Commodities Drop Signals Global Growth Concern: Chart of the Day – Bloomberg 09-22-14

Salient to Investors:

  • The slump in commodity prices to a 5-year low signals investors are cautious about the strength of the global economy. Brent crude touched a 2-year low last week and iron ore at Qingdao is the lowest since 2009.
  • Economists expect China to grow 7.4% in 2014, the weakest since 1990.
  • Daniel Briesemann at Commerzbank sees high pessimism among speculative financial investors on commodities.
  • IEA said oil inventories in developed countries probably expanded in August at twice the usual pace for the time of year Morgan Stanley expects supply to beat demand in aluminum to nickel to iron ore in 2014.

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Stocks Triumph 3rd Month in Best Run Since ’09 as Gold Sinks – Bloomberg 12-01-13

Salient to Investors:

Bill O’Neill at UBS Wealth Mgmt said the story is still the combination of easy money policies and expectations of growth into 2014 and that growth is on the horizon.

The Investment Companies Institute reports individual investors gave $30 billion to managers in 2013, the first net inflows into equity funds since 2006, and versus $400 billion outflows in the previous 4 years.

The average of 19 forecasts expects the S&P 500 to fall 4 percent in December to 1,733. December has been the second-best month for US equity returns in data from 1928, with an average return of 1.5 percent, versus the monthly mean of 0.6 percent.

The S&P 500 trades at 16.3 times projected earnings.

Michael O’Sullivan at Credit Suisse Private Banking & Wealth Mgmt said the economy looks much, much more healthy.

4 of 5 investors, traders and analysts expect the Fed to taper in March or later, with just 5 percent looking for a move this month.

Goldman Sachs expects gold at $1,110 and Brent at $105 in 12 months.

Barclays sees gluts in aluminum, copper, nickel and zinc this year or next, and says copper will average $6,500 in Q4 2014.

The US is meeting 86 percent of its own energy needs, the most since 1986, and the International Energy Agency predicts the US will overtake Russia and Saudi Arabia as the world’s largest oil producer by 2015.

The median economist expects the 10-yr Treasury yield to rise to 3.1 percent by mid-2014.

John Rutledge at Safanad expects many months in which the Fed is the dominant story, and said the tapering story worries investors as to whether the Fed is there to sop up Treasury issues.

The median economist expects the euro to weaken to $1.30 against the dollar by mid-2014, and the yen to weaken to 104.

Benoit Anne at Societe Generale sees no appetite to invest into emerging markets as fear of the Fed prevails and investors are reluctant to take on risk as year-end looms.

 Jim McDonald at Northern Trust said economic momentum and monetary policy momentum are better in the developed economies, while there is too much uncertainty in the emerging world as reflected in their stocks.

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Our Chat With Jeremy Grantham – The Wall Street Journal 09-20-13

Salient to Investors:

Jeremy Grantham at GMO said:

Commodity prices fell for a hundred years by an average of 70 percent, and then from 2002 basically everything tripled and regained the whole decline in 6 years – tobacco was the only commodity that fell. The game changed because of the ridiculous growth rates in China whose 1.3 billion people use 45 percent of the coal used in the world, 50 percent of all the cement and 40 percent of all the copper.

The most important, valuable and critical commodity is phosphate or phosphorous, which is necessary for all living things. Yet we are mining and depleting it. 85 percent of the low-cost, high-quality phosphorous is in Morocco and belongs to the King of Morocco, and the rest of the world has 50 years of reserve if we don’t grow too fast.

I would own stock in the ground, great resources, reserves of phosphorous, potash, oil, copper, tin, zinc, but aluminum and iron ore less so because there is so much. I would not own coal or tar sands because it is hugely expensive to build coal utilities, and plants for tar sands are massive. So before they get their money back, the price of solar and wind will have come down so much.

The pressures on food are worse than anything else, so invest wisely in very good farmland, though it has had a big run and you can never afford to ignore value. Look for farmland in distinctly stable countries like Australia, New Zealand, Uruguay, Brazil, Canada, and the US. Forestry is a little overpriced but we are in a world where everything is overpriced because of incredibly low interest rates that push people into investing.

A career politician has a very short horizon and is not interested in problems that go out five or 10 years, as are corporations because a dollar in 10 years has a much lower value than a dollar today. The oil industry is making a bundle so does not want to change to a system that recognizes climate change and the need to have a tax on carbon.

With politicians so dependent on campaign contributions from the vested interests, the financial world, but more particularly the energy world, it is a miracle anything gets done.

The central idea in the stock market is patience and value and mean reversion and in society, it is resources and climate damage.

The market can go a lot higher with the Fed pushing it – to yet another real bubble, like the one in 2000 with Greenspan, the housing bubble and financial bubble with Bernanke and Greenspan.

America and Australia are the two very, very optimistic-biased societies. Mention housing bubble to Australians, they hate you for years! Optimism is very useful in enterprise, in start-ups because when the smoke clears, you end up with the Amazons and the Googles – we just throw more darts at the dartboard. But the downside is only 10 percent survive, but they all think they’re going to win.

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Goldman Sachs and the Price of a Can of Beer – Bloomberg 07-26-13

Salient to Investors:

The New York Times reported that every time an American opens a can of soda, beer or juice they pay a fraction of a penny more because of a maneuver by Goldman Sachs and other financial players that ultimately costs consumers billions of dollars. The allegation is that investment banks have moved into the aluminum market in order to rig it and force prices up.

What’s mostly going on is that the price of aluminum for future delivery has risen above its price in the spot market, creating an arbitrage opportunity. Users of aluminum are having to pay higher premiums for delivery as though there were a shortage, despite high stocks in warehouses.

Both the US CCFTC and LME are looking into complaints.

LME data is quirky, because some inventory is not counted as inventory because the LME has not officially certified its existence, giving sophisticated players an opportunity to mislead the market and game the system. LME’s standard contract allows warehouses to charge fees long after the owner has asked for delivery, giving the warehouse owner a reason to stall.

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Copper Users Squeezed as Glut Clogs Warehouse Lines: Commodities – Bloomberg 05-29-13

Salient to Investors:

Copper stockpiles are rising to the highest in a decade, yet manufacturers are paying the biggest premiums for the metal in as much as 7 years as financing deals lock up supply and extend lines at warehouses.

LME copper inventories more than doubled in the past year and supplies exceed demand for the first time since 2009.

Metal Bulletin data show buyers in Shanghai pay $135 a metric ton more than LME futures, up from $55 last year.

Copper entered a bear market in April. Goldman Sachs expects a decline to $7,000 in 12 months.

Standard Bank predicts global output to rise 4.3 percent to 21.1 million tons in 2013 as demand expands 2.2 percent to 20.9 million tons.

Glencore Xstrata, Goldman Sachs, JPMorgan Chase and Trafigura Beheer control more than half of the 700-plus sheds in the LME’s network.

Financing typically involves buying the metal for nearby delivery and forward selling to take advantage of a contango, where prices rise into the future – transactions helped by record-low borrowing costs.

Robin Bhar at Societe Generale said most manufacturers get metal on long-term contracts with suppliers, using LME warehouses to buy metal if needed. Societe Generale estimates that as much as 80 percent of aluminum inventory tracked by the LME, as much as 60 percent of zinc and as much as 50 percent of nickel are tied up in financing agreements. Bhar said the main casualties will be consumers – historically, higher stocks, higher supply would result in lower premiums, but we have circumvented the normal laws of economics.

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Bull Wagers Tumble Most This Year as Gold Bets Drop: Commodities – Bloomberg 02-17-13

Salient to Investors:

Hedge funds et al reduced net-long positions across 18 US futures and options last week, the largest decline since November 13, as signs of improving US growth reduced demand for gold and rains in South America added to signs that crop harvests will be bigger.

Bets on higher gold prices fell to the lowest since December 2008. Gold is off to its worst start to a year since 2001.

James Paulsen at Wells Capital Mgmt said confidence is building in a sustainable global recovery could hurt gold, while agricultural commodities will pullback in 2013 as weather normalizes.

Dan Denbow at USAA Precious Metals & Minerals Fund said people have become more risk on, and are taking money out of the more defensive assets like gold. George Soros and Louis Moore Bacon cut their stakes in gold ETPs in Q4 2012.

Walter Hellwig at BB&T Wealth Mgmt said signs of a deepening recession in Europe may hurt demand for commodities.

Marubeni Corp said Japan’s stockpiles of aluminum reached the highest in almost four years, signaling waning demand.

Cameron Brandt at EPFR Global said money managers pulled a net $13 million from commodity funds last week, spurred by the sixth straight week of outflows from gold and precious-metals funds, the longest stretch since Q1 2011.

Peter Sorrentino at Huntington Asset Advisors said some of the smart money that’s looking at bigger crops has started to exit, tripping a landslide, and some agriculture commodities may have moved too far, too fast, so we may get a bounce, but not the start of another rally.

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Emerging Stocks Decline to Three-Week Low as Samsung, Kia Tumble – Bloomberg 01-25-13

Salient to Investors:

Laurentia Amica Darmawan at PT First State Investments Indonesia said the currency issue is the biggest risk factor in the foreseeable future for Asian companies, and will continue until we have clarity on how long global monetary easing will last.

Credit Suisse lowered Turkish banks to neutral from positive, saying the net interest margin peaked in 2012 and they are vulnerable risks ignored by the market.

Goldman Sachs has a negative outlook for aluminum prices.

The MSCI Emerging Markets Index trades for 11 times estimated earnings versus the MSCI World’s multiple of 13.6.

Citigroup said emerging-market equity funds attracted funds last week, the seventh week stocks lured more funds than bonds.

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Aluminum Glut No Bar to Gains as Barclays Says Sell: Commodities – Bloomberg 12-26-12

Salient to Investors:

Barclays estimates stockpiles will rise for at least the next four quarters, and production will exceed demand by the most since 2009. The median analyst expects futures to rise as much as 16 percent in 2013.

Buyers are waiting a year to get metal. Credit Suisse says as much as 80 percent of stockpiles tracked by the LME are locked into financing deals and unavailable to consumers. Jeremy Baker at Vontobel Commodity Fund said the artificial tightness is created by financing, while fundamentally aluminum is the least attractive metal due to excessive supply. Michael Widmer at Bank of America said the market balances generally don’t matter – what matters is what is happening on the LME so you have to pay up for obtaining the metal.

The median estimate expects aluminum to rise 10 percent in Q4 2013 from Q4 2012.

Gayle Berry at Barclays said demand for aluminum has been stronger than any other base metal over the past decade but supply has grown strongly, and this will continue in 2013 so recommends selling into any rallies.

Hussein Allidina at Morgan Stanley says aluminum has the weakest outlook of 21 commodities because the increase in premiums caused by financing deals is limiting the output cuts needed to curb the glut.

CRU says transportation accounts for 25 percent of aluminum consumption and construction 24 percent. LMC Automotive expects global car sales to rise 2.5 percent in 2013.

The IMF sees global growth of 3.6 percent in 2013 versus 3.3 percent in 2012.

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Morgan Stanley Backs Gold, Corn, Beans as Best Picks in 2013 – Bloomberg 12-06-12

Salient to Investors:

Peter Richardson and Hussein Allidina at Morgan Stanley said:

  • Calls for the end of the commodities super-cycle is too simplistic as commodities are cyclical but the elasticity of supply and demand and length of the cycle vary significantly.
  • Gold, silver and corn will outperform other raw materials next year as a weaker dollar and rising investor demand bolster precious metals while supply curbs aid grains. Gold will average $1,853 an ounce in 2013 due to low real interest rates, buying by central banks and geopolitical uncertainty. Silver will average $35 an ounce.
  • Corn and soybeans should benefit from harvest delays in South America
  • Aluminum, sugar, nickel and uranium are bearish as supplies will outpace demand.

Jeffrey Currie at Goldman Sachs reiterated an overweight call on commodities, forecasting a 7 percent return in 12 months. With supply constraints easing, China slowing, and producer-company returns normalizing, Currie said it is tempting to say the super-cycle is over,  but this is simply the next phase of a commodity-investment cycle that began in the late 1990s. Goldman likes crude, corn and copper, and expects gold to peak in 2013 on a recovery in the US economy.

Edward L. Morse at Citigroup believes the super-cycle has ended.

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Best Metals Forecaster Smirk Sees China Recovering: Commodities – Bloomberg 11-14-12

Salient to Investors:

Justin Smirk at Westpac Banking focuses primarily on economic cycles, central banks and financial markets to make commodity predictions. He says:

  • Industrial metals will rally through June 2013 as the economy strengthens in China. China’s economy is at a turning point both for policy and inventories, said
  • We are at the worst for the growth cycle and commodity prices will rise through 2012 and into 2013.
  • Aluminum will rise to $2,380 a metric ton by June because of China’s recovery and central-bank actions in Europe and the US, boosting energy prices, which are 40 percent of smelters’ production costs.
  • Nickel will rise 14 percent to $18,500 a ton, copper as much as 11 percent to $8,500 a ton, zinc gains 7.7 percent to $2,100 a ton
  • See little value in gold so tend to miss the bullish runs, and its price stability is surprising.
  • Iron ore  has seen the worst of the rise in costs, so expect $170 by June.

Barclays  increased estimates for an aluminum glut for 2012 and 2013 said prices will decline. Goldman Sachs is increasingly cautious about copper for the next several months, partly because of record stockpiles in China’s bonded warehouses.

The median analysts expects aluminum to average $2,200 in Q2, copper $8,225, zinc $2,200 and nickel $18,875.

 Barclays estimates China consumes 43 percent of all aluminum, 41 percent of copper, 44 percent of nickel and 43 percent of zinc. Europe consumes 18 percent of all copper and 14 percent of aluminum.

Itay Simkin at Krom River Trading said having an economist on staff is a must.

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