Tag: US T Bond

Dawes Points Where are we now

by Alison Sammes

Where are we now?

Key Points

  • US equity markets hit new all time highs
  • Asian markets surge
  • Economic data showing robust growth in many countries
  • Global cash levels still very high
  • Commodity prices may be readying for a surge in 2015
  • Chinese steel production still over 820mtpa and 820mt YTD (+5.3%)
  • Iron ore imports into China up 15% YTD and likely to exceed 900mt
  • US$ still strong for now
  • Japanese yen breaking down
  • Global bonds have spike high then sell-off
  • Gold price hammered into an important low?
  • All these indicators say BUY RESOURCES  STOCKS!!
Interesting and volatile times we live in!  As hoped, the recent stock market decline wasn't one to be concerned about after all and now we have all time highs in the US and market surges in most places from India to Shanghai, Tokyo and even Australia.  What are these markets telling us about where we are now?  The thought of the global economic boom is still there in my mind and these actions give me more confidence that the likelihood is increasing. Don't laugh.  Look at the data. Dawes Points has continually emphasised that the markets are telling us that the outlook is far better than the commentariat would have you believe and the markets last week certainly gave some evidence that more is to come.  The Dow Theorists, mostly bears, now have to turn bullish because all three Dow Indices (Industrials, Transports and Utilities) are at all time highs and have confirmed the next leg of the Bull Market is underway.  Many other bears will be forced to change their stances. The 4.8% jump by the Nikkei, and >1% by Mumbai, Shanghai, Singapore, Hong Kong on Friday followed the lead from the US and are likely to be firmer again this week to reflect Friday's US action.  Shanghai is up 21% since June and India is up 21% since May in the latest stage of these moves. The US economic growth numbers of +3.5% for the Sept Qtr are part of a line of results that have given 4 of the past 5 qtrs at above 3.5% (5qtr ave 2.8%pa) and a general uptrend for the past two years and certainly don't suggest the end of the world. United States GDP Growth Rate Corporate earnings for many companies in the US have been good and FactSheet reports for Sept Qtr 2014 that, for the 362 companies it follows, 78% have had earnings above the mean estimate and 59% had sales above the mean estimate. EPS figures for these companies are 7.3% higher than a year ago and about 28% higher than in 2007 pre GFC. The good US economic growth data have been above expectations and many other countries are also providing this better data. More recent data and IMF forecasts* for 2015 paint a positive picture although much of the recent data in UK and Europe are better than IMF forecasts* and its very recent outlook downgrades.
% GDP growth

2014

2015*

US

3.2

3.1

Japan

0.9

0.8

UK

3.2

2.7

Germany

1.4

1.5

China

7.4

7.1

Taiwan

3.9

4.0

India

5.6

6.4

In contrast to the strength of so many markets and all these positive economic and business data it seems the world still is in love with defensive positions in cash and fixed income.  Australia has A$1,640bn in bank deposits and recent discussions in SE Asia and China suggest investors and businesses currently have 35-50% of investable assets in cash. A survey by UK firm Hogan Lovells has an interactive website that uses Bloomberg data to give corporate cash balances for the top 1000 global corporations. Data for August 2013 was US$5,623 billion, up 39% from US$4,044 billion in August 2012. Look at these numbers in US$bn and what they might be now.
Region August 2012 August 2013

+%

Now??

Nth America      1,850      2,462

33%

3,000??

Asia Pacific      1,100      1,790

63%

2,000??

Europe         837      1,033

23%

1,100??

UK         147         186

27%

200??

Latin America           71           97

37%

110??

Other           39           55

41%

60??

Total      4,044      5,623

39%

6,470???

It seems highly likely to me that the rising stock markets and quite reasonable economic growth figures will be giving a great boost to confidence in the corporate sector and this should be flowing into the consumer and SME sectors.  And the first change will be for new orders for inventory to meet anticipated or received increased demand. These large cash inventories should be very important in determining economic activity everywhere over the next few years This issue of inventory really fascinates me. In the resources sector we are all familiar with the inventory data for metals on LME, COMEX and Shanghai Metals Exchange and export and import port stockpiles.  We all currently expect mine stocks to be minimal and sometimes data is available for smelter and steel mill raw and finished inventory. But inventory in the hands of users/developers/intermediaries/resellers can be difficult to ascertain.  And all these people see the same papers, TV, blogs, trade journals and watch the daily markets as we do.  Fear affects everyone's mood. Dow down 250 points means everyone buying a little less this week to ensure cashflows are OK. It has always been clear from previous cycles that when a recovery takes hold and business and consumer confidence picks up then demand exceeds consumption as downstream inventories are rebuilt. If copper is used as an example, the International Copper Study Group is forecasting copper consumption in 2014 to grow 4.4% from 20,525 ktonnes to 21,429kt, being about 900kt.  Refined copper production is expected to rise by about 1,100kt so that a net surplus of about 200kt is expected in 2014 on top of a surplus of 400kt in 2013. At current consumption rates the world uses almost 60kt per day. 410kt per week. Current LME copper inventories are just 160kt whilst COMEX is 30kt.  Total identifiable inventories are about 1,100kt. Should the processing stream decide to increase copper inventories by three days or 180kt then the demand for metal would rise not by 4.4% in 2014 but by 5.4% and the current LME and COMEX inventory would be absorbed. The mountains of corporate cash could easily find the US$1.2bn to fund this increase. Recent reports have suggested UK hedge fund Red Kite has already acquired more than 50% of these LME copper inventories. This extra demand can often remove a sizeable chunk of LME inventory and change the market balance for the year ahead. Note that LME inventories for copper, aluminium, zinc and tin have been declining in 2014 and have to be considered to be tight.
000t

1-Jan-13

1-Jul-13

1-Jan-14

1-Jul-14

current

Jul-13

Jul-14

Copper

320

665

366

155

162

-75.6%

4.8%

Zinc

1220

1061

933

668

698

-34.2%

4.5%

Lead

320

198

214

194

227

14.4%

16.9%

Tin

12

14

10

11

10

-25.8%

-8.8%

Nickel

139

187

262

305

385

106.0%

26.4%

Aluminium

5210

5435

5458

5046

4429

-18.5%

-12.2%

Price would then be set by willing buyers and sellers and not unwilling buyers and desperate sellers. Many of these commodities could benefit. Speaking of inventory, it certainly seems that investors holdings in resource stocks are very low and will need to be increased!

Commodity outlook encouraging

Commodities have been weak recently with iron ore, oil and gold as good examples. But it is notable that many commodities and other markets (especially the A$) have had declines but are bouncing off on a long term support line.  Many agricultural commodities have had typical selling exhaustion patterns (as if from liquidation of long positions) and fit along these support lines. Should these commodities bounce then the uptrend can be quickly re-instated. Much has been made of the influence of a strong US$ but individual supply demand patterns are more important than just a currency adjustment. Oil and natural gas need to be closely followed because a strong US$ won't have much of an impact on these prices.The Islamic militants in Iraq may affect oil and gas fields and also may try to intercept tankers in the major choke points such as Straits of Hormuz to give some supply problems for the West.  Also US natural gas inventories are relatively low ahead of what could be another cold winter.

Steel in China

Consumption of steel is forecast by the China Metallurgical Industry Planning and Research Institute in Beijing (Sept 2014) to peak in 2017 at 763mt and decline to about 696mt by 2025. China Crude Steel Production was 779mt in 2013 and should be 820-830mt in 2014 and 850mt in 2015.  It should peak in the mid-term of 13th Five-year Plan Period (2016-2020) in 2017 at approximately 870mt before declining to 850mt by 2020 and 800mt by 2025.  Note that RIO and BHP have a longer term growth rate that takes crude steel production above 1,000mtpa. The most recent World Steel Association data gives 821mtpa for September for China but this should slow seasonally ahead of the 2015 Spring Festival to give the 820-830mt for 2014. To achieve this crude steel production rate, iron ore imports have been surging and are up about 15% YTD and have exceeded 1,000mtpa on a monthly basis.  The full year should be about 10% higher than in 2013. Domestic magnetite concentrate production should decline by as much as 140mtpa by 2018 such that total imports should exceed 1,150mtpa basis 62%Fe and with lower grade iron ores around 58% Fe this figure should exceed 1,200mtpa. Source: China Metallurgical Industry Planning and Research Institute I continue to be amazed at the incessant calls for crude steel production in China to decline sharply and to hear that demand for raw materials into China is slowing.  15%pa growth in 2014 after 10% in import growth in 2013 is a decline? Nevertheless, the iron ore price has slipped below US$80/t causing hardship for high cost producers, especially those in China.  This graphic suggests about 85% of China magnetite concentrate production is losing cash.  Perhaps 30% is losing over US$40/t. The steel mills do not appear to have yet rebuilt depleted inventories and port inventories are now declining and are at a 7 month low.  Some of the ore accumulated for low cost financing and placed on these port stockpiles may have now been already sold off and might reduce the additional pressure on the market. The major producers from BHP, RIO, FMG to Vale have been aggressively producing and selling ore to hurt the Chinese producers and to place pressure on potential new entrants.  What is really interesting is the indications that iron ore production costs are coming down rapidly for these big players and should all be below US$60/t CFR basis 62%Fe. US$80 should be an important level but Chinese steel mills inventory actions will have the final say by the end of the year.

US$ strength

The rise in the US$ against most currencies has been seen to be the main driver behind the decline in commodity prices and that the market place sees a strong US$ as deflationary. This is all very nice but look at these numbers.  The CRB Index (basis CCI – graphic above) has been declining in US$ since highs in March Qtr 2011 but despite the strong US$ it is actually up for most currencies in 2014! CRB Index rebased to 100 for 2011 highs in each currency, with Dec 31 and current figures.
  2011 High

2011

2012

2013

2014

From high

2014

US$

100

82

80

74

70

-30.0%

-5.1%

Euro

100

88

85

75

78

-21.8%

4.5%

Yen

100

74

82

91

93

-7.2%

1.7%

SF

100

82

79

71

72

-27.6%

2.7%

A$

100

81

78

84

81

-19.5%

-3.6%

This graph of the CRB Index in Euros says something more.  This is likely to break upwards as global demand improves.  Copper has been rising gently in Euros since the March Qtr. While the US$ has been strong the Yen has not and the Yen makes up 13.6% of the USDX.   The Euro makes up 57.6% of this US$ Index and a close look at the cross rates doesn't suggest the US$ is going a lot further from here although it might not fall back much for a while.  The Yen is certainly going to be weaker but probably not many other currencies will. A weaker Yen is also obvious from this graphic says the A$ should be very strong against the Yen. Outflows of capital from Japan must be expected.  The gold price in Yen is also looking quite strong.

US T Bonds  - Surge then selloff

The remarkable surge in bond prices in mid October seemed to be a last gasp run and the decline since then still makes these bonds very vulnerable as global economic growth improves and deflationary risks recede. These bonds will also provide much of the capital that will join with cash to move into equities and commodities. The parallel of US TBonds with the US$ still needs to be considered. The US$ must follow its bond prices.

Gold price hammered into an important low?

Gold and gold stocks have been a hard road to follow but I think the fundamental arguments for a strong gold price and much higher gold shares remain. Governments destroy currencies by spending too much and racking up debts.   People who have lived through violent currency depreciation know the value of gold and the two biggest populations in India and China are showing this by buying as much gold as they can get their hands on.  Central banks are buying gold again.  Demand is stronger than mine and scrap supply so it can only be banks and hedge funds selling volume. How much do they have left? The evidence is clear that this uptrend has been broken.  A fair technical target could be US$700/oz if you wanted to be bearish. But this is also valid technical support with yet another market having three bounces along the support line. And this graphic is back to crisis levels.  Back below 2008 lows and back to 1986 levels.  Extreme long term support here for the US Gold Index! And to clutch at some other straws the sell off in the GDX ETF has been on massive volume and back to this pervasive and remarkable three point downtrend support line that we see  in so many markets this year. And when we look at gold shares against gold it suggests that this is the final selling and capitulation stage - or else gold is going to US$700 and most of the gold industry will close. This just screams that we must be near the end of the 42 month decline in gold shares. I particularly like NST, MML and DRM here as low cost producers and GOR, ABU, KGD, BLK and CGN as developers. Paradigm has opened an account with a bullion dealer which allows clients to invest directly into gold with delivery or to be held in storage.  Talk to me about it if you are interested. Stocks to BUY The major resources stocks BHP, RIO, FMG, WPL, STO, OSH are attractive opportunities and so many of the juniors are so cheap and very good value where currently funded. The Dawes Points Outlook is for this market to run for many years to the upside so there will be many opportunities coming through. For those seeking a general exposure to non resources stocks I can recommend the new A$50m IPO of CBG Capital LIC with a manager whose two funds have outperformed the ASX 200 reliably over the past 8 and 12 years respectively. Good growth and a fully franked dividend yield of 5-6%pa.   The minimum of A$16m has already been reached and the offer has a closing date of 20 November. A flyer on this will be circulated this week, but please call me on +612-9222-9111 if you'd like to discuss this. 5 November 2014  

Gold Market

by Barry Dawes
  • Gold bull market set to resume uptrend
  • Sovereign markets for gold, currencies and bonds confirming a positive resources outlook
  • Gold demand still robust
  • Islamic State issues concerns increasing
  • Gold bullion account established for investing or trading
  • Australian gold equities still very cheap
Gold prices have just travelled sideways in US$ for almost 15 months since bottoming after the April-June 2013 sell off despite strong physical demand from China and India and continuing takeup of gold coins. US$ gold has generally held its price since then but is down 34% from its high of US$1923/oz in Sept 2011 but well off the Dec 2013 sub US$1200 lows. The picture for gold itself also is far more encouraging when viewing it in other currencies and when the sovereign bond markets are brought in we can see some fascinating trends developing. Gold in the major currencies appears strongest in Yen terms with gold in Euros and Pounds not far behind.  The Yen looks curiously very weak against most currencies. A$ gold is steady. The US T Bond market peaked in July 2012 and the recent falls in yields are interesting, particularly in European bonds, but it all suggest a major generational low in yields is coming soon and then everything looks dangerous to be in bonds for at least the next decade.  How will these bonds ever be repaid? A new issue for having the security of gold is arising with the actions in Iraq and Syria that could have a major positive impact on gold prices in the very near future. Risks of the Islamic brotherhood revolts spreading into Muslim countries around the world are high and the oilfields in the Middle East and, more importantly the oil States themselves, are vulnerable.  The risks go further.  Nigeria, Libya and Pakistan are all vulnerable. Gold shares suffered a more severe battering in their 32 month bear market from the April 2011 record highs but they too made their lows in December 2013 and many have since rallied nicely. Bringing these all together still provides a positive trend for gold and the extreme lows in prices and cross-asset relativities for gold are considered to be well behind us now. Gold and shares in Australian gold producers are good insurance and the markets seem to be agreeing with this.  Paradigm can help you here. Paradigm has set up a dealing account with Capital Bullion to allow you to buy and sell gold and bullion gold coins and have somewhere safe to store them. Please call me to discuss. As noted above, gold in US$ has been trading in a relatively narrow band between US$1200 and US$1400 for over a year while holding a 13 year long-term uptrend of sorts and still oversold.

 

In the shorter term the action can be seen as within a relatively narrow band but has shown some violent action within it. It should be expected than the violent action will continue when the next market direction is confirmed.   Nevertheless the action seems to me to be very constructive and should soon be resolved with an upside break out. Gold in other currencies is also encouraging with Euro Gold close to E1000/oz. Gold in GBP has broken a downtrend. Gold in Yen seems to be leading.    Something is odd with Yen just now, could it be energy dependency? Or something else? I will come back to this later. Gold in A$ is steady but a break to the upside is due soon. And just as an aside, it is worth noting silver.  A moment of truth coming up here.  A big break seems likely here.  Up or down? The supply and demand says break upwards.  But let’s just see. Some very interesting graphics here to consider with the macro picture . First.  Gold  has some long term seasonal influences .  This graphic courtesy of Dmitri Speck suggests that from September until December an average seasonal move of about 3% could be expected.  So after this seasonably sharp early September decline we could see US$30-50 rise by Christmas.    On average.  Pity this graphic didn’t include the 2013-2014 volatility. But it is what it is and it is helpful. On other interesting points to consider are the US$’s recent rapid move into the Top Channel after 8 years of trying.   Is this of significance?  Should be, with improving global economic outlooks and the US leading.  The shale gas revolution is certainly helping with US energy costs and competitiveness but I still think the emerging global recovery is better for other countries than just the US. The short term for the US$ is very much overbought with it surging 4% in two months and all momentum indicators signalling overbought. It is also noteworthy that this US$ index is rising whilst the US$ is actually weakening against the Chinese Yuan and the A$. And with the various European bond markets rallying into parabolas it must be now saying that it is very close to the end of the global bullmarkets in bonds. US 30 year T-Bonds had a fall in yields but it is very hard to see lower rates here. Note the low in yields here in the 30 year was two years ago in July 2012. Especially when the recent lows in yield were not confirmed by similar strength in the 10 year bonds.   From the commodities and resources viewpoint it will be the flows OUT of these bonds that push up equity markets and commodities.  The data shows about US$80,000bn in bonds global bonds. The local Australian resources market would be a very happy recipient of just 0.1% (US$80bn) thank you.   In the gold shares the US Philadelphia Gold Index (XAU) has bottomed and turned up after basing along a major longer uptrend. The market action can be seen better through the two ETFs GDX (the XAU) and also through GDXJ which is the smaller cap stock ETF. Gold stocks in North America are still at only 30% of their long term relative value against gold itself but recent action suggests a turn is underway after bottoming and moving up. The fall in gold stocks against the general market has been even more horrendous but that fall is over now and should start to move up again to give significant outperformance. Here in Australia the gold sector is recovering and some excellent gains were recently made by some of the Paradigm favourites but the index has again drifted back to levels equal to the 2004 and 2005 lows. Looking at the performance of the ASX XGD it is still more than 70% below the April 2011 highs. I still like NST, GOR, ABU, SAR and SAR with BLK and ATV very cheap. The bottoming process is still underway as can be seen from the ASX  Small Resources but the character of the market is showing strong performances by many small resources stocks (that may not yet be in the  XSR) and a considerably stronger market that is taking capital raisings again.   This is clearly the time to be bullish. And to leave you with a few other things to be positive about:
  • The Chinese stock market, along with the rest of those in Asia, is gaining real strength.  It is hard to reconcile the continuing negativity about China with performance of Shanghai and almost all the other Asian stock markets.
  • The TSX-Venture Index is now showing some life and its direction will support the ASX Small Resources.  A break above about 1100 on this index would be very positive.
  • And finally this one really intrigues me.   What is happening with the Yen?  The A$ looks to be about to make a strong upmove against the Yen over the next year or so.  The Yen is also showing (see above) a much stronger gold price than in US$.  Keep watching this.
Barry Dawes 8 September 2014 Disclosure: Barry Dawes holds GOR, NST, ATV, BLK.