Equities explosion coming

Key Points

It is not just me saying this.  It is the markets that are telling us as you will see.

In following global economic activity I have always used the World Steel Association monthly data to gauge activity in the real economy.  My observation of this data over the past few years showed there was no discernible slowdown in China despite all the hysteria and I stayed bullish.  Near real time data here is far superior to pontificating US Fed watchers.

The data is almost `live’ and is untainted by interpretation so gives me a good indication of real activity across the world and has encouraged me to stay bullish despite the Wall St negative groupthink.

Now I have just discovered another near-real time indicator and I think it is brilliant!  No longer do we need forecasts.  We can now have `nowcasts’!

The people behind the SWIFT international funds transfer have come up with an index of economic activity based on the character of the 2m or so funds transfers that it undertakes each day.

In their own words:-

SWIFT, the financial messaging provider for more than 10,000 financial institutions and corporations in 212 countries, today confirmed that the SWIFT Index accurately forecast the current economic recovery growth levels for the UK, the US and OECD region seven months ago.
Based on an average of 2 million SWIFT payments messages per day, the SWIFT Index produces quarterly GDP growth nowcasts and forecasts for the UK, EU27, Germany, US and OECD economies and publishes these on a monthly basis.
Today, as SWIFT releases the August SWIFT Index forecasts, it is expected that the UK economy will see further growth in Q4 with a year-on-year GDP growth rate of 1.7% as the country is on the path to recover the pre-financial crisis levels of growth.
The following graph shows year-on-year GDP growth based on the SWIFT Index, clearly indicating improving growth for the UK, Germany, US, EU27 and OECD aggregates.
Description: Description: SIBOS_Fig0645AM_17Sep13
For the EU27 region, the SWIFT Index points to significant GDP growth moving from -0.3% in Q2 to 0.8% by the end of 2013.
Similarly, the German economy will continue to pick up with year-on-year GDP growth moving from 0.5% at the end of Q2 to 1.3% growth by the end of Q4 2013.
Continuing the SWIFT Index’s prediction in February that the US economy would reach 1.6% growth by the end of Q2, further growth is expected in Q4 2013 reaching 1.5% year-one-year GDP growth.
Underpinning the combined regional growth, the OECD region will also grow from 0.9% at the end of Q2 2013 to 1.6% year-on-year GDP growth by the end of 2013 signaling the world economy will have overcome the worst of the financial crisis.

This says that the Europe and the US are turning up and when combined with China on track, Sth America doing OK , MENA strong and Africa growing we have a synchronised global economic upturn.

And equity markets around the world are telling us that.

This week I reviewed my 26 October 2012 Market Update entitled Heed the Markets Not the Commentators  – Bull Markets Anyone?  Unfashionable at the time but that note predicted strong breakouts in the DOW, the S&P 500, the Wilshire and the Russell 2000, the DAX and the FTSE.  The All Ords looked OK.

Well, these markets have generally zoomed up indicating recovery was underway yet the overwhelming tone of the commentary of the past year was negative with continuing concerns over European banking system and Europe’s `depression’,  China stalling or falling and of course the US in dire straits.    And remember that mantra that investors `were only chasing yield’ so that only big mature companies were worthy of investment funds?  Remember that?

And what have been the results?

The case was made then, and even more now, that the small cap Russell 2000 Index and the very broad Wilshire 5000 Index were indicating that the recovery was indeed broad and that the performance of the smaller caps reinforced the growth aspects and not that the defensive stocks were the place to be.

So let’s look at the results in their own currencies.

Index

26 Oct 2012

26/7 September 2013

% change

Russell 2000

816

1078

32

Wilshire 5000

14774

18142

23

S & P 500

1412

1698

20

Dow Jones 30

13103

15328

17

DAX

7200

8664

20

FTSE

5805

6565

13

All Ords

4533

5302

17

Shanghai

2101

2155

3

It would seem that the US small caps have done best.  So much for the `chasing yield’ thesis.
Wilshire showed good breadth.  So much for the big cap only theme.

And the S&P outperformed the Dow.  Although NASDAQ was not included in my list, it was up 27%.
So equity markets generally went well and Tokyo was up almost 66%. So what about commodities?

Commodity

26 Oct 2012

26/7 September 2013

% change

Aluminium

1909

1775

-7

Copper

7850

7226

-8

Lead

2039

2069

1

Zinc

1821

1861

2

Nickel

16405

13755

-16

Tin

20550

23179

13

Cobalt

25000

26500

6

Molybdenum

24150

20000

-17

West Texas Crude

86.2

103.03

20

Gold

1719

1324

-23

Thermal coal*

88

78

-11

Iron Ore*

119

134

13

*Not used in table on 26 Oct 2012  

Apart from weakness in gold and nickel and soggy coal there is not much here to comment on.
So what about the rest of the Market Update of 26 October 2012 that was bullish on resources stocks?  Probably the less said about it, the better.  Unfortunately for us all.

Gold was looking good then and was lining up for a strong 2013.  Yeah, right.  Copper was heading higher.  China steel production was steady with a growth bias.  Iron ore had recovered from the <US$90/t blues.   It was setting up for a good 2013.
So what happened to resources stocks?  Just trashed.  Globally.

Stock/Index

26 Oct 2012

26/7 September 2013

% change

BHP

34.25

36.36

6%

ASX Metals and Mining

3505

3271

-7%

ASX Small resources

4073

2399

-41%

ASX Gold Index

5710

2586

-55%

US XAU

183

94

-49%

With these results of major highs in the major equity markets and nothing particularly significant in commodities and with the A$ about 10% lower then resources stocks should be about line ball with a year ago.  Worst case.

But they are not and that is the key.  Why did it happen this way?

Other than blind stupidity on the part of the Wall St negative groupthink I don’t know. (I think I do, actually! But that is for another time.)
But what extraordinary value has now been created for astute investors.

Note that the market is now stirring and the rises over the next few weeks will be very sharp for many stocks.  Don’t miss out.
Since the beginning of 2013, over 120 companies have come through our doors to showcase their projects.   Oil and gas, gold, iron ore, copper, fertilizers, coal, rare earths and much more.

Almost all wanted capital but in the falling market to June 2013 that was just about impossible to obtain.  Despite being priced at a fraction of their NPVs and with A$1515bn in Australian bank deposits.  So value in this sector has been outstanding all year and even more now.
I think that those companies with tenacious and persevering managers (many of whom have forgone salaries and fees and have actually made loans back to their companies)  and with reasonable projects will survive and will prosper.

You would be amazed at the number of major new resource discoveries that have been made by these companies and the extraordinary value that has been created yet totally ignored by a market place that is currently looking for safety when the world has already said `cash is trash’.
Resources stocks are at their lowest risk when at their lows.  If they survive.  But most have, and the window is opening for capital raisings again so most will survive. And prosper.

Make sure you don’t miss out.   It is here when the percentage gains are greatest and the risks lowest.
The `Optimism Upleg’ is now with us and I think it is about to really accelerate.

Make sure you contact us.  bdawes@psec.com.au

Use this link to access an account opening form

Now, for a little bit of fun.

Let’s go on a trip around the world of bull markets.

And just before we do you can put this little issue right at the front of your mind.  I put this in again after including it in the last issue of Dawes Points but it is the key to everything.  Capital flows.

THE WORLD NO LONGER NEEDS THE US$ AS A SAFE HAVEN BECAUSE THE GLOBAL ECONOMY IS OK.

Funds will flow from here and from the world’s overpriced and un-`risk adjusted’ bond markets.

Got that OK?

Now let’s start with the leading indices in the US which are leading everything else.  The Russell 2000 and the Wilshire.

Russell 2000 (bottom 2000 of Russell 3000 Index so `smaller’ companies) Uptrend clearly powering on and breakout made last December.

Ditto for Wilshire 5000 (6400 US-based stocks).

 


S&P 500 has a massive base that a technical analyst might say could support a substantial rise.

Dow Jones Industrial Ave (30 stocks) May be a touch stronger than S&P in the longer term

So much for the Greater Depression in the US!

Now looking at Europe

DAX Germany is not far behind the US but is already out of the starting blocks in a recovering Europe.

UK FTSE   Getting ready to fly!

French CAC   Nothing wonderful but an important short term upmove is coming.

Spanish IBEX    Again nothing great but the downtrend is broken

Italy Dow Jones Italy Index   Not the right one to be in but after a major decline a downtrend is broken

It would seem that the stockmarkets are agreeing with the SWIFT `Nowcast’ of a recovery in Europe!

So much for the Euro Depression too and collapse of the banking system!

And for the Euro to Zero crowd this one is for you.  A break above about $1.40 would be very telling. The Euro Zone trade surplus is currently running at well over Euro200bnpa.

Now let’s do a quick trip to Asia with Japan first.
Nikkei Index has broken a 22 year downtrend thanks to Abe-nomics.

Korea’s Kospi has a very strong uptrend and is about to break higher.

Taiwan seems to want to go higher as well.

India is testing its uptrend but there is a lot of energy here.  Should break higher.

Hong Kong’s Hang Seng has been basing for over four years and has weathered the China-bashing.

China  Shanghai is about to break a 5 year downtrend. A strong performer in the year ahead

So that brings it to us here in Australia.  Much like the rest of Asia.

Let’s just first think about it.  Major markets led by the US and Germany with other Europe just a little behind.  Asia in all regions just ready to fly.  Economic growth in Europe and US looking sound (SWIFT `Nowcast’) and Asia is always there.  Commodity prices are OK.  Oil, LNG, iron ore and copper are firm.  Coal is still soft but recovering and gold is good and looking better.  The A$ should rise against the US$.
Yes, the All Ords is on its way! Grab your internet banking log in, send some cash and get ready for some fun!

And for the resources sector proxy we can use BHP.  Almost ready to go.  Strongly

.

So after that around the world  tour to the major economic growth engines we have the following conclusions.

And a special factor comes into play here.  The `commodities falling’  mantra would have encouraged inventory shedding at the user level and with the weak share prices and bankers’ reluctance to fund new projects we will be coming up to a very special period of supply and demand.  Demand will exceed consumption so the already-low producer and terminal market inventories will be stretched.   And new supply has already been deferred.

Welcome to the resources `Optimism Upleg’!   Small cap resources stocks are gifts. This is a very special asset class where the underlying resource asset can increase geometrically in value over a cycle. 10 and 20 baggers abound.

Here the ASX Small Resources is back to the levels of 2004 and is still 65% below its 2011 highs. Bargains everywhere.

Barry Dawes

30 September 2013

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