Daniel Moser's Instablog Daniel Moser is a graduate of The University of Tulsa Collins College of Business. He majored in finance and has minors in economics and political science. Currenty he holds a position in the commodity trading arm of a major integrated oil company in Texas. His research interests include Global Macro, Macroeconomics, Portfolio Engineering, Portfolio Management, Investments, Trading, Empirical Finance and Empirical Economics, and Political Economy. Daniel Moser http://seekingalpha.com The Good, the Bad, and the Ugly http://seekingalpha.com/instablog/256313-daniel-moser/39343-the-good-the-bad-and-the-ugly?source=feed 39343 Fundamental data on the economy is not 100% bearish. Some data is, some data isn’t. Of course, naysayers will point out that the positive data which has been released can have holes poked in it by astute economic practitioners, but the converse is true as well. So what’s the moral for investors? Don’t become so devoted or attached to one particular viewpoint that you forgo, marginalize, or flat out ignore, fundamental data which finds itself opposed to your pre-conceived market view. 
 
We all know these types of people. Larry Kudlow is a perfect example of someone who is so incredibly committed to a particular viewpoint (in his case bullish optimism) that he attempts to marginalize any and all data that goes contrary to his endless supply of bullish optimism. Come to think of it, I can only think of one or two times in the past year that Larry has ever flat out admitted that X data is actually bad and no positive spin can even be attempted. Make no mistake; there are an absolute ton of “perma bears” out there as well. You know the type– the sort of people who argue the world is going to enter a massive depression, fiat currencies will disappear, and 9mm bullets (or shotgun shells for the less skilled marksmen) and/or water will be the only true store of value.
 
I am reminded of the common quote by J.M. Keynes, “When the facts change, I change my opinion. What do you do sir?” It would serve investors well (myself included) to keep this quote in mind from time to time. The simple fact is markets are dynamic and uncertain–which is to say...WE ALL have the ability to be wrong. What has 4 years of studying investments in college, continuous self-study, and personal experience taught me on this front?  Investors and traders who refuse to admit when they are wrong, thus cut a losing position are, in a word, dangerous.
 
With all that being said, let’s cover some of the good, the bad, and the ugly in the economy.
 
General Economic Activity Indicators:
 
The Good:
 
Figure 1, shown right below, is the historical real GDP growth starting 4 quarters before the “end” of 4 previous recessions as well as the current recession.  As you can see, in a historical context, we are approaching a period in which GDP has historically grown higher as each quarter passes.   



Figure 2, shown immediately below, is similar to figure 1, except this graph is for industrial production–and it is monthly vs. quarterly. This graph tells a similar story: we are entering a period of strong recovery in industrial production.



Figure 3, is similar to figure’s 1 and 2 except it is the ISM manufacturing index. (By now, you should be able to see a formatting trend, as all of these graphs are formatted very similar to figure 1 and 2). It has started to flatten out, but it is still on par with the previous recoveries from the last 4 recessions thus it remains safe to say that this...is a good thing.



The Bad:
 
Figure 6, shown below, is a graph of non-farm productivity. Yes, productivity gains are positive for corporate earnings. However, if (and it is a BIG if) history is any guide, the gains earned from productivity may be approaching an “all played out” stage.



The UGLY:
 
Business inventories, as shown below by Figure 5, are a monumental drag on the economy. October data was a modest positive, as inventories actually gained 0.3%. But a single data point is not a trend. This trend is horrid and even if the rate of decline slows…each negative data point marks a bad sign.



Consumer Indicators:
 
The Good:
 
Figure 7, is a graph of personal consumption which has begun to move higher, and in the historical contexts of the previous 4 recessions, is about to enter a period in which personal consumption trends higher. Considering the U.S. economy is largely a consumer driven economy, this as they say…is a good thing. 



Figure 8, is a graph of disposable income. It has been lagging to date, however it might very well start to trend higher. Granted disposable income, in this situation, is probably directly influenced by the daunting unemployment rate keeping downward pressures on wages. But for now it is trending somewhat higher…and as such it should be in the good camp.    



The Bad:
   
Figure 9, is not so pretty. The upward trending consumer consumption data, shown by figure 7, does not appear to be translating into retail sales. As such this particular sector might see some usual seasonal boost by Christmas shopping, but I wouldn’t want to be a retailer relying on much after this traditionally strong period. 


 
The UGLY:
 
Consumer credit, shown in figure 11, is in a downward trend and qualitatively has very little hope of ending anytime soon–given the deleveraging of the entire system. This is a bit of a mixed bag in the sense that as consumer credit declines, the “consumer” becomes much more inherently stable, but on the other hand…de-leveraging provides substantial negative forces to the overall economy.
   


The Labor Market:
 
The Good:
 
The boost in industrial production, shown in figure 2, is translating into increasing average weekly hours in the manufacturing sector, which is shown by figure 17. This is without question a positive. It seems more likely that companies will increase their hours for their employees before they begin increasing their head count-So maybe this is a precursor to an improving employment scenario.

 

The Bad:
 
Non-farm payrolls, as shown in figure 13, are still trending downward. The rate of decline is almost a moot point.  Every decline is a decline, and a decline in non-farm payrolls is a bad thing for a lot of people, as well as the macro-economy. 



The UGLY:
 
Figure 15, the unemployment rate, speaks for itself. It has been steaming higher, and until there are some major policy changes or extremely positive shocks to the economy, this trend is not likely to reverse. Even an unemployment rate that remains flat, at 10%, is a very negative fundamental factor for the U.S. economy–make no mistake about it.  



Housing and Construction:
 
The Good:
 
Single family home sales, according to Figure 20, have been increasing. In a historical context of previous recessions, this trend is not likely to stop. This is a good thing, so long as some lending standards are being applied (which is not necessarily the case), as it will help clear out excess inventories which were built up in the housing bubble. 



The Bad:
 
Housing starts, shown in Figure 19, are sort of a mixed bag. It appears to be rolling over, which is not good. However, there is a bit of a positive element to this...if housing starts will remain flat, the inventory overhang will continue correcting itself which is ultimately healthier for the overall economy anyways. 



The UGLY:
 
Non-residential construction, which should include commercial real-estate, is in shambles and it doesn’t look like it will be improving anytime soon. Moreover, judging by 3 of the past 4 recessions, non-residential construction usually struggles to find its footing for quite some time after the end of each recession.  This time it will probably not be any different, and may in fact be far worse.


 
In summation, investors and traders should be open to new facts as they come out. I hope I have shown that there is a mixture of positive and negative data out there, and all of it is worth considering when evaluating investment decisions.  As an investor or trader it is important to not be so devoted to a single perspective that you fail to properly evaluate new facts.  Admit when you are wrong and move on.


Disclosure: No positions in any companies mentioned in this article

Disclosure: long fcx pcu vale psec etv cno agco and fax]]> Thu, 10 Dec 2009 15:32:07 -0500 Fundamental data on the economy is not 100% bearish. Some data is, some data isn’t. Of course, naysayers will point out that the positive data which has been released can have holes poked in it by astute economic practitioners, but the converse is true as well. So what’s the moral for investors? Don’t become so devoted or attached to one particular viewpoint that you forgo, marginalize, or flat out ignore, fundamental data which finds itself opposed to your pre-conceived market view. 
 
We all know these types of people. Larry Kudlow is a perfect example of someone who is so incredibly committed to a particular viewpoint (in his case bullish optimism) that he attempts to marginalize any and all data that goes contrary to his endless supply of bullish optimism. Come to think of it, I can only think of one or two times in the past year that Larry has ever flat out admitted that X data is actually bad and no positive spin can even be attempted. Make no mistake; there are an absolute ton of “perma bears” out there as well. You know the type– the sort of people who argue the world is going to enter a massive depression, fiat currencies will disappear, and 9mm bullets (or shotgun shells for the less skilled marksmen) and/or water will be the only true store of value.
 
I am reminded of the common quote by J.M. Keynes, “When the facts change, I change my opinion. What do you do sir?” It would serve investors well (myself included) to keep this quote in mind from time to time. The simple fact is markets are dynamic and uncertain–which is to say...WE ALL have the ability to be wrong. What has 4 years of studying investments in college, continuous self-study, and personal experience taught me on this front?  Investors and traders who refuse to admit when they are wrong, thus cut a losing position are, in a word, dangerous.
 
With all that being said, let’s cover some of the good, the bad, and the ugly in the economy.
 
General Economic Activity Indicators:
 
The Good:
 
Figure 1, shown right below, is the historical real GDP growth starting 4 quarters before the “end” of 4 previous recessions as well as the current recession.  As you can see, in a historical context, we are approaching a period in which GDP has historically grown higher as each quarter passes.   



Figure 2, shown immediately below, is similar to figure 1, except this graph is for industrial production–and it is monthly vs. quarterly. This graph tells a similar story: we are entering a period of strong recovery in industrial production.



Figure 3, is similar to figure’s 1 and 2 except it is the ISM manufacturing index. (By now, you should be able to see a formatting trend, as all of these graphs are formatted very similar to figure 1 and 2). It has started to flatten out, but it is still on par with the previous recoveries from the last 4 recessions thus it remains safe to say that this...is a good thing.



The Bad:
 
Figure 6, shown below, is a graph of non-farm productivity. Yes, productivity gains are positive for corporate earnings. However, if (and it is a BIG if) history is any guide, the gains earned from productivity may be approaching an “all played out” stage.



The UGLY:
 
Business inventories, as shown below by Figure 5, are a monumental drag on the economy. October data was a modest positive, as inventories actually gained 0.3%. But a single data point is not a trend. This trend is horrid and even if the rate of decline slows…each negative data point marks a bad sign.



Consumer Indicators:
 
The Good:
 
Figure 7, is a graph of personal consumption which has begun to move higher, and in the historical contexts of the previous 4 recessions, is about to enter a period in which personal consumption trends higher. Considering the U.S. economy is largely a consumer driven economy, this as they say…is a good thing. 



Figure 8, is a graph of disposable income. It has been lagging to date, however it might very well start to trend higher. Granted disposable income, in this situation, is probably directly influenced by the daunting unemployment rate keeping downward pressures on wages. But for now it is trending somewhat higher…and as such it should be in the good camp.    



The Bad:
   
Figure 9, is not so pretty. The upward trending consumer consumption data, shown by figure 7, does not appear to be translating into retail sales. As such this particular sector might see some usual seasonal boost by Christmas shopping, but I wouldn’t want to be a retailer relying on much after this traditionally strong period. 


 
The UGLY:
 
Consumer credit, shown in figure 11, is in a downward trend and qualitatively has very little hope of ending anytime soon–given the deleveraging of the entire system. This is a bit of a mixed bag in the sense that as consumer credit declines, the “consumer” becomes much more inherently stable, but on the other hand…de-leveraging provides substantial negative forces to the overall economy.
   


The Labor Market:
 
The Good:
 
The boost in industrial production, shown in figure 2, is translating into increasing average weekly hours in the manufacturing sector, which is shown by figure 17. This is without question a positive. It seems more likely that companies will increase their hours for their employees before they begin increasing their head count-So maybe this is a precursor to an improving employment scenario.

 

The Bad:
 
Non-farm payrolls, as shown in figure 13, are still trending downward. The rate of decline is almost a moot point.  Every decline is a decline, and a decline in non-farm payrolls is a bad thing for a lot of people, as well as the macro-economy. 



The UGLY:
 
Figure 15, the unemployment rate, speaks for itself. It has been steaming higher, and until there are some major policy changes or extremely positive shocks to the economy, this trend is not likely to reverse. Even an unemployment rate that remains flat, at 10%, is a very negative fundamental factor for the U.S. economy–make no mistake about it.  



Housing and Construction:
 
The Good:
 
Single family home sales, according to Figure 20, have been increasing. In a historical context of previous recessions, this trend is not likely to stop. This is a good thing, so long as some lending standards are being applied (which is not necessarily the case), as it will help clear out excess inventories which were built up in the housing bubble. 



The Bad:
 
Housing starts, shown in Figure 19, are sort of a mixed bag. It appears to be rolling over, which is not good. However, there is a bit of a positive element to this...if housing starts will remain flat, the inventory overhang will continue correcting itself which is ultimately healthier for the overall economy anyways. 



The UGLY:
 
Non-residential construction, which should include commercial real-estate, is in shambles and it doesn’t look like it will be improving anytime soon. Moreover, judging by 3 of the past 4 recessions, non-residential construction usually struggles to find its footing for quite some time after the end of each recession.  This time it will probably not be any different, and may in fact be far worse.


 
In summation, investors and traders should be open to new facts as they come out. I hope I have shown that there is a mixture of positive and negative data out there, and all of it is worth considering when evaluating investment decisions.  As an investor or trader it is important to not be so devoted to a single perspective that you fail to properly evaluate new facts.  Admit when you are wrong and move on.


Disclosure: No positions in any companies mentioned in this article

Disclosure: long fcx pcu vale psec etv cno agco and fax]]> spy economy housing retail Chinese Oil Demand Prospects in 2010 http://seekingalpha.com/instablog/256313-daniel-moser/38408-chinese-oil-demand-prospects-in-2010?source=feed 38408 In many respects commodity imports to China helped stabilize and even bolster commodity prices throughout 2009. Needless to say Chinese supply and demand for commodities in 2010 will be a crucial element in determining whether commodities remain strong or weaken throughout 2010. 
 
Focusing on oil, it can be observed that global oil demand turned positive during Q4 2009, thanks to Chinese strength. 



According to Bernstein Research, “we expect China year over year apparent oil demand growth to be close to 4%, most of which will come from growth in genuine demand rather than storage as 4Q demand continues to strengthen.” They go on to point out that while 4% growth in oil demand out of China is right around the historical average, given that 6 months ago the International Energy Agency estimate for Chinese oil demand growth was slated at -1%, the 4% growth rate is really quite remarkable. 
 
In Bernstein’s view there will be three key variables that continue to drive oil demand in China:
 
1.      Historical relationship between GDP growth and oil demand – As it turns out, historically oil demand in China has been 50% of GDP growth which implies that oil demand growth should be approximately 4% given the IMF’s projection of 8-9% GDP growth in 2010. Bernstein addresses some critics who are concerned that the fiscal stimulus will be withdrawn early by arguing that withdrawal of fiscal stimulus is unlikely, “given the government commitment to this program and the time scales required to complete some of the major infrastructure projects which have been started. [Furthermore], it is difficult to stop building highways, bridges, and buildings half way through.”
 
2.      Increasing demand for transportation fuels – “As has been widely quoted, vehicle output is up a staggering 80% year over year with demand for goods and passenger vehicles particularly strong.”



3.      The second phase of the Chinese strategic petroleum reserve (SPR). “Plans are underway to construct storage sites at 8 new locations where China will add a further 170mmbls of storage in addition to the 104mmbls completed under phase 1. Some of these sites should be ready by the end of the year. Assuming the SPR is filled over a 3 year time frame this could add a further 1% to 2% to Chinese oil demand, in addition to the 4% to 5% growth which is expected from normal GDP growth.”
 
In conclusion, “If we avoid a 'double dip' in GDP in OECD countries and China continues to act as a proxy for emerging market demand, global oil demand growth in 2010 should be strong and supportive of oil prices which we believe will continue to rise.”
 
Relevant position of author: long PSEC


Disclosure: psec

Disclosure: long psec]]> Fri, 04 Dec 2009 09:59:18 -0500 In many respects commodity imports to China helped stabilize and even bolster commodity prices throughout 2009. Needless to say Chinese supply and demand for commodities in 2010 will be a crucial element in determining whether commodities remain strong or weaken throughout 2010. 
 
Focusing on oil, it can be observed that global oil demand turned positive during Q4 2009, thanks to Chinese strength. 



According to Bernstein Research, “we expect China year over year apparent oil demand growth to be close to 4%, most of which will come from growth in genuine demand rather than storage as 4Q demand continues to strengthen.” They go on to point out that while 4% growth in oil demand out of China is right around the historical average, given that 6 months ago the International Energy Agency estimate for Chinese oil demand growth was slated at -1%, the 4% growth rate is really quite remarkable. 
 
In Bernstein’s view there will be three key variables that continue to drive oil demand in China:
 
1.      Historical relationship between GDP growth and oil demand – As it turns out, historically oil demand in China has been 50% of GDP growth which implies that oil demand growth should be approximately 4% given the IMF’s projection of 8-9% GDP growth in 2010. Bernstein addresses some critics who are concerned that the fiscal stimulus will be withdrawn early by arguing that withdrawal of fiscal stimulus is unlikely, “given the government commitment to this program and the time scales required to complete some of the major infrastructure projects which have been started. [Furthermore], it is difficult to stop building highways, bridges, and buildings half way through.”
 
2.      Increasing demand for transportation fuels – “As has been widely quoted, vehicle output is up a staggering 80% year over year with demand for goods and passenger vehicles particularly strong.”



3.      The second phase of the Chinese strategic petroleum reserve (SPR). “Plans are underway to construct storage sites at 8 new locations where China will add a further 170mmbls of storage in addition to the 104mmbls completed under phase 1. Some of these sites should be ready by the end of the year. Assuming the SPR is filled over a 3 year time frame this could add a further 1% to 2% to Chinese oil demand, in addition to the 4% to 5% growth which is expected from normal GDP growth.”
 
In conclusion, “If we avoid a 'double dip' in GDP in OECD countries and China continues to act as a proxy for emerging market demand, global oil demand growth in 2010 should be strong and supportive of oil prices which we believe will continue to rise.”
 
Relevant position of author: long PSEC


Disclosure: psec

Disclosure: long psec]]> psec uso oih Oil and Commodities Copper demand is not quite as weak as some would have you believe http://seekingalpha.com/instablog/256313-daniel-moser/36521-copper-demand-is-not-quite-as-weak-as-some-would-have-you-believe?source=feed 36521 Before everyone freaks out listening to the claims that copper demand has seized and will never return, thus we should all kill ourselves, take a little look at the supply and demand balance for copper from 2008 through projected 2010. 
 
First, let me put in a disclaimer that information according to Barclays data. The article I wrote a few days ago which argued that estimates for supply side growth are a staggering 8% for 2010 – which, as history has shown of analyst supply projections, is far too optimistic as for the general analyst community.  The data shown below is from Barclays and as such their production growth estimate is much more modest than 8%. So there is no contradiction between what I wrote a few days ago and what I am writing now. 



Items to note from the above data: 
 
  • Even with a weaker Q4 relative to Q3, global consumption of copper has declined by only 1.9% during 2009 (approximately). Of course, some of this consumption might very well be stock piling, and not actual consumption of copper.
  • Even if the demand for copper slows down in China to some extent, by examining the above data you will see that consumption is starting to pick up in other regions of the world as well. 
  • The following chart, shown below, shows apparent consumption of copper vs.. Semiconductor production. As most people know, copper is nicknamed “Dr. Copper” because copper is in fact a base input into a lot of different industries throughout the world…semiconductor production being one of them.  This is to argue that a fair amount of copper is likely being consumed even if a significant portion is being stock piled for future consumption. 


  • Furthermore, focusing on a 1 year time frame for the copper story really misses the point. The world is shifting. As the world shifts resource rich countries will attempt to diversify their own economies away from the dependency on natural resource exports which is to imply they want to modernize. We can see this when “President Dmitry Medvedev Monday [November 16th] made the first ever official visit by a Russian leader to Singapore to promote stronger ties with the high-tech island as he seeks to modernize Russia's economy.” Why does this matter? “High-tech” requires copper! Furthermore labor intensive countries i.e. China and India are the so called rich countries now…and as they develop a much broader middle class, their level of consumption (requiring more copper as an input) will be increasing. Ten percent of this theme will not have played out over the course of 2010. Focusing on 2010, is like focusing on the first mile of a marathon…it doesn’t do you any good to be the leader that early on if you can’t finish the second mile. 
  • Not to mention the fact that the U.S. Dollar may very well reverse its course for some period of time. I personally believe will be a relatively significant correction will occur in the USD at some point during 2010–although I am not sure of the timing or the duration of such a reversal. However, in the longer run the trend is still down. Until fiscal order is put in place and monetary stimulus is back to neutral, the direction of the USD is down and as such commodities are just the right place to be.
 
So I guess I just want to conclude by saying that demand does not appear to be nearly as bad as some would have you believe. Yes there will be setbacks from time to time. However, as I have said in previous articles…as long as the price of copper is well above the marginal cost of production…the copper mining industries' return on invested capital will be significantly above the S&P 500 average and as such copper mining represents a compelling opportunity for the long term investor. 

Author is long FCX, VALE, PCU
]]> Thu, 19 Nov 2009 14:41:09 -0500 Before everyone freaks out listening to the claims that copper demand has seized and will never return, thus we should all kill ourselves, take a little look at the supply and demand balance for copper from 2008 through projected 2010. 
 
First, let me put in a disclaimer that information according to Barclays data. The article I wrote a few days ago which argued that estimates for supply side growth are a staggering 8% for 2010 – which, as history has shown of analyst supply projections, is far too optimistic as for the general analyst community.  The data shown below is from Barclays and as such their production growth estimate is much more modest than 8%. So there is no contradiction between what I wrote a few days ago and what I am writing now. 



Items to note from the above data: 
 
  • Even with a weaker Q4 relative to Q3, global consumption of copper has declined by only 1.9% during 2009 (approximately). Of course, some of this consumption might very well be stock piling, and not actual consumption of copper.
  • Even if the demand for copper slows down in China to some extent, by examining the above data you will see that consumption is starting to pick up in other regions of the world as well. 
  • The following chart, shown below, shows apparent consumption of copper vs.. Semiconductor production. As most people know, copper is nicknamed “Dr. Copper” because copper is in fact a base input into a lot of different industries throughout the world…semiconductor production being one of them.  This is to argue that a fair amount of copper is likely being consumed even if a significant portion is being stock piled for future consumption. 


  • Furthermore, focusing on a 1 year time frame for the copper story really misses the point. The world is shifting. As the world shifts resource rich countries will attempt to diversify their own economies away from the dependency on natural resource exports which is to imply they want to modernize. We can see this when “President Dmitry Medvedev Monday [November 16th] made the first ever official visit by a Russian leader to Singapore to promote stronger ties with the high-tech island as he seeks to modernize Russia's economy.” Why does this matter? “High-tech” requires copper! Furthermore labor intensive countries i.e. China and India are the so called rich countries now…and as they develop a much broader middle class, their level of consumption (requiring more copper as an input) will be increasing. Ten percent of this theme will not have played out over the course of 2010. Focusing on 2010, is like focusing on the first mile of a marathon…it doesn’t do you any good to be the leader that early on if you can’t finish the second mile. 
  • Not to mention the fact that the U.S. Dollar may very well reverse its course for some period of time. I personally believe will be a relatively significant correction will occur in the USD at some point during 2010–although I am not sure of the timing or the duration of such a reversal. However, in the longer run the trend is still down. Until fiscal order is put in place and monetary stimulus is back to neutral, the direction of the USD is down and as such commodities are just the right place to be.
 
So I guess I just want to conclude by saying that demand does not appear to be nearly as bad as some would have you believe. Yes there will be setbacks from time to time. However, as I have said in previous articles…as long as the price of copper is well above the marginal cost of production…the copper mining industries' return on invested capital will be significantly above the S&P 500 average and as such copper mining represents a compelling opportunity for the long term investor. 

Author is long FCX, VALE, PCU
]]> Copper Gold Mining Global Macro View: Is the supply side for copper going to be a game changer in 2010? http://seekingalpha.com/instablog/256313-daniel-moser/35954-global-macro-view-is-the-supply-side-for-copper-going-to-be-a-game-changer-in-2010?source=feed 35954 Copper has had one hell of a run.  On October 20th, I wrote a post for Seeking Alpha arguing that even if copper did not break through the $3/lbs. level, mining stocks would be able to fair just fine.  My argument is relatively simple and straight forward:  with copper prices significantly above even the producers with the highest marginal cost of production (somewhere between 90 cents to 1.50/lbs.) copper miners can earn an excellent return on invested capital.  So long as copper prices remain strong (notice I did not say 'keep climbing'), copper mining companies should continue to drift higher and I would expect them to outperform the general market.

 

Some recent data put out by Barclays indicates that the supply of copper is expected to increase by 8% in 2010.  This would undoubtedly be a significant headwind for the price of copper to overcome, if it were only true. 



The reality of the situation is probably no where near as extreme as 8%.  In fact, investors must ask if that number is even logical.  Very few companies maintained capital budgets over the course of 2009 and quite frankly they probably won’t

bring their budgets back into full swing during 2010.  As I recall, a lot of the mining companies I tend to focus on cut their cap-ex spending by at least 30%.  Where in the world is this 8% increase in supply going to come from?
 

I am not exactly sure why analysts that forecast mining supply are so off, so consistently when it comes to projecting growth in mining supply.  The reality of the situation is that they are consistently off target by being far too optimistic about the supply side of the equation.

 

Over the past 3 years, the analysts responsible for projecting mining supply have tended to overestimate the growth in supply by about 7% on average, with respect to copper.  So, perhaps the actual supply of mining will increase by 1-2% during 2010, but one must seriously doubt it will increase by 8%. 

 

In fact Barclays argues that, “it would be wrong to consider these current ‘market consensus’ projections for 2010 output as not at risk from some revision. There are some obvious sources of risks capable of disrupting current production schedules. First, the risk to output estimates stem from an increasing number of labour strikes – rising prices have inflated miner’s expectations, whereas mining companies are generally still in defensive balance sheet mode, meaning the risks of fall-out are high. Already there have been such episodes at mines in Canada, Chile and Peru. Related to this, lower capital expenditure budgets – in some cases close to bare minimum needed to sustain facilities - mean that output is generally at higher risk of disruption. In addition, many of the new mine projects coming online are located in less established mining countries, thus being at greater risk of logistical and labour deficits. Depletion of ore reserves is a particularly serious issue for copper and zinc mines, resulting in a moderation of run rates at existing mines as well as fewer new projects.”

What can investors conclude from all this?  Demand is not the only thing that affects prices.  Sometimes the supply side of the equation is the crucial dynamic that can be missed by investors.  I am not sure how one can measure how widespread a certain perspective is…but if the 8% supply growth view is a relatively entrenched view within market expectations for copper…then the market might very well be setting up for some solid performance out of the red metal, as well as copper mining companies, throughout 2010 as their supply expectations are proven to be WAY too optimistic (yet again). 

 

Author remains long: FCX, PCU, and VALE 

 

]]> Mon, 16 Nov 2009 16:14:36 -0500 Copper has had one hell of a run.  On October 20th, I wrote a post for Seeking Alpha arguing that even if copper did not break through the $3/lbs. level, mining stocks would be able to fair just fine.  My argument is relatively simple and straight forward:  with copper prices significantly above even the producers with the highest marginal cost of production (somewhere between 90 cents to 1.50/lbs.) copper miners can earn an excellent return on invested capital.  So long as copper prices remain strong (notice I did not say 'keep climbing'), copper mining companies should continue to drift higher and I would expect them to outperform the general market.

 

Some recent data put out by Barclays indicates that the supply of copper is expected to increase by 8% in 2010.  This would undoubtedly be a significant headwind for the price of copper to overcome, if it were only true. 



The reality of the situation is probably no where near as extreme as 8%.  In fact, investors must ask if that number is even logical.  Very few companies maintained capital budgets over the course of 2009 and quite frankly they probably won’t

bring their budgets back into full swing during 2010.  As I recall, a lot of the mining companies I tend to focus on cut their cap-ex spending by at least 30%.  Where in the world is this 8% increase in supply going to come from?
 

I am not exactly sure why analysts that forecast mining supply are so off, so consistently when it comes to projecting growth in mining supply.  The reality of the situation is that they are consistently off target by being far too optimistic about the supply side of the equation.

 

Over the past 3 years, the analysts responsible for projecting mining supply have tended to overestimate the growth in supply by about 7% on average, with respect to copper.  So, perhaps the actual supply of mining will increase by 1-2% during 2010, but one must seriously doubt it will increase by 8%. 

 

In fact Barclays argues that, “it would be wrong to consider these current ‘market consensus’ projections for 2010 output as not at risk from some revision. There are some obvious sources of risks capable of disrupting current production schedules. First, the risk to output estimates stem from an increasing number of labour strikes – rising prices have inflated miner’s expectations, whereas mining companies are generally still in defensive balance sheet mode, meaning the risks of fall-out are high. Already there have been such episodes at mines in Canada, Chile and Peru. Related to this, lower capital expenditure budgets – in some cases close to bare minimum needed to sustain facilities - mean that output is generally at higher risk of disruption. In addition, many of the new mine projects coming online are located in less established mining countries, thus being at greater risk of logistical and labour deficits. Depletion of ore reserves is a particularly serious issue for copper and zinc mines, resulting in a moderation of run rates at existing mines as well as fewer new projects.”

What can investors conclude from all this?  Demand is not the only thing that affects prices.  Sometimes the supply side of the equation is the crucial dynamic that can be missed by investors.  I am not sure how one can measure how widespread a certain perspective is…but if the 8% supply growth view is a relatively entrenched view within market expectations for copper…then the market might very well be setting up for some solid performance out of the red metal, as well as copper mining companies, throughout 2010 as their supply expectations are proven to be WAY too optimistic (yet again). 

 

Author remains long: FCX, PCU, and VALE 

 

]]> Copper Mining Materials Global Macro Outlook for Volatility in 2010 http://seekingalpha.com/instablog/256313-daniel-moser/35913-global-macro-outlook-for-volatility-in-2010?source=feed 35913 Global Macro View for Volatility in 2010:  What should investors make of the exceptionally steep yield curve coupled with the level of stock market volatility, as measured by the VIX index?  Back in June, I wrote an article on Seeking Alpha calling for investors to short volatility.  Since then the VXX (volatility ETN) has fallen from 75 to 42.5 or by approximately 43%, as the VIX index fell from the 50% range to the low 20% range.  Where do I think the VIX is going from here?  Applying the same analysis as what I posted back in June would lead to the same conclusions–short volatility represents a compelling opportunity.  However, I don’t believe shorting volatility represents quite the same risk/reward as it did before.

 

In this case, I believe the risk/reward scenario actually points to buying volatility at certain levels.  In my opinion the market is inherently unstable.  Going into 2010, the global economy/market is being bolstered by massive amounts of government stimulus.  In addition to massive government spending, central banks around the world have engaged in outright market intervention by practices such as quantitative easing.  Although we can argue about the timing of the exodus of government stimulus, surely we can agree that sometime during the second half of 2010, several governments (if not the majority of governments throughout the world) and central banks will begin withdrawing the stimulus capital as well as slowing down or outright halting intervention in the fixed income markets.  At that point we will really see if the global economy can stand on its own two feet.  The temptation to quote a personal hero of mine, Dennis Gartman, is just too overwhelming for me to resist. Dennis Gartman recently said, “Investing is rather like the children’s game of ‘Musical Chairs.’ We must dance while the music is playing, knowing full well that when the music stops we shall all be dashing for the few chairs that are there to be taken and we shall fight for them when that time comes, but while the music plays…while the flute is up to the musician’s lips; while the bow is being pulled across the violin… dance we must, or sit out the game on the sidelines.”

 

Dennis Gartman is really on to something here.  In this instance, there is a ton of uncertainty in the market place, and quite frankly rightfully so.  The more I think about it, the more I think 2010 could be a range bound year for volatility.  I can’t really see why the market should average less volatility than the 20-30% range, as seen from 1997-2003, given the vast amount of serious issues, policies, and questions that will remain through 2010.  Would I outright short volatility at this level?  No.  Would I buy volatility instruments such as the VIX between 20-23% or the VIX ETN (Ticker: VXX) between 40-42/per note…absolutely. 

 

I am not outright bearish for 2010, but having said that I also believe whatever 2010 holds in-store for investors, it will not be an easy going upward trend for the entire year.  When the governments around the world start implementing their withdrawals of support, the markets will be in for a rocky ride.  In my mind, the market, expressed in volatility, will resemble the 1997-2003 period in which the VIX was anything but stable–albeit range bound.  Thus, until the facts change further, at this point selling volatility at the low 20% level looks like a mugs game.  The better strategy, in my opinion, is to buy volatility between 20-22% and sell volatility between 27-32% for the duration of 2010.  At some point the music will stop and investors will be rushing for the few remaining chairs…I want to be there waiting to sell them a chair.  Thanks for reading and good luck.              


 

]]> Mon, 16 Nov 2009 12:06:26 -0500 Global Macro View for Volatility in 2010:  What should investors make of the exceptionally steep yield curve coupled with the level of stock market volatility, as measured by the VIX index?  Back in June, I wrote an article on Seeking Alpha calling for investors to short volatility.  Since then the VXX (volatility ETN) has fallen from 75 to 42.5 or by approximately 43%, as the VIX index fell from the 50% range to the low 20% range.  Where do I think the VIX is going from here?  Applying the same analysis as what I posted back in June would lead to the same conclusions–short volatility represents a compelling opportunity.  However, I don’t believe shorting volatility represents quite the same risk/reward as it did before.

 

In this case, I believe the risk/reward scenario actually points to buying volatility at certain levels.  In my opinion the market is inherently unstable.  Going into 2010, the global economy/market is being bolstered by massive amounts of government stimulus.  In addition to massive government spending, central banks around the world have engaged in outright market intervention by practices such as quantitative easing.  Although we can argue about the timing of the exodus of government stimulus, surely we can agree that sometime during the second half of 2010, several governments (if not the majority of governments throughout the world) and central banks will begin withdrawing the stimulus capital as well as slowing down or outright halting intervention in the fixed income markets.  At that point we will really see if the global economy can stand on its own two feet.  The temptation to quote a personal hero of mine, Dennis Gartman, is just too overwhelming for me to resist. Dennis Gartman recently said, “Investing is rather like the children’s game of ‘Musical Chairs.’ We must dance while the music is playing, knowing full well that when the music stops we shall all be dashing for the few chairs that are there to be taken and we shall fight for them when that time comes, but while the music plays…while the flute is up to the musician’s lips; while the bow is being pulled across the violin… dance we must, or sit out the game on the sidelines.”

 

Dennis Gartman is really on to something here.  In this instance, there is a ton of uncertainty in the market place, and quite frankly rightfully so.  The more I think about it, the more I think 2010 could be a range bound year for volatility.  I can’t really see why the market should average less volatility than the 20-30% range, as seen from 1997-2003, given the vast amount of serious issues, policies, and questions that will remain through 2010.  Would I outright short volatility at this level?  No.  Would I buy volatility instruments such as the VIX between 20-23% or the VIX ETN (Ticker: VXX) between 40-42/per note…absolutely. 

 

I am not outright bearish for 2010, but having said that I also believe whatever 2010 holds in-store for investors, it will not be an easy going upward trend for the entire year.  When the governments around the world start implementing their withdrawals of support, the markets will be in for a rocky ride.  In my mind, the market, expressed in volatility, will resemble the 1997-2003 period in which the VIX was anything but stable–albeit range bound.  Thus, until the facts change further, at this point selling volatility at the low 20% level looks like a mugs game.  The better strategy, in my opinion, is to buy volatility between 20-22% and sell volatility between 27-32% for the duration of 2010.  At some point the music will stop and investors will be rushing for the few remaining chairs…I want to be there waiting to sell them a chair.  Thanks for reading and good luck.              


 

]]> vxx Evaluating the USD, Interest Rates, and Commodities http://seekingalpha.com/instablog/256313-daniel-moser/33255-evaluating-the-usd-interest-rates-and-commodities?source=feed 33255 In a report put out by Barclays called, “It’s Not Just the Dollar Stupid”, Barclays argues that “from time-to-time market commentators can become focused on certain relationships to the point of obsession. So it is with commodities and the value of the USD at present. Price moves of varying magnitudes in markets as diverse as oil, soybeans, gold and copper are all being attributed to recent fluctuations in the value of the US dollar, with very few other factors given much attention or significance. This obsession with currencies risks obscuring the important developments in fundamentals that is far more significant in determining and differentiating commodity market trends.”
 
Yesterday, I found myself scratching my head profusely trying to figure out what the heck everyone was thinking with respect to currencies, interest rates, stocks and commodities. The logical argument presented yesterday was that interest rates moved up across the curve which led to a reversal in the USD decline against most other currencies which then took a negative toll on stocks and commodities alike. Does this make any since?
 
Well, yes the USD has been on a relatively persistent decline against many other currencies. And yes, this has coincided with an appreciation of most commodities (and stocks). But, “the flow of economic and fundamental data are improving fast in many commodity markets and that this is as important, if not more so than dollar trends. The past two weeks alone have brought much stronger-than-expected Chinese commodity import data and a raft of impressive statistics on GDP, IP, fixed asset investment and retail sales. Market specific data are also improving: for example in oil, where the trend of diminishing US inventory overhang has continued and the trend of improving global oil demand is very much intact. Supply issues are also exerting an important influence. In grains, bad weather is leading to huge delays to the US harvest, while in copper, a combination of strikes and technical problems are causing a significant re-assessment of the production outlook.”
 
It appears that most of the fundamental factors underlying commodity markets have taken a back seat for the time being. So what gives? The pro-dollar argument is that interest rates rising will put significant pressure to the shorts as new money floods into U.S. Dollars which will put significant downward pressure on commodities (and apparently stocks) if recent history is any guide. Wait a minute! Does that make sense?
 
This is empirically false. Furthermore, this argument doesn’t even make economic sense. What exactly do people think causes higher interest rates across the curve? Yes, the short end of the curve can be impacted by the Federal Reserve. However, the long end of the interest rate curve is determined by the global supply and demand of capital. As capital becomes dissuaded from or even flat out weary of the safety and value of United States Government securities, capital begins to flow away from the United States–which in fact causes interest rates to rise. Case in point…if China finally began to diversify away from the USD, they would stop buying treasuries which would necessarily put upward pressure on interest rates until enough additional buyers came in to fill the void created by the lack of new Chinese demand. So, as investors listen to pundits claim that higher interest rates will lead to the USD reversing its decline…please keep in mind that that logic is actually a fallacy. 

Where would the new demand for USD come from? As far as I can tell there is no new source of demand (increases the demand for USD) to offset the capital outflow (increases interest rates) that would occur leading to interest rates increases.  Although it is worth mentioning that the increase in the U.S. savings rate does help keep interest rates pushed down to some extent, though it is not nearly enough pressure to counteract any lack in Chinese demand for U.S. Treasuries.  Furthermore, an increase in U.S. savings rates should not result in a higher value for the USD since domestic savings is already denominated in USD. 
 
So now empirically debunking this horrible theory... 
 
I am most interested in countries like Australia, Canada, and Brazil.  I just decided to pick a few commodity oriented countries. The three charts shown below are the respective exchange rates of each commodity producing country I am interested in, compared to the U.S. 30 Year Treasury Bond yield. It is easy to observe a positive correlation between the yield on the 30 year bond and all three foreign currencies. Let me characterize this relationship in words…As interest rates rise, the U.S. Dollar declines relative to the currencies of all three commodity producing nations. As I argued above, capital is flowing out of the United States to other homes including Australia.   







In my opinion there are two fundamental reasons this relationship exists. First of all, the direct capital outflow theory in which capital is actually flowing away from the U.S. and into these other countries-which causes U.S. interest rates to rise simultaneously causing the value of the U.S. Dollar to decline in value relative to these other country’s currency, respectively. Secondly, I would argue inflation risks. 30 Years is a very long time to wait for the return of one’s capital. One of the very first things business students are pounded with in school is time value of money. In essence we know that in an inflationary environment, money 30 years from now is not worth what it is today. As such, there is an extra inflation premium built into the 30 year bond price which translates into a higher yield compared to shorter term investments i.e. the 2 Year Treasuries. 
 
What is inflation? Inflation could be simply defined as the increase in the price level of an economy. In an inflationary world everything becomes more valuable except for money. Things like oil, natural gas, agricultural products like corn or orange juice, metals like copper, nickel and gold all become more valuable while money becomes less valuable. What do all these countries have in common? They produce stuff like oil, copper, gold, uranium, and a bunch of other commodities. Quite simply, these countries are rich in natural resources.  And empirically, when U.S. interest rates rise the currencies of these countries become more valuable compared to the value of the U.S. Dollar.  
 
Why are some people thinking that the USD decline will be reversed if interest rates start to rise? Who knows…but they will likely be proven wrong. The USD might very well reverse its decline in the short run but longer term, who in their right might is bullish the USD? I cannot think of a single positive factor that leads to a bullish dollar case. Of course, this is the same logic that gets people violently destroyed in the market because the market itself becomes so incredibly skewed to one side. Awe, there it is. The most crowded trade as of late is quite clearly bearish the U.S. Dollar. In my opinion, the shorts getting modestly squeezed and shaken is what caused yesterday’s commodity debacle. This could get much worse before it gets better. But eventually, those with a longer term outlook will be proven right. The path of least resistance will once again be taken. Inevitably, the USD will once again continue lower. This has one or two HUGE caveats. If the fiscal house of the United States government, businesses, and households is put into order, the USD can actually start a legitimate fundamental recovery against other currencies. Until that day comes, this anomaly of higher interest rates coupled with a higher USD, should be seen as a buying point for long term investors to make their way into commodity related industries.
 
The reality of the situation is that higher interest rates are without question somewhere on the horizon. That is not because the outlook for the United States is rosy. On the contrary, higher interest rates in the future will be a direct result of decades of bad fiscal policy and extremely “easy” monetary policy. Don’t buy into the argument that a strong U.S. Dollar will likely coincide with these upward moving interest rates.   
 
Author is long FCX, PCU, VALE, PSEC, ETV, and AGCO

]]> Tue, 27 Oct 2009 17:17:29 -0400 In a report put out by Barclays called, “It’s Not Just the Dollar Stupid”, Barclays argues that “from time-to-time market commentators can become focused on certain relationships to the point of obsession. So it is with commodities and the value of the USD at present. Price moves of varying magnitudes in markets as diverse as oil, soybeans, gold and copper are all being attributed to recent fluctuations in the value of the US dollar, with very few other factors given much attention or significance. This obsession with currencies risks obscuring the important developments in fundamentals that is far more significant in determining and differentiating commodity market trends.”
 
Yesterday, I found myself scratching my head profusely trying to figure out what the heck everyone was thinking with respect to currencies, interest rates, stocks and commodities. The logical argument presented yesterday was that interest rates moved up across the curve which led to a reversal in the USD decline against most other currencies which then took a negative toll on stocks and commodities alike. Does this make any since?
 
Well, yes the USD has been on a relatively persistent decline against many other currencies. And yes, this has coincided with an appreciation of most commodities (and stocks). But, “the flow of economic and fundamental data are improving fast in many commodity markets and that this is as important, if not more so than dollar trends. The past two weeks alone have brought much stronger-than-expected Chinese commodity import data and a raft of impressive statistics on GDP, IP, fixed asset investment and retail sales. Market specific data are also improving: for example in oil, where the trend of diminishing US inventory overhang has continued and the trend of improving global oil demand is very much intact. Supply issues are also exerting an important influence. In grains, bad weather is leading to huge delays to the US harvest, while in copper, a combination of strikes and technical problems are causing a significant re-assessment of the production outlook.”
 
It appears that most of the fundamental factors underlying commodity markets have taken a back seat for the time being. So what gives? The pro-dollar argument is that interest rates rising will put significant pressure to the shorts as new money floods into U.S. Dollars which will put significant downward pressure on commodities (and apparently stocks) if recent history is any guide. Wait a minute! Does that make sense?
 
This is empirically false. Furthermore, this argument doesn’t even make economic sense. What exactly do people think causes higher interest rates across the curve? Yes, the short end of the curve can be impacted by the Federal Reserve. However, the long end of the interest rate curve is determined by the global supply and demand of capital. As capital becomes dissuaded from or even flat out weary of the safety and value of United States Government securities, capital begins to flow away from the United States–which in fact causes interest rates to rise. Case in point…if China finally began to diversify away from the USD, they would stop buying treasuries which would necessarily put upward pressure on interest rates until enough additional buyers came in to fill the void created by the lack of new Chinese demand. So, as investors listen to pundits claim that higher interest rates will lead to the USD reversing its decline…please keep in mind that that logic is actually a fallacy. 

Where would the new demand for USD come from? As far as I can tell there is no new source of demand (increases the demand for USD) to offset the capital outflow (increases interest rates) that would occur leading to interest rates increases.  Although it is worth mentioning that the increase in the U.S. savings rate does help keep interest rates pushed down to some extent, though it is not nearly enough pressure to counteract any lack in Chinese demand for U.S. Treasuries.  Furthermore, an increase in U.S. savings rates should not result in a higher value for the USD since domestic savings is already denominated in USD. 
 
So now empirically debunking this horrible theory... 
 
I am most interested in countries like Australia, Canada, and Brazil.  I just decided to pick a few commodity oriented countries. The three charts shown below are the respective exchange rates of each commodity producing country I am interested in, compared to the U.S. 30 Year Treasury Bond yield. It is easy to observe a positive correlation between the yield on the 30 year bond and all three foreign currencies. Let me characterize this relationship in words…As interest rates rise, the U.S. Dollar declines relative to the currencies of all three commodity producing nations. As I argued above, capital is flowing out of the United States to other homes including Australia.   







In my opinion there are two fundamental reasons this relationship exists. First of all, the direct capital outflow theory in which capital is actually flowing away from the U.S. and into these other countries-which causes U.S. interest rates to rise simultaneously causing the value of the U.S. Dollar to decline in value relative to these other country’s currency, respectively. Secondly, I would argue inflation risks. 30 Years is a very long time to wait for the return of one’s capital. One of the very first things business students are pounded with in school is time value of money. In essence we know that in an inflationary environment, money 30 years from now is not worth what it is today. As such, there is an extra inflation premium built into the 30 year bond price which translates into a higher yield compared to shorter term investments i.e. the 2 Year Treasuries. 
 
What is inflation? Inflation could be simply defined as the increase in the price level of an economy. In an inflationary world everything becomes more valuable except for money. Things like oil, natural gas, agricultural products like corn or orange juice, metals like copper, nickel and gold all become more valuable while money becomes less valuable. What do all these countries have in common? They produce stuff like oil, copper, gold, uranium, and a bunch of other commodities. Quite simply, these countries are rich in natural resources.  And empirically, when U.S. interest rates rise the currencies of these countries become more valuable compared to the value of the U.S. Dollar.  
 
Why are some people thinking that the USD decline will be reversed if interest rates start to rise? Who knows…but they will likely be proven wrong. The USD might very well reverse its decline in the short run but longer term, who in their right might is bullish the USD? I cannot think of a single positive factor that leads to a bullish dollar case. Of course, this is the same logic that gets people violently destroyed in the market because the market itself becomes so incredibly skewed to one side. Awe, there it is. The most crowded trade as of late is quite clearly bearish the U.S. Dollar. In my opinion, the shorts getting modestly squeezed and shaken is what caused yesterday’s commodity debacle. This could get much worse before it gets better. But eventually, those with a longer term outlook will be proven right. The path of least resistance will once again be taken. Inevitably, the USD will once again continue lower. This has one or two HUGE caveats. If the fiscal house of the United States government, businesses, and households is put into order, the USD can actually start a legitimate fundamental recovery against other currencies. Until that day comes, this anomaly of higher interest rates coupled with a higher USD, should be seen as a buying point for long term investors to make their way into commodity related industries.
 
The reality of the situation is that higher interest rates are without question somewhere on the horizon. That is not because the outlook for the United States is rosy. On the contrary, higher interest rates in the future will be a direct result of decades of bad fiscal policy and extremely “easy” monetary policy. Don’t buy into the argument that a strong U.S. Dollar will likely coincide with these upward moving interest rates.   
 
Author is long FCX, PCU, VALE, PSEC, ETV, and AGCO

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