Equities and commodities explosion now really underway

Key Points

New record highs in important equity indices fuelled by better earnings data and some major M&A activity provide strong evidence that the Dawes Points synchronised global economic boom is on track to flourish in 2014 and the Year of the Horse and beyond.  The sidelined cash built up in most economies around the world will now start to flow into investment and consumption and add significantly to economic growth.   Several good years are ahead of us all and the opportunities everywhere are boundless.

Would you believe the GDP growth rates of 5.9%pa for Japan in the March Qtr and forecasts of 4% pa for the US in June Qtr? Some technical reasons here of course but nine months ago you would have said I was on drugs if I had said that.  You probably did anyway!

Well it has been almost 18 months since Dawes Points made strong suggestions of a global economic recovery that would bring boom conditions back to the resources sector in 2014 and beyond.  The US equity market boom led by the small caps (the Russell 2000)  and the broader market (Wilshire 5000) has been followed by the S&P 500 and the Dow Industrials in keeping with better economic and earnings data.

The mergers have added to this but what is interesting is that the velocity of circulation of cash (GDP divided by M2 money supply) has been falling for some years and has really decelerated since the GFC in 2007/08 while everyone (individuals, corporates and banks) have built up cash levels in very defensive stances. 

Even here, RBA figures show the A$538bn in term deposits and A$572bn in savings accounts in a total ofA$1572bn.  ATO data suggest SMSFs have 31% in cash, 15% in property and only 32% in shares.  This cash buildup has contributed to weak data on retail expenditures and also on the lack of interest in general investment especially higher risk ventures such as mining stocks and junior companies in particular which have lagged here in great contrast to the performances of the major US indices.

Could it be a change is underway at last?   Most definitely YES!!

The new mergers mania may be changing this velocity of circulation. US banks have had a record 26% of net equity assets held as cash and have held back on lending.  The current M&A surge with bank lending support may get this index moving the other way at last.  Let's keep watching it.

Velocity of M2 Money Stock USA  – Federal Reserve Bank of St Louis

You have been advised of this growth outlook for quite some time at Dawes Points so why was it that Dawes Points was able to say this whilst all the massive brainpower of local and global investment banks said otherwise.  Experience, knowledge and vision I think is the catch phrase. This was the motto of MPS almost 15 years ago.

The more recent comment has been to heed the markets not the commentators.

Forty-something Western Generation Xers who have been brought up in an environment of entitlement, compliance and communication can only respond within that paradigm.    

However, the paradigm for six times their number in China, India, ASEAN, Africa and Sth America is something far different. 

A rise in domestic living standards is imperative and they know it can only come from someone being able to sell something to someone else. And by George that is occurring almost everywhere. People feeling pleased with what has been bought, sellers pleased that they have sold a quality product at an attractive price that makes a profit but importantly one that will entice a return customer and everyone wins.  It  is a pity that all socialists and bureaucrats seem to think about is a crappy product(mostly government services) and care nothing about repeat customers because they usually have a monopoly.  Just jack up prices, pay the bureaucrat more and who cares about the service, outcome or recipient.

Anyway, the US equity markets now really like what they see and the recent breakouts show the markets around the world also really like what they see.  But not everyone it would seem.

Have a look at these next two graphics.

The first shows that institutional clients of BofAML sold a cumulative net US$50bn of equities since 2007.  Assuming BofAML has a 10% market share and that its clients are no different from those of any other Wall Street broker then just maybe about US$500bn has been sold on market by institutional clients.  Hedge funds are also out/short.  Just the man in the street building up his holdings as the market surges to record highs and US corporates now on a buying spree recognising the great value there.  And a myriad of new technologies.  Who has got it right?  Who has got it very wrong?

So many professional fund managers are scared and short!  Sell shares and buy bonds for goodness sake?

And then what about this?

Record highs accompanied by rising short positions.  Not the psychology of market highs.

Think of what this means.

Market psychology should tell us that peaks in markets are accompanied by participants believing that the new plateau of prosperity will continue forever, higher Share Index targets are rolled out daily and that market shorts should be overwhelmed and ridiculed.  It's not happening that way.  Caution, caution, caution is the mantra.

I attended the annual Resources Information Unit conference in Sydney this week. Some wonderful opportunities offered and so cheap!  But almost all of the resources sector summation presentations said the same thing!  Caution, caution and caution. Commodity prices are going nowhere for at least another 18 months.  Maybe 2016.Don’t know about gold. Too hard. Sure do some stock picking by crystal ball gazing and impute resource potential from a few drill holes but don't do anything before a JORC figure is given.   Just ignore the drawdown of inventory for copper and lead/zinc and tin.  New supply is coming. Not sure about where from, but it is probably coming from Africa.  Or Sth America/China. Somewhere.  But it's not Australia just now. 

But now look at what the markets are saying.

New highs in the US equity markets.  I have been talking about this for over two years now for the US to lead the world out of misery.

And the economic boom rolls to the East.  First to Europe that obviously did not collapse.

Then further East to India, where growth and now a change of government suggest much more to come.

And the Far East. Hong Kong is a proxy for China and it is all good here.

Sth Korea is relying on Japan and China. KOSPI up 2.63% last week. Would love to buy stocks here!

UK catching up after some major changes. Almost a year of indecision but it will run well soon.

Commodities starting higher.  Agricultural commodities might be leading but watch energy.

Brent looks like it is ready to run.  I sure like oil and gas stocks in Australia! From WPL at the top to STO, OSH, BPT, SXY, DLS, BUR, AJQ, CTP and HPR. Get aboard!

Then metals to follow.

Copper looks very strong after the scam selloff.

And look at these LME copper inventories.  Down 72% in 11 months.  LME stockpile is declining at more than 15% per month now. Just 191kt. Just 3.6 days consumption. What Purchasing Manager is now going to sit tight while thinking about `oversupply'. Buy copper producers! 

What we see in copper is replicated in lead, zinc and tin to a lesser extent but all show production declines and very tight markets out a year or so.  Falling LME inventories to critical levels of under 2 weeks supply will force prices higher.  Aluminium and nickel have been in oversupply difficulty but may now be also showing demand exceeding supply so their inventories might continue to fall from current quite high levels.  It is the direction that counts and the momentum then builds.

Have at look at bauxite prices into China. Lots of alumina/aluminium capacity. Not much bauxite. There may be an analogy for bauxite and aluminium with iron ore and steel.  We saw a big jump in iron ore vs steel.  Just might get a jump in bauxite vs aluminium.   Watch this space.

As Dawes Points has said ad nauseam, the crude steel production numbers out of China say very clearly growth is continuing.  Output was a record 827mtpa in March.  I hear over 830mtpa in April. Who are the conmen here?  Take a bow US investment banks with an anti China agenda and their collapse in China steel production.  I maintain my forecast of new highs in iron ore prices within the next two years.

 

You should listen to the iron ore company executives.  They know what their clients are saying and wanting.

Funny how so much oversupply in iron ore has Chinese ships arriving at Australian ports to take every tonne they can get while prices are low. Record exports from us.  Record imports from them.

And port inventories are high but mill inventories are low.  The stocks to import ratio at about 35 days is still 40% BELOW two years ago. 

Fortescue (ANZ Research) shows these new mills being built on the coast to take imported hematite ores, not much local magnetite required here. Imports will soon make up over 80% of iron ore demand in China.

And look at Shanghai.  Trying very hard to move ahead against the bearish environment but major structural changes are afoot to help.  SOEs are now encouraged to tap massive savings in China and take equity to replace debt and to start to really free up business strategies from just providing a social service to creating earnings for shareholders.  PER of 9.8x is very attractive now.  Same price level as 2001 but about 30x PER lower. Go China!

I mentioned ASEAN which now includes Vietnam, Cambodia, Laos and Myanmar within the new ATIGA free trade agreement.

Look at this result for 617m people and 50%<35 years of age.  Better demographics than China and no One Child Policy. Almost as important as India and Sth America.  

Note, too, the energy consumption and growth rate of MENA (Middle East and North Africa)!  MENA energy consumption is one third that of the US and growing at over 4%.  US energy demand growth is negligible!

These are impressive numbers using BP data.

And look at the ASEAN economic growth rates stats from the IMF.  Not far behind China with almost 50% of its population.  Mostly English speaking peoples too so good rule of law!  I hope you are getting the full picture here.

US Bonds have peaked and yields heading higher. Dawes Points has not got this right yet but the latest rally sure suggests they are just grasping at straws. This will be a major source of funds to the equities and commodities bull markets as participants move out of an overvalued sector in a very tired 30 year bull market that has already peaked almost two years ago.

And the US$ is breaking down.  What a rear guard action over the past couple of years.  Truly grasping at straws here too.

While the US$ is fighting for relevance the A$ has finished its correction.  Next stop is US$0.95, then higher.

I mentioned attending the RIU Resources Conference last week. I saw about 40 company presentations and a few industry commentaries.  Of the 43 companies I would be happy to invest in about 20 just on the  basis of outstanding growth prospects and another 10 or so on just ridiculous valuations.

Of course there was the caution, caution, caution, commentary but I really don't think there is much time left to be cautious.  This a great bull market that is developing and there really isn't much time at all.

So I will make some suggestions.

I will also make some other suggestions.

And finally yet another plug for old favourites

I have a list of about 20 Super Stocks for clients. Major outperformance expected. Contact me if you are interested.

I own BHP, FMG,CTP, BLK, HPR, LMB, LNG, DLS, AJQ, Fo.V

Sydney

18 May 2014

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