Gold's Crash, Europe's Woes Signal Global Decline: Companies To Watch

by: Emmet Kodesh

"The macro outlook is bleak and equities markets still are not pricing it in. It is time to get out of industrials. Supply is robust but demand is weak." (Reuters 4-17-13)

The collapse of PM (precious metal) prices in 2008 preceded the collapse of the general equities markets. PMs recovered sooner and roared for almost three years before basing and then plunging, pushed down the last chute by the Goldman Sachs April 10 call to short sell. The recent woes of gold and long term sag of commodities raise serious concerns about global growth, "a big red flag." The confluence of forces I have been chronicling tends toward stagflation and then global depression. The controlling oligarchy is re-setting the macro structure and consolidating wealth to produce a fiercely extractive, maximally managed hi-tech feudalism.

At the end of this piece I will present reasons why the correction in equities that has begun is unlikely to V-bounce to new strength as happened in 2Q 2009. As noted in the epigraph above and as I have argued in several pieces, the market outlook is grim. But before noting some signals of global economic distress I offer for consideration a new index of companies and sectors you can use to monitor the macro-economic situation.

The GSCI or Goldman Sachs (NYSE:GS) Commodity Index is now the S&P Commodity Index though still widely known as GSCI. It includes 24 commodities: industrial metals (6.1%), agricultural (10.4%), energy (78.7%), livestock (3%) and precious metals (1.8%). The GSCI is a trading index (it began as an index fund) and thus like SPDR Gold (NYSEARCA:GLD) or other representative proxies can be used to manipulate sectors, markets and even economies while those who play it profit at the expense of economic health. GSCI values are weighted by 5-year average production in respective sectors and those who assign the weightings as well as big traders can create disorder or shocks to the system. Thus, finance abets geopolitical goals. The situation now is that all commodities are down YTD with precious and industrial metals (-17.9 and -11.8) and livestock (-8.7) the worst performers. The energy components are little better, ranging from -5.8 to -7.8%. This is a grim picture but I propose a better measure of health to guide investment strategies and life decisions.

The DJ-UBS futures commodities is more balanced than the GSCI. Consisting of seven sectors, the DJ-UBS limits commodities to 15% weighting, sets a maximal sector level at 33% in the index and is rebalanced annually. But my basket of production and growth is not simply for measuring commodity or sector performance but to identify trends and health in basic industries, their raw materials and transportation to markets per demand as reflected in the valuations of the major companies involved.

My alternative market-watch tool is a group of major companies that produce and/or distribute products, technologies or commodities essential to economic growth and life itself. By making a watch-list of these or similar companies and ETFs you can track the pulse of world economic health without relying on or being swayed by headlines, talking points and debates that sometimes do more to distract and channel than inform. It would be ideal to develop a metric to gauge performance of this basket by math. I presented a few examples from this new index in my second piece on the thesis for precious metals. I did so in order to show that the global economy indeed has been sluggish since 3Q 2009 and declining since 1Q 2011 despite the robust run of US equity indices the first five months of 2011 and during most of 2012 and 1Q 2013.

My index looks to the materials, machinery, technology and transportation essential to the production and shipment of goods. The basic industries in the index are shipping, mining, construction and agricultural machinery and technology like Caterpillar (NYSE:CAT), Deere (NYSE:DE) and Monsanto (NYSE:MON). In chemicals see DuPont (NYSE:DD) and Dow Chemical (NYSE:DOW). For agriculture track the grains ETF (JUG), fertilizer via Saskatchewan Potash (NYSE:POT) and agricultural and timber ETFs (NYSEARCA:MOO) and (NYSEARCA:CUT). For steel you may choose among Nucor (NYSE:NUE), US Steel (NYSE:X) and Arcelor (NYSE:MT). For oil I track Exxon (NYSE:XOM) and Chevron (NYSE:CVX) and Swiss large cap Transocean (NYSE:RIG) that provides offshore hi-tech oil and gas drilling services. The flat-lining of RIG since 2Q 2010 and its bumping along for 16 months at its 1Q 2009 crash level has been flashing red lights while many obsess about the latest drama at Apple (NASDAQ:AAPL). Kinder Morgan (NYSE:KMI) gives a view of America's thriving pipeline and storage network. I use Canadian Railway (NYSE:CNI) for transportation as it increasingly links North American and Far Eastern economies, and Baltic Shipping (NYSE:BALT). I do not include technology like Microsoft (NASDAQ:MSFT) or Intel (NASDAQ:INTC) for while they run systems they do not create or ship or refine the materials that enable life: one could use them as barometers of the tech industry. For retail one could add Wal-Mart (NYSE:WMT), Amazon (NASDAQ:AMZN) or Google (NASDAQ:GOOG) by which one enters the interface of society, commerce, governance and information extraction, the personal transparency that increases terror.

My index has a significant weighting to miners because they produce the materials that sustain civilized life. I look mainly to large diversified miners like BHP Billiton (NYSE:BHP), Rio Tinto (NYSE:RIO), Freeport McMoRan (NYSE:FCX) and Vale (NYSE:VALE). For precious metals I use Gold Corp (NYSE:GG) with its relatively sound balance sheet and geographically secure properties. The importance of copper leads me to include SCCO as back-up to FCX on this vital commodity. As I wrote when examining the thesis for PMs, the long-term pain in this sector also sends warnings about the direction of the world economy, a concern affirmed in the Reuters articles cited above. This watch list and de facto index includes major producers and movers of essential materials. One could include other shipping companies besides: Paragon (PRGN), Safe Bulkers (NYSE:SB), and /or Knightsbridge Tankers (VLCCF). For energy one could add China National Oil Co (CNOC) or Gazprom. The main point is to get major producers, refiners, suppliers and transport that uphold economy and commerce. I hope to develop a metric for this cluster of economic indicators.

Recent data from Europe shows the direction for our own economy whose under-pinning remains challenged. Doug Short recently showed that the main growth in work rate is among people over 60. This is a sign of desperation for seniors and declining prospects for the young. The numbers of those in their peak earning years (45-64) are dropping and those above 65 increases while the Fed suppresses fixed income and prepares a bond bubble that will burst in its collision with demographic collapse. Resource nationalism and extractive tax policies combine in an impoverishment and depopulation agenda. The increasing rush to the apparent safety of US Treasuries shows ongoing weakness in the global economy and will end in massive losses.

European new car registrations, a proxy for sales of new cars fell 8.7% yoy from 2012 to 2013. This is the lowest level since 1990 when the metric began being recorded. March 2013 new car sales were down 10.3% yoy. Unemployment levels among Europeans 17-30 years old are very high in most nations in the EU: 26% in France, 37% in Italy, 56% in Spain: the rate in Greece is 59%. "Italy has become ungovernable" one observer states. The jobless rates despite floods of liquidity signal a culture that will collapse in a generation. Volkswagen, the largest European automaker, posted a 5.2 percent decline in January and Citroën, No. 2 auto maker in the European Union, fell 16.3 percent, while rival Renault dropped 5.6 percent. This decline in the European auto market and in the discretionary spending of Europeans is NOT simply a north-south phenomenon. Economically sounder northern Europe has seen startling and steep declines. In Germany, car sales have fallen 8.6 percent yoy. While sales in France and Spain declined 15.1 % and 9.6% respectively, sales in Holland fell 31.2%, in Greece 34.5% and auto sales in Finland were down 28%. These hard facts help explain the plunge in the steel industry. Salvation from this major decline will not come from America and the companies I list above suggest redemption is not overseas either. China, the world's biggest copper importer clearly is slowing.

Consider: in real terms, the market top of 1929 was not exceeded till 1960: 31 years. The situation today is far grimmer in being sustained by fictions and manipulation. As the Reuters piece quoted at the top states, the macro-outlook is bleak and global equities have not yet priced it in." Producers create despite regulation but sovereigns riot in devaluation and deficit spending while fiat cash sits in banks and debt-laden consumers strain to retire debt and limit purchases. "A big red flag" as Vlastelica and Leong wrote for Reuters (linked above), hangs "over the global economy."

Use a version of the index presented above to monitor the true status of growth, how it is hindered by fiscal policy and obscured by geopolitical fireworks from Korea to Syria to Boston. The miners and builders will tell us when the world begins a genuine recovery and emergence from the secular bear in place since 2Q 2000. Lastly, surging PM demand from America (immense retail buying of Silver Eagles) to Asian central banks and individuals suggests that a collapse of world economies may leave PMs as the "last man standing" when a new reserve order is in place as urged by the World Gold Council-OMFIF report I described here. For now, take more defensive positions and watch a basic production index like that presented in this piece.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FCX, GG over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.