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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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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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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China 3% Growth Risk Seen by Barclays Signals Likonomics Anxiety – Bloomberg 07-28-13

Salient to Investors:

Sudakshina Unnikrishnan and Jian Chang at Barclays say should China’s growth dip to 3 percent in the next 3 years, copper would fall more than 60 percent, zinc by up to 50 percent, and oil to $70 a barrel. They cite risks of slowing industrial production and of financial stress due to debt of companies and local governments, and Likonomics inflicting short-term pain.

Zhang Zhiwei at Nomura sees a 1-in-3 chance of Chinese GDP dropping to below 5 percent for four consecutive quarters starting at or before Q4 2014, and says a growth rate of 5.9 percent in 2014 would lead metal prices to fall as much as 30 percent and oil prices as much as 20 percent. Nomura expects Chinese growth of 6.9 percent in 2014, but said a growth rate of 5.9 percent would trim 0.3 percent from world economic growth.

Societe Generale sees a non-negligible risk of less than 6 percent growth in 2013 and an outside chance of 3 percent average expansion for half2 2013 and half1 2014. In the event of a hard landing, Societe Generale said 1.5 percent would be shaved off global expansion in the first year, and would recommend selling copper call options and buy copper puts, buying the US dollar and Treasuries, and selling the Russian ruble, South African rand and the Chilean peso.

Andrew Polk at the Conference Board said trying to slow gradually is very difficult, partly because it’s a self-enforcing mechanism and can become a vicious cycle, and sees average growth in China of 5.5 percent over the next 5 years. Polk sees a distinct possibility that the slowdown could get out of control. Polk said Australians are overly reliant on China and the export trade, and have not done enough to diversify their own economy, so would be hurt.

Orville Schell at the Asia Society said he does not know if the world is ready for China’s growth below 7 percent – the Chinese economy is mortal and ultimately subject to the same kinds of cyclical growth as every other economy.

Stephen Roach at Yale said China wants enough growth to maintain social stability and prevent the economy from a more serious shortfall, so does not see a hard landing.

Jim O’Neill at Bloomberg said the notion of a soft or hard landing is simplistic, and China is adjusting in the right direction as gauged by the relationship between real retail sales and industrial production. O’Neill said 7.5 percent growth in 2013 and this decade is reasonable, and equivalent to the US growing by 4 percent in terms of world contribution – any further Chinese slowing would be big.

Barclays said quarterly growth dropping briefly to 3 percent within the next 3 years was increasingly likely, but expects 7.4 percent growth in 2013 and 2014. Barclays said even if growth slowed that much, China would bounce back rapidly afterwards.

Alaistair Chan at Moody’s Analytics said China is a gray swan, not a black one, because a hard landing won’t be totally unexpected and there may be a recession sooner or later, in which case it won’t be pretty for commodity exporters in the short run.

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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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The Global Economy In 2013: 5 Key Economic Trends? – Seeking Alpha 01-23-13

Salient to Investors:

Shane Brett at AllAboutAlpha writes:

  • The long-term outlook for the US economy is broadly positive with housing stabilized, consumer confidence slowly returning, political instability solved by Obama’s decisive win, and as health spending increases under Obamacare.
  • Cheap domestic energy will continue and the US will seriously expand exploration of shale oil using fracking technology. 2013 will see a relocation of energy intensive industries back to the US, causing trade disputes.
  • The big unknown for the US is the effect of massive Quantitative Easing, and currency volatility is virtually guaranteed.
  • The US has the benefits of being food and potentially energy independent, having a young growing population, and of being the center for economic creativity and new business start-ups.
  • China will ramp up infrastructural spending in 2013 providing a boost to the world economy, boosting copper prices and commodity dependent economies like Canada and South Africa.
  • Chinese companies are starting to bid more aggressively for both US companies and domestic American contracts, which will cause friction over the next few years.
  • The German election in September will completely dominate 2013  in Europe, with little substantive progress being made in ending the Euro Zone Crisis until then.  Merkel has disguised both the true size of the Euro crisis and the price to hold the Euro Zone together from the German electorate.
  • The main economies of Europe will teeter between zero growth and recession in 2013.
  • Global money creation will increase currency volatility, with the US Dollar and Euro weakening significantly in 2013. The Australian Dollar is the most overvalued currency now that country’s commodity export boom is subsiding, domestic economy slowing, and interest rates falling. The Euro will remain volatile.
  • The amount of money creation is unprecedented and its outcome largely unknown – massive currency debasement has always preceded high inflation and economic decline. Inflation will rise in the years ahead – always the intention of the US to devalue in real terms its gigantic national debt.
  • Commodity prices will stop declining in 2013 and the super cycle will resume – excluding oil, commodity prices declined progressively throughout the whole of the twentieth century, but reversed the whole decline during the past decade.
  • The world faces a zinc and phosphorous shortage.  The world population will increase by 140 million people in 2013. Many important countries depend on importing food.
  • The melting of the North Pole ice caps will add new regular shipping routes across the Arctic in 2013, a major economic advantage to Russia, Canada, the US and Scandinavia.

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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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