Eric Coffin - Seeking Alpha 'Eric Coffin' Tag RSS Syndication from SeekingAlpha.com SeekingAlpha.com http://seekingalpha.com/author/eric-coffin Trendy Markets Still Not Reversing http://seekingalpha.com/article/178234-trendy-markets-still-not-reversing?source=feed 178234 The gold price has swept past the US $1200 mark - in both directions - so it’s time to check numbers against concepts and patterns. The yellow metal’s modern history began with Western economic expansion in the 19th century. That outstripped our ability to supply gold equivalent to economic activity at fixed rates. With currencies delinking from gold by the early 1970s, miners couldn’t supply enough of it at the old fixed rates. Contrast that with copper, which was in a supply glut at the time due to technological changes. Paper currencies were already a large multiple of gold horde values by this point.

Unfettered gold took one of the most incredible price runs in history during the 1970s, peaking near 2500% above its old official US$ price in 1981. That brought bulk mining technologies to gold akin to those copper miners had used since early in the century, and a big increase in supply. That, plus selling from official hordes, pushed gold miners into the same cycle of profitable spurts sandwiched between longer red ink troughs that copper producers were already suffering.

]]> Tue, 15 Dec 2009 07:25:35 -0500 Eric Coffin Eric Coffin submits:

The gold price has swept past the US $1200 mark - in both directions - so it’s time to check numbers against concepts and patterns. The yellow metal’s modern history began with Western economic expansion in the 19th century. That outstripped our ability to supply gold equivalent to economic activity at fixed rates. With currencies delinking from gold by the early 1970s, miners couldn’t supply enough of it at the old fixed rates. Contrast that with copper, which was in a supply glut at the time due to technological changes. Paper currencies were already a large multiple of gold horde values by this point.

Unfettered gold took one of the most incredible price runs in history during the 1970s, peaking near 2500% above its old official US$ price in 1981. That brought bulk mining technologies to gold akin to those copper miners had used since early in the century, and a big increase in supply. That, plus selling from official hordes, pushed gold miners into the same cycle of profitable spurts sandwiched between longer red ink troughs that copper producers were already suffering.


Complete Story »]]> SPX GLD UDN UUP Eric Coffin What Happens to Metals if the U.S. Weakens Again? http://seekingalpha.com/article/176119-what-happens-to-metals-if-the-u-s-weakens-again?source=feed 176119 The announcement of a surprisingly large US trade deficit for September had some assuming the US consumer is back in a buying mood. Alas, the much watched Michigan consumer confidence index for November quickly followed, and it is off a large 4.6 points, from 70.6 in October to 66.0 now. The import gains were largely for crude oil, and there was some gain from the “declunkering” auto sector. Even in weak markets there will periods of restocking that have to be figured into single bits of data. Before Friday was done inventory levels for crude came out that were full enough to knock its price back from recent highs.

Chinese data indicates better than the astounding growth that had been expected, and Japanese data indicated stronger than expected growth. Europe is back in the black, though at sub 1% rates for the zone as a whole. Canadian trade data for September came out the same day as the US figures, and it surprised with only half the $1.8 billion deficit that had been expected. There were somewhat higher exports to the US, but the real surprise was a very large percentage gain to Europe.
Increased trade between economies with strengthening currencies is likely to be volatile going forward as currency ratios move about. Those looking for a stronger greenback near term mostly assume that would be in conjunction with a weaker Euro. That makes sense given both economies can’t see the end of the debt tunnel yet, but the players are realigning in ways that continue to bode uncertainty and the old “rules” of the currency game have not been working so well of late.
Talk of having the Yuan rise as part of rebalancing the trade picture is finally getting some nods from Chinese officials. It will happen at some point, and probably soon in a small way if China’s economy continues its strong performance. When to expect a larger move that would make its regional trading partners (and US senators) happy is still anyone’s guess. There have been more recent comments about letting foreign companies issue Yuan denominated bonds. A small thing, but part of building the financial infrastructure necessary to move the Chinese currency from being a peg to a true market participant.
If gold’s price gains are saying anything specific it’s that a strengthening Yuan could be harder on the Dollar than anything else. The broader message is however that the currencies dance winners won’t be known till the music stops. This is creating a market for the yellow metal as a neutral asset against all fiat currencies that we expect would largely be sustained even if the currency pairs roll over and the Dollar sees a gain.
A consolidation of gold’s price on a large uptick for the greenback should still be expected, but gold holders would be as interested in the yellow metal’s value in their home currencies as in its trade against the Dollar, and that could steady its market. The Dollar has seen brief periods of strength in the past few sessions that have not led to anything like the gold selloffs expected by some. It’s also of note that gold is now quite close to record highs in several other currencies, including the Euro.
The steadiness of copper and the other base metal prices continues to impress. While we continue to view this as part of the Dollar dance, there are more signs that sellers are not worried about future markets. CODELCO, Chile’s state owned and the sector’s largest copper producer, has just indicated it plans to raise handling rates to China by 15%, or $10 per tonne. Though not a large factor, it is evidence that CODELCO is getting more comfortable with the demand picture to Asia. News out of China on the environmental issues at lead-zinc smelters have quieted, but we doubt gone away. To this could be added a number of mine supply disruptions, but as noted in the Journal none is large enough individually to be large concerns per se.
While we are still expecting consolidation in base metal prices, we increasingly wonder if that wouldn’t simply cause offers in the commercial stockpiles to begin disappearing. The same logic holds here as for the precious metals that local currency considerations will drive decisions about what price is too low to put metal into the market. If China does start incremental gains for its currency, again that may only muddy the waters. Chinese metal holders would need to start thinking in terms of whether they could pay fewer Yuan at future date for the same amount of metal, which isn’t an issue with the Yuan-$ rate essentially fixed as it is now.
Cutting to the chase, we remain concerned by the currency equations that have become such a large part of metals pricing. Though base metal stockpiles remain at manageable levels they do continue to build, and we believe that is what should govern opinion about future pricing for the time being. We doubt there will be a large uptick for base metal stories before general economic stats indicate that broader global growth will continue, and are willing to wait for that. If the contrarian few that believe a bounce should be in the offing for the greenback are right, we would expect that to weigh more heavily on base metals than on gold. That would be a buying opportunity we’d look kindly on since our concerns about pricing are short term, not long term.

Disclosure: No positions
]]> Wed, 02 Dec 2009 06:12:30 -0500 Eric Coffin Eric Coffin submits:

The announcement of a surprisingly large US trade deficit for September had some assuming the US consumer is back in a buying mood. Alas, the much watched Michigan consumer confidence index for November quickly followed, and it is off a large 4.6 points, from 70.6 in October to 66.0 now. The import gains were largely for crude oil, and there was some gain from the “declunkering” auto sector. Even in weak markets there will periods of restocking that have to be figured into single bits of data. Before Friday was done inventory levels for crude came out that were full enough to knock its price back from recent highs.

Chinese data indicates better than the astounding growth that had been expected, and Japanese data indicated stronger than expected growth. Europe is back in the black, though at sub 1% rates for the zone as a whole. Canadian trade data for September came out the same day as the US figures, and it surprised with only half the $1.8 billion deficit that had been expected. There were somewhat higher exports to the US, but the real surprise was a very large percentage gain to Europe.
Increased trade between economies with strengthening currencies is likely to be volatile going forward as currency ratios move about. Those looking for a stronger greenback near term mostly assume that would be in conjunction with a weaker Euro. That makes sense given both economies can’t see the end of the debt tunnel yet, but the players are realigning in ways that continue to bode uncertainty and the old “rules” of the currency game have not been working so well of late.
Talk of having the Yuan rise as part of rebalancing the trade picture is finally getting some nods from Chinese officials. It will happen at some point, and probably soon in a small way if China’s economy continues its strong performance. When to expect a larger move that would make its regional trading partners (and US senators) happy is still anyone’s guess. There have been more recent comments about letting foreign companies issue Yuan denominated bonds. A small thing, but part of building the financial infrastructure necessary to move the Chinese currency from being a peg to a true market participant.
If gold’s price gains are saying anything specific it’s that a strengthening Yuan could be harder on the Dollar than anything else. The broader message is however that the currencies dance winners won’t be known till the music stops. This is creating a market for the yellow metal as a neutral asset against all fiat currencies that we expect would largely be sustained even if the currency pairs roll over and the Dollar sees a gain.
A consolidation of gold’s price on a large uptick for the greenback should still be expected, but gold holders would be as interested in the yellow metal’s value in their home currencies as in its trade against the Dollar, and that could steady its market. The Dollar has seen brief periods of strength in the past few sessions that have not led to anything like the gold selloffs expected by some. It’s also of note that gold is now quite close to record highs in several other currencies, including the Euro.
The steadiness of copper and the other base metal prices continues to impress. While we continue to view this as part of the Dollar dance, there are more signs that sellers are not worried about future markets. CODELCO, Chile’s state owned and the sector’s largest copper producer, has just indicated it plans to raise handling rates to China by 15%, or $10 per tonne. Though not a large factor, it is evidence that CODELCO is getting more comfortable with the demand picture to Asia. News out of China on the environmental issues at lead-zinc smelters have quieted, but we doubt gone away. To this could be added a number of mine supply disruptions, but as noted in the Journal none is large enough individually to be large concerns per se.
While we are still expecting consolidation in base metal prices, we increasingly wonder if that wouldn’t simply cause offers in the commercial stockpiles to begin disappearing. The same logic holds here as for the precious metals that local currency considerations will drive decisions about what price is too low to put metal into the market. If China does start incremental gains for its currency, again that may only muddy the waters. Chinese metal holders would need to start thinking in terms of whether they could pay fewer Yuan at future date for the same amount of metal, which isn’t an issue with the Yuan-$ rate essentially fixed as it is now.
Cutting to the chase, we remain concerned by the currency equations that have become such a large part of metals pricing. Though base metal stockpiles remain at manageable levels they do continue to build, and we believe that is what should govern opinion about future pricing for the time being. We doubt there will be a large uptick for base metal stories before general economic stats indicate that broader global growth will continue, and are willing to wait for that. If the contrarian few that believe a bounce should be in the offing for the greenback are right, we would expect that to weigh more heavily on base metals than on gold. That would be a buying opportunity we’d look kindly on since our concerns about pricing are short term, not long term.

Disclosure: No positions

Complete Story »]]> UUP SPX GLD Eric Coffin Resource Stocks: Volume Tells the Tale http://seekingalpha.com/article/172335-resource-stocks-volume-tells-the-tale?source=feed 172335 India’s central bank taking 200 tonnes (6.4 million oz) of gold from the IMF in an off-market trade has certainly lit a fire under the yellow metal. While a trade of that nature was anticipated, India, which is about the savviest of commercial gold players, was not atop the expected buyers’ list. Given the greenback was steady and that gold’s chart went near vertical when the overnight rumor became official, it is likely that the big long position that came into the market forced some covering on the short side. Is this more than a spike?
We think India’s move could be, in part, a signal it should have a bigger chair at economic tables, which we agree with. Since Indians are the biggest gold buyers on the planet, lifting a perceived overhang from its market has the side benefit for India's central bank of protecting an existing wealth pool of its citizens. And the near US $7 billion price tag is not large against India’s $260 billion foreign reserve holdings.
However, it does have a bigger impact on gold’s market (about $115 billion annually, now) and that got noticed. Also, it will further establish the notion of a currency basket that includes gold as a global trading medium, and conversely a weaker greenback. That should continue the move of capital into gold as dollar hedge.
In saying that, we realize that it would be tough for gold to replace the oil market as a home for dollar hedge trades simply because of the oil market's much larger scale. But oil cannot continue to gain without causing major problems for the near term economy, nor can oil continue to rise if other energy components are not doing the same. Scale aside; gold makes sense as a place to lay anti-dollar bets, and especially for players worried about longer term wealth preservation. But so too do other metals.
If copper does truly have a PhD in economics (not that that title has quite the allure of a few years ago), our take has to be that the Doctor is mulling over an extended lunch. The red metal’s price continues to bounce against the $3/lb ($6600/t) level even while available stockpiles have grown. There has been a slight decline of stockpiles in the past few days, but that was after having recouped 60% of the drawn down earlier in the year.
Clearly, new metrics are at work. We and others have already pointed at Dollar roulette as one. In fact that is a big part of the whole market these days, and it’s an issue that will grow in the telling. There has also been a build up of small supply disruptions in copper, such as the shut down of most output from BHP’s Olympic Dam mine in South Australia. The mine’s capacity is less than 1% of global copper supply (but a big chunk of uranium output), but this isn’t the only mine at reduced capacity.
The psychology of relatively minor supply disruptions when new mine development is still limited may be adding some price support. The other base metals are similarly in a neural pose these days. Rumblings about a better market are most prominent around zinc, as are concerns about maintaining concentrate streams to smelters outside of China. That would be next year’s story, but it is worth noting. For the past century or so mines were dictated to by smelters, but now smelters are worried about keeping their market shares and the balance of power has been shifting.
As with most things in this changing market landscape, it is tough to make assumptions about the next six months. That simple truism is driving things right now, if being in neutral could be called “driving.” Producers’ share prices are shifting with the market, but still finding support. It may well be the balance of the year will mostly be about ensuring gains after a strong uptick, and making cash for future events.
There has been more weakness due to profits taking in some of the early exploration gainers. Conversely, former laggards have been able to pick up steam by showing project advancement. There is a general sense of rotation out of strength and into future potential, at least in our part of the playground. That is meaningful.
As broader stock market gains began to peel away, we have been struck by a consistent lift in one measure. While other North American equity markets saw share turn over slide the TSX Venture exchange has actually seen daily volumes as strong as they have ever been. This is not dollar-volume, and some of it can be accounted for by share issuances that are bloated by historic standards. It does however indicate that there are still punters out there.
While we think of the Venture exchange as a proxy of the junior resource sector, other sectors are obviously part of it. Funding for the Tech space is reviving a decade after that bubble burst, and green energy concepts are growing in number. However, on checking volume leaders most days the lists are at least nominally composed primarily of resource deals.
Bears might argue this is desperate averaging down ahead of the next major down shift in the market. It doesn’t look to us like the random buying during the bounce of a bear market rally. That type of buying typically comes in spurts, and focused on companies based on their previous market strength. Nor frankly do we think such buying is very likely after last year’s market drubbing.
This is a sustained turnover that relates to broader markets only in terms of showing patience on weak days. It is focused on companies that do have underlying assets, regardless of how well they made markets in the past. We see a concerted effort to own resource assets in juniors while they are still in the bargain bin. And we believe this is being done by folks who have been around the sector long enough to recognize that US dollar roll over and supply constraints are still near and mid term factors.
To anyone who thinks we are drinking our own bathwater we can only say, 'you’re right.' We are not suggesting that simply because “the usual suspects” are coming to the venture side of mining that prices will go up. Nor does this buying mean they all expect immediate gratification. However, there is a mood building for significant gains for the sector this coming year. Even market watchers with large concerns about the broader economy are recognizing that the resource sector has good fundamental potential. Both supply-demand against Asian growth and the shifting currencies market favour it.
We do expect the balance of the year to have a significant cash generating ethic. After the roller coaster ride we have had that kind of prudence is to be expected. Despite base metal prices holding up, that kind of thinking is evident by consolidation amongst the producers in that space. Gold producers have been doing better, and for the time being we continue to expect this to be the preferred subsector in the metals market.
There may be some frustration with explorers who seem not to be living up to their results, relative to peers, after putting in strong performances. Taking gains along the way will continue to be important, but we also expect rebalancing that will include stronger recognition for undervalued assets. That is usually a question of moving through volume, and the market shifts that take place through year end.
Barring an “event” of some magnitude, it will take an accumulation of stats indicating how well economies are doing as their government stimuli slow down to shift the market too far off its current groove. That is will be next year’s story, and we think it’s too soon to make assumptions on the outcome.
For the time being we will remain on volume watch, both in terms of metals directly and the equities that deal with them. We continue to favor speculations that can generate drilling success, while accumulating those that are still waiting for a mood shift in the market that will lead traders to recognize their already established values.
Disclosure: No positions
]]> Mon, 09 Nov 2009 18:18:50 -0500 Eric Coffin Eric Coffin submits:
India’s central bank taking 200 tonnes (6.4 million oz) of gold from the IMF in an off-market trade has certainly lit a fire under the yellow metal. While a trade of that nature was anticipated, India, which is about the savviest of commercial gold players, was not atop the expected buyers’ list. Given the greenback was steady and that gold’s chart went near vertical when the overnight rumor became official, it is likely that the big long position that came into the market forced some covering on the short side. Is this more than a spike?
We think India’s move could be, in part, a signal it should have a bigger chair at economic tables, which we agree with. Since Indians are the biggest gold buyers on the planet, lifting a perceived overhang from its market has the side benefit for India's central bank of protecting an existing wealth pool of its citizens. And the near US $7 billion price tag is not large against India’s $260 billion foreign reserve holdings.
However, it does have a bigger impact on gold’s market (about $115 billion annually, now) and that got noticed. Also, it will further establish the notion of a currency basket that includes gold as a global trading medium, and conversely a weaker greenback. That should continue the move of capital into gold as dollar hedge.
In saying that, we realize that it would be tough for gold to replace the oil market as a home for dollar hedge trades simply because of the oil market's much larger scale. But oil cannot continue to gain without causing major problems for the near term economy, nor can oil continue to rise if other energy components are not doing the same. Scale aside; gold makes sense as a place to lay anti-dollar bets, and especially for players worried about longer term wealth preservation. But so too do other metals.
If copper does truly have a PhD in economics (not that that title has quite the allure of a few years ago), our take has to be that the Doctor is mulling over an extended lunch. The red metal’s price continues to bounce against the $3/lb ($6600/t) level even while available stockpiles have grown. There has been a slight decline of stockpiles in the past few days, but that was after having recouped 60% of the drawn down earlier in the year.
Clearly, new metrics are at work. We and others have already pointed at Dollar roulette as one. In fact that is a big part of the whole market these days, and it’s an issue that will grow in the telling. There has also been a build up of small supply disruptions in copper, such as the shut down of most output from BHP’s Olympic Dam mine in South Australia. The mine’s capacity is less than 1% of global copper supply (but a big chunk of uranium output), but this isn’t the only mine at reduced capacity.
The psychology of relatively minor supply disruptions when new mine development is still limited may be adding some price support. The other base metals are similarly in a neural pose these days. Rumblings about a better market are most prominent around zinc, as are concerns about maintaining concentrate streams to smelters outside of China. That would be next year’s story, but it is worth noting. For the past century or so mines were dictated to by smelters, but now smelters are worried about keeping their market shares and the balance of power has been shifting.
As with most things in this changing market landscape, it is tough to make assumptions about the next six months. That simple truism is driving things right now, if being in neutral could be called “driving.” Producers’ share prices are shifting with the market, but still finding support. It may well be the balance of the year will mostly be about ensuring gains after a strong uptick, and making cash for future events.
There has been more weakness due to profits taking in some of the early exploration gainers. Conversely, former laggards have been able to pick up steam by showing project advancement. There is a general sense of rotation out of strength and into future potential, at least in our part of the playground. That is meaningful.
As broader stock market gains began to peel away, we have been struck by a consistent lift in one measure. While other North American equity markets saw share turn over slide the TSX Venture exchange has actually seen daily volumes as strong as they have ever been. This is not dollar-volume, and some of it can be accounted for by share issuances that are bloated by historic standards. It does however indicate that there are still punters out there.
While we think of the Venture exchange as a proxy of the junior resource sector, other sectors are obviously part of it. Funding for the Tech space is reviving a decade after that bubble burst, and green energy concepts are growing in number. However, on checking volume leaders most days the lists are at least nominally composed primarily of resource deals.
Bears might argue this is desperate averaging down ahead of the next major down shift in the market. It doesn’t look to us like the random buying during the bounce of a bear market rally. That type of buying typically comes in spurts, and focused on companies based on their previous market strength. Nor frankly do we think such buying is very likely after last year’s market drubbing.
This is a sustained turnover that relates to broader markets only in terms of showing patience on weak days. It is focused on companies that do have underlying assets, regardless of how well they made markets in the past. We see a concerted effort to own resource assets in juniors while they are still in the bargain bin. And we believe this is being done by folks who have been around the sector long enough to recognize that US dollar roll over and supply constraints are still near and mid term factors.
To anyone who thinks we are drinking our own bathwater we can only say, 'you’re right.' We are not suggesting that simply because “the usual suspects” are coming to the venture side of mining that prices will go up. Nor does this buying mean they all expect immediate gratification. However, there is a mood building for significant gains for the sector this coming year. Even market watchers with large concerns about the broader economy are recognizing that the resource sector has good fundamental potential. Both supply-demand against Asian growth and the shifting currencies market favour it.
We do expect the balance of the year to have a significant cash generating ethic. After the roller coaster ride we have had that kind of prudence is to be expected. Despite base metal prices holding up, that kind of thinking is evident by consolidation amongst the producers in that space. Gold producers have been doing better, and for the time being we continue to expect this to be the preferred subsector in the metals market.
There may be some frustration with explorers who seem not to be living up to their results, relative to peers, after putting in strong performances. Taking gains along the way will continue to be important, but we also expect rebalancing that will include stronger recognition for undervalued assets. That is usually a question of moving through volume, and the market shifts that take place through year end.
Barring an “event” of some magnitude, it will take an accumulation of stats indicating how well economies are doing as their government stimuli slow down to shift the market too far off its current groove. That is will be next year’s story, and we think it’s too soon to make assumptions on the outcome.
For the time being we will remain on volume watch, both in terms of metals directly and the equities that deal with them. We continue to favor speculations that can generate drilling success, while accumulating those that are still waiting for a mood shift in the market that will lead traders to recognize their already established values.
Disclosure: No positions

Complete Story »]]> GLD UDC UUP Eric Coffin On Economic Cycles http://seekingalpha.com/article/168501-on-economic-cycles?source=feed 168501 From the October 2009 HRA Dispatch

David Coffin & Eric Coffin, HRA Advisories

Mayan Indian elder Apolinario Chile Pixtun has restated his belief that the world is not going to end in 2012. Or more precisely, that his beliefs don’t suggest the world should end despite it being the end of a major cycle in the Mayan calendar. According to China Daily, he is even more emphatic that he’s tired of being asked about it. 2012 is the end of a 5126 year cycle (end of the 13th of 13 Baktun). It also ends a 26800 year cycle that may relate to the Earth’s wobble, which is useful for gauging the drift of seasonal climate changes. China Daily also briefly mentions predictions by 16th century (Christian calendar) French herbalist Nostradamus that is being combined with the Mayan cycles to create buzz for a spate of movies and TV specials.

]]> Fri, 23 Oct 2009 09:14:16 -0400 Eric Coffin Eric Coffin submits:

From the October 2009 HRA Dispatch

David Coffin & Eric Coffin, HRA Advisories

Mayan Indian elder Apolinario Chile Pixtun has restated his belief that the world is not going to end in 2012. Or more precisely, that his beliefs don’t suggest the world should end despite it being the end of a major cycle in the Mayan calendar. According to China Daily, he is even more emphatic that he’s tired of being asked about it. 2012 is the end of a 5126 year cycle (end of the 13th of 13 Baktun). It also ends a 26800 year cycle that may relate to the Earth’s wobble, which is useful for gauging the drift of seasonal climate changes. China Daily also briefly mentions predictions by 16th century (Christian calendar) French herbalist Nostradamus that is being combined with the Mayan cycles to create buzz for a spate of movies and TV specials.


Complete Story »]]> GLD UUP UDC UDN SPX PGB Eric Coffin Lending Reversals - East and West http://seekingalpha.com/article/157791-lending-reversals-east-and-west?source=feed 157791 The chorus singing of the need to separate commodities from broader views of market movement appears to be growing again. It’s possible to separate this into “supply constraint” and “Asia rising camps”, but in general it is recognized that both come into play. Supply constraint singers realize that the mineral commodities sector was under capitalized for a long period beginning about 1980. Asia rising tunes increasingly look back to the last decade to recognize that mineral prices were already tied to Asian growth in the 1990s. Our contention that a “decoupling” of metal prices from western markets has taken place stems from Asian growth, while our expectation of continued historically high prices is based on supply constraint. The two need to be weighed against a second post-Crunch decoupling to gauge timing.

Germany, France and Japan all recorded small but positive economic growth in Q2. Canadian housing sales in July were the highest ever recorded. While we do view these stats as part of a post-Crunch bounce partly related to government generated stimuli, the early awakeners are hardly random. Germany and Japan have high personal savings rates. France and Canada (especially the latter) have banking systems that were largely unscathed by the Debt Crunch. A large portion of the Canadian housing turn-over is first time buyers who had been scared away from the market but now feel they should take advantage of low interest rates. These are the industrialized economies that are best placed to recover from the impacts of a credit squeeze because they have cash or available credit, though Japan and Germany need to work on domestic consumption.

]]> Sun, 23 Aug 2009 11:09:30 -0400 Eric Coffin Eric Coffin submits:

The chorus singing of the need to separate commodities from broader views of market movement appears to be growing again. It’s possible to separate this into “supply constraint” and “Asia rising camps”, but in general it is recognized that both come into play. Supply constraint singers realize that the mineral commodities sector was under capitalized for a long period beginning about 1980. Asia rising tunes increasingly look back to the last decade to recognize that mineral prices were already tied to Asian growth in the 1990s. Our contention that a “decoupling” of metal prices from western markets has taken place stems from Asian growth, while our expectation of continued historically high prices is based on supply constraint. The two need to be weighed against a second post-Crunch decoupling to gauge timing.

Germany, France and Japan all recorded small but positive economic growth in Q2. Canadian housing sales in July were the highest ever recorded. While we do view these stats as part of a post-Crunch bounce partly related to government generated stimuli, the early awakeners are hardly random. Germany and Japan have high personal savings rates. France and Canada (especially the latter) have banking systems that were largely unscathed by the Debt Crunch. A large portion of the Canadian housing turn-over is first time buyers who had been scared away from the market but now feel they should take advantage of low interest rates. These are the industrialized economies that are best placed to recover from the impacts of a credit squeeze because they have cash or available credit, though Japan and Germany need to work on domestic consumption.


Complete Story »]]> SPX BKF BDD BOM GLD Eric Coffin Metals Snap-Back Rally http://seekingalpha.com/article/154288-metals-snap-back-rally?source=feed 154288 The continued enthusiasm for metals can be tied to a combination of devaluation of the Greenback and hopes that western recessions are bottoming. The deteriorating US Dollar is an element that will have to be weighed against the demand picture for the next decade. However, western demand hasn’t been fundamental to pricing metal, or oil, for over a decade. Current enthusiasm, especially in light summer trading, should be treated gingerly.
It is that hope of a broader bottoming that is causing the US$ to break below its established range. As fear leaves the market, the capital that had gone to the Dollar because of its liquidity seeks higher returns. These include commodities that are, for the moment, being treated as “early cycle participants of the global (read: western) recovery”.
In 1997 the Asian Tigers crashed as their Dollar pegs broke against a flood of cheap Chinese goods. The resource sector smacked down as metals hit new floor prices well below actual costs despite continued boom times for the western economies. We have now moved to the inverse of that 1997 market as capital moves away from the greenback and its flood of cheap (so far) debt. That has just taken over from internal fundamentals as the push on higher mineral commodity pricing.
We have been taking advantage of commodities that were oversold during the Crunch against sustainable demand in Asia, and in China most specifically. That will hold into the medium term since there is insufficient capacity in metals to create a supply bubble. However, the anti-Dollar move we are in can create overbought price spikes, and the nascent bottoming of the western downturn wouldn’t support them. We now want to be clear that spikes are two edged, and this summer rally could in end in the fall.
The copper price did consolidate back to its near-term base at US $2.14 ($4720/t) on July 8th. It then turned around and has recently been making new 2009 highs with this latest burst of enthusiasm. This is despite a steady, though not yet large, rise in LME copper stockpiles. Shanghai stockpiles have held steady, but the exchange indicates orders have fallen off with the recent price gains. We doubt much of the excess stocking in China will get sold back into the market, but it does still need to be used up.
Some idled mine capacity may come back on-line, but caution will still reign during a price spike. It is time to sort out where you want to realize some gains from our earlier quick move into the oversold copper producers after the Crunch. However, the point has been made that Asia, and China in particular, is the price maker for this market.
The post Crunch price recovery for copper will generate a selective reentry of capital into the junior space. Good copper stories with expanding deposits can begin to bear fruit as they have for us in the gold space. But, they too will consolidate on the downside of a spike, so do treat them as the speculations they are.
Gold continued to be range bound, with a push from the weakening $ countered by the pull of private stocks being sold down. The Indian market has continued to be the important source of “scrap” sales. However, with a break down of the greenback below 2008-09 support levels we expect those sellers to back off and wait for gains. For how long probably will have as much to do with other Mumbai markets as anything else.
Strong gains by several of our junior gold picks in July have validated our view that there is capital willing to take risk for higher gains in the yellow metal’s space. Lifting a couple of junior valuations by $100 million isn’t large in the broader scheme; it was in fact tougher for them to find volume when they were trading at $20 million market caps. The new found liquidity will of itself help to sustain the new price levels, but on-going results will also have add to that support.
This is not yet a broad move into the junior gold space, but more issues are at least seeing their share prices going green. Until a few more large wins are confirmed by take-over this will continue to be a stock pickers market. Some interesting new deals are beginning to show up again, and we expect to outline a few of these going forward.
There has also been a significant lift in the nickel price. Impressive gains for auto sales in China, and in Germany have offset declines elsewhere. Government subsidy accounts for a part of the gain in China, and essentially all of it in the form of a “€ for clunkers” program in Germany. The rapid run through and expansion of the 1 billion $ for clunker program in the US should help as well. However, it is work stoppages in almost all of Canada’s nickel mining regions the market is truly counting on now.
Over capacity continues to plague the nickel sector. While some further gains are possible near term it will take a less fragile growth picture to sustain nickel pricing as the Canadian output comes back up to speed.
The Trail zinc smelter is getting enough business to be brought back to full capacity, despite continued gains for zinc stockpiles on the LME. Import of zinc concentrates into China had increased this year due to an unwillingness by China’s smelters to buy some “dirty” domestic concentrates. We are not yet ready to focus on zinc, but do continue to watch for closure of near depleted deposits as a future buy signal.
Iron ore has without question become the most interesting of the bulk minerals this year. The system of annualized price setting based on negotiation between sellers and primarily Japanese users continues to look broken. It took three months after the usual March 31st price setting date for some large Chinese buyers accept a contract rate 33% below last year’s highest ever pricing for Australian ore. The national steel producers group is still arguing. This is the same cut Japanese and South Koreans had accepted, but less than the 40% cut Chinese firms had been looking for.
Recent news indicates that, the 2009 markdown not withstanding, this largest of metal markets still belongs to the sellers. According to Platts the price of Chinese spot importers of iron ore rose by over 21% in July over June, which is still a y/y 50% decline in average prices that had spiked a year ago.
Bloomberg has reported that spot pricing to China is now above $100/tonne, a 7% increase over the July average, which means the spot price is sitting about 20% above the annual price negotiated with the Japanese and Korean mills. The near term gains are attributed to poor spot availability in Australia, and shipping bottlenecks out of India. Cheaper prices earlier in the year also led to shutdowns in China itself which has a large number of small inefficient miners producing substandard product.
Teck Corp (TCK) has also indicated that its metallurgical coal operations have moved back to full capacity due to higher Chinese demand than had been expected at the start of the year. In the rest of the world steel makers are seeing a gradual up-tick in orders and still limited profitability. There is however an up-tick in both Japanese and German industrial output that may signal the worst is in fact over for at least these two cashed up members of the industrialized world.
In gauging future supply of iron ore it is important to note that infrastructure is at least as important as holding a deposit. Rail and port facilities must be in place to sell iron ore. That is why our review this month is a company moving to production in an iron ore region that was left behind by the shift of steel production to Asia 30 years ago. They have the pieces in place to get started. We expect to have more to say on this region over the next while and perhaps on other iron ore developers when they look ready.

Disclosure: No positions
]]> Thu, 06 Aug 2009 09:46:38 -0400 Eric Coffin Eric Coffin submits:
The continued enthusiasm for metals can be tied to a combination of devaluation of the Greenback and hopes that western recessions are bottoming. The deteriorating US Dollar is an element that will have to be weighed against the demand picture for the next decade. However, western demand hasn’t been fundamental to pricing metal, or oil, for over a decade. Current enthusiasm, especially in light summer trading, should be treated gingerly.
It is that hope of a broader bottoming that is causing the US$ to break below its established range. As fear leaves the market, the capital that had gone to the Dollar because of its liquidity seeks higher returns. These include commodities that are, for the moment, being treated as “early cycle participants of the global (read: western) recovery”.
In 1997 the Asian Tigers crashed as their Dollar pegs broke against a flood of cheap Chinese goods. The resource sector smacked down as metals hit new floor prices well below actual costs despite continued boom times for the western economies. We have now moved to the inverse of that 1997 market as capital moves away from the greenback and its flood of cheap (so far) debt. That has just taken over from internal fundamentals as the push on higher mineral commodity pricing.
We have been taking advantage of commodities that were oversold during the Crunch against sustainable demand in Asia, and in China most specifically. That will hold into the medium term since there is insufficient capacity in metals to create a supply bubble. However, the anti-Dollar move we are in can create overbought price spikes, and the nascent bottoming of the western downturn wouldn’t support them. We now want to be clear that spikes are two edged, and this summer rally could in end in the fall.
The copper price did consolidate back to its near-term base at US $2.14 ($4720/t) on July 8th. It then turned around and has recently been making new 2009 highs with this latest burst of enthusiasm. This is despite a steady, though not yet large, rise in LME copper stockpiles. Shanghai stockpiles have held steady, but the exchange indicates orders have fallen off with the recent price gains. We doubt much of the excess stocking in China will get sold back into the market, but it does still need to be used up.
Some idled mine capacity may come back on-line, but caution will still reign during a price spike. It is time to sort out where you want to realize some gains from our earlier quick move into the oversold copper producers after the Crunch. However, the point has been made that Asia, and China in particular, is the price maker for this market.
The post Crunch price recovery for copper will generate a selective reentry of capital into the junior space. Good copper stories with expanding deposits can begin to bear fruit as they have for us in the gold space. But, they too will consolidate on the downside of a spike, so do treat them as the speculations they are.
Gold continued to be range bound, with a push from the weakening $ countered by the pull of private stocks being sold down. The Indian market has continued to be the important source of “scrap” sales. However, with a break down of the greenback below 2008-09 support levels we expect those sellers to back off and wait for gains. For how long probably will have as much to do with other Mumbai markets as anything else.
Strong gains by several of our junior gold picks in July have validated our view that there is capital willing to take risk for higher gains in the yellow metal’s space. Lifting a couple of junior valuations by $100 million isn’t large in the broader scheme; it was in fact tougher for them to find volume when they were trading at $20 million market caps. The new found liquidity will of itself help to sustain the new price levels, but on-going results will also have add to that support.
This is not yet a broad move into the junior gold space, but more issues are at least seeing their share prices going green. Until a few more large wins are confirmed by take-over this will continue to be a stock pickers market. Some interesting new deals are beginning to show up again, and we expect to outline a few of these going forward.
There has also been a significant lift in the nickel price. Impressive gains for auto sales in China, and in Germany have offset declines elsewhere. Government subsidy accounts for a part of the gain in China, and essentially all of it in the form of a “€ for clunkers” program in Germany. The rapid run through and expansion of the 1 billion $ for clunker program in the US should help as well. However, it is work stoppages in almost all of Canada’s nickel mining regions the market is truly counting on now.
Over capacity continues to plague the nickel sector. While some further gains are possible near term it will take a less fragile growth picture to sustain nickel pricing as the Canadian output comes back up to speed.
The Trail zinc smelter is getting enough business to be brought back to full capacity, despite continued gains for zinc stockpiles on the LME. Import of zinc concentrates into China had increased this year due to an unwillingness by China’s smelters to buy some “dirty” domestic concentrates. We are not yet ready to focus on zinc, but do continue to watch for closure of near depleted deposits as a future buy signal.
Iron ore has without question become the most interesting of the bulk minerals this year. The system of annualized price setting based on negotiation between sellers and primarily Japanese users continues to look broken. It took three months after the usual March 31st price setting date for some large Chinese buyers accept a contract rate 33% below last year’s highest ever pricing for Australian ore. The national steel producers group is still arguing. This is the same cut Japanese and South Koreans had accepted, but less than the 40% cut Chinese firms had been looking for.
Recent news indicates that, the 2009 markdown not withstanding, this largest of metal markets still belongs to the sellers. According to Platts the price of Chinese spot importers of iron ore rose by over 21% in July over June, which is still a y/y 50% decline in average prices that had spiked a year ago.
Bloomberg has reported that spot pricing to China is now above $100/tonne, a 7% increase over the July average, which means the spot price is sitting about 20% above the annual price negotiated with the Japanese and Korean mills. The near term gains are attributed to poor spot availability in Australia, and shipping bottlenecks out of India. Cheaper prices earlier in the year also led to shutdowns in China itself which has a large number of small inefficient miners producing substandard product.
Teck Corp (TCK) has also indicated that its metallurgical coal operations have moved back to full capacity due to higher Chinese demand than had been expected at the start of the year. In the rest of the world steel makers are seeing a gradual up-tick in orders and still limited profitability. There is however an up-tick in both Japanese and German industrial output that may signal the worst is in fact over for at least these two cashed up members of the industrialized world.
In gauging future supply of iron ore it is important to note that infrastructure is at least as important as holding a deposit. Rail and port facilities must be in place to sell iron ore. That is why our review this month is a company moving to production in an iron ore region that was left behind by the shift of steel production to Asia 30 years ago. They have the pieces in place to get started. We expect to have more to say on this region over the next while and perhaps on other iron ore developers when they look ready.

Disclosure: No positions

Complete Story »]]> GLD FCX TCK.B XSRAY.PK TCK JJN JJC IAU Eric Coffin Markets Get More Decisive http://seekingalpha.com/article/150390-markets-get-more-decisive?source=feed 150390 Decision Time…

From the July 19, 2009 HRA Dispatch
The shift towards a more positive mood became infectious last week, despite a continuation of at best mixed results from either side of the Atlantic. In New York the brokers were showing good Q2 results, but the bankers are still flushing cash away on an operating basis. Being able to gain on the decline of assets is aiding the traders, while the lenders continue to deal with the losses this creates. The same holds for the European finance side, though the German finance minister put out an opinion that his recession appeared to be bottoming. If the numbers prove correct the German economy will decline by 6% this year. That is good news given much of this would be in the 3.8% decline in Q1 alone. Bottoming is different that improving, but this is another underscoring of the simple reality that those economies which have cash reserves can look for ways to move on. Mostly they will look East (Japan being the exception, geographically speaking).
There has also been an improvement of sorts in the US housing sector, with housing starts gaining for the second month in a row. That permitting speaks to an improved mood, but also possibly other concerns. In Canada, which didn’t get into full bubble mode with its housing, there has been a surge in house buying that has bidders paying above asking prices. This is in part to lock in mortgage rates while they remain low. Any interest rate gains near term will have as much to do with risk perception as anything else, so we are cautious about this particular mood shift.
The quick rebound in metal prices this mood shift has created is decidedly impressive. Copper actually touched a Post-Crunch high despite inventories being steady, and nickel has gained in part because of anticipated shut down of the Sudbury complex. It is true that has been several disruptions to copper supply. There will be reduced output at Teck’s Highland Valley operations in British Columbia due to geotechnical concerns, and Freeport McMoran (FCX) has just told workers who have confronted by local protesters at its Grasberg operation to stay home. A stoppage at Grasberg in particular would be worrying to copper buyers, but it is still too early to assume this will continue.
Some added stocking may be in order given the potential of these disruptions to supply, but that doesn’t make us comfortable with gains this is generating for some metal producers. The gains can continue while the mood remains buoyant, but actual cash flow will have to underpin share prices and it is Q2 reporting season. This is not an across the board concern, and we still like those companies that continue to play catch up (see the Capstone update), but we reiterate our caution about wanting to see some market consolidation.
That said, we are in a better mood about the speculative end of the sector. A number of our gold specs have had very good months, in keeping with results they have put out. We think that should continue through the summer, for those with the right goods. We are also getting more interested in the base metal specs despite the above stated concerns. The speculative end of the sector has its own rhythms, and after a general trouncing there will be lot of people looking at otherwise good companies trading well below perceived values. There is a slow shift towards some of these companies now. As with the gold juniors, it will be selective and for the time being focused on companies that have the cash needed to expand on previous good results. We are not saying a summer rally in for base metal explores is underway, but it is time to be sorting out who you like. If the mood continues to improve, some of these will jump before much longer.
Disclosure: No positions
]]> Wed, 22 Jul 2009 06:48:12 -0400 Eric Coffin Eric Coffin submits:

Decision Time…

From the July 19, 2009 HRA Dispatch
The shift towards a more positive mood became infectious last week, despite a continuation of at best mixed results from either side of the Atlantic. In New York the brokers were showing good Q2 results, but the bankers are still flushing cash away on an operating basis. Being able to gain on the decline of assets is aiding the traders, while the lenders continue to deal with the losses this creates. The same holds for the European finance side, though the German finance minister put out an opinion that his recession appeared to be bottoming. If the numbers prove correct the German economy will decline by 6% this year. That is good news given much of this would be in the 3.8% decline in Q1 alone. Bottoming is different that improving, but this is another underscoring of the simple reality that those economies which have cash reserves can look for ways to move on. Mostly they will look East (Japan being the exception, geographically speaking).
There has also been an improvement of sorts in the US housing sector, with housing starts gaining for the second month in a row. That permitting speaks to an improved mood, but also possibly other concerns. In Canada, which didn’t get into full bubble mode with its housing, there has been a surge in house buying that has bidders paying above asking prices. This is in part to lock in mortgage rates while they remain low. Any interest rate gains near term will have as much to do with risk perception as anything else, so we are cautious about this particular mood shift.
The quick rebound in metal prices this mood shift has created is decidedly impressive. Copper actually touched a Post-Crunch high despite inventories being steady, and nickel has gained in part because of anticipated shut down of the Sudbury complex. It is true that has been several disruptions to copper supply. There will be reduced output at Teck’s Highland Valley operations in British Columbia due to geotechnical concerns, and Freeport McMoran (FCX) has just told workers who have confronted by local protesters at its Grasberg operation to stay home. A stoppage at Grasberg in particular would be worrying to copper buyers, but it is still too early to assume this will continue.
Some added stocking may be in order given the potential of these disruptions to supply, but that doesn’t make us comfortable with gains this is generating for some metal producers. The gains can continue while the mood remains buoyant, but actual cash flow will have to underpin share prices and it is Q2 reporting season. This is not an across the board concern, and we still like those companies that continue to play catch up (see the Capstone update), but we reiterate our caution about wanting to see some market consolidation.
That said, we are in a better mood about the speculative end of the sector. A number of our gold specs have had very good months, in keeping with results they have put out. We think that should continue through the summer, for those with the right goods. We are also getting more interested in the base metal specs despite the above stated concerns. The speculative end of the sector has its own rhythms, and after a general trouncing there will be lot of people looking at otherwise good companies trading well below perceived values. There is a slow shift towards some of these companies now. As with the gold juniors, it will be selective and for the time being focused on companies that have the cash needed to expand on previous good results. We are not saying a summer rally in for base metal explores is underway, but it is time to be sorting out who you like. If the mood continues to improve, some of these will jump before much longer.
Disclosure: No positions

Complete Story »]]> GLD BDD BDG BOS SPY JJC JJN Eric Coffin Markets Remain Indecisive Through June http://seekingalpha.com/article/145272-markets-remain-indecisive-through-june?source=feed 145272 As we move through June, markets look less and less decisive about the medium term trend. Large cap indices have flattened out and look like they are slowly rolling over. All the commentary about how large the bounce has been off the March lows belies the fact that most of the bigger bourses really haven’t gone anywhere since early May. The truly impressive aspect of this to us has been the down shift in volume. It has been falling almost constantly for several months, with average daily volume off by almost a third on the US S& P and over half on the Dow over the past three months.

Shanghai six month chart

]]> Thu, 25 Jun 2009 05:47:34 -0400 Eric Coffin Eric Coffin submits:

As we move through June, markets look less and less decisive about the medium term trend. Large cap indices have flattened out and look like they are slowly rolling over. All the commentary about how large the bounce has been off the March lows belies the fact that most of the bigger bourses really haven’t gone anywhere since early May. The truly impressive aspect of this to us has been the down shift in volume. It has been falling almost constantly for several months, with average daily volume off by almost a third on the US S& P and over half on the Dow over the past three months.

Shanghai six month chart


Complete Story »]]> SPX GLD BDG BOS Eric Coffin Who's Got the Goods? Shippers Do http://seekingalpha.com/article/141714-who-s-got-the-goods-shippers-do?source=feed 141714 As credit and markets collapsed during the past year, one of the more common measures cited as a gauge of the disaster was the Baltic Dry Index. The BDI fell off a cliff and dropped an incredible 95% during Q3 and Q4 of last year in the worst performance by far it has ever put in.

]]> Sun, 07 Jun 2009 04:02:22 -0400 David Coffin Eric Coffin submits:

As credit and markets collapsed during the past year, one of the more common measures cited as a gauge of the disaster was the Baltic Dry Index. The BDI fell off a cliff and dropped an incredible 95% during Q3 and Q4 of last year in the worst performance by far it has ever put in.


Complete Story »]]> SPY DIA Eric Coffin David Coffin World Economies Try to Move Forward with New Engines of Growth http://seekingalpha.com/article/140022-world-economies-try-to-move-forward-with-new-engines-of-growth?source=feed 140022 The greatest economic realignment since Genghis Khan took over Eurasia’s trade routes is continuing apace. The west remains mired in an assets contraction of its own making, and the east is refocused on channeling its growth engines into domestic consumption. The resource sector, which is our focus and which has been governed by those growth engines for a decade and half, is indicating at least the expectation of continuing gains in the east. That does not mean we ignore what is going on the developed west, plus Japan.

Most of the planned bad news on the US banking system is now on the table or at least anticipated, in some form. The stress test requirements for US banks at $75 billion of new capital required are workable, though heavily dilutive. There are legitimate doubts that this will actually be sufficient given the depth of the hole these banks have dug. And, there is still much to be done on making various derivatives markets more transparent so that can be properly figured into the mess. More shoes may drop on western banking, and particularly in Europe that has been less willing to write down its losses. At best a long period of capital accumulation is still ahead in order to deal with the over leverage that caused the problem. However, the LIBOR rate has shrunk enough to indicate commercial banks feel they are sorting each other out, and the TED spread between US T-bill and Eurodollar rates has slipped back below 50 basis points that is the top end of “normal” risk. So while some banks are still of necessity scooping up capital to their own accounts, it’s clear others believe they can gauge how to risk the capital that they do have for lending, and that they are finding non-government homes for capital that they are again comfortable with.

]]> Thu, 28 May 2009 08:47:43 -0400 Eric Coffin Eric Coffin submits:

The greatest economic realignment since Genghis Khan took over Eurasia’s trade routes is continuing apace. The west remains mired in an assets contraction of its own making, and the east is refocused on channeling its growth engines into domestic consumption. The resource sector, which is our focus and which has been governed by those growth engines for a decade and half, is indicating at least the expectation of continuing gains in the east. That does not mean we ignore what is going on the developed west, plus Japan.

Most of the planned bad news on the US banking system is now on the table or at least anticipated, in some form. The stress test requirements for US banks at $75 billion of new capital required are workable, though heavily dilutive. There are legitimate doubts that this will actually be sufficient given the depth of the hole these banks have dug. And, there is still much to be done on making various derivatives markets more transparent so that can be properly figured into the mess. More shoes may drop on western banking, and particularly in Europe that has been less willing to write down its losses. At best a long period of capital accumulation is still ahead in order to deal with the over leverage that caused the problem. However, the LIBOR rate has shrunk enough to indicate commercial banks feel they are sorting each other out, and the TED spread between US T-bill and Eurodollar rates has slipped back below 50 basis points that is the top end of “normal” risk. So while some banks are still of necessity scooping up capital to their own accounts, it’s clear others believe they can gauge how to risk the capital that they do have for lending, and that they are finding non-government homes for capital that they are again comfortable with.


Complete Story »]]> GOLD CHINA Eric Coffin Base Metals and Global Changes http://seekingalpha.com/article/138356-base-metals-and-global-changes?source=feed 138356 We shared our concerns about the pace of copper’s gains between sending the last Dispatch and Journal. Since the Journal went out copper moved to just shy of US $ 2.20 per pound ($4,850/t) before starting its current consolidation phase. This is the same price area at which it was seeing support attempts on the way down in mid-October. The LME’s forward price curve has flattened, but continued warehouse inventory reductions suggest further support at this level is possible.

China

]]> Tue, 19 May 2009 04:58:27 -0400 Eric Coffin Eric Coffin submits:

We shared our concerns about the pace of copper’s gains between sending the last Dispatch and Journal. Since the Journal went out copper moved to just shy of US $ 2.20 per pound ($4,850/t) before starting its current consolidation phase. This is the same price area at which it was seeing support attempts on the way down in mid-October. The LME’s forward price curve has flattened, but continued warehouse inventory reductions suggest further support at this level is possible.

China


Complete Story »]]> BHP Eric Coffin Be the Bid, Ben (Please) http://seekingalpha.com/article/137820-be-the-bid-ben-please?source=feed 137820 The previous section (to be posted seperately) dealt with some of the reasons the market is stronger. Now we move to some of the danger zones that still need to be navigated.
There was a great deal of hand wringing in the market over the stress tests, thanks to multiple leaks and trial balloons on the subject. While there were a couple of individual nasty surprises, the overall scale and order of banks from best to worst wasn't much of a shock. That's as it should be; analysts have been stirring these entrails for months. Traders don't like the dilution banks suffer to get more capital, but that was bad news everyone knew was coming.
It's clear that unemployment will not look “good” for quite a while. Employment is a lagging indicator. Markets turn well before unemployment peaks, but it still has an impact. Employmen... have to get much, much better before aggregate income for Americans is reducing debt loads. The US economy won’t see anything like potential growth before that happens. As much as we want to be cheery about it, its clear that the American consumer cannot affort to pull the economic train any longer. Shoppers aren't dissapearing, but it will be a long, long time before that sort of spending is a giving US GDP a major lift the way it did in the last cycle.
Speaking of debt, we note that some credit market indicators we watch have seen big improvements this month. The TED (treasury-Eurodollar) spread is down to 74 bps, a level not seen since last summer and LIBOR is back below 1% and sitting near all time lows.
One rate that doesn’t look so good is the TNX or ten year note yield shown in the chart below. 3% was thought to be Bernanke’s “line in the sand” which prompted his quantitative easing announcement in mid March. That announcement generate the drop to 24.64 in mid March but that respite was short lived. The rate is now at 3.10% after reaching a six month high of 3.38%, and it will be tough to hold it there with so much new treasury paper being sold.
click to enlarge
10 Year Treasury Note Yield - 6 Month Chart
After the last Fed meeting, Bernanke said he did not expect to add to debt purchases. We&rsq... not buying that thanks to the scary message of this TNX chart. To our minds, Bernanke on the bid is not about growing the money supply so much as its about holding treasury rates down. Ben has to be the bid, or US rates could easily run far higher as new treasury debt swamps the market.
The US absolutely cannot afford skyrocketing interest rates for the next couple of years. We expect a lot more money supply creation. The latest Treasury estimates point to the need for $3 trillion in issuance this year. Only a fraction of that has been done and the "bid to cover" ratio has been dropping, while its still healthy. We realize that there are many who assume that the Fed will simply mop up whatever excess liquidity it generates when things start looking better. While the Fed may ultimately be able to do that, its not realistic to think the massive transactions being undertaken now can be reversed the way small overnight refi transactions were in the past. Bernanke will not be able to close out these trades until the US economy is much stronger. The market will not be able to absorb it without interest rates rocketing higher.
The combination of expected new money supply and moves to riskier assets is impacting the Dollar, as shown in the next chart. The dollar index has broken through the trend line it held every since the dollar bottomed last July. Its now sitting at the level it fell to when Bernanke made the quantitative easing announcement in March.
One Year US Dollar Index Chart
Looming supply and generally better numbers in other economies could and should push the USD index down to at least the level it fell to in December and an ultimate low below last July's low is a real possibility. Most currency traders are chartists after all; violating the trend generated more selling and breaking support levels will generate more. There is no great mystery here. The US has to expand its money supply and its debt as it tries to navigate this disaster.
We've said since the start of this debacle that we do not think the US will lead the world out of this one. Increasingly, we believe the US will use the time honoured method of debt reduction - inflating as much of it away as possible before starting to pay it off. That sort of value destruction for the US currency means further gains for both base and precious metals and other commodities. That should generate some higher highs in the resource space, at least in May.
Where this all ends ultimately is a tougher call. We are very comfortable about longer term commodity prices on a supply/demand basis. Charts will not tell anyone where prices for most commodites will base. They will and have based at levels that generate supply destruction, which means at or above sector cash operating costs. Miners are not willing to produce at a loss for extended periods. The current downturn has included the most rapid closures of production capacity we've ever seen. Metal prices will move to levels that will allow the mining sector to generate adequate supply at a profit longer term. The price levels required for most metals to meet that basic condition is much higher than most people realize. The developing world is the marginal demand generator for most commodities. That is the reason most commodity prices have fared better than expected by others and should do even better longer term. Most of these areas are still growing, as bad as things are and we expect demand from these areas will overwhelm demand destruction in the G8 as we move forward and the world economy heals itself. There will simply not be enough metals supply unless prices justify more mine startups.
Part of what makes the longer term call tricky is that commodities may well be prices in some other dominant currency or currency basket so changes in the value of the USD will become less meaningful. That is an issue for another day however. We don't see that happening quickly enough to be a basis for valuing commodity explorers and producers&nbs... now. We do think its coming however.
Disclosure: No positions
]]> Fri, 15 May 2009 07:45:43 -0400 Eric Coffin Eric Coffin submits:
The previous section (to be posted seperately) dealt with some of the reasons the market is stronger. Now we move to some of the danger zones that still need to be navigated.
There was a great deal of hand wringing in the market over the stress tests, thanks to multiple leaks and trial balloons on the subject. While there were a couple of individual nasty surprises, the overall scale and order of banks from best to worst wasn't much of a shock. That's as it should be; analysts have been stirring these entrails for months. Traders don't like the dilution banks suffer to get more capital, but that was bad news everyone knew was coming.
It's clear that unemployment will not look “good” for quite a while. Employment is a lagging indicator. Markets turn well before unemployment peaks, but it still has an impact. Employmen... have to get much, much better before aggregate income for Americans is reducing debt loads. The US economy won’t see anything like potential growth before that happens. As much as we want to be cheery about it, its clear that the American consumer cannot affort to pull the economic train any longer. Shoppers aren't dissapearing, but it will be a long, long time before that sort of spending is a giving US GDP a major lift the way it did in the last cycle.
Speaking of debt, we note that some credit market indicators we watch have seen big improvements this month. The TED (treasury-Eurodollar) spread is down to 74 bps, a level not seen since last summer and LIBOR is back below 1% and sitting near all time lows.
One rate that doesn’t look so good is the TNX or ten year note yield shown in the chart below. 3% was thought to be Bernanke’s “line in the sand” which prompted his quantitative easing announcement in mid March. That announcement generate the drop to 24.64 in mid March but that respite was short lived. The rate is now at 3.10% after reaching a six month high of 3.38%, and it will be tough to hold it there with so much new treasury paper being sold.
click to enlarge
10 Year Treasury Note Yield - 6 Month Chart
After the last Fed meeting, Bernanke said he did not expect to add to debt purchases. We&rsq... not buying that thanks to the scary message of this TNX chart. To our minds, Bernanke on the bid is not about growing the money supply so much as its about holding treasury rates down. Ben has to be the bid, or US rates could easily run far higher as new treasury debt swamps the market.
The US absolutely cannot afford skyrocketing interest rates for the next couple of years. We expect a lot more money supply creation. The latest Treasury estimates point to the need for $3 trillion in issuance this year. Only a fraction of that has been done and the "bid to cover" ratio has been dropping, while its still healthy. We realize that there are many who assume that the Fed will simply mop up whatever excess liquidity it generates when things start looking better. While the Fed may ultimately be able to do that, its not realistic to think the massive transactions being undertaken now can be reversed the way small overnight refi transactions were in the past. Bernanke will not be able to close out these trades until the US economy is much stronger. The market will not be able to absorb it without interest rates rocketing higher.
The combination of expected new money supply and moves to riskier assets is impacting the Dollar, as shown in the next chart. The dollar index has broken through the trend line it held every since the dollar bottomed last July. Its now sitting at the level it fell to when Bernanke made the quantitative easing announcement in March.
One Year US Dollar Index Chart
Looming supply and generally better numbers in other economies could and should push the USD index down to at least the level it fell to in December and an ultimate low below last July's low is a real possibility. Most currency traders are chartists after all; violating the trend generated more selling and breaking support levels will generate more. There is no great mystery here. The US has to expand its money supply and its debt as it tries to navigate this disaster.
We've said since the start of this debacle that we do not think the US will lead the world out of this one. Increasingly, we believe the US will use the time honoured method of debt reduction - inflating as much of it away as possible before starting to pay it off. That sort of value destruction for the US currency means further gains for both base and precious metals and other commodities. That should generate some higher highs in the resource space, at least in May.
Where this all ends ultimately is a tougher call. We are very comfortable about longer term commodity prices on a supply/demand basis. Charts will not tell anyone where prices for most commodites will base. They will and have based at levels that generate supply destruction, which means at or above sector cash operating costs. Miners are not willing to produce at a loss for extended periods. The current downturn has included the most rapid closures of production capacity we've ever seen. Metal prices will move to levels that will allow the mining sector to generate adequate supply at a profit longer term. The price levels required for most metals to meet that basic condition is much higher than most people realize. The developing world is the marginal demand generator for most commodities. That is the reason most commodity prices have fared better than expected by others and should do even better longer term. Most of these areas are still growing, as bad as things are and we expect demand from these areas will overwhelm demand destruction in the G8 as we move forward and the world economy heals itself. There will simply not be enough metals supply unless prices justify more mine startups.
Part of what makes the longer term call tricky is that commodities may well be prices in some other dominant currency or currency basket so changes in the value of the USD will become less meaningful. That is an issue for another day however. We don't see that happening quickly enough to be a basis for valuing commodity explorers and producers&nbs... now. We do think its coming however.
Disclosure: No positions

Complete Story »]]> UDN GLD SLV DDP DPU DYY IEF UUP Eric Coffin Markets Have Hit a Bottom, But Is It THE Bottom? http://seekingalpha.com/article/127737-markets-have-hit-a-bottom-but-is-it-the-bottom?source=feed 127737 The spring in the financial sector’s step last week has some wondering if bottoms are finally forming in for the equities market. This is based on an assumption that weak banks couldn’t get much cheaper and that, to Wall Street’s way of thinking, a “real” bull rally has to be led by financials. Certainly it's true there is much less $ (or £, or €) value that can be chopped off them than has already been. Early year profits indicated by some of the larger and weaker US banks, and comment by US Fed Chairman Bernanke that the recession could be over by year’s end if the banking sector stabilizes, also helped the cause.

Of course this enthusiasm does ignore that going from anywhere to 0 is a 100% loss so financials are not exactly risk free. Concern about whether some banks need to be nationalized in order to induce some true stability is not yet off the table. The detail of the early year profitability is yet to be laid out, and it came with cautions that Q1 still has a month to go. Banks’ operating profits can build through a quarter only to be lost on booking off capital requirements and write downs. Wall Street views too much that looks bad as a one time event that shouldn’t be included in “real” earnings. Losses are losses where we come from.

]]> Wed, 25 Mar 2009 06:10:57 -0400 David Coffin Eric Coffin submits:

The spring in the financial sector’s step last week has some wondering if bottoms are finally forming in for the equities market. This is based on an assumption that weak banks couldn’t get much cheaper and that, to Wall Street’s way of thinking, a “real” bull rally has to be led by financials. Certainly it's true there is much less $ (or £, or €) value that can be chopped off them than has already been. Early year profits indicated by some of the larger and weaker US banks, and comment by US Fed Chairman Bernanke that the recession could be over by year’s end if the banking sector stabilizes, also helped the cause.

Of course this enthusiasm does ignore that going from anywhere to 0 is a 100% loss so financials are not exactly risk free. Concern about whether some banks need to be nationalized in order to induce some true stability is not yet off the table. The detail of the early year profitability is yet to be laid out, and it came with cautions that Q1 still has a month to go. Banks’ operating profits can build through a quarter only to be lost on booking off capital requirements and write downs. Wall Street views too much that looks bad as a one time event that shouldn’t be included in “real” earnings. Losses are losses where we come from.


Complete Story »]]> SPY DIA Eric Coffin David Coffin Old Fashioned Leverage: China Takes Out Its Wallet http://seekingalpha.com/article/123115-old-fashioned-leverage-china-takes-out-its-wallet?source=feed 123115 While western banks continue to undergo a period of deleveraging and retrenchment, Chinese firms are making use of the oldest form of leverage – available cash in a down market. That has come to the aid of Rio Tinto (RTP) which went into debt to purchase Alcan (Aluminum Company of Canada) in 2007. Chinalco (Aluminum Company of China) has agreed to take various minority stakes in aluminum, copper and iron producing Rio subsidiaries for US $12.3 billion, which is a reasonable sum for interests that earned $2.2 billion in 2008.

Added to this are $7.2 billion of convertible bond purchases, which at significantly above market strike prices would bring Chinalco’s stake in Rio Tinto Group to 18%. The Rio Tinto share price was held aloft by a hostile bid from BHP-Billiton during the strongest part of the mining finance market. Furthering its association with Chinalco makes the obvious point that company management would rather be aligned with its growth market, rather than against it as the BHP bid would have done.

]]> Fri, 27 Feb 2009 04:18:49 -0500 Eric Coffin Eric Coffin submits:

While western banks continue to undergo a period of deleveraging and retrenchment, Chinese firms are making use of the oldest form of leverage – available cash in a down market. That has come to the aid of Rio Tinto (RTP) which went into debt to purchase Alcan (Aluminum Company of Canada) in 2007. Chinalco (Aluminum Company of China) has agreed to take various minority stakes in aluminum, copper and iron producing Rio subsidiaries for US $12.3 billion, which is a reasonable sum for interests that earned $2.2 billion in 2008.

Added to this are $7.2 billion of convertible bond purchases, which at significantly above market strike prices would bring Chinalco’s stake in Rio Tinto Group to 18%. The Rio Tinto share price was held aloft by a hostile bid from BHP-Billiton during the strongest part of the mining finance market. Furthering its association with Chinalco makes the obvious point that company management would rather be aligned with its growth market, rather than against it as the BHP bid would have done.


Complete Story »]]> RTP BHP GLD SLV Eric Coffin Gold: How the Market Has Changed http://seekingalpha.com/article/120479-gold-how-the-market-has-changed?source=feed 120479 David Coffin co-wrote this article.

The gold market is spreading both joy and fear lately. Those who have followed it for some time are more than pleased to see it working its way convincingly above the September Dollar price highs and out of a down trending channel that it has been bouncing around in since making all time highs last March. Both of those marks were cleared easily Thursday and trading is stable in overseas markets, itself a good sign as gold is notorious for giving back gains from large price spikes.

]]> Fri, 13 Feb 2009 07:20:27 -0500 Eric Coffin Eric Coffin submits:

David Coffin co-wrote this article.

The gold market is spreading both joy and fear lately. Those who have followed it for some time are more than pleased to see it working its way convincingly above the September Dollar price highs and out of a down trending channel that it has been bouncing around in since making all time highs last March. Both of those marks were cleared easily Thursday and trading is stable in overseas markets, itself a good sign as gold is notorious for giving back gains from large price spikes.


Complete Story »]]> GLD UDN UUP Eric Coffin Bernanke's Quant Fund http://seekingalpha.com/article/111416-bernanke-s-quant-fund?source=feed 111416 David Coffin co-wrote this article.

So, it comes to this. The Fed announced the most anticipated rate cut in history; though some didn’t expect 75-100 bps based on the ecstasy on Wall Street after the announcement. This move brings the Fed to the end of Stage One in its battle to save the world from the aftereffects of the credit bubble. The Fed can’t cut rates any further and, based on where short term Treasuries have been trading lately, this move just made official what the market had already priced in. A big upward move in the main US equity indices notwithstanding, this was hardly a shocker.

]]> Thu, 18 Dec 2008 08:36:40 -0500 Eric Coffin Eric Coffin submits:

David Coffin co-wrote this article.

So, it comes to this. The Fed announced the most anticipated rate cut in history; though some didn’t expect 75-100 bps based on the ecstasy on Wall Street after the announcement. This move brings the Fed to the end of Stage One in its battle to save the world from the aftereffects of the credit bubble. The Fed can’t cut rates any further and, based on where short term Treasuries have been trading lately, this move just made official what the market had already priced in. A big upward move in the main US equity indices notwithstanding, this was hardly a shocker.


Complete Story »]]> UUP UDN GLD SLV FXE FXY Eric Coffin Investors React to the Markets Like Deer in Headlights http://seekingalpha.com/article/107292-investors-react-to-the-markets-like-deer-in-headlights?source=feed 107292 If you think you have just been through a month like no other in the market, you’re right. One thing separating this market from any in our memories is the level of absolute panic and despair. You can usually count on some of the popular financial media to be bullish in the face of contrary evidence. Not this time. We’ve been amazed by the total negativity from every corner.

While we believe in giving the straight goods, there is a point at which 'yelling “fire!” in the theatre' becomes meaningless and counterproductive.  Everyone knows the markets are crappy; repeating the obvious doesn’t impart any useful information. It also generated a level of panic that has kept people from making any sort of financial decisions that could be delayed. This applies to companies as well as individuals.

]]> Fri, 21 Nov 2008 06:02:30 -0500 Eric Coffin Eric Coffin submits:

If you think you have just been through a month like no other in the market, you’re right. One thing separating this market from any in our memories is the level of absolute panic and despair. You can usually count on some of the popular financial media to be bullish in the face of contrary evidence. Not this time. We’ve been amazed by the total negativity from every corner.

While we believe in giving the straight goods, there is a point at which 'yelling “fire!” in the theatre' becomes meaningless and counterproductive.  Everyone knows the markets are crappy; repeating the obvious doesn’t impart any useful information. It also generated a level of panic that has kept people from making any sort of financial decisions that could be delayed. This applies to companies as well as individuals.


Complete Story »]]> SPY DIA QQQQ Eric Coffin Supply Destruction for Base Metals http://seekingalpha.com/article/104635-supply-destruction-for-base-metals?source=feed 104635 Editor's note: The following article was sent to subscribers in September. The intent was to remind readers what to look for in the various metals sectors in terms of supply going forward. Balance will return to the market not just from eventual demand increases but also (and perhaps mainly) from supply cut backs. We chose zinc to focus on as it has the largest percentage of uneconomic operations at current prices. For reasons we go into in the article, we expect a quicker supply response than in past cycles. That is happening with zinc; two of the potential shut downs we referred to below have occurred as have several others of similar size and a couple of larger operations will likely shut by year end. The effect the market meltdown will have on the supply pipeline that analysts are still using to project prices 3-5 years out will be dealt with in a separate article. For now, suffice it to say that the 5%+ annual supply increases that analysts continue to use in assuming supply and demand will not be balanced again for several years are the stuff of fantasy.

It's been a brutal summer for the entire resource sector on both the metals and equities side, compounding an already nasty year. The past six weeks have brought one of the steepest sell-offs we've ever seen for both commodities and materials stocks. There has been a lot of talk about demand destruction, but less focus, as usual, on the supply side of the equation.

]]> Fri, 07 Nov 2008 01:30:19 -0500 Eric Coffin Eric Coffin submits:

Editor's note: The following article was sent to subscribers in September. The intent was to remind readers what to look for in the various metals sectors in terms of supply going forward. Balance will return to the market not just from eventual demand increases but also (and perhaps mainly) from supply cut backs. We chose zinc to focus on as it has the largest percentage of uneconomic operations at current prices. For reasons we go into in the article, we expect a quicker supply response than in past cycles. That is happening with zinc; two of the potential shut downs we referred to below have occurred as have several others of similar size and a couple of larger operations will likely shut by year end. The effect the market meltdown will have on the supply pipeline that analysts are still using to project prices 3-5 years out will be dealt with in a separate article. For now, suffice it to say that the 5%+ annual supply increases that analysts continue to use in assuming supply and demand will not be balanced again for several years are the stuff of fantasy.

It's been a brutal summer for the entire resource sector on both the metals and equities side, compounding an already nasty year. The past six weeks have brought one of the steepest sell-offs we've ever seen for both commodities and materials stocks. There has been a lot of talk about demand destruction, but less focus, as usual, on the supply side of the equation.


Complete Story »]]> TCK HBMFF.PK LMC XSRAF.PK PCU FCM Eric Coffin Which Inflation Is It Anyway? http://seekingalpha.com/article/88570-which-inflation-is-it-anyway?source=feed 88570 There is a debate building around inflation. The outcome of this debate will determine the direction of interest rates and credit creation. By extension, many commodity prices, especially precious metals and energy, will get direction too.

This past week saw the release of the US CPI reading for June with a "headline" increase of 1.1%. Even the much derided "no heat-no eat" Core Rate that excludes food and fuel was up 0.3% for the month.

]]> Fri, 01 Aug 2008 09:05:01 -0400 Eric Coffin Eric Coffin submits:

There is a debate building around inflation. The outcome of this debate will determine the direction of interest rates and credit creation. By extension, many commodity prices, especially precious metals and energy, will get direction too.

This past week saw the release of the US CPI reading for June with a "headline" increase of 1.1%. Even the much derided "no heat-no eat" Core Rate that excludes food and fuel was up 0.3% for the month.


Complete Story »]]> USO OIL GSG DBC Eric Coffin Commodity Driven Role Reversal http://seekingalpha.com/article/83791-commodity-driven-role-reversal?source=feed 83791 David Coffin co-wrote this article.

In the 1970s, Baby Boomers were swelling job ranks and women were moving out of the home and into the paid workforce in most of the industrialized world.  At the same time, OPEC pushed crude oil prices through the roof to overturn what it viewed as a predatory system of resource transfer set up by colonial powers.   

]]> Fri, 04 Jul 2008 04:28:37 -0400 David Coffin Eric Coffin submits:

David Coffin co-wrote this article.

In the 1970s, Baby Boomers were swelling job ranks and women were moving out of the home and into the paid workforce in most of the industrialized world.  At the same time, OPEC pushed crude oil prices through the roof to overturn what it viewed as a predatory system of resource transfer set up by colonial powers.   


Complete Story »]]> Eric Coffin David Coffin