Friday, June 24, 2011

Apple (AAPL) Fails First Attempt At Its 200-DMA

Apple (AAPL) briefly traded back above its 200-day moving average today, but it has since reversed and is now closing right near its intraday low. The stock is down by nearly 12% since its peak on 2/17 and more than 7% this month alone. Surprisingly, even with the ugly looking chart below (lower highs and lower lows), not a single sell-side analyst who covers the stock has it rated a sell. Outside a handful of holds (5), every other analyst (48) covering the stock has it rated a buy. Who will be the first analyst to cry uncle and downgrade the stocks?

Century of Hunger Is Warning From France as Farm Ministers From G-20 Meet

French President Nicolas Sarkozy said the world must take action to avoid another food crisis, as agriculture ministers meet in Paris.

A lack of transparency in global agricultural markets is adding to price swings and threatens future food production, Sarkozy said in a speech to Group of 20 farm ministers. World leaders risk making this “the century of hunger” unless they can agree on new rules on food supply, French Agriculture Minister Bruno Le Maire said before the meeting.

France, which holds the G-20 presidency, wants a central database on crops, limits on export bans, international market regulation, emergency stockpiles and a plan to raise global output.

“We have to act, and act together,” Sarkozy said. “The world is watching you.”

Wheat as much as doubled in the past year as Russia and Ukrainecurbed exports after drought decimated crops, adding to record global food prices the World Bank says drove 44 million more people into poverty since June. Nations will spend $1.29 trillion on food imports this year, the most ever and 21 percent more than in 2010, the United Nations estimates.

France’s position on the main proposals being put to the G- 20 ministers is that either all are agreed on or there is no accord, Le Maire said in an interview with Bloomberg Television on June 20.

All or Nothing

“We don’t want to dilute the action plan,” Le Maire said. “Either the G-20 members are able to find consensus on something which would help us to fight against excessive volatility and to fight against hunger in the world,” or “it would be a failure,” he said.

The choice is “international solidarity” or “egotism” if nations want to avert this becoming the “the century of hunger,” he told a meeting of 120 farmers groups in Paris last week. France is the European Union’s biggest farm producer.

The ministers will most likely balk at the proposal on trade restrictions, said Robert Carlson, international relations director at the Washington-based National Farmers Union. “That’s going to be a tough one,” Carlson said in an interview in Brussels. “Probably the last thing you get agreement on is the agreement to let somebody else control the borders of your country.”

The meeting is “a good chance to be able to focus on what needs to be done,” Jonathan Barratt, managing director at Commodity Broking Services Pty. in Sydney, told Linzie Janis on Bloomberg Television’s “First Look.”

Food Riots

The last time prices surged, from 2007 to 2009, more than 60 food riots occurred worldwide, according to the U.S. State Department.

The G-20 countries account for 65 percent of all farmland and 77 percent of global grain output, according to a statement on the website of the G-20 presidency.

“No one would understand that 20 agricultural ministers would gather and meet in Paris, without specific and concrete decisions on this question of agriculture, and this question of hunger in the world,” Le Maire said.

Corn futures advanced 82 percent in the past 12 months in Chicago trading, a global benchmark, rice gained 39 percent and sugar jumped 65 percent. There will be shortages in corn, wheat, soybeans, coffee and cocoa this year or next, according to Utrecht, Netherlands-based Rabobank Groep. Prices also rose after droughts and floods fromAustralia to Canada ruined crops last year. European farmers are now contending with their driest growing season in more than three decades.

India’s Measures

India, which limits some food exports to manage prices and supply, may be reluctant to coordinate those measures with other countries, said Dinesh Mishra, the head of the National Cooperative Union of India, a New Delhi-based organization that includes farm groups and agricultural-development banks.

“We depend on the monsoon and other weather conditions for good crop production,” Dinesh said in an interview in Brussels. “We need to be careful in making our policies, ensuring that our domestic requirements are met.”

India was among nations which banned rice exports in 2008 as prices for the staple food for half the world reached an all- time high. Egypt also cut sales, Vietnam barred speculators from its domestic market and China imposed export taxes.

The proposal to limit export curbs and start a database, to be managed by the UN’s Food and Agriculture Organization, will be “especially sensitive,” Le Maire said last week.

Hands Tied

“Countries want the guarantee that they can feed their population,” he said. “You’re asking countries to tie their hands, so I understand it’s difficult.”

World food output will have to rise 70 percent by 2050 as the global population climbs to 9.2 billion from an estimated 6.9 billion in 2010, the UN estimates.

Biofuels, some of which are derived from crops including corn, are not part of the main proposals to the ministers’ meeting. National policies are too far apart for agreement and the subject “isn’t ripe,” Le Maire said. Brazil uses sugarcane to produce ethanol, while the U.S. transforms corn into the fuel. U.S. Agriculture Secretary Tom Vilsack told reporters on June 20 that he would defend the use of biofuels.

France is likely to win backing for the proposed database on food stocks and production, according to the National Farmers Union’s Carlson and Pekka Pesonen, the secretary general of Brussels-based Copa-Cogeca, a European farmers group.

Political Issue

“It’s more of a practical issue rather than a political issue,” Pesonen said. Getting the information may be “the biggest challenge” because some countries “don’t have this information available for themselves,” he said.

Growth in agricultural output will slow to 1.7 percent a year through 2020, compared with 2.6 percent in the previous decade, the FAO and Paris-based Organization for Economic Cooperation and Development said in a report this month.

France will only sign an agreement that includes regulation of financial markets for agricultural commodities, Le Maire said. The details will be discussed by G-20 finance ministers later this year, he said.

The world needs “a new agricultural model” because “this price volatility has become insupportable,” Sarkozy told farm groups in Paris on June 16.

“It’s a political moment of the kind that doesn’t happen very often, perhaps once in a lifetime,” David Nabarro, the UN’s special representative on food security and nutrition, told a conference in Paris on June 16. “It can transform or it can fail, and much of this depends on how governments act over the next few weeks and months.”

CNBC interview: Rickards "Fed could buy gold to devalue dollar, ease debt"

How Thursday's Big Oil News Could Reward Small Investors‏

A couple quick thoughts on today's Big Oil News – the IEA releasing 60 million barrels from Strategic Reserves around the world to help lower global oil prices – before I get into who will benefit from this (and there's a surprise here).

In terms of fundamentals, this really is a cry for help.

a. 60 million barrels equals about 18 hours of global production – hours, not days or weeks. It's inconsequential.

b. The world is already well supplied with oil – there is no shortage of oil anywhere on earth that I can see. North America in particular is overflowing with oil.

c. Oil doesn't trade on its fundamentals, or it would be $60-$70 a barrel right now. Or pick your own number. But it would be lower.

In terms of market psychology however, the IEA may be smarter than the pundits think.

Oil, like all markets, trades on fear. And there is now so much liquidity in the world that often (if not usually) the tail wags the dog in commodity markets. What I mean by that is that the financial derivatives surrounding oil – the ETFs, the futures contracts etc. – help determine the price of commodities as much as the underlying demand. So managing their fear and greed of investors in those products is a bigger job than ever before.

With this new reality that has developed over the last decade, but especially since QE1 & QE2, I would suggest the governing elites of the world (DAD) need a new way to communicate to the capital markets (MUSCULAR INDEPENDENT TEENAGER) to really get their attention that they will pull out all the stops to obtain a semi-permanent lower oil price.

But what it could do is convince many of the new entrants in the futures market to dump their "oil long" holdings. Speculators have been buying oil long contracts in record amounts up until a few months ago. See this chart from Canadian brokerage firm Canaccord Genuity:

Oil Spec contract levels 2

Now, the chartist in me says that after a recent round of weakness, a dive in oil prices will weed out the latent longs – cause them to give up hope. And then the liquidation of ETF holdings, of futures contracts, begins in earnest and causes a waterfall effect on oil prices.

If/when that speculative liquidation happens, trend lines get exacerbated – things go up higher than fundamentals would say they should, and go lower than what fundamentals indicate. So I suggest that when oil traders and other market players say oil is going HERE, wherever here is, you can likely count on it going 10% past that.

That's the tail wagging the dog, and why we have so much more volatility in the commodity markets now.

So in one sense, this chart tells me the timing of the IEA announcement was perfect, if they were targeting a large part of the market – the speculators. They're saying we will do everything we can to keep oil lower for longer than you think, this lower oil price scenario is not short term, so you will lose money on your trade.

(I have this mental image of the head of the IEA saying to oil long speculators – SOLDTOYOUSUCKA!)

Perhaps the IEA was looking at fundamentals saying hey, there is no need for this oil price as supplies are plentiful and the western world's economy is weak, so if we can just change market psychology a bit, we can get what we want - $80 oil.

So who will benefit from today's news, i.e. how can I use today's news to make money?

One place is obvious, the other one is...counter-intuitive.

Certainly if you want lower prices, bring on more supply. And that means more drilling, which should be music to the ears of investors in energy services stocks – the drillers and their sub-trades, like the fracking companies and the supply companies to them.

The energy producers of the world ARE increasing their spending to find new supply – a whopping 25% more in 2011 over 2010 to $133 billion, says US securities firm Raymond James. Here in western Canada, producers will be spending 32% more this year over last, according to Canadian brokerage Wellington West Capital Markets.

But the strangest sector to benefit from lower oil prices, I think, will be junior oil stocks. For the last two months the overriding psychology in this space has been backward.

That is - the oil price has to go down before junior oil stocks can go up.

Junior oil stocks were having the same inverse relationship to oil that the Dow Industrials were; a high oil price will cause recession so sell riskier and junior stocks – including junior oils.

The first clue that this thinking was affecting junior oil stocks was when they did not benefit from the last $20 move in the price of oil, up to $125/barrel.

Then as the Arab Spring did NOT move into Saudi Arabia, the world's largest oil producer, the political risk premium came out of the global oil price, and oil fell back to $100.

But that wasn't enough for junior oil stocks to move again. Partly that's because it's summer – many investors leave for holidays, and trading volumes dry up. A lot of these stocks have raised hundreds of millions of dollars and now have hundreds of millions of shares issued – and need lots of volume to keep their share price up. So in one sense, the value reset button has already been pushed on many junior oil stocks.

For over a month now I've been reading into the junior energy markets that until oil gets under $90 and stays there for a short while, the market is not willing to buy the juniors in such a wave that a rising tide will lift all boats like it did from September 2010 to March 2011.

Another way of saying this is that junior oil stocks aren't low because the market has no faith in the oil price; rather, it's because the market has too much faith in it.

So once the market is convinced the oil price will stay low enough to not cause recession, it will again buy the juniors, as even at $80/bbl these companies make GREAT money. Some valuations will get reset (though much of that is now done), but the fast growing, discovery making juniors will once again get rewarded.

Are We Running Out of Silver?

Silver has been on fire for the last three years – substantially outperforming its spotlight-grabbing cousin, gold.

Because we believe this bull run is far from over, we advise investors to always maintain exposure to the precious metals markets. But the question every investor faces in a bull market is: Do I buy now, anticipating prices will continue higher – and chance getting clobbered if a correction arrives? Or do I wait for a pullback and possibly miss out on big gains?

There’s risk either way.

But we suggest using temporary price declines to steadily accumulate the best silver stocks and your preferred form of bullion. Looking back, after this bull market has finally run its course, we think gold and silver will have amply rewarded those who bought smart, had meaningful exposure, and stayed the course.

There are numerous factors that influence the direction of silver prices, but there are two key trends regarding supply and demand that are critical to understand.

The first is industrial use. Demand from a number of industries that use silver has been flat or falling. Household demand for silver like cutlery, flatware, and candlesticks hasn’t risen in ten years. Jewelry fabrication is up but a blip. With the shift to digital photography and image storing, use in photographic film processing continues to fall. And yet, total demand from industrial users keeps climbing.

So what’s driving industrial demand?

Growing Uses for Silver

Since 1999, consumption in electronics has increased 120%. Silver use in solar panels began in 2000, and usage is up 640% since. Silver was first used in biocides (antibacterial agents) in 2002 and, while still a small percentage of total silver use, it has grown six-fold. Taken together, these three industrial uses of silver are consuming about half of all the silver mined each year!

Furthermore, the Silver Institute forecasts that total industrial use of silver will rise by 36% over the next five years, to 666 million troy ounces/year. That’s a lot of silver, meaning this portion of demand isn’t letting up anytime soon.

To put it another way, ten years ago, jewelry and silverware consumed twice as much silver as electronics applications. Today, electronics applications consume much more silver than jewelry and silverware. The point is not only that the number of industrial uses for silver is growing, but also that the demand within each of those usage categories is rising as well. These increasing sources of demand are now more likely to keep a floor under the silver price in the future.

The second issue is mine supply. Silver mine production has been increasing over the past decade, largely due to rising prices, allowing companies to ramp up production and bring more metal to the market. In fact, global mine production is up 33% since 1999.

But despite miners digging up more and more silver, production alone can’t meet global demand, and the gap has to be filled by scrap silver coming to market.

But there’s a catch with scrap. Traditional sources of old silver scrap are depleting. Meanwhile, the new industrial sources of future silver scrap do not lend themselves to recycling as easily as, say, silverware. While scrap metal comprises about 20% of silver’s total supply, many of these new applications are difficult to reclaim. Some applications contain such small amounts that they’re uneconomic to recapture, such as many biocidal and nanotechnology applications. With others it’ll be a long wait. Solar panels, for example, have a 20- to 30-year life. Still others are waiting for more effective recovery programs; more than half of all silver in cell phones, TVs, computers and other electronics, for instance, still ends up in landfills.

In other words, a growing portion of the silver that’s consumed today won’t be returning to the market anytime soon. And that may be one very good reason why the bull market in silver won’t be ending anytime soon.

Financial World's 'Day of Reckoning' is Imminent

Can Heelys Stop Skid the Way Fad Footwear Firm Crocs Did?

When Heelys Inc. (NASDAQ:HLYS) had its 2006 IPO, financial commentators were united in their opinion that the maker of wheeled sneakers would fade away into oblivion. That was even as shares of the Texas-based Heelys Inc. stock soared 85% on their first day of trading. Heelys has defied skeptics — at least for now — and managed to survive, though HLYS stock is a shadow of its former self.

But hey, if Crocs Inc. (NASDAQ:CROX) could rebound, maybe Heelys could too … right? Maybe not. Shares of the Carrollton, Texas, footwear company recently traded for $2.07, well under the $33.60 high they reached on their first day of trading. Heely’s shares have plunged more than 30% this year alone.

The reasons for the Heelys struggles are many. First, there were the safety concerns. The wheeled sneakers soon became the toy parents loved to hate — with good reason. A 2007 medical study from Ireland documented cases of 67 children being treated for Heelys-related injuries. Schools forbade students from wearing Heelys and malls and other public venues cracked down on “heeling” out of a justifiable fear of attracting lawsuits.

Then there is the issue of practicality. Unlike Crocs Inc.(NASDAQ:CROX) shoes, Heelys are of limited use. Crocs too were considered a fad but its brand has endured because the shoes are comfortable, durable and practical. Shares of the maker of the plastic sandals that some consider ugly have climbed more than 46% this year. Net income for the first quarter of 2011 at the Niwot, Colo. company increased 276.1% to $21.5 million, or 24 cents a share. Revenue increased 35.9% to $226.7 million.

Uggs and Tevas, two trendy footwear brands, are also faring well during these uncertain economic times. Deckers Outdoors Corp. (NASDAQ:DECK), which makes both brands, reported record first quarter profit of $19.2 million, or 49 cents a share, beating Wall Street expectations. Uggs brand sales rose 42.2% while Teva gained 16.8%. Its shares, which have pulled back lately, are up 4% this year.

Heelys, where business development company Capital Southwest Corp. (NASDAQ:CWSC) was an early backer and remains a significant shareholder, have faltered as its rivals have soared. Everything that could have gone wrong for Heelys seems to have done so. In the company’s latest earnings release, CEO Tom Hansen cast a wide net to blame for Heelys’ bad luck including the natural disasters in Japan. He didn’t hold an earnings conference call.

At the end of the last quarter, Heelys had $62.6 million in cash and investments. Yahoo Financeindicates that the company has no total debt, which offers a rare bit of good news for investors. The company’s market cap of $56 million makes it an easy acquisition for either Crocs or Deckers Outdoor. Capital Southwest, which acquired its stake in Heelys in May 2000 for $103,490 that’s worth about $17 million today, may take the company private and re-IPO it later. Gary L. Martin, Southwest’s CEO, is the Independent Chairman of Heelys. He may be looking for an exit strategy.

Without a sale there are fewer reasons for investors to get excited about Heelys than ever. It reported a net loss of $1.18 million, or 4 cents a share, in the three months ending March 31, 2011, little changed from a year earlier. Revenue fell $549,000 to $6.1 million. Consolidated net sales in 2010 were $30.4 million, down from $43.8 million a year earlier. At the time of its IPO, Heelys had been profitable for at least three straight years. Revenue was $117 million in the nine months ended Sept. 30, 2006, up from $29 million in the year-ago period.

The Dark Side Of This Big Oil Inventory Release

IEA in Paris announced this morning a release of 60 million barrels from OECD inventories. The implications of this extraordinary action are not positive. Let’s first take a look at the most recent global production data, which shows the large downward move of supply coming into March 2011, from the loss of Libyan oil. IEA is pointing to this loss of supply as the prima causa for its decision. | see: Global Crude Oil Production in mbpd (million barrels per day) 2004-2011.


While some asset markets, perhaps global stock markets, may take comfort from the lower price of oil over the next 90 days, the intermediate term realities, implied by this action, are rather worrisome. I will list a few here:

* We know that Saudi Arabia did not rescue the oil market this Spring, as was originally anticipated. Both the Financial Times and covered this issue originally in February. By April, it was clear that Saudi did not make up the Libyan loss. Thus, the IEA inventory release implies that whatever extra supply Saudi Arabia can offer, it is either too sour and heavy to bring down the price of global diesel, or Saudi can only pump extra oil for short periods of time. In my view, both of these factors are in play.

* Releases of oil from inventory are counterintuitively bullish, not bearish, for prices. While oil prices no doubt will be rocked for several months now, releases such as these only highlight the fundamental problem at hand: structurally restrained supply. For example, the OECD could have turned to non-OPEC producers within their sphere of influence and asked them to produce more. But Non-OPEC producers, accounting for 57% of total global supply, have no spare capacity. The oil market is going to figure this out more quickly than most imagine.

* By knocking price down, the IEA is threatening the vast quantity of marginal supply that has come on stream the past two years. Much of this oil is broken free from shale, drilled at great depths in oceans, or converted from oily dirt (tar sands). To the extent that price is knocked down by such actions, this will affect the future development plans of those Oil and Gas producers who’ve been engaged in bringing the world its new, high-priced supply. I target the $80.00 level as the price point not where supply is taken offline, but where future marginal supply of any substantial note is at risk. Again, the oil market is going to do this math and it will not take long to run the calculations.

Today’s release of inventory is confirmation that the era of permanently constrained supply is now very much with us. Because industrial economies are simply machines that convert energy inputs into useful work and services, today’s action is also a reminder that the dream of higher growth in conjunction with lower oil prices is now very much a backward looking view, a nostaglia for a past that’s no longer possible.