Investors Head for Exit as Commodities Extend Slump – Bloomberg 09-30-14

Salient to Investors:

  • Investors pulled the most money from US ETPs backed by raw materials since April.
  • US corn and soybean crops are the biggest ever, global stockpiles of nickel are at an all-time high, the US is producing the most oil since 1986, while China is headed for its slowest expansion in two decades.
  • The Bloomberg Commodity Index is set for a fourth straight annual loss, the longest slide since data began in 1991.
  • Societe Generale lowered its price forecasts for more than half of the 43 raw materials it tracks, and recommended shorting gold on rising US interest rates and a rising dollar, target below $1,000 over the medium-term.
  • Citigroup pared its outlook on crude oil, gold, corn and wheat.
  • Goldman Sachs still expects losses in copper and gold.
  • In August, Citigroup forecast the Arabica-coffee crop shortfall may leave a global production deficit lasting into 2016. Citigroup is bullish on palladium, copper, nickel, lead, coking and thermal coal, cocoa and coffee.
  • Deutsche Bank forecast commodities will end 2014 in a positive run with nickel, zinc and lead outperforming.
  • Donald Selkin at National Securities said certain markets are bullish because of supply issues, including cattle, nickel and coffee, while the worst may also be over for the big three – gold, crude oil and grains.
  • Jeffrey Currie at Goldman Sachs expects gold to fall to $1,050 by year-end, copper to fall to $6,200 a metric ton over 12 months due to a major increase in stockpiles.
  • The IEA said global oil demand will weaken because of weaker growth in China and Europe, rising exports from Libya, and booming US output, all outweighing potential output disruptions in Iraq.
  • Economists expect China to grow 7% in 2015, the slowest rate since 1990.
  • Quincy Krosby at Prudential Financial said you need growth in China to support a rally in raw-material prices.

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Gold to Coffee Drive Bullish Bets to 17-Month High – Bloomberg 02-25-14

Salient to Investors:

Hedge funds’ net-long positions of 18 US-traded commodities rose 18 percent last week to the highest since September 2012. Investors tripled the net-long position in arabica coffee this month to the most bullish since May 2011

Barclays said weather is the big driver of commodities.

EPFR Global data show commodity funds are headed for the first monthly inflows since September 2013.

Brazil is having its weakest rainy season in decades, just when moisture is needed the most for coffee tree roots to absorb soil nutrients.

Rabobank Intl said yields and quality for arabica beans will be constrained during this season and the next, and prices will be supported by longer-term concern that output will be limited.

Rabobank said soybean production in Brazil and Argentina is still projected to climb 10 percent, even with the dry weather. The USDA said corn and soybean harvests in the US in 2014 will be the biggest ever, meaning an increase in stockpiles before 2015’s harvest.

Dan Cekander at Newedge USA said grain fundamentals themselves do not suggest a bull story – not without a significant Northern Hemisphere problem in 2014.

Goldman Sachs said the S&P GSCI Enhanced Commodity Index will fall 4.3 percent in the next 12 months, agriculture will decline 9 percent, and precious metals will fall 14 percent.

Gold bets climbed 31 percent to the highest since October 29.

David Mazza at State Street Bank & Trust said assets in the SPDR Gold Trust are heading for the first monthly inflow since December 2012.

Cameron Brandt at EPFR Global said commodity funds are heading for their first monthly inflows since September.

Mark Luschini at Janney Montgomery Scott said the decline in prices last year has helped re-establish equilibrium between supply and demand, so better growth should pull industrial commodities higher, though we are not back in the middle of a commodities super cycle yet.

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Copper Heads for Longest Slump in 27 Years on Factory Outlook – Bloomberg 02-03-14

Salient to Investors:

Copper is heading for the longest losing streak since at least April 1986 on signs of weakening demand.

Bill O’Neill at Logic Advisors said the supply demand equation is still leaning to the bearish side.

Goldman Sachs said global supply will exceed demand by 385,000 tons this year, after a 45,000 ton surplus in 2013, and prices will grind lower.

Kazuhiko Saito at Fujitomi said China’s week-long holiday has made things worse for copper by reducing liquidity, so we may see copper test $7,000 before the Chinese return later this week. 

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The 2014 Contrarian Investment Tour, From Rupees to Copper – Bloomberg 12-10-13

Salient to Investors:

Lewis Braham writes:

Contrarian funds can be a hedge of sorts, though a potentially volatile one as out-of-favor sectors tend to be cyclical and prone to booms and busts. Shorting is inherently dangerous as markets have been trending higher.

Brian Singer at William Blair Macro Allocation Fund said currencies help diversify portfolios because they behave very differently from stocks and bonds. Singer recently put 19 percent of the fund in the Indian rupee which he says is undervalued by as much as 70 percent and India’s new central bank governor has already taken actions to stabilize it by raising interest rates. Singer uses financial derivatives to earn a 6 percent yield on the equivalent of a bank deposit. Individual investors can buy currency CDs – a 3-month FDIC-insured rupee CD from Everbank yields 7.25 percent. Singer is short the iShares Russell 1000 Growth ETF and long the iShares Russell 1000 Value ETF  and says people believe the US is the only source of growth and stability in the world but will be surprised in 2014 at how volatile growth stocks can be.

Don Hodges at the Hodges Pure Contrarian Fund is betting on coal, iron and copper mining stocks and said a recovery in the sector will begin when the Chinese work off their commodity inventories and begin buying again.

Jason Hsu at Research Affiliates said emerging market stocks are at a tremendous discount to US stocks. Hsu said the Shiller PE ratio for the S&P 500 is 24 versus its 16.5 average, versus 13.5 for emerging markets. Hsu is buying TIPS – TIPS with maturities of more than 20 years are yielding 1.5 percent over inflation, and is betting on a decline in large US stocks as well as on improved prospects for high-yield and emerging market bonds.

The BlackRock Municipal Target Term Trust trades at an 11.5 percent discount to portfolio value and yields 6.73 percent on a tax-free basis.

Rudolph Riad-Younes at RSQ International Equity Fund does not like gold because it trades closer to 20 percent above its cost of production versus 10 percent to 15 percent historically, and that cost will fall in the next 5 years, further driving down gold prices.

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Goldman Says Buy H-Shares Amid Growth: China Overnight – Bloomberg 12-02-13

Salient to Investors:

Noah Weisberger at Goldman Sachs said:

  • The Hang Seng China Enterprises Index will rise 18 percent to 13,600 by the end of 2014, the biggest gain since a rise of 62 percent in 2009, on prospects the economy will stabilize.
  • Commodities will lag the rally in equities.
  • Buying Chinese stocks and selling copper futures may generate a combined return of 25 percent next year.  Stability in China’s growth is insufficient to lift demand for copper as a supply glut weighs on the market as economic growth is driven by the developed market.
  • Equities are Goldman’s favorite asset class in an environment where growth is moderate but not overheating, while policy makers remain accommodating.

The median economist predicts China’s GDP to grow 7.5 percent in 2014.

The Hang Seng China Enterprises Index is at 19 percent below its average valuation of the last 5 years.

Allan Conway at Schroder Investment Mgmt has been positive for China for some time and is overweight Chinese stocks with 22 percent of his portfolio.

Goldman recommends buying S&P 500 futures while selling the Australian dollar; betting European interest rate swaps will decline while 5-year Treasury yields will rise; and selling the Canadian dollar.

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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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Worst Raw-Material Slump Since ’08 Seen Deepening: Commodities – Bloomberg 12-01-13

Salient to Investors:

History suggests the commodity slump will deepen by the end of December as prices head for their first annual loss since 2008.

Since 1971, the S&P GSCI Spot Index fell in December 83 percent of the time whenever it was losing for the year through November.

EPFR Global reports investors pulled $34.1 billion from commodity funds since the end of December 2012, a record since tracking the flows in 2000.  Economists expect China to slow for a third year in 2013.

Michael Cuggino at Permanent Portfolio Family of Funds said the trend lower will hold through the end of the year as investors see anemic or slowing economic growth in developed and emerging-market economies amid more supply on hand.

Jeffrey Currie at Goldman Sachs sees significant declines through next year for iron ore, gold (to $1,045 by year-end 2014), soybeans and copper as the supercycle of rising prices is eclipsed by more supply. Citigroup and Credit Suisse are bearish.

Goldman Sachs forecast in October that the S&P GSCI Enhanced Commodity Index will be 0.7 percent lower in 12 months, led by precious metals expected drop of 17 percent and agricultural products expected drop of 8.1 percent.

Michael Haigh et al at Societe Generale sees signs of a rebound in global growth and gains in developing economies supporting demand for raw materials, and said investors have become excessively pessimistic on industrial metals because prices are below output costs for some producers.

Economists predict the global economy to grow 2.8 percent in 2014, the most since 2011.

4 of 5 investors expect the Fed to delay tapering until March 2014 or later.

Catherine Raw at BlackRock Commodity Strategies Fund said less fear about the global economy moving into 2014 is positive for commodity demand.

Citigroup said China’s move away from infrastructure expansion may mean less demand for raw materials. The mean economist expects China to slow from 7.7 percent in 2012 to 7.6 percent in 2013, 7.5 percent in 2014 and 7.2 percent in 2015.

Wagers by hedge funds et al have slumped 27 percent since the end of December 2013, and are net-short for corn, copper, coffee, wheat, soybean oil, natural gas and ultra-low-sulfur diesel.

Global holdings in gold ETPs have tumbled 30 percent in 2013 to the lowest since March 2010.

Barclays predicts copper supply will outpace demand by 407,000 metric tons this quarter, versus a 636,000-ton shortfall in the previous six months, while 2014’s surplus will total 193,000 tons, versus from a 63,000-ton deficit in 2013.

Jack Ablin at BMO Private Bank  said supply and demand imbalances have been really fueling huge stockpiles in Chicago, and does not see many signals of an upturn in commodities yet.

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New shape-shifting metals discovered – BBC News 10-04-13

Salient to Investors:

A new martensite metal is the prototype of a new family of smart materials that can change shape tens of thousands of times when heated and cooled without degrading, unlike existing technology.

Currently, martensite metals are made of an alloy of nickel and titanium but after repeated shape changes build up stresses inside that degrade them and eventually break them apart. The new alloy is made of zinc, gold and copper, and could be used in applications ranging from space vehicles to electronics to jet engines.

Prof Richard James said devices could convert heat to electricity directly, e.g. using the waste heat from computers and cell phones to recharge the battery and make them more efficient.

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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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Hedge Funds Trim Gold Bets on Stimulus Speculation – Bloomberg 08-12-13

Salient to Investors:

Hedge funds cut net-long gold positions by the most since June. while holdings of short contracts rose 26 percent. Net-bullish bets across 18 US-traded raw materials dropped to the lowest since March and a measure of bets on agricultural commodities turned negative for the first time. Holdings in global ETPs backed by gold is the lowest since May 2010.

Jim Russell at US Bank said global inflation has not played out as anticipated, and won’t so is not buying gold.

Daniel Briesemann at Commerzbank said gold won’t see lasting gains until investors stop selling ETP holdings.

Bernie Williams at USAA Investments said gold, while volatile, tends to hold up over time, and has a place in a portfolio for preservation of capital and to offset currency debasement.

Barclays said the rise in copper last week was an opportunity to short sell.

Jeff Sica at Sica Wealth Mgmt said there’s been a drastic increase in supply of food commodities, especially corn, and the only way we are going to see an increase in commodities is if we see an increase in QE.

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