Friday, January 21, 2011

Marc Faber On Global Food Inflation And His Stock Market Outlook

Marc Faber appeared yesterday on CNBC and explained why he is the latest adherent of the "reverse decoupling" theory, whereby the emerging markets are to underperform the developed countries. Of course, anyone who has seen the action in the Shanghai Composite in the past 3 months does not need to be convinced of this. Faber, then proceeds to share some perspectives on Chinese geopolitical ambitions in light of the Hu visit (thank you $19 billion China-US Boeing arrangement which has already cost 1,000 US jobs), and evaluates the impact of rampant money printing on the cost of living in developing countries. To the latter recent riots, and occasional revolutions, across Africa and the Middle East probably frame the issue best. Here is Faber's take: "My concern is this - we have money printing around he world, and in particular in the US, and that has led to very high inflation around the world, and in very low income countries, energy and food account for a much larger portion of disposable income than in the United States. So these countries are suffering from high inflation and that reduces the purchasing power of people, so I think that monetary authorities in emerging economies will have to tighten, or they will have to let inflation to accelerate, both of which are not particularly good for equities." Well, yes, but who cares: after all it is only a matter of time before someone on CNBC pitches the tremendous stock market return in such stunning examples of monetary prudence as Zimbabwe and Weimar Germany.

Silver May Decline 20% as Coin Sales Signal `Crowd': Technical Analysis

Silver prices may retreat as much as 20 percent this year as soaring demand for physical metal signals a “crowded” trade, said Barry James, the chief executive officer of James Investment Research Inc.

Sales of 1-ounce American Eagle silver coins have totaled 4,588,000 in January, heading for a record, according to data from the U.S. Mint. Silver futures in New York rallied 84 percent last year, climbing to a 30-year high of $31.275 an ounce on Jan. 3, as investors sought a haven against financial turmoil.

“The coin sales are an indication of the level of interest in silver,” said James, who oversees $2.4 billion in Xenia, Ohio. “It’s too popular. When the crowd discovers a good deal, it’s usually long over.”

Prices have more than doubled in two years as investors bought precious metals to protect against a weakening U.S dollar and Europe’s financial crisis. Holdings in exchange-traded products backed by silver have dropped 1.6 percent since touching a record in mid-December. The metal tumbled 24 percent in 2008 after gaining for seven straight years. (more)


For the uninitiated, the summation index is a measure of market breadth. It looks at the number of stocks going up as against the number of stocks going down and, to put that figure in context, looks at how the net result is moving over time. As such, it is a reasonable indicator of how capital flows are being distributed through the market. (For a fuller explanation, refer to McClennan publications here.)

So to the chart above, the summation index has been struggling to regain even its late 2010 highs and in doing so has been defining a bearish divergence as the NYSE index has been stretching to new heights. This suggests that the market has been gaining ground on the backs of fewer and fewer stocks. We could interpret this as more and more stocks are bumping up against valuation constraints – or put another way, valuation multiples can only move so far ahead of earnings growth.

Even with $50bn in POMO purchases scheduled into the end of January, a few days of heavier volume selling could well tip the summation index back towards bearish territory. We’ll see how it behaves assuming the selloff continues – being alert to any positive divergence (ie. lower NYSE index with the summation index turning higher) as a sign that buying has kicked in. Bigger picture though this indicator is suggesting that the internals of this market aren’t all that healthy.

A gold exploration hotspot with more discoveries to come

The Gold Report: It's a treat to interview someone with such extensive knowledge of the Yukon, probably the hottest gold area play anywhere. Mike, you have been working with the Yukon government since 1990. These days, one company will spend more exploring for gold in one season in the Yukon than did all the juniors combined just a few years ago. Did you think you'd ever see such a remarkable gold rush?

Mike Burke: Yes, I did, actually. I think I've proven over the years that I'm a great believer in the mineral potential of the Yukon. In 1983, as a student, I worked for Canamax Resources, which was looking for gold and tungsten in the Yukon. When I graduated in 1987, Canamax opened up the Ketza River mine. I worked there as a mine geologist through development, production and closure. We mined out the oxide portion of the Ketza River deposits, but there are substantial sulfide reserves there, as well as a ton of exploration potential. Yukon-Nevada Gold Corp. (TSX:YNG) has been working there in the last few years, but Ketza River is far from reaching its full potential. We're now seeing exploration success there.

A number of placer gold districts in the Yukon have produced a substantial amount of gold from creeks. I'm pretty sure it didn't fall from the sky. There hasn't been a discovery of a substantial gold deposit in those areas except for Victoria Gold Corp.'s (TSX.V:VIT) Dublin Gulch, in the Mayo Mining District. Dublin Gulch is a 2.5 million-ounce (Moz.) gold deposit, but in the Klondike or Livingston Creek or other placer mining areas there's no substantial multi-million ounce gold deposit. That's always been a mystery. There hasn't been much modern exploration in these areas, but we're seeing it now. Companies are using new technology to augment old techniques like soil geochemistry. When I worked as a student, we'd go out and get our 50 soil samples a day and come back and plot by hand where they were on a field map. In the fall, we would take that information to draftsmen in the Vancouver office who would draft a master set of maps with the locations and assay data. Now GPS is used to collect that data in the field so locations with assay data can be plotted instantly when the assay data is received, sometimes while still in the field. I knew that once we started seeing money spent in the right areas, hidden gold deposits would be discovered. And we've definitely seen a couple in the last few years. (more)

Rising commodity prices have stalled, denting sector in 2011: AKS, MT, PKX, X

At the end of 2010, steel bulls were justifiably riding high. Stocks in the sector such as AK Steel (NYSE: AKS), Arcelor Mittal (NYSE: MT), POSCO (NYSE: PKX) and U.S. Steel (NYSE: X) all had outstanding December performances sparked in large part by the bevy of price hikes in the industry. In fact, the price of a ton of the most common raw steel, hot-rolled coil, has surged about 60% from early December to mid January. That’s a very big increase.

Yet so far in 2011, steel stocks have failed to follow suit. Now investors are asking the question: where’s the strength in steel stocks? Take a look at how these four steel stocks have faired so far in 2011:

  • AK Steel, -13%
  • Arcelor Mittal, -7%
  • PKX, -3%
  • U.S. Steel, -9%

Certainly, some of the sell-off in the sector can be attributed to profit taking in these stocks after the aforementioned run up at the end of last year. However, there may be a more pernicious bear roaming about the steel plant.

Some industry observers think that the current high price steelmakers are charging customers for all types of steel is just not sustainable. In a note to clients outlining her first-quarter industry forecast, UBS Investment Research steel analyst Timma Tanners recently argued that prices for raw materials such as iron ore, coking coal and scrap used to make steel may soon “run out of steam.” That, according to Tanners, would pave the way for steel prices to level out and momentum in the sector to slow.

Tanners also said that the benchmark hot-rolled coil price in the United States is currently at $800 per ton, and is likely to stay there for the next 10 weeks. However, she added that prices will likely drop to about $700 per ton in during the second quarter. This could mean that investors are jumping the steel ship well in advance of any projected slide in the prices steelmakers can charge their customers.

The other potential reason for the lack of strength in the steel space is weak customer demand. Although sectors such as the auto industry have increased their consumption of steel, construction sector demand remains depressed. It’s this weak demand from the construction sector that may pull down steel prices going forward, and that would be widely viewed as another reason to keep selling steel stocks.

We’ll get a better sense of the industries margins, and about their projections for pricing, after all of the steelmakers report their latest quarterly earnings. Until then, or until we get a better sense of clarity on pricing and steel demand, we are likely to see more of the same weakness in steel stocks.

BNN: Top Picks

Jason Donville, President and CEO, Donville Kent Asset Management, shares his top picks.

click here to watch the video

Hourly Action In Gold From Trader Dan

Home sales hit 13-year low; slow recovery ahead

The number of people who bought previously owned homes last year fell to the lowest level in 13 years, and economists say it will be years before the housing market fully recovers.

High unemployment and a record number of foreclosures are deterring potential buyers who fear home prices haven't reached the bottom. Job growth is expected to pick up this year, but not enough to raise home sales to healthier levels.

"We built too many houses during the boom, and now after the crash, it will take us a long time to get back to normal," said David Wyss, chief economist at Standard & Poor's in New York.

The National Association of Realtors reported Thursday that sales dropped 4.8 percent to 4.91 million units in 2010. That was slightly fewer than in 2008, which had been the weakest year since 1997.

The poor year for sales did end on a stronger note. Buyers snapped up homes at a seasonally adjusted annual rate of 5.28 million units in December, the best sales pace since May and the 12.8 percent rise from November was the biggest one-month surge in 11 years. (more)

Natural Gas Closes at Five-Month High on Bigger-Than-Forecast Supply Drop

Natural gas futures rose to the highest price in more than five months after a government report showed that U.S. inventories fell more than forecast last week as cold weather boosted demand for the heating fuel.

Gas gained 2.9 percent after the Energy Department said supplies dropped 243 billion cubic feet in the week ended Jan. 14 to 2.716 trillion. A survey of Bloomberg users released five minutes before the report showed an expected drop of 234 billion. Temperatures last week were below normal in the East and Midwest, according to the National Weather Service.

“The storage withdrawal is respectable and the market seems to like it so far,” said Martin King, an analyst at FirstEnergy Capital Corp. in Calgary.

Natural gas for February delivery advanced 13.4 cents to $4.695 per million British thermal on the New York Mercantile Exchange, the highest settlement price since Aug. 4.

Gas was trading at $4.56 before the report was released at 10:30 a.m. in Washington. The futures have declined 15 percent from a year ago. (more)

3 Stock Bargains Based on Assets: ADM,ED, SJM

Thirty years ago the typical U.S. stock sold for less than a 20% premium to its "book value" – or what the company's accountants say its factories, machines, patents and other assets are worth. Today the typical stock sells for a premium of more than 150% to its book value.

Part of that difference is surely explained by the rise of the information economy. Companies like Google ( GOOG: 626.77, -4.98, -0.78% ) and eBay ( EBAY: 30.78, +1.68, +5.77% ) turn ideas into profits using only a sprinkling of physical assets. But it may also be due to over-pricing by investors. And stocks with low share prices relative to their book values tend to produce higher returns than those with high price-to-book ratios, all else held equal. That phenomenon has been documented since the early 1990s and as recently as 2006.

One theory on why stocks with low price-to-book ratios tend to outperform has to do with the tendency of investors to extrapolate past events too far into the future. Highly profitable firms tend to be awarded high price-to-book ratios, but also tend to attract a rush of competition that can crimp future earnings. Companies with modest price-to-book ratios, meanwhile, lend themselves well to the sort of efficiency efforts that can improve future returns. (more)

Watch Out, Bond Yields Are At A Major 17-Year Battleground, And May Be Poised To Surge

Stocks end down after sell triggers activate

U.S. stocks closed slightly lower Thursday, after investors used worries about China’s fast growth rate to extend the first significant market pullback since November.

“Is it the real correction? Yes, we’re here. We are seeing selling on the news, and good earnings that still result in downward pressure,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald.

The Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 11,823, -2.49, -0.02%) closed down 2.49 points, or 0.02%, to 11,822.80, led by a 2% drop in the shares of Caterpillar, Inc. /quotes/comstock/13*!cat/quotes/nls/cat (CAT 93.70, +0.09, +0.10%)

The S&P 500 Index /quotes/comstock/21z!i1:in\x (SPX 1,280, -1.66, -0.13%) closed down 1.66 points, or 0.1%, to 1,280.26, with natural-resource and energy companies hit hardest, and with defensive sectors, specifically consumer staples and utilities, faring best. On Wednesday, the index posted its largest percentage decline since November.

The Nasdaq Composite Index /quotes/comstock/10y!i:comp (COMP 2,704, -21.07, -0.77%) shed 21.07 points, or 0.8%, to 2,704.29.

For every five stocks climbing, nine fell on the New York Stock Exchange, where nearly 1.2 billion shares traded hands. (more)