Friday, May 20, 2011

10 High Yield Investment Ideas – Including Pfizer Inc. (NYSE:PFE) and Intel Corp. (NASDAQ:INTC), PM, PG, CVX, COP,ABT,BMY, VZ, SE

Investing in dividend paying stocks offers a few benefits such as a hedging against inflation, dividend payers also provide a steady cash stream in bear market periods and serve as a way to add some cash to a portfolio without moving in and out of positions. During tough market environments we recommend buying safe, well managed, attractively-priced dividend stocks as opposed to fleeing the equity markets to the “safety” of the realm of fixed-income. This strategy serves as a way to “stay in the game” if the market does experience a run-up, while at the same time protecting your portfolio from a long-term bear market.

Utilizing The Applied Finance Group’s backtest system, we ran a strategy of investing only in companies with a market capitalization of greater than US$ 1 Billion and a dividend yield above 3%. The strategy has worked fairly well with the annualized returns over the last 12 years beating the overall universe. While the dividend paying strategy worked well, a strategy based on AFG’s valuation metric performed better.

The best results were achieved by utilizing both variables. When we limited our universe to companies that had a dividend yield greater than 3% and had an attractive AFG valuation score, the returns were even better than the standalone variables.

Valuation + Dividend Strategy Performance

The companies that we have provided in our list of attractive dividend-payers include the following criteria…

To meet the screen criteria companies must:

a) Have above $1 billion market cap

b) Pay a dividend yield of 3.15% or larger

c) Rank above the 70th percentile of companies within its sector in valuation attractiveness

High Yield Investment Ideas - Russell 1000

Hedge Farm! The Doomsday Food Price Scenario Turning Hedgies into Survivalists

On the rare occasion that New Yorkers talk about farming, it's usually something along the lines of what sort of organic kale to plant in the vanity garden at the second house in the Adirondacks. But on a recent afternoon, The Observer had a conversation of a different sort about agricultural pursuits with a hedge fund manager he'd met at one of the many dark-paneled private clubs in midtown a few weeks prior. "A friend of mine is actually the largest owner of agricultural land in Uruguay," said the hedge fund manager. "He's a year older than I am. We're somewhere [around] the 15th-largest farmers in America right now."

"We," as in, his hedge fund.

It may seem a little odd that in 2011 anyone's thinking of putting money into assets that would have seemed attractive in 1911, but there's something in the air-namely, fear. The hedge fund manager and others like him envision a doomsday scenario catalyzed by a weak dollar, higher-than-you-think inflation and an uncertain political climate here and abroad.

The pattern began to emerge sometime in 2008. "The Hedge Fund Manager Who Bought a Farm," read the headline on one February 2008 Times of Londonpiece detailing a British hedge fund manager's attempt to play off the rising prices of grains in order to usurp local farmland. A Financial Times piece two months later began: "Hedge funds and investment banks are swapping their Gucci for gumboots." It detailed BlackRock's then-relatively new $420 million Agriculture Fund, which had already swept up 2,800 acres of land.

Even Michael Burry, the now-defunct Scion Capital founder and star protagonist of Michael Lewis' The Big Short-who bet against the housing bubble in 2008 with credit default swaps to enormous profit-gave a rare interview on Bloomberg TV last year, explaining that he's thrown his hat into "productive agriculture land with water on site" as it's going to be "very valuable in the future." (Like most of those asked to comment for this story to The Observer, Burry declined to discuss his investments in farmland.)

Three years later, the purchase of farmland both in America and abroad by outside investors has increased-so much so that in February, Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, warned against the violent possibilities of a farmland bubble, telling the Senate Agriculture Committee that "distortions in financial markets" will catch the U.S. by surprise again. He would know, because he's seeing it in his backyard: Kansas and Nebraska reported farmland prices 20 percent above the previous year's levels and are on pace to double values in four years. A study commissioned by the Organization for Economic Cooperation and Development and released in January estimated the amount of private capital currently committed to farmland and agricultural infrastructure at $14 billion. It also estimated that future investments will "dwarf" what's currently being thrown into land, by two to three times. Further down, the study makes a conservative projection that the amount of capital potentially entering the sector over the next decade will fly past $150 billion.

When asked if this is an end of the world scenario, the hedge-fund manager replied, “It really is. I tell my fiancée this from time to time, and I’ve stopped telling her this, because it’s not the most pleasant thought.’

This is happening in part because investors see their play as a hedge against hyperinflation. While the rest of the world uses the current calculation of the Consumer Price Index as a proxy for the cost of goods, some farmland investors are using a different equation, one from 1980. These investors assert inflation should be calculated the way it was before the Boskin Commission's 1996 reworking of the CPI formula-in which case, it would be much, much higher.

"The CPI supposedly today is something like 1.5 percent," says the hedge fund manager. "We think the actual rate of inflation is something closer to 6 or 7 percent on an annual basis. It's also not about what it's been over the last 10 years; it's about what it's going to be over the next 10 years."

So the logic is that not only is the dollar worth far less than we think it is, but everything is more expensive and will only move further in that direction. Especially food, the value of which may have risen due to population increases, especially in places like China, where a consumer-happy middle class has finally started to emerge.

The rising cost of food can be seen even in New York's yuppiest enclaves, where prices are high to begin with. Bloomberg food critic Ryan Sutton has been running a blog called The Price Hike wherein he measures the shifting costs of food at the plate in Manhattan restaurants. Mario Batali's Del Posto is charging 21 percent more per meal since October. Gordon Ramsay at The London? Sixty-nine percent more since last month. Michelin favorite Bouley? Forty percent. The Breslin, at the Ace Hotel? Thirty-three percent. And so on.

But farmland isn't an option for most investors. Farming is still mostly made up of family-run businesses, in the U.S., at least. Much of the farmland being purchased in America is purchased at estate sales. Pure-play farming isn't a readily available product.

You can invest in John Deere for equipment; you can invest in Monsanto for seeds and agricultural tech. You can even invest in Kraft, which puts the plants on the supermarket shelf. But for now, it's difficult to invest in a one-stop-shop farm. Additionally, there isn't much arable land out there, it's not increasing, and the quality of the land varies from parcel to parcel. And to make money off a farmland investment, you can't just sit on it. You have to know what to do with it. "If you farm it like we do, you can generate a yield," says the hedge fund manager. "We think the farmland will be worth 5 to 10 percent more every year, and on top of that, you get the commodities yield." In other words, hedge funds are growing, picking and selling corn.

Asked if the American public would eventually see a chance to invest in Old McHedgeFund's farm one day, the manager replied in the affirmative: "Yes. Without a doubt." He estimated it would be only a few years before this happened. Just two weeks ago, Bloomberg Businessweek reported that El Tejar SA, the world's largest grain producer, is planning on selling $300 million of bonds this year before a planned IPO. The plans for the IPO will be fast-tracked pending the sale of the bonds. If farming IPOs begin to emerge en masse, then farming-already often a dicey proposition simply on the basis of its being difficult to do correctly, the volatility of the weather and the possibility of entire crops going bad-may be vulnerable to a bubble.

There is, of course, a slightly more sinister reason to develop a sudden interest in agriculture. Last year, Marc Faber recommended to anyone: "Stock up on a farm in northern Norway and learn to drive a tractor." He sees a "dirty war" on the horizon, playing on fears of a biological attack poisoning food supplies. Those sort of fears drive capital into everything from gold (recently at an all-time high and a long-time safe haven for investors with currency concerns) to survivalist accoutrements. In this particular case, one might buy the farm in order to avoid buying the farm.

That may seem extreme, but even the lesser scenarios are frightening to some. When asked if this is an end-of-the-world situation, the hedge fund manager replied: "It really is. I tell my fiancée this from time to time, and I've stopped telling her this, because it's not the most pleasant thought." He pauses for a moment. "We just can't keep living the way we're living. It'll end within our lifetime. We're just going to run out of certain things. We'll just have to learn how to adjust."

Precious Metal Miner Bottom?

Precious metal miners have seen, on average, a 16% drop from their April highs. Some, like the silver miners, have seen a greater correction. Right now, the GDX appears to be putting in a short-term bottom. The question stands whether this will be a lasting bottom and a step towards breaking out of the consolidation since November 2010 as miners have done over and over since 2002. Let’s take a look at some of the drivers effecting prices, fundamentally and technically.

Starting with currencies, the euro and the U.S. dollar have consolidated since last week’s article. These two are the key in leading the stock and commodity markets higher or lower. Looking at the specifics, it seems that the 50-day moving average is blocking any counter move in the currencies – supporting the U.S. dollar price above 75.09 and suppressing the euro below 1.433. As I write, both of these prices are being tested. The chart below shows the euro on a daily (left) and a 30-min chart (right) to look at some of the technical issues – focusing on price. A couple of things to note since our last look at the euro:

  • As I wrote last week, a rising trend broke on May 6th.
  • A basing/consolidation pattern has been taking place since May 12th with a higher low on May 17th.
  • As the euro is staging a rally, there are multiple resistance zones to discuss starting off with the 50-day moving average and two areas of congestion (yellow boxes) that should serve as resistance on initial contact. These will need to be watched closely.

Euro daily and 30-minute charts (click to enlarge)


Because the euro is 57.6% of the U.S. dollar index, the chart of the U.S. dollar is almost a mirror image of the euro. Here too, we see that the 50-day moving average is supporting the U.S. dollar. A breakdown here would categorize the break above the 50-day moving average as a whipsaw event.

usd dxy daily

So the euro was up, and the dollar was down today. What happened to commodities? They fell. Commodities have been very “whippy” since the euro dropped on May 5th due to the ECB pause in rates and May 6th due to the rumor Greece would leave the Euro zone. Silver has been consolidating between $33 and $36 as traders play the volatility, in and out. Crude Oil has been whippy, trading between $96 and $102 on the July contract for west Texas crude since the May 5-6th decline. July copper futures dropped below key support on May 5th and have since retested the old support. Today, copper is below that level again on a drop in the leading economic indicator number from the Conference Board this morning. Price also has to contend with the short-term, 20-day moving average at $4.11 today.

copyer hg

Precious Metal Miners

I think that, like many of our readers and clients, I’ve been asking myself “is this a bottom in precious metals?” I think the answer is that this is a trading bottom, but I’m loathe to say, “Backup the truck” because of the unsettling macro picture that could send the U.S. dollar higher if issues aren’t resolved correctly. These issues include:

  • Will Greece and Ireland get the next tranche in bailout or will they restructure their debt?
  • What happens to the markets after the Federal Reserve begins removing stimulus (QE2.0 ends)?
  • Will Trichet resume rate hikes at the ECB in June?
  • How will continued uprisings in the Middle East play out with oil?

These questions raise a lot of uncertainty that didn’t exist in January during the last mining stock correction. Likewise, I don’t think the recent correction can fairly be identified with the bottom in January as circumstances have diverged. Another item that’s different today than in January is the degree of margin hikes by regulators. I think it’s important to continue to look at the miners because of capital controls being exercised in the futures markets. I think this will cause a lot of retail players in futures to reconsider the alternatives found in mining companies.

Putting the fundamentals aside for now, I do mainly work in technical analysis. The basic idea is that we have a secular bull market in commodities and commodity stocks. As such, the bull market should “behave” in a bullish manner and if it ever begins to not “behave” in a bullish manner, then reductions in positions are warranted. The other reason to reduce positions is when valuations are stretched and prices have risen “too high”. I discussed this particular issue as it surfaced in Silver on April 21st in “Bulls, Do Not Lower Your Guard”. In giving precious metals the benefit of the doubt here after a 16% correction, there are some patterns and price levels to discuss as I monitor precious metal stocks’ price behavior.

#1 Precious metal stocks are near support in a consolidation zone

The GDX has been at support for a week now and a bounce here was overdue. We’ve been in a trading range since November and we’re now at the bottom of that trading range. From a trading prospective, risk is low buying at the bottom of a trading range and stopping out if price breaks support. That’s why I’m bullish here short-term.

gdx consolidation

# 2 The technical support isn’t as strong as it was in January

Volume on the GDX spiked when it broke through the 200-DMA (distribution). It’s been steadily elevated here, but nothing has approached the volume characteristics (climactic) one would expect to see in a typical 30 percent correction in precious metal miners like we have seen at least once a year. Basically, the January bottom was in a lot better shape than the current bottom when in January the miner index held above the 200-day moving average on very large volume (hinting at accumulation).

#3 Hurdles on the way up. The main addition here is the 200-day moving average.

On the way up from $54 support, there are more hurdles present than at the same price level in January. In particular, there is a confluence of resistance near $57

  • We have the 200-day moving average to contend with at $57.38 Thursday
  • Area of congestion at $57 (red box below)
  • 38.2% retracement of the decline near $57.60 (see below)
  • 20-day moving average moving down through $57.81 where it closed today.

gdx 60 min

#4 A halt to a metals advance at $57 wouldn’t be the end to this rally.

Should the likely occur, in a correction between $57 and $57.60, the potential exists for demand to enter in early; and thus, for a higher low on the next move down above the recent breakout near the $55.24-55.46 zone. Such a higher low would form the basis for a short-term trend reversal, and not just a trading bounce in precious metal mining stocks.

gdx bottom

#5 Focusing on the long-term trend

Markets move in different timing cycles, from the secular trend to the minute to minute trend. The secular trend in precious metal mining stocks is up. The long-term trend on mining stocks is sideways. The intermediate trend turned down in April. The short-term trend is also down with a potential reversal in the cards. The trading trend is up with a break above the last few session highs near $55.46 on the GDX gold miners index.

Looking in particular at the long-term trend, which has been sideways since November, we are at a critical inflection point in which a break below the January correction would confirm the long-term trend has turned down. It would also serve a major blow to the gold bull market, technically, in my opinion based on the initial item I discussed: behavior.

One such behavior is that bullish breakouts should hold. Such a breakout took place in the HUI gold bugs index last year when the price rose clear above 500. As you can see from the chart below, this was an area that has plagued the gold bug index since the 2008 top. Well, we broke above that late last year and it has held ever since, including during the January correction. A break below 500 would be a severe blow, with a downside target of 384 (double top target). If 500 holds, there is a mega chart pattern that formed and has already completed. The retest of the pattern near the 500 zone needs to hold for this pattern to continue to exist.

I’ve already identified the negative scenario, should the HUI continue to correct past the January low; that of a double top price pattern with a 384 target, (a 36% decline from the April top near 600). Let’s talk about the upside targets should the bullish secular trend reassert itself here. Looking back over the past nine years, consolidations like the one we’re experiencing, have served to pace the bullish advance, releasing over-optimism and resetting the trend. Once broken to the upside, like a spring, they have released tremendous bullish momentum. I can remember writing about the very same subject to clients during such periods between 2004 and 2006, as well as between 2006 and 2007 (see yellow price patterns below). Well, a mega pattern was created in the 2008 collapse and was completed last year when the gold bug index rose above 500. The target for the pattern is an upside move to 850. If we break below the 500 zone (two orange bars below) then this pattern will have been nullified and like the 2008 correction, precious metal miners will suffer a severe blow. Fundamentally, if the sovereign debt crisis unravels in Europe, I think the downside scenario could take place and completely throw the inflationists off as the world gets sent through a second financial crisis in three years.



We’re at an inflection point. As the chart above shows, this is a critical level for the bulls and bears in precious metals. It’s highly dependent upon fundamental issues. I don’t think there’s justification to back up the truck and load up on precious metals here, there’s enough risk to give me pause. 2008 was not a friendly environment to be long precious metals and precious metal stocks. The 16 percent correction we’ve seen thus far is a baby correction in precious metals. Typically, we see a 30 percent decline at least once a year. That might be why I don’t see the puked out technical indications I’d typically see at a bottom for me to say there’s a high probability that a low has been put in here. I continue to watch the credit default swaps in Europe and read the news daily to identify fundamental catalysts. There’s still too much uncertainty to say, the bottom is in. In closing, as I typically have shown, here are the credit default swaps on the peripheral European nations that continue to have economic hardships and whose debt is becoming expensive to refinance.

global currency italy portugal spain ireland greece

Hussman: Stocks ‘Strenuously Overvalued’ Now

Stocks are in for a rough patch in part because they simply cannot sustain the expectations built into them by investors, argues fund manager John Hussman in a recent note to clients.

“The stock market continues to be strenuously overvalued here, with a variety of historically reliable methods indicating probable total returns for the S&P 500 of only about 3.5 percent over the coming decade,” writes Hussman, president of Hussman Investment Trust.

“This does not necessarily imply much about near-term market returns, though the continuing syndrome of overvalued, overbought, overbullish, rising-yield conditions does contribute to near-term risk.”

Hussman says that unless another asset bubble inflates to replace the previous ones, durable long-term gains will hard to come by in the stock market.

Yet he admits that there will probably be some pretty significant swings in the meantime.

“For example, a series of market fluctuations -40%, +85%, -36% and +100% within a 10-year period would produce a 10-year return about 3.5% annually, so a poor long-term expectation doesn't rule out the likelihood of significant investment opportunities in the interim,” Hussman writes.

“The real difficulty at present is that at already elevated valuations, it's less likely that those opportunities will be front-loaded.”

None of this is scaring off hedge fund manager Barton Biggs. He says buy, buy, buy while equities are cheap.

"I’m still big in U.S. tech, both the old champions and the new contenders," Biggs says in his latest note to investors, according to the Business Insider.

"The former are just too cheap at below S&P valuations in relation to their above-average, albeit reduced-growth prospects."

Peter Grandich Interview

Coppers Talking Infrastructure

By Richard (Rick) Mills
Ahead of the herd

As a general rule, the most successful man in life is the man who has the best information

Pure gold deposits are increasingly difficult to find.

What really bothers me is that in the 1980s or 1990s, we saw three to five discoveries of 5 to 20 million ounces each, and upwards of 30 to 50 million ounces a year. That is what makes or breaks the industry. There are no discoveries of that magnitude now.” Pierre Lassonde,veteran gold analyst, co-founder/chairman of Franco Nevada Mining Corp., former president of Newmont Mining Corp.

Each year the mining industry must come up with a major new gold discovery of five million ounces just to replace what one of the world’s top gold miner’s digs up. Because large pure gold deposits are so hard to find - the low hanging fruit has already been picked - gold miners are turning to deposits that contain other metals like copper.

"In the case of gold, the world is currently mining it faster than it is finding it. Furthermore the average size and grade of gold discoveries continues to decline.” Richard Schodde, Managing Director of MinEx Consulting

Mining is the story of depleting assets, that asset must be constantly replenished; miners that want to stay in business must replace every oz taken out of the ground and there isn’t a lot of the larger size gold deposits left to find or buy that would really affect most of these larger company’s bottom lines. Replacing what they’ve mined let alone finding more productivity/resources is getting harder and harder.

"It's not a bad time to diversify if you are a gold miner. There are lots of reasons to be bullish on gold, at the same time copper has a stronger long-term outlook. Over the next five years I am by and large bullish and wouldn't be surprised if copper saw an upper range between $10,000 to $12,000." William Adams, analyst at

Porphyry Copper/Gold Deposits

Porphyry copper/gold targets are becoming increasingly important in the global quest to replace declining copper and gold production. These kinds of deposits yield about two-thirds of the world’s copper and are therefore the world’s most important type of copper deposit.

Porphyry copper deposits are copper orebodies which are associated with porphyritic intrusive rocks and the fluids that accompany them. Porphyry orebodies typically contain between 0.4 and 1 % copper with smaller amounts of other metals such as molybdenum, silver and gold.

There are two factors that make these kinds of deposits so attractive to the world’s major mining companies – firstly by focusing on profitability and mine life instead of solely on grade your other inputs of scale/cost can offset the lower grade and this results in almost identical gross margins between high and low grade deposits. Low grade can mean big profits for mining companies – Copper/gold porphyries offer both size and profitability.

The second factor affecting profitability of these often immense deposits is the presence of more than one payable metal ie for gold miners using co-product (copper) accounting the cost of gold production is usually way below the industry average.

So not only are the traditional miners of these scarce and often immense ore bodies in competition for them but increasingly yesterdays gold only miners are becoming interested as well. These kinds of deposits are one of the few deposit types containing gold that have both the scale and the potential for decent economics that a major gold mining company can feel comfortable going after to replace and add to their gold reserves.

The Vancouver Sun newspaper said high copper demand combined with limited new supplies have made copper the new gold as far as profit margins are concerned.

Copper boasts a higher profit margin than gold – at US$4.29 (U.S.) per pound copper has a 68-per-cent profit margin over industry average break even costs, compared with gold's 52 per cent.

"As 2011 unfolds, we expect copper to touch $5, yielding an extraordinary 70 per cent profit margin over average world break-even costs including depreciation." Patricia Mohr Scotiabank economist

Supply and Demand

Copper is supported by:

  • The growth in demand from Africa, China, India and other emerging markets
  • Global infrastructure deficit
  • A low interest rate environment bodes well for the whole resource sector
  • The overall weakness in the U.S. dollar translates into support for dollar denominated metal prices

In the Scotiabank Commodity Price Index report for April Mohr said “Copper could still retest the previous US$4.60 record of February 14. Chinese copper fabricators destocked copper and produced 2.1% fewer copper semis in January and February due to credit restrictions and high prices. However a big seasonal pick-up in consumption in the second quarter will lift prices."

We see renewed strength in the second half and you’ve got to be bullish copper for the next few years. The global recovery is becoming more broad-based and you’re not going to see any new mines coming on stream for at least this year.” Christin Tuxen, analyst at Danske Bank A/S

Australian equity research firm Resource Capital Research (RCR) said it expects the copper market to move from a small surplus in 2010 to a deficit of around 400,000 tonnes by 2011.

According to JPMorgan Securities Ltd, the world refined copper market will have a 500,000-metric-ton deficit in 2011.

BHP Billiton Ltd. (BHP), the world’s largest mining company, said in January that output from their Escondida mine in Chile, the world’s largest copper mine, would drop by as much as 10 percent in the year ending in June because of lower ore grades.

Codelco, based in Santiago and the world’s largest copper producer, said on March 25 that supply from its mines fell for the fifth time in six years.

London based Anglo American Plc and Kazakhmys Plc reported lower output this year.

Michael Jansen, metals strategist at JPMorgan Securities Ltd, predicts a deficit of 500,000 tons to 600,000 tons this year.

Macquarie expects a shortfall of 550,000 tons.

Morgan Stanley projects copper prices will average $4.45 a pound in 2011, up 24 percent from an earlier estimate.

Australia & New Zealand Banking Group Ltd expects copper to average $4.57 a pound this year, up 12.5 percent from a previous estimate.

European copper producer Aurubis said that the global economy continues to recover, according to the IMF, and should achieve a growth rate of 4.4% in 2011 followed by 4.5% in 2012. This indicates sustainably high copper demand that cannot even be harmed by China's restrictive interest rate policy or the economic weakness of certain countries.

The market will see a wider deficit because of steady demand growth in emerging markets, including China and Brazil, a gradual economic recovery in the US and Europe and tight mine supplies. This year's deficit will be the most since 2004, according to company data. Hidenori Kamoo, general manager of the marketing department at Pan Pacific Copper Co

Tom Albanese, CEO Rio Tinto Group, the world’s second largest mining company, said that the industry has struggled to maintain supply because of declining ore grades, delays to mine expansions and disruption from strikes.

Ore grades averaged 0.76 percent copper content in 2009, compared with 0.9 percent in 2002. CRU, a London based research company.

Chile mined 6.6 percent less copper in February than a year earlier, the fifth decline in the last six months. National Statistics Institute

There are still reasons to be bullish on copper into next year. The market is still going to be tight.” David Wilson, analyst Societe Generale SA

Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, said in January that it would produce less metal than forecast this year.

Barclays Capital says copper demand growth will slow to 4.1 percent this year, down from 9.6 percent in 2010 - still more than twice the anticipated 1.7 percent expansion in supply. Barclays forecasts an 889,000 ton shortfall for 2011.

We’re still seeing an incredibly tight market. China has to buy copper. They can’t find substitutes.” Kevin Norrish, managing director, Barclays Capital

RBS forecast average prices between $10,000 and $11,500 in 2012, 2013 and 2014.

Barclays Capital saw copper trading on average at $12,000 in 2012.

StanChart's Zhu saw prices at just under $12,000 in 2014.

Christine Meilton, chief consultant at CRU Group said there was a risk some copper projects, expected to come on stream in 2012 and 2013, will be delayed because of red tape, poor infrastructure and funding difficulties.

We suggest the upcoming summer period could be a very exciting time for LME copper prices. The market is positioning for declining LME copper inventories during the June-July-August period. In response, we believe copper prices should move higher.” John Redstone, analyst Desjardins Securities Inc.

Redstone is maintaining his average copper price forecast of $4.50 per pound in 2011 and $5 in 2012.


"For at least the next three years we are still very bullish on copper as the market will remain in deficit over that period, even under the most conservative global demand forecasts, and there is a possibility that this deficit could be more prolonged if demand grows faster than expectations. Copper is highly exposed to Asia, and urbanization in China and India will provide upside momentum for at least the next 10 years and perhaps as long as 20 years." Judy Zhu, analyst Standard Chartered Bank

Urbanization is a macro-trend, in 1800 two percent of the global population was urban, by 1950 it was 30%. The UN projects that by the year 2030 there will be 1.5 billion more people living in cities. China has one fifth of the world’s population, India has another 1.2 billion people and Africa adds another billion. China and India consume a lot of copper, so increasingly will Africa.

Urbanization and the accompanying necessary infrastructure build out - power, construction, energy and transportation – needed to accomplish developing countries urbanization/industrialization plans are obviously key drivers in increased copper consumption.

Infrastructure Deficit

Equally as important is the fact we have a global crisis in existing infrastructure. The demand this crisis is going to place on copper might very well be more than the demand coming from developing countries to build new infrastructure.

The amount of money, commodities and effort required is going to be massive:

  • The American Society of Civil Engineers (ASCE) estimated, in 2005, US infrastructure investment needed to be $1.6 trillion dollars over the following five years
  • European Union Energy Sector alone requires - $1.2T over 20 years

In a 2007 report, Booz Allen Hamilton estimated that investment needed to “modernize obsolescent systems and meet expanding demand” for infrastructure worldwide between 2005 and 2030 was about US$ 41 trillion.

Infrastructure spending by sector:

  • Water and wastewater $22.6 trillion
  • Power $9.0 trillion
  • Road and rail $7.8 trillion
  • Airports/seaports $1.6 trillion

Infrastructure spending geographically:

  • Middle East $0.9 trillion
  • Africa $1.1 trillion
  • US/Canada $6.5 trillion
  • South America/Latin America $7.4 trillion
  • Europe $9.1 trillion
  • Asia/Oceania $15.8 trillion

In January of 2009 CIBC World Markets issued a study that said a sharp deterioration in existing infrastructure could lead to as much as $35 trillion in public works spending over the next 20 years.

Infrastructure spending geographically:

  • North America $180 billion/year
  • Europe $205 billion/year
  • Asia $400 billion/year
  • Africa $10 billion/year

The World Economic Forum’s report, Positive Infrastructure, released in May 2010 finds that the world faces a global physical, hard asset, infrastructure deficit of US$ 2 trillion per year over the next 20 years.

In 2009 the ASCE updated their 2005 report on US infrastructure - no area rates higher than a C+. Roads, aviation, and transit declined in score while dams, schools, drinking water, and wastewater held at D or lower. One category, energy, improved, from a D to a D+. Below are the 2009 grades and new spending requirement:

  • Aviation D
  • Bridges C
  • Dams D
  • Drinking Water D-
  • Energy D+
  • Hazardous Waste D
  • Inland Waterways D-
  • Levees D-
  • Public Parks and Recreation C-
  • Rail C-
  • Roads D-
  • Schools D
  • Solid Waste C+
  • Transit D
  • Wastewater D-
  • America's Infrastructure GPA: D
  • Estimated 5 Year Investment: $2.2 Trillion

Click for a larger image

The 2009 fiscal stimulus package - the American Recovery and Reinvestment Act (ARRA) - included $72 billion for infrastructure upgrades - enough to cover six percent of the 5 year infrastructure deficit estimated by the ASCE. Half a percentage point in maintenance cost will cut the life span of an infrastructure asset by 10 years.

Electrical Grid

ASCE’s Report Card for America's Infrastructure gives the US Electric Grid a rating of D, its summary:

“The U.S. power transmission system is in urgent need of modernization. Growth in electricity demand and investment in new power plants has not been matched by investment in new transmission facilities. Maintenance expenditures have decreased 1% per year since 1992. Existing transmission facilities were not designed for the current level of demand, resulting in an increased number of "bottlenecks," which increase costs to consumers and elevate the risk of blackouts.”

Our grids today are more stressed than they have been in the past three decades. If we don’t expand our capacity to keep up with an increase in demand of 40 percent over the next 25 years, we’re going to see healthy grids become increasingly less reliable.” Today, with the grid operating flat-out, any disruption—like the downed transmission line that sparked the 2003 blackout in the Northeast—can cripple the network.” Kevin Kolevar, assistant secretary for electricity delivery and energy reliability at the Department of Energy

April 15th 2011 the International Copper Study Group (ICSG) said “global growth in copper demand for 2011 is expected to exceed global growth in copper production and the annual production deficit, estimated at about 250,000 metric tons of refined copper in 2010, is expected to be about 380,000 t in 2011. In 2012, refined usage is again expected to increase in all major world markets, with global demand expected to rise by more than 4%.”

The ICSG does not forecast copper production catching up with demand anytime soon, certainly not in 2011 or 2012.

"The global economy is running a major infrastructure deficit as the cost of decades of under-investment is now surfacing." Benjamin Tal, analyst CIBC World Markets

High Speed Rail (HSR)

To attract new businesses to our shores, we need the fastest, most reliable ways to move people, goods, and information — from high-speed rail to high-speed internet. Excerpt from US President Obama’s recent State of the Union address

Obama is calling for eighty percent of Americans to have access to high speed rail by 2036 - currently no American has access to high speed rail.

A projection from rail proponents indicates that building the 9,000 miles of high speed corridors identified by the U.S. Department of Transportation would:

  • Create 4.5 million permanent jobs and 1.6 million construction jobs
  • Save 125 million barrels of oil
  • Eliminate 20 million pounds of CO2 per mile per year
  • Reinvigorate U.S. manufacturing
  • Generate $23 billion in economic benefits in the US Midwest alone

These new lines also require massive support infrastructure: stations, metro transport links in cities and modern signaling/safety systems.

Copper is the key to the increased speed of modern high speed trains. Today’s high speed trains do not have a motor located in the locomotive, instead they use a series of motors and transformers located under the length of the train. New high-speed trains with their electric traction engines use from 3 to 4 tonnes of copper per train.

Building HIgh-Speed LinesAn additional 10 tonnes is used in the power (catenary system – overhead cable made of copper or copper-alloy that is suspended horizontally above the track and supplies the trains electricity) and communications cables per kilometer of track.

China’s already found an area where it could rapidly increase public investment to stimulate growth - rail construction.

China's total investment in high speed rail was first reported to be about US$300 billion - the Chinese planned a 12,000km high speed passenger network supplemented by 20,000km of mixed traffic lines capable of 200-250kph.

Recent reports indicate that over US$600 billion will be spent on rail construction during the 2011-2015 Five Year Plan. By 2020 there would be at least 16,000 km of passenger dedicated high speed rail. The total rail network by 2020 would be 120,000 km - 80% of it electrified.

By early fall 2010, the Ministry of Railways announced that China had more than doubled the length of high speed track to over 7000km.

China has plans to construct its high speed rail line through Asia and Eastern Europe in

order to connect to the existing infrastructure in the European Union (EU). Additional rail lines are planned into South East Asia as well as Russia – this will likely be the largest infrastructure project in history.

The project will include three major high speed lines:

  • UK/Europe to Beijing (8,100 km) and then extend south to Singapore
  • A second line will connect into Vietnam, Thailand, Burma and Malaysia
  • The third line will connect Germany to Russia, cross Siberia and then back into China

Asia High Speed RailFinancing and planning for this monumental project is being provided by China – who is already in negotiations with 17 countries to develop the project . In return the partnering nation will provide natural resources to China.

"We will use government money and bank loans, but the railways may also raise financing from the private sector and also from the host countries. We would actually prefer the other countries to pay in natural resources rather than make their own capital investment." Wang Mengshu, a member of the Chinese Academy of Engineering and a senior consultant on China's domestic high-speed rail project

The exact route of the three lines has yet to be decided, but construction for the South East Asian line had already begun in the Chinese southern province of Yunnan and Burma is about to begin building its link. China offered to bankroll the Burmese line in exchange for the country's rich reserves of lithium, a metal widely used in batteries.

Russia and China have announced plans to build a new trans-Siberian link. Iran, Pakistan, and India are each negotiating with China to build domestic rail lines that would link into the overall transcontinental system.

China has mastered the art of building high speed rail lines quickly and inexpensively. “These guys are engineering driven — they know how to build fast, build cheaply and do a good job.” John Scales, the lead transport specialist in the Beijing office of the World Bank.

China hopes to complete this massive infrastructure project within 10 years


Major infrastructure projects typically boost productivity throughout the economy. Massive stimulus packages that focus on creating jobs at home - through public works projects – will, in this authors opinion, become very popular with governments looking to generate massive employment and restart the global economy.

Interest in the junior mining space is going to become intense but there is still time for investors to capitalize on the coming infrastructure boom.

Are junior resource companies, run by quality management teams with outstanding copper projects, on your radar screen?

If not maybe they should be.

Where Have All The Bulls Gone?

While business TV anchors are busy watching the LinkedIn (LNKD) IPO and wondering whether or not we are in the early stages of another bubble, individual investors are heading for the hills. In the latest sentiment survey from the American Association of Individual Investors (AAII), bullish sentiment dropped below 30% (26.7%) for the first time since August 2010 when the QE2 rally began. Even though the S&P 500 remains near its highs of the bull market, nearly all the bullish sentiment that was built up during the rally has now been given back. People like to say that the individual investor is always the last to get in and the first to get out. This time at least, the individual is making a quick exit. Will they be too early?