tons in 2014, unchanged from 2013, while BHP is looking at 1.1 mln tons this year, rising to 1.3 mln tons in 2015. year. In addition, Mongolian copper conc volumes surged 53% year-on-year in March, as the Oyu Tolgoi project cranks up.  Miners operating from Indonesia, including  Freeport and Newmont, are not  faring as well given the continued supply restrictions on concentrates. Chile is expected to do well, expected to produce 6.07 million tons of copper this year and 6.24 million in 2015. On the demand side, Chinese copper demand remains decent, with premiums now at their highs for the year. In addition, the government has entered the market to scoop up 2000,000 tons for its stockpile last week, but prices hardly responded, somewhat par for the course. For the month ahead, we look for a slightly higher trading range setting in, somewhere between $6500-$6900.
Aluminum prices shot up by almost 4% in April, getting to a high of $1,900, a level last seen in October 2013.  Some of this strength was due to a ruling by the UK High Court that the new warehousing rules proposed by the LME are “unfair and unlawful”. Investors interpreted this to mean that the “warehousing trade” would stay in place, keeping upward pressure on premiums and pulling flat prices higher as well. The LME said it would appeal parts of the ruling, while also announcing plans to launch a new premium contract by Q1 of 2015, a tacit admission that premium volatility is here to stay. All this augurs well for the May launch of the new CME contract, whose designers are well aware of the pitfalls surrounding the current LME contract and are keen to avoid them. In the meantime, the fundamentals of the market look uninspiring. Although some 1.3 mln tons of output have been taken off since 2013, we have yet to see the effects in the data. The latest IAI figures show global produc-tion for March (ex-China) rising again to 2.08 million tons, up from a revised 1.866 million tons in February, while March’s ex-China run-rate of 24.5 million tons was the highest since August of last year. In China, Chalco’s was the latest producer to announce a cutback (600,000 tons), but Chinese production nevertheless rose by 10.2% in the first quarter. Despite the increases, the rate of growth in both ex-Chinese and Chinese production seems to be leveling off, which is why investors have been bidding aluminum prices higher. The bullish view may end in tears unless we see more substantial cuts coming from China. We think this will eventually happen, but likely over the course of the year and going into 2015, when we are more upbeat on the market that right now. In the meantime, over the course of May, we see prices trading between $1775-$1900.
Zinc prices posted solid gains this month, rising by almost 4% in April partly on account of improving fundamentals and on perceptions that the Chinese government is keen to avoid a slowdown, which may explain why it announced plans to speed up construction of railway lines and highways this month. Strong demand for Chinese zinc financing deals also contributed to the gains; the latest trade data shows that China took in 68,000 tons of refined zinc in March, almost double the 38,000 tons in February and a good indication that most of this metal will go into financing deals as opposed to consumption. The big in-take could also partially explain why LME zinc stocks have fallen by about 41,000 tons so far this month against a backdrop of a tightening market. In this regard, the ILZSG reports that zinc was in a 6,000-ton deficit in January to February, while for the year as a whole, the Group expects a 117,000 ton deficit. In the most recent Reuters poll, LME cash zinc was forecast to average $2060/ton this year and $2,250/ton in 2015. The mean forecasts also calls for a 50,000 ton deficit this year and a 75,000 tons shortfall next year. Shorter-term, and over the course of May, we see prices trading between $1970-$2110.
Similar to zinc, lead prices rose by about 4% in April, reversing the downtrend seen in March. Indeed, lead enjoys the most favorable fundamentals in the LME group thanks to projections of structural deficits for both this year and next.  The latest report from the ILZSG has the market in a 15,000-ton deficit in Jan-Feb, with the full-year deficit expected at 49,000 tons. Separately, a Reuters poll projects the 2014 deficit to be at 28,000 tons this year and 32,000 tons next, which begs the question as to why prices are not pushing even higher? Huw Roberts, an independent lead/zinc consultant for whom we have much respect for, told a Reuters chat forum this month that lead’s inability to rally may be due to the fact that the supply shortfall is likely overexaggerated given what he thinks is the underreported growth in secondary lead production, both inside and outside of China. In China, high secondary production (fueled in large part by concentrate imports)  means that the domestic market is actually well supplied and also explains why 7,300 tons of refined lead was exported out of the country despite highs costs and no VAT rebate. Roberts sees Chinese lead growing by 7% this year, about in line with last year. Vehicle sales will drive a major part of this, but new car sales are only a small part of the market. A bigger component is batteries, especially for two and three-wheel e-bikes, which consume about 45% of all lead. Over the course of 2014, the Reuters consensus sees prices at $2180, rising to $2300 in 2015.  In May we see prices fluctuating between $2040-$2180.
Nickel surged to a 14-month high in April, fueled by expectations that the Indonesian export ore ban will keep supplies tight for the foreseeable future, while persistent concerns over sanctions on the Russian metal sector was also a contributing factor.  The latest trade numbers show China’s nickel ore imports declining sharply, with March imports off by 59% y-o-y to 2.3 million tons and well below January's 6.12 mln tons record high. Not surprisingly, ore imports from Indonesia fell 79% y-on-y and although there was an uptick of imports from the Philippines, the country will not be able to replace Indonesian volumes anytime soon. Despite the tight supply picture, we have not been seeing big drops in LME stocks; although inventories have been declining of late, they are actually higher now than where they were when the ban went into effect. In the meantime, the latest INSG report projects there will be a surplus of 50,000 tons of nickel this year, below earlier estimates. Other analysts are also shaving their surplus numbers and many are calling for a deficit for next year. However, forecasting the 2015 balance remains uncertain at this stage, as much rides on what will happen with Indonesian export policy between now and then. We are bullish on nickel, but are not starry-eyed about its long-term prospects. Remember that the Indonesian Parliament could modify the ban and the president could override part of it unilaterally (as he is legally entitled to do), in which case we could see a rather substantial selloff setting in. In addition, runaway prices could lead to demand instruction, substitution, or allow other extraction technologies to become more competitive. At the end of the day, the run-up is due to what remains an artificially-induced squeeze. As such, it could collapse equally as fast, as many of these schemes ultimately do. The latest Reuters poll shows nickel averaging $15,650/ton this year and $17,396/ton in 2015, both fairly low given the $30,000–$40,000 projections bandied about of late. We see prices trading between $17,800–$19,200 over the course of May.
Tin posted a good gain in April (up almost 4%), with much of the advance due to the inconsistency seen with regard to Indonesian tin exports. In this regard, exports have ranged from a low of 4,600 tons in December to a high of 13,560 tons in February, with the latest March number coming in at 7,800 tons. Cumulative exports since September (about the time when the new trading policies kicked in) are trending lower, clocking in at 40,000 tons, 20,000 tons below the same periods in 2011 and 2012. In response to the decline in longer-term exports, cancelled LME tin warrants have surged and now account for more than half of the tin stocks-- already low to begin with. Despite all this, investors are resisting the temptation to bid tin prices substantially higher like they did in nickel, as unlike nickel, tin units are at least flowing out of Indonesia. Moreover, more traders are using the local exchanges; ICDX volumes in March, for example, came in at 2,665 tons, but April turnover in the first week alone was 2,000 tons. In addition, first-quarter volumes totaled 10,540 tons, close to the 11,500 tons of metal exported. Another reason why tin prices have not exploded is that demand pressures are easing. China has been a consistent importer in recent years, but imports dropped sharply last year to 14,300 tons, less than half the 31,300 tons imported in 2012. That trend is continuing this year; only 2,019 tons came in during Q1 and there is now talk that China could become a net exporter for the first time since 2007. In terms of the supply/demand outlook, ITRI projects the 2014 deficit to be around 10,700 tons this year, forcing the ending stock ratio down to 2.5 weeks, the lowest in the LME space. For 2015, we see a 5,000 ton deficit forming. Over the course of May, we see prices trading between $22,600-$23,850, in line with the steadier tone we see for much of the year.

Saturday, May 3, 2014

Marc Faber Warns "Social Media Stocks Are Just The Start, Market Crash Coming In 2nd Half"

Having called for the demise of the hype/hope growth stocks, biotech, and social media schemes at the end of 2013, Marc Faber believes the weakness in those sectors is a signal of things to come (and that the so-called "rotation" to quality stocks is fallacious in the medium-term). 

Faber carefully notes that the size of markets allows some stocks to move up as others move down and so the overall market "looks" ok, but warns "we have already had a big break in parts of the market... but we haven't had the big break in the overall market," adding that "it's too late to buy the US stock market," confirming what we noted about Jeremy Grantham's dismal outlook for US equities in the medium-term (and how and when the bubble bursts)

Simply out, given yields around the world and the fundamentals, "individual investors have excessively optimistic expectations about their future returns," which is terrible news for the record amounts of Greater Fools piling in as professionals pile out.

Marc Faber Warns "Social Media Stocks Are Just The Start, Market Crash Coming In 2nd Half"

Another Post : Marc Faber's 2014 Predictions of 30th December 2013

I recently started to follow him & found DOW JONES made a High 16558 on 31st Dec 2013 and crashed to 15340 on 05th Feb 2014, on the other hand Gold made a Low 1181 on 31st Dec 2013 and Rallied to 1393 on 17th March 2014.

Thursday, April 3, 2014

Edward Meir, Indepent Commodity Consultant April 2014 Report - BASE METAL

Edward Meir, Indepent Commodity Consultant April 2014 Report - BASE METAL
The following is an excerpt from monthly market overview for April 2014, written by Edward Meir, Indepent Commodity Consultant with INTL FCStone Inc.
Copper crashed in March, with prices falling by roughly $760/ton from the $7085 high to the intraday low of $6321 before a decent bounce set in over the last week. A slew of worse-than-expected Chinese macroeconomic indicators has been the main reason behind the weakness, coupled with the fact that February refined copper imports dropped some 30% from January's record levels. In addition, Chinese copper premiums remain weak, while Shanghai inventories have climbed to nine-month highs. Moreover, investors were shaken by reports of sizable corporate defaults, this time by companies “close to home” such as a real estate developer and a steel mill. Finally, the fact that the Chinese government did not take any action to make anyone whole in the aftermath of these defaults was a clear signal to investors that they were on their own. The fear now is that stockpiles of commodities, which are typically used to raise financing such as copper and iron ore, may be liquidated further in order to raise cash. Although still unsubstantiated, there are reports some 700,000 tons of copper are being financed and held “off exchange”, but we think that fears of mass liquidation at this stage are overblown. Prices rebounded lately on talk that the Chinese government may order stimulus spending in order to stabilize growth, but we don’t think this is necessarily going to do much other than lead to a short-term and a likely ill-fated bounce. In April, we see prices trading between $6400-$6850
Aluminum did not do much over the course of March, ending the month slightly higher. Underlining the grim state of affairs, China's Chalco warned that at current prices, around half of China's aluminum producers are losing money. In fact, Chinese smelters are shutting capacity, but the cutbacks are being offset by more efficient operators and new startups. Chalco expects Chinese output to rise 7.6% this year to 26.8 million tons, but we would not be surprised to see the actual number come in slightly less than that by the time the year is over. We say this in view of the fact that the government seems to be serious about weeding out excess capacity across a number of industries. Additionally, aluminum prices in Shanghai sank to a record low last month, but importantly, did not bring out any kind of government buying for the stockpile, an indication that the authorities may want to let industry fend for itself. In the meantime, we are seeing continued cutbacks in non-Chinese production, including a 147,000 ton decrease put through by Alcoa-Brazil last week, lending more credence to the view that the ex-Chinese balance is now moving towards a greater deficit. (The IAI has February global output ex-China at 1.87 million tons, down from 2.05 million tons in January). For the month ahead, we see prices trading between $1720-$1840. However, we are much more upbeat on prices for later this year, as we think investors will have to start to discount a tighter market going into 2015 as cutbacks –even from China – start to accelerate. Financial problems at Rusal are also something to watch and could be a short-term bullish wild card.
Zinc sold off over the course of March, with the complex losing about $200/MT at one point, although critically, key double-bottom support at $1940 held.  On the LME side, stocks actually increased over the course of the month, as did holdings in Shanghai, with both these variables contributing to the negative tone as well. In addition, further selling came our way during the middle of the month on reports that a large accumulation of unreported zinc inventories (said to total as much as 500,000 tons) could potentially be delivered against a large short position. We were skeptical about the story at the time and at the end, the delivery never materialized. On the fundamental side, the zinc balance continues to show signs of tightening. In its latest report, the ILZSG said that zinc was in deficit by 60,000 in January, a number that matched 2013’s entire shortfall. In addition there was a large uptake of zinc imports judging from the latest January/February Chinese trade figures, but given the slowing economy, we don’t know how much of this is being siphoned off into financing deals. Over the course of the month, we see zinc trading between $1915-$2060, but like aluminum, we are friendlier to the metal heading into year-end, as investors come around to discounting the prospect of a growing deficit in 2015.
Similar to other metals, lead finished lower over the course of March, hitting nine-month lows at one point before recovering a touch going into month end. We continue to be rather surprised by lead’s relative poor performance and attribute March’s decline to the blowback from lower copper prices . In addition, LME stocks are not falling as hard as they once were, likely another reason for the sluggish tone.  In the meantime, the ILZSG reported last month that lead was in deficit by 31,000 tons in January, almost equivalent to the entire shortfall seen last year, but this failed to generate much upside excitement. In addition, lead’s ending stock ratio is now at 2.8, among the lowest in the LME group. We still like the prospects for lead going forward given that many of the variables we have highlighted in our previous commentary, including a structural deficit aggravated by mine closures and mounting environmental costs are still in place. One way to perhaps trade the complex is to go long lead and short zinc; the differential between the two got to a low of $31 at one point last month, down from $247 in November. It is now around $118 but we suspect it may have more room to expand given that the two are not entirely unrelated in terms of supply. In April, we see lead trading between $2020-$2170.
Nickel continued worked sharply higher this past month, gaining a whopping $2,000 a ton at one point, as Indonesian concerns and worries about possible sanctions against Russian metal boosted prices. However, a correction of sorts has set in of late, with prices retracing from the $16,400 intraday high reached in March. We suspect that the current selloff will prove to be short-lived, as the underlying picture still looks constructive. For one thing, Indonesian legislative elections that take place on April 9th may not result in any immediate change in policy with respect to the ban and so we may have to wait until the presidential elections are over in July before we see any change. In addition, CRU estimates that Chinese port stockpiles of nickel ore are down by some 4 million tons since the ban went into effect, paring China’s overall port holdings by some 20% and telling us that the restrictions are clearly starting to have some effect. CRU also calculates that for every week the ban is in place, an additional 750,000 tons of inventory is displaced. But whatever happens going forward, we should note that the rally in nickel this year is an artificially-induced move and as such, it has the potential to collapse under its own weight. The more relevant question is when; we think it will be later rather than sooner and accordingly, we expect to see a $15,400-$16,400 range prevailing at least through April.
Tin prices were range-bound over the course of March, trading within a $1000/ton band and closing the month pretty much flat. The market’s weaker spell occurred early on in March, just about the time when the Indonesians announced that refined tin shipments increased to 6,000 tons in February, up 30% from January. However, given the inconsistency in the data (exports have bounced around from 4,600 tons to 13,560 tons over the past three months) investors chose not to sell aggressively into the February number, as we suspect they remained uneasy about the supply pipeline going forward. For their part, the Indonesians are talking the market up; PT Timah says that it sees exports down some 35% this year on account of trading rules that make purchases contingent on trading in the domestic exchange. More broadly, PT Timah expects the global tin deficit to grow to 20,000 tons this year, almost double the 12,000 shortfall put out by ITRI and well ahead of the 3,000 ton January consensus figure issued by Reuters. Like nickel, we expect tin prices to work lower once the Indonesian restrictions become more flexible and supply starts to flow more freely, but unlike nickel, we think the Indonesians may see their tin program enjoy more long-term success. Over the course of April, we expect prices to trade between $22,400-$23,400.

Friday, March 14, 2014

BNP Paribas Favors Lead, Tin, Zinc Over Copper

BNP Paribas is reiterating its position favoring lead, tin and zinc over copper in the base-metals complex. The bank points out copper fell to its forecast of $6,500 as metric ton even sooner than it expected. BNP Paribas says it still looks for the copper market to move into a “material but far from catastrophic” supply surplus in 2014-15. The bank says it still has a positive view on demand, looking for growth of more than 10% over the next two years. However, the bank also looks for world mine production to rise by about 10% over 2014-15, with refined production outpacing mine output. 

The bank says a copper rally above $7,000 likely would present a selling opportunity. “But we do not believe the fundamentals warrant a decline below $6,000/t, either in the short term or in 2015, when the market will begin to look to the increasingly positive medium-term story,” says metals strategist Stephen Briggs. 

“Our preferred trading recommendation remains: short copper versus long a basket of lead, tin and zinc. The price ratios have already come a long way, but we expect copper/zinc and copper/lead both to eventually reach 2.5:1, with tin/copper at 4:1.”

Saturday, February 22, 2014

Supply and demand key to base metals success: Adam Low

Adam Low of Raymond James believes that the outlook is excellent for zinc, good for copper and neutral for iron ore. In this interview with The Gold Report, he argues that it comes down to supply and demand. Copper supply may soon lag demand, and zinc demand, which is increasing steadily, will soon face a 10% decline in supply. 
The Gold Report: Your 2014 prognosis for industrial metals is largely positive, correct?
Adam Low: Yes, although our view is not universal. We are most positive on copper and zinc, somewhat less enthusiastic about nickel. We're fairly neutral on iron ore, although we do expect a bit of softening in iron ore prices.
TGR: Why do you like zinc?
AL: We are starting to see fundamental changes occurring in the market. This is a supply story. Zinc has been an unloved metal for decades. As a result, there has been very little investment, which means that six major mines in operation for decades have or will soon end production.
The first two, in Canada, closed in 2013. The next major shut down, scheduled for mid-2015, is MMG Inc.'s (1208:HK) Century mine in Australia, the world's second-largest zinc mine.
TGR: How much global supply will be lost as a result?
AL: About 10%.
TGR: So prices will rise?
AL: Yes. Visible inventories on the London Metals Exchange, as well as on the Shanghai Futures Exchange, are down about 30% over the last year. And zinc demand is increasing steadily. There are some suggestions that we have a small zinc deficit already.
TGR: What are the supply and demand fundamentals in copper?
AL: I'd characterize the copper market as being infected with "short-termism." Mine supply grew quite spectacularly in 2013: between 6% and 7%. How sustainable is that growth? In a couple of years, we could easily have the same problem we had a decade ago, when mine supply lagged behind demand.
TGR: Why would this happen?
AL: One-third of global copper supply comes from Chile. This country is increasingly constrained by power and water supplies; labor rates are rising as well. Chile's state-owned copper enterprise, the Corporación Nacional del Cobre de Chile (CODELCO), produces about one-tenth of global copper, and it requires something on the order of $20–27 billion ($20–27B) in reinvestment over the next five or six years in order to maintain both current production and grow its production base. That will be quite difficult.
TGR: Why are you less enthusiastic about nickel?
AL: In the long term, we remain skeptical about that market. Indonesia, one of the world's largest nickel miners, has implemented a ban on exports of raw ore, which curtailed a major source of global supply. Nevertheless, nickel has abundant visible inventories. It also has growing supply from long-beleaguered laterite projects now finally coming to fruition: Ambatovy, Koniambo and Onça Puma.
TGR: Why are iron ore prices softening?
AL: We expect supply growth from mines to outweigh demand growth, particularly as major mines start up in Australia and Brazil. At current prices, the industry is making phenomenal margins, more than 100%. At lower prices, companies at the high end of the cost curve will struggle, but the others should continue to do very well.
TGR: To what extent are higher base metal prices dependent on positive global economic news?
AL: Growth is a key factor. The U.S. economy appears to have improved, although I'm a little bit skeptical about just how robust or sustainable this growth is, especially now that the Federal Reserve has decided to reduce its bond buying.
TGR: How do you view the short-term economic prospects of China and Europe?
AL: In Europe, the latest purchasing manufacturers' index is at its best since 2011. We are beginning to see some resurgence from some of the weakest economies, such as Greece. And Germany still looks good. Even so, I don't think we can count on Europe being the key driver for world economic growth quite yet.
TGR: And China?
AL: China is still growing and from a larger base. So while its relative growth may be less impressive than it was, its absolute growth is still quite extraordinary. Any industrialized Western nation would be incredibly envious of "only" 6–7% GDP growth per year.
TGR: There is a growing concern that the equities markets are overheated, particularly with the Fed tapering quantitative easing. If there is a significant correction, will base metals equities follow suit, or could we see instead a flight to safety in metals?
AL: If there is a significant correction, we could see base metals equities follow suit, even though they didn't enjoy the upside the rest of the market did. In the longer term, the widening gap between the growing demand and the dwindling supply of many base metals should spark a resurgence of investor interest in this sector.
TGR: Will base metals equities continue to lag prices in 2014?
AL: This trend should begin to correct. Base metals prices have been quite steady over the last year despite headlines that have generated fear and volatility. This steady price environment should provide investors with greater comfort about metals prices, which should, in turn, lead to greater confidence in investing in the equities.

Thursday, January 30, 2014

Investors ditch zinc for lead as supply tightens

* Forward curve shows physical tightening in lead
* Some investors going long lead, short on zinc
* Lead seen in deficit in 2014, zinc in surplus

Investors ditch zinc for lead as supply tightensSome investors are switching long zinc positions to lead on the view that others got the timing wrong on when zinc would feel the impact of dwindling mine supplies, analysts say.
The increasing scarcity of immediate supply for lead and the more plentiful spot market for zinc - the best performing industrial metal of 2013 - is showing up in near-term forward curves of the metals, moving in opposite directions.
"We think the zinc story is reasonably strong but we don't think it's a 2014 story," Hermes Fund Managers' metals analyst Joseph Murphy said.
Spread and ratio trades between the two metals, often found in the same mines, is a top play among investors and traders.
They piled into zinc last year, betting on shortages from big operations such as Australia's Century mine, the world's No. 3. The mine, owned by China's MMG Ltd , is due to see output drop this year and run out of ore in mid-2015. 
"Fundamentally zinc is improving, but over a longer time frame. Lead has more solid fundamentals now," Standard Bank analyst Leon Westgate said. "Lead should outperform zinc by some margin (in the coming weeks)."
Lead usually sees more demand in the winter as car batteries often go dead in cold weather and need to be replaced.
"We have a moderately constructive outlook for lead heading into 2014 a function of healthy auto sales growth in the U.S. and China, higher industrial battery demand growth in China, ongoing mine production challenges and flat Chinese refined lead production," Deutsche Bank analyst Grant Sporre said in a note.
Cash zinc had been at a premium to the three month contract of $9.50 a tonne at the start of the year, indicating shortages, but this has flipped to a discount of $13.60.
Lead, by contrast, has trimmed its cash-three month discount to $14.39 a tonne from $28.50 at the start of 2014.
The broader supply-demand balances also favour lead.
"There's been quite a lot of interest ... in putting the spread trade back on where you are long the lead leg and short the zinc leg," Hermes Fund Managers' Murphy said.
"We think zinc is overpriced at current levels and we expect it to underperform, particularly against the likes of lead over the next few weeks," he said.
The gap between the price of the two metals narrowed to $87 on Jan. 9 from nearly $200 a month earlier as cheaper zinc moved closer to lead, but it has since moved back to about $150.
Murphy is targeting the spread to move to $170-$180, not to the widest gaps of last year of over $200.
The price of benchmark zinc on the London Metal Exchange gained 12 percent from late November to last Wednesday, but has since shed more than 4 percent.
The lead market is expected to have a deficit of 22,000 tonnes by the end of this year, deepening to 51,000 tonnes in 2015, according to consensus forecasts of analysts polled by Reuters.
Zinc, on the other hand, is forecast to have a 96,000 tonne surplus this year, narrowing to 17,500 tonnes in 2015.

Wednesday, January 29, 2014

Marc Faber Warns "Insiders Are Selling Like Crazy... Short US Stocks, Buy Treasuries & Gold"

Beginning by disavowing Mario Gabelli of any belief that rising stock prices help 'most' people ("Fed data suggests half the US population has seen a 40% drop in wealth since 2007"), Marc Faber discusses his increasingly imminent fears of the markets in this recent Barron's interview.
Quoting Hussman as a caveat, "The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak. There's no calling the top," Faber warns there are a lot of questions about the quality of earnings (from buybacks to unfunded pensions) but "statistics show thatcompany insiders are selling their shares like crazy."
His first recommendation - short the Russell 2000, buy 10-year US Treasuries ("there will be no magnificent US recovery"), and miners and adds "own physical gold because the old system will implode. Those who own paper assets are doomed."
Via Barron's,
Faber: This morning, I said most people don't benefit from rising stock prices. This handsome young man on my left said I was incorrect. [Gabelli starts preening.] Yet, here are some statistics from Gallup's annual economy and personal-finance survey on the percentage of U.S. adults invested in the market. The survey, whose results were published in May, asks whether respondents personally or jointly with a spouse have any money invested in the market, either in individual stock accounts, stock mutual funds, self-directed 401(k) retirement accounts, or individual retirement accounts. Only 52% responded positively.
Gabelli: They didn't ask about company-sponsored 401(k)s, so it is a faulty question.
Faber: An analysis of Federal Reserve data suggests that half the U.S. population has seen a 40% decrease in wealth since 2007.
In Reminiscences of a Stock Operator [a fictionalized account of the trader Jesse Livermore that has become a Wall Street classic], Livermore said, "It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight." Here's another thought from John Hussmann of the Hussmann Funds: "The problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak. There's no calling the top, and most of the signals that have been most historically useful for that purpose have been blaring red since late 2011."
I am negative about U.S. stocks, and the Russell 2000 in particular. Regarding Abby's energy recommendation, this is one of the few sectors with insider buying. In other sectors, statistics show that company insiders are selling their shares like crazy, and companies are buying like crazy.
Zulauf: These are the same people.
Faber: Precisely. Looking at 10-year annualized returns for U.S. stocks, the Value Line arithmetic index has risen 11% a year. The Standard & Poor's 600 and the Nasdaq 100 have each risen 9.4% a year. In other words, the market hasn't done badly. Sentiment figures are extremely bullish, and valuations are on the high side.
But there are a lot of questions about earnings, both because of stock buybacks and unfunded pension liabilities. How can companies have rising earnings, yet not provision sufficiently for their pension funds?
Good question. Where are you leading us with your musings?
Faber: What I recommend to clients and what I do with my own portfolio aren't always the same. That said, my first recommendation is to short the Russell 2000. You can use the iShares Russell 2000 exchange-traded fund [IWM]. Small stocks have outperformed large stocks significantly in the past few years.
Next, I would buy 10-year Treasury notes, because I don't believe in this magnificent U.S. economic recovery. The U.S. is going to turn down, and bond yields are going to fall. Abby just gave me a good idea. She is long the iShares MSCI Mexico Capped ETF, so I will go short.
What are you doing with your own money?
Faber: I have a lot of cash, and I bought Treasury bonds.
Faber: I have no faith in paper money, period. Next, insider buying is also high in gold shares. Gold has massively underperformed relative to the S&P 500 and the Russell 2000. Maybe the price will go down some from here, but individual investors and my fellow panelists and Barron's editors ought to own some gold. About 20% of my net worth is in gold. I don't even value it in my portfolio. What goes down, I don't value.
Which stocks are you recommending?
Faber: I recommend the Market Vectors Junior Gold Miners ETF [GDXJ], although I don't own it. I own physical gold because the old system will implode. Those who own paper assets are doomed.
Zulauf: Can you put the time frame on the implosion?
Faber: Let's enjoy dinner tonight. Maybe it will happen tomorrow.
There is a colossal bubble in assets. When central banks print money, all assets go up. When they pull back, we could see deflation in asset prices but a pickup in consumer prices and the cost of living. Still, you have to own some assets. Hutchison Port Holdings Trust yields about 7%. It owns several ports in Hong Kong and China, which isn't a good business right now. When the economy slows, the dividend might be cut to 5% or so. Many Singapore real-estate investment trusts have corrected meaningfully, and now yield 5% to 6%. They aren't terrific investments because property prices could fall. But if you have a negative view of the world, and you think trade will contract, property prices will fall, and the yield on the 10-year Treasury will drop, a REIT like Hutchison is a relatively attractive investment.
Faber: The outlook for property in Asia isn't bad because a lot of Europeans realize they will need to leave Europe for tax reasons. They can live in Singapore and be taxed at a much lower rate. Even if China grows by only 3% or 4%, it is better than Europe. People are moving up the economic ladder in Asia and into the middle class.
Are you bullish on India?
Faber: I am on the board of the oldest India fund [the India Capital fund]. The macroeconomic outlook for India isn't good, but an election is coming, and the market always rallies into elections. The leading candidate is pro-business. He is speaking before huge crowds.
In dollar terms, the Indian market is still down about 40% from the peak, because the currency has weakened. In the 1970s, stock market indexes performed poorly and stock-picking came to the fore. Asia could be like that now. It is a huge region, and you have to invest by company. Some Indian companies will do well, and others poorly. Some people made 40% on their investments in China last year, but the benchmark index did poorly.
I like Vietnam. The economy has had its troubles, and the market has seen a big decline. I want you to visualize Vietnam. [Stands up, walks to a nearby wall, and begins to draw a map of Vietnam with his hands.] Here's Saigon, or Ho Chi Minh City, the border with China, and the Mekong River. And here in the middle, on the coast, is Da Nang.
Faber: I recommend shorting the Turkish lira. I had an experience in Turkey that led me to believe that some families are above the law. When I see that in an emerging economy, it makes me careful about investing.