Dawes Points: Activity accelerating

Key Points

  • A prosperous 2014 and Year of the Horse to all
  • US Bond market breaking down
  • Leading Equity markets still making new highs into  2014
  • Laggard markets catching up
  • Resource Sector low made in late June 2013
  • Major Nth American Resources stocks powering on
  • ASX Metals and Mines Index has broken 30 month downtrend
  • Iron ore export volumes robust and growing
  • Gold sector and small resources showing increases in turnover
  • Resource Sector capex to resume with A$400bn in new projects

2014 is now with us and it is appropriate to do some crystal ball gazing for the year ahead and beyond.  The markets are providing us all with some now very clear indications of the near term and what is in store for medium and longer terms.  The Resources Market low came in late June 2013, over 6 months ago.  It does look very encouraging now and the Year of the Horse will start early this year and is rearing to go!

The short term reality is however, strongly coloured by the historic poor performances of most stocks in our resources sector over the past 30 months despite the low occurring in June 2013.  Poor market action of volume and breadth say loud and clear that participation rates have been and are still low.  That means the general market place does not believe and few players from local and foreign institutional investors to even fewer punters have been playing.  But the signs are already there for a major change. Turnover volumes are rising as investors realise that all is not gloom and doom.  Production data is strong and product prices are good and firming.

But before we go forward it is worth reviewing the past year, that most horrible of years, 2013.

Dawes Points of 28 January 2013 started with:

The foundation for the year ahead was pointed out in a positive Paradigm Outlook from October 2012 which suggested that investors should “Heed the markets, not the commentators”.  So many market indices (Germany, India and several in the US) were then pushing all-time highs and others (Shanghai, Hong Kong, FTSE, Nikkei and the All Ords) had broken downtrends from the 2007-08 highs and were clearly looking over the horizon to some sort of better times.  Commodities were holding up OK whilst PE ratios for many stocks and markets were at the lower end of the ranges of recent times and dividend yields were looking very attractive.

Yes that was what the view was then.  And it all came to pass.  That view of the all time highs in many of the major US equity market indices leading the world, with Europe following and Asia and other emerging economies bringing up the rear, has been completely vindicated.  Also the US T Bond market continued its poor performance and the US$ Index gave back most of its 5% rally.  Oil was higher and copper has rallied back after a soggy mid year period.

Unfortunately the Resources Sector was savaged.  You may well ask why.

The performance of the markets in 2013 was definitely a tale of two halves with the low occurring for most indices in the last week of June.  This was the very notable 27 June that should stand as the cycle low in gold and most major indices outside of the gold share themselves (see Dawes Points 5 July 2013   – End of EOFY Sale).

The North American Indices clearly led with the Small Caps (S&P 600 +Russell 2000) as the stars but NASDAQ also did well with 38.3%.  Dow Transports did 39.5% whilst the Dow Industrials was a real laggard – only 26.5%. Where is the Recession!!!    (Note that the far right column gives the % of the gain that was achieved in the Dec Half.)

Index

Dec 2012

June 2013

Dec 2013

Dec-Dec

June-Dec

% Dec Half

S&P 600 Smallcaps

343

396

485

41.4%

26.1%

63%

Russell 2000

849

977

1164

37.0%

21.9%

59%

Wilshire

14995

16992

19706

31.4%

18.1%

58%

S&P 500

1426

1606

1848

29.6%

17.0%

57%

Nasdaq

3019

2935

4177

38.3%

41.1%

107%

Dow Industrials

13104

12880

16576

26.5%

28.2%

106%

Dow Transports

5307

6174

7401

39.5%

23.1%

59%

Russell 2000

849

977

1164

37.0%

21.9%

58%

Interesting that about 60% of the performance came in the Dec Half, but NASDAQ and the DOW had all their performance and more in the Dec Half after a negative June Half.

These stock market performances were very robust against a weak bond market and a US$ that gave back almost all its June Half rally.  Note rising bond yields and rising stock markets.  Never believe that junk about stock markets falling with rising interest rates!   See more below.

Index

Dec 2012

June 2013

Dec 2013

Dec-Dec

June-Dec

% Dec Half

US 10 Yr Bond

132

126

122

-7.8%

-3.1%

39%

US 30 Yr Bond

147

135

127

-13.2%

-5.1%

39%

US $ Index

79.8

83.4

80.2

0.5%

-4.0%

-735%

European Markets had a very week June Half but roared in the Dec Half to give results good but weaker than the Dow Industrials.  But Europe is following on well.  Where is the banking sector collapse!

Index

Dec 2012

June 2013

Dec 2013

Dec-Dec

June-Dec

% Dec Half

Germany DAX

7612

6416

9552

25.5%

41.2%

162%

UK FTSE

5898

6215

6749

14.4%

9.0%

63%

France CAC

3641

3739

4296

18.0%

15.3%

85%

Spain IBE

8167

7763

9916

21.4%

26.4%

123%

Italy Milan

16273

15239

18968

16.6%

22.9%

138%

Asia is following Europe with Japan on steroids via Abenomics up 56.7% and everyone but China just managing to stay positive.  Everyone outside of Japan had a very strong Dec Half.

Index

Dec 2012

June 2013

Dec 2013

Dec-Dec

June-Dec

% Dec Half

Japan

10395

13677

16291

56.7%

25.1%

44%

India

19427

19396

21170

9.0%

9.1%

102%

Hong Kong

22657

20803

23306

2.9%

11.0%

385%

Shanghai

2261

1979

2116

-6.4%

6.0%

-94%

SFT 25

39

32

38

-2.1%

15.3%

-714%

Taiwan

183

192

205

11.9%

7.1%

60%

 Kopsi

1985

1863

2011

1.3%

7.5%

559%

Here in Australia we were with the true laggards with the All Ords managing 14.8%, whilst really bringing up the rear were most things resources or gold.  The June Half was really ugly but all except gold shares were up in the Dec Half.

Index

Dec 2012

June 2013

Dec 2013

Dec-Dec

June-Dec

% Dec Half

All Ordinaries

4664

4775

5353

14.8%

12.4%

84%

Mines +Metals

3643

2747

3339

-8.3%

16.3%

-195%

ASX Small Resource

3781

1931

2172

-42.6%

6.4%

-15%

ASX Gold Index

4898

2064

1898

-61.2%

-3.4%

6%

XAU

165.6

90.15

84.147

-49.2%

-3.6%

7%

The well publicised concerns over Europe, China and the US have simply failed to materialise and global economic activity has continued to expand and the SWIFT Code Index NOWCAST is indicating accelerating growth into 2014.  Production of crude steel globally held up very well and is up 4.2% to 1.447mt for the 11 months to Nov 2013.  China maintained a rate of almost 800mtpa throughout the year although November was about 6% lower that the year to date average.

So let’s look at the key driver again that was mentioned in the last Dawes Points in December.  The US Treasury Bond market.  It is breaking down.  The Maginot Line has been left behind.  Mitchell Johnson was the Panzer and he destroyed the defenders by outflanking them.  Twenty years of Conventional Wisdom is about to come unstuck as this long term uptrend in bond prices is broken and the short term is showing rising bond yields.

The table earlier in this note shows a 13.2% fall in the 30 year Bond Price and 7.8% in 10 year Bonds.  These are capital losses in `risk free’ assets.  A lot more to come but keep in mind that this is a BIG market with natural long term buyers so a sharp drop is probably not going to happen. But then again it might.

The US$ itself is the next part of the puzzle and we are in for a sharp move soon because it has held a fairly steady level for over 2 years .  It could be up and would correspond with a bond rally and possibly lower gold but it might be just the opposite.  I think it will weaken and fail to lift into the Top Channel.

Description: http://stockcharts.com/c-sc/sc?s=$USD&p=M&st=1980-07-13&en=(today)&i=p52458081222&a=305083431&r=1389832883813
Through most of the last decade equity markets rose as the US$ weakened and it was fascinating to watch how highs and lows in the S&P 500 seemed to exactly match lows and highs in the US$.

The strength in so many equity indices around the world particularly in the US is confirming firm economic growth in the US and that is giving confidence to other countries, starting in Europe and Sth America and spreading to Africa MENA and finally Asia.  Faster growing economies should attract funds from the US and certainly out from the safe haven of US T Bonds. So lower US$ and higher equities.

The positioning of these big markets (currencies, bonds and equities) will be determining the FLOW of FUNDS for future market performances.  So if these equity market surges to new highs, uptrend breaks in bonds and downtrend breaks in major cyclicals are genuine then the FLOW of FUNDS from bonds and also cash will be to equities and commodities.

I consider that the current build ups in bank deposits world-wide are something quite unprecedented and should then result in something quite unprecedented in equity markets.  Here in Australia we have this extraordinary A$1,544bn in bank deposits including A$808bn in Household deposits.  What do you think will happen when the herd starts to really flow in to equities again?  Yes, big bull market!

And it is global.

Coming to the resources side we can revisit the performances of our major indices and also some commodities.  The resources indices were down sharply for the year before recovering but the metals themselves fared much better, apart from the structural problems for nickel and aluminium, and finished the year well, especially zinc.

Index

Dec 2012

June 2013

Dec 2013

Dec-Dec

June-Dec

% Dec Half

Mines +Metals

3643

2747

3339

-8.3%

16.3%

-195%

ASX Small Resources

3781

1931

2172

-42.6%

6.4%

-15%

ASX Gold Index

4898

2064

1898

-61.2%

-3.4%

6%

Metals (US$/t)

Copper

7915

6750

7394

-6.6%

8.1%

-124%

Zinc

2034

1823

2085

2.5%

12.9%

514%

Lead

2340

2058

2206

-5.7%

6.3%

-110%

Tin

23500

19800

22550

-4.0%

11.7%

-289%

Nickel

17085

13680

13970

-18.2%

1.7%

-9%

Aluminium

2040

1731

1764

-13.5%

1.6%

-12%

LME inventories are also in very good shape to support higher prices, except for nickel and aluminium. Note copper inventories have almost halved since end June and at the current 336kt are less than a week’s consumption at 20mtpa. And lead and zinc are each under two weeks.

Inventory (000t)

Dec 2012

June 2013

Dec 2013

Dec-Dec

June-Dec

Copper

320

666

366

14.4%

-45.0%

Zinc

1220

1061

933

-23.5%

-12.1%

Lead

320

198

214

-33.1%

8.1%

Tin

12

14

10

-24.5%

-32.4%

Nickel

139

187

261

87.0%

39.5%

Aluminium

5210

5435

5458

4.8%

0.4%

The important industrial metals copper, lead and zinc should have a strong decade due to a lack of available new capacity.  And tin now should be regarded as a technology metal given that its key use is in solder for electronics.

Other commodities are doing OK with the trends suggesting a major move quite soon within the March Qtr 2014. Iron ore, as has been stated so often, still looks strong and I expect new highs in the next couple of years.  Coal is bottoming and beginning its upturn.  Oil is behaving well and should resume uptrend.

So let’s get back to the Metals and Mining Index.  Down 25% in the June Half and up 22% in the Dec Half, and now having broken its downtrend from April 2011 is looking to move sharply higher.  The most recent surges following the strong iron ore production and export figures are probably indicating that the next stage of `fasten your seat belts’  (Stage I Dawes Points 16 Oct +8.6% , Stage II Dawes Points 11 December +9.2%)  is about to get underway in earnest.

The downtrend was broken, the break out returned to the downtrend and break line and then bounced off nicely.  If all goes well this should really accelerate before the end of the March Quarter.

ASX XMM Metals and Mining Index 2009-2014

The data in last month’s Dawes Points on projections on iron ore, coal and LNG exports should be sufficient to get the major stocks BHP. RIO, FMG, WPL and STO moving but it will be the price moves on the metals such as copper, zinc, lead and tin that will really drive the OZL and PNA type stocks and of course the hundreds of juniors.

I also want to stress the importance of uranium and all the technology metals like antimony, lithium, graphite, palladium, platinum, tungsten and tantalum that should be strong performers over this new and exciting stage of the cycle.

Evidence is everywhere for the disdain the market has for resources and I even saw yesterday that an economist from a major foreign `Investment Bank’ was still talking about the end of the Resources Boom.  Well it certainly is still the Conventional Wisdom but the markets are telling me something very different. Even the new Australian Federal Government has given the go ahead for another A$400bn in resources projects yet commentators are still skeptical.

The latest market share graphics shows that XMM share of All Ords ASX turnover value had dropped almost in half from the 28-33% of 2010-12 to well under 20% for most of 2013 but the early 2014 figures show that market share is now just over 20%.  Encouraging news!  Even more important is the data for Small Resources (XSR) after collapsing from ~5% to ~2.5% is now over 3.5% in 2014.  A very healthy sign!  The data for these charts is limited and is only available from 2006 for the XMM and 2000 for the XSR.

The much abused gold sector is improving its share of turnover and a strong end of year/start of year week gave a 3.5% surge to show gold stocks are coming back into favour.

Gold shares around the world have been beaten up and are now well down but are also well down against gold and also against stocks.  When the market decides that the incredibly strong demand for physical gold out of Asia, the buying of gold by central banks and general still firm demand for coins is enough to absorb the last of the ETF sales and the shenanigans of the hedge funds, then the net effect on gold should be very strong.

It is also notable that the gold bars registered on COMEX are now just 370,000oz.  Just enough for 3,700  100oz contracts to take delivery. Not much.  The figure was 638koz two months ago and 3.0moz in March 2013. This is not the only metric to watch here but it is a useful indicator.

The extremes in the values for the XAU in the two charts above are suggesting very firmly to me that gold did in fact bottom on 27 June 2013 and that we will get a sharp shortcover rally and then a lot more.  My view and I am sticking to it.

The ASX Gold Index is back over 2100 which is almost 25% up from the December low at 1703 but is still down 75% from the April 2011 high.

Importantly while the Gold Index made a new demoralizing low in December most other indices did not and so the Small Resources (XSR) is now looking very attractive.

Within the Small Resources there are dozens of stocks that offer extraordinary value and some I mentioned a few issues ago.

The opportunities are just extraordinary.  So many and hard to choose which are best for short, medium and long term!

I do like the graphite sector as a new growth area and particularly recommend LMB and VXL but I think we might be hearing a lot more about these stocks and similar stocks in the technology metals this year.

Finally the A$ is getting beaten around too but you should all be familiar with this correlation graphic of monthly closes where the co-efficient is 0.73.  It was well over 80 until early 2013 but I think it will catch up again.  What it says is that where the gold stocks go, so will the A$.  And rather than it suggesting that the US$/A$ has to fall back to US$0.70 I consider it to be saying when the gold stocks turn up, the A$ will be following them up.

And finally this weekly graphic suggest the US$/A$ is only correcting and consolidating against a very high level of negative sentiment.  The next few weeks should just do it.

The markets are turning our way, the misery of the past few years should be lifted from our eyes and we should all be looking to making some money again.  LMB and VXL have been very kind to us in this regards but I can see many more coming.

Barry Dawes

BSc F Aus IMM MSAA MSEG
17 January 2014

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