ColinTwiggs, Author at the patient investor

May 28, 2016

A tale of two gluts: oil and iron ore cross $US50 on opposite paths

From Eddie van der Walt:

Crude oil and iron ore are two of the world’s most important industrial commodities, where supply and demand are tied to the fate of the global economy. Yet, they’re doing very different things right now.

Oil traded above $US50 a barrel for the first time this year while iron, moving in the opposite direction, fell below $US50 a ton on Thursday. It’s a slightly artificial comparison — there’s little physical equivalence between a barrel of oil and a ton of ore — but their differing paths tell us something about how the aftermath of the global commodities crash is playing out in different industries.

…Iron ore has been on a wild ride in 2016 following three years of losses spurred by rising low-cost production. A speculative trading frenzy in China helped to lift prices above $US70 last month from below $US40 in December, but they’ve fallen back on signs that global stockpiles are still building.

Port inventories in China increased 1.6 per cent to 100.45 million tons last week, the highest level since March 2015, according to data from Shanghai Steelhome Information Technology Co. They’re up 7.9 per cent this year.

Citigroup Inc. said in a report on Tuesday it remained bearish on iron ore, forecasting persistent oversupply on rising output from the top miners like Brazil’s Vale SA and BHP Billiton Ltd. as well as Gina Rinehart’s Roy Hill project in Australia.

“It takes a long time to turn output in mining on and off; the oil tap is arguably easier to open and close,” Robin Bhar, an analyst at Societe Generale SA in London, said by phone. “There was also a lot more to be done in metals, where demand collapsed. Oil hadn’t experienced a similar collapse.”

Source: A tale of two gluts: oil and iron ore cross $US50 on opposite paths

May 28, 2016

Donald Trump and Hillary Clinton agree on one thing…. | Business Insider

Hillary Clinton and Donald Trump disagree on a lot, if not most things. There is, however, one issue in which they seem in agreement….. both candidates have expressed support for increased infrastructure spending. This is good news for manufacturing and heavy industries.

…..Trump has supported rebuilding infrastructure from the beginning of his campaign.

“Rebuild the country’s infrastructure; nobody can do that like me, believe me,” he said in the speech announcing his candidacy.

“It will be done on time, on budget, way below costs, way below what anyone ever thought. I look at these roads being built all over the country and I say, ‘I could build these things for one third.’ We have to rebuild our infrastructure: our bridges, our roadways, our airports.”

…..Clinton, for her part, has said she would increase federal spending on infrastructure projects by $275 billion in the five years following her possible inauguration.

Monetary policy has been over-used and is not having the desired effect. Instead of new capital investment, low interest rates have encouraged speculative investment in stocks and real estate, driving up prices to unsustainable levels, and stock buybacks with similar results.

Infrastructure spending is absolutely essential to get the global economy back on track. It boosts employment and national income, saves government spending on welfare (unemployment) programs, and encourages new capital spending. Voters are rightly afraid of rising public debt but investment in productive infrastructure is a no-brainer.

Source: Donald Trump and Hillary Clinton agree on one huge thing — and Wall Street knows it | Business Insider

Hat tip to Steve L.

May 26, 2016

Gold tanked? Not yet!

Gold broke below its recent flag formation, warning of a test of support at $1200/ounce.

Gold

Selling is driven by expectations of a Fed interest rate hike in June …..and recent Chinese stimulus which postponed Yuan devaluation against the Dollar. But expectations of a rate hike are causing a sell-off of the Chinese Yuan, with the USDCNY strengthening over the last few weeks.

USDCNY

…Which in turn will cause the Chinese to sell foreign reserves to support the Dollar peg (…..else devalue which would panic investors and cause a downward spiral). Sale of Dollar reserves by China would drive the Dollar lower.

Dollar Index

…and Gold higher. I remain bullish as long as support at $1200/ounce holds.

Disclosure: Our Australian managed portfolios are invested in gold stocks.

May 26, 2016

Why Aussies sell in May

We all know “sell in May and go away” but why do Australian investors mimic their Northern counterparts when they are headed into Winter, not Summer holidays?

Apart from the influence of large Northern hemisphere indexes on smaller Southern hemisphere markets, we should also consider that the financial year for Australians ends on 30 June. Institutions tend to window-dress their balance sheets before the year-end by selling off non-performers and building a strong cash holding for new acquisitions. Private investors are also motivated to realize tax losses before the year-end.

Bell Potter’s Coppo Report observes:

“I have looked at tax loss selling over the years & it actually begins earlier than most realise – around now. It usually goes for 4 weeks until the 3 week of June & then some stocks start to recover.”

Only 35% of ASX 200 stocks are lower but these tend to be the heavyweights, with Coppo pointing out they represent 56% of market capitalization. At an average annual loss of -15%, they offer plenty of motivation for tax loss selling.

May 25, 2016

Stock buybacks: Short-term gain, long-term pain

Companies are maintaining stock buybacks and dividends payouts despite falling earnings. Combined buybacks and dividend payouts for S&P 500 corporations exceeded earnings by an estimated $572 billion for 2015.

The chart below illustrates how stock buybacks, for S&P 500 stocks, have grown to exceed dividend payouts. The combined figure now exceeds earnings, leaving nothing for investment. The only way to make up the shortfall is to raise debt.

S&P 500 Stock Buybacks and Dividends compared to Earnings

Private nonresidential fixed investment (which excludes inventory increases) is declining as a percentage of GDP.

Fixed Investment

And corporate debt is rising relative to profits.

Nonfinancial Corporate Debt v Profits

But rising debt is not a recent development. Corporate debt has been growing since interest rates started to decline in the 1980s, doubling the corporate debt level as a percentage of GDP.

Nonfinancial Corporate Debt v 10-year Treasury Yields

Corporate profits have also grown dramatically, even when adjusted for inflation. But some of this increase is attributable to unsustainable low interest rates.

Corporate Profits in 2009 Dollars

And the more debt grows, the more unsustainable corporate profits become.

Corporate Profits / Debt

The graph above shows corporate profits as a percentage of corporate debt (excluding banks and other financial corporations). The lower the level, the greater the risk.

University of Massachusetts economics professor William Lazonick warned in 2014 that companies were forsaking new investment in favor of stock buybacks. His conclusion was that corporate executives are lining their own pockets:

“Corporate executives give several reasons …..But none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay, and in the short term buybacks drive up stock prices.”

May 24, 2016

The ‘black swan event’ that could send oil to $US25 a barrel | Business Insider

From Elena Holodny | May 24, 2016, 10:13 AM

Both WTI crude and Brent crude were around $US48 per barrel on Monday, well above their lows below $US30 per barrel earlier this year. But all of that may come crashing down if one “black swan event” transpires, argued a Bank of America Merrill Lynch global commodities research team.

From their recent note to clients (emphasis ours): “Global GDP in US dollar terms at market exchange rates is stagnant. Continued US dollar strength could force Saudi Arabia either to cut oil production modestly and push Brent back to $50 or de-peg the Saudi riyal, our black swan event, which could lead Brent to collapse to $25/bbl.”

While this certainly sounds ominous for the oil market, it’s worth noting that analysts and financiers are split on whether the Saudis will actually de-peg their currency and undo the current fixed exchange rate with the US dollar….

Source: The ‘black swan event’ that could send oil to $US25 a barrel | Business Insider

May 24, 2016

Death of America’s department stores

From Bob Bryan:

Old-school retail has been getting walloped lately…..

Torsten Sløk, chief international economist at Deutsche Bank, has one chart in his monthly chartbook that lays out a pretty straightforward reason for the decline. In the chart, Sløk presents the startling decrease in the amount of income Americans spend on clothing….

Source: HERE IT IS: One brutal chart shows death is imminent for America’s department stores | Business Insider

May 24, 2016

Gold: Is it flagging?

Gold is now in the fourth week of a flag formation and is testing support at $1250/ounce. The best flag signals are in weeks 3 or 4. With no immediate prospect of a breakout, this raises the question: is gold losing momentum?

Gold

Increased likelihood of a Fed interest rate hike has certainly taken some wind from the sails …..as has recent Chinese stimulus which at least postponed (but not averted) Yuan devaluation against the Dollar. While this affected short to medium-term prospects, factors driving long-term demand for gold are unaltered. From a technical view, narrow candle ranges over the last 4 days suggest increased buying at the $1250 support level. And breakout above the flag remains a buy signal ……at least into the fifth week.

Silver experienced a much sharper sell-off, but on the weekly chart still looks likely to respect support at $16.00/ounce. Respect would suggest another test of resistance at $18.00 to $18.50.

Silver

On the weekly chart gold remains on track for a test of $1300/ounce. For as long as support at $1200 holds, we retain our bullish view on gold.

Gold

* Target calculation: 1300 + ( 1300 – 1050 ) = 1550

With the added incentive of a weakening Aussie Dollar, Australian gold stocks, represented here by the All Ords Gold Index (XGD), remain in a strong primary up-trend. A 13-week Twiggs Money Flow trough above zero and breakout above the recent trend channel are both bullish signs.

All Ords Gold Index (XGD)

Disclosure: Our Australian managed portfolios are invested in gold stocks.

May 22, 2016

The high-rise boom is over

From The AFR:

Macquarie Bank is planning to hit the brakes on lending to high rise and high density apartment dwellings in up to 120 postcodes around the nation amid growing fears about falling demand and oversupply. A confidential memo from the bank to brokers announces that from May 23 it will require a maximum loan to value ratio of 70 per cent, which means buyers will have to stump-up another 10 per cent deposit…

Leith van Onselen:

Macquarie’s latest actions, of course, also follows curbs by other major lenders aimed at mitigating exposure to high-rise developments, including:

tightening of lending criteria….

increased mortgage rates for investors; and

refusing to lend to overseas buyers…..

Every tightening of criteria by Australia’s mortgage lenders represents another nail in the high-rise apartment boom’s coffin.

Source: Macquarie joins high-rise lending crack-down – MacroBusiness

May 22, 2016

The Internet of Things: it’s arrived and it’s eyeing your job

From Malcolm Maiden:

The Internet of Things is “billions of connected devices from vending machines to mining equipment, aircraft engines and their componentry, agricultural sensors and cars,” [Andy] Penn said in his first keynote speech as Telstra CEO in July last year.

It both offers opportunities and poses threats. Penn mentioned in his first speech for example that a Committee for Economic Development of Australia report on Australia’s future workforce had estimated that almost 40 per cent of the jobs that exist in Australia had a moderate to high likelihood of disappearing in the next 10 to 15 years.

“Machine learning is the biggest driver of this because of its implications for the service industry,” he said. “In future, many traditional services type activities will be done by computers more quickly, more cheaply and more accurately.

“New jobs will be created by the Internet of Things, too of course. We just don’t know yet exactly where they will be…..”

Source: The Internet of Things: it’s arrived and it’s eyeing your job