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A YIELD CURVE PLUS & a Mongolia "High-5" by Standard Chartered Bank

|Includes: HD, Turquoise Hill Resources Ltd. (TRQ)

8-23-2010

 

Dr. John L. Faessel

ON THE MARKET

Commentary and Insights

Dr.Faessel@onthemar.com

 

Quote of the day

 

“It is much cheaper and enormously more profitable for the special interests to purchase the regulatory favors of Washington's political harlots than to compete in a fair, unsubsidized marketplace."

~ Lee Robinson ~

        ~~~~~~~

 

The seven-day trading support in the NASDAQ and Dow Transports has held up, but NOT SO with the Dow Industrials, S&P 500 (SPX) or the important Bank Index (BKX); so we've got a "situation" here, both from a technical and a "big picture" economics / fundamental overview. The double-dip worry is still there. On one hand robust profits, record cash holdings and healthy balance sheets weigh against the alarming Treasury yields that are, to put it mildly, shocking! And warning of deflation. But, "Hark" the good news; yield curve analysis (the ten-year T-bond yield minus the three-month T-bill rate) suggests that the probability of a US recession one year out is well below 1%. Also see the BARRON’s Confidence Index below that suggests we're muddling forward based on the trillions spent in the bond market.* Another positive bit of news to hang your hat on is that the total credit from the US commercial banks in July was up over 8% "annualized".

 

On Copper - "red gold" - the world's leading economic indicator:

Super-savvy 157-year-old Standard Chartered Bank (chartered by Queen Victoria) has just come out with a terrific report on what they think will be a global shortage of copper, iron ore, thermal and coking coal. The extent of their analysis is exemplary; they interviewed management in over 800 copper, iron ore, coking and thermal coal projects and found that supply will be waning as new production will be pushed out to 2013/14 at the earliest. This is why they think copper price has been so strong in the face of the Euro debt crisis and the market selloff in May and June. They believe that copper will firmly trade in contango. And they expect a huge increase in copper price to $8006 a ton, near-term and over $12,000 a ton in two years out. Copper closed at $7252 a ton on the London Metals Exchange on Friday.

 

Standard Chartered see’s the big winners as those companies who have near-term growth. They especially mention Mongolia, Ivanhoe Mines (IVN) and South Gobi coal. They see Mongolia as a major new supplier of coal and copper to the world and especially China.

 

A couple of items excerpted from the report: China now consumes 35% of the global copper supply and estimates that China’s consumption will grow at a steady rate of 3–4% on the back of urbanization and infrastructure spend. They also conservatively assume 1–2% growth for European and US consumption. Also interesting is that Chinese companies have invested over $25 billion in acquiring stakes in 19 iron ore start-ups and producers over the past three years.

 

If you would like a copy the exceptional just-released Standard Chartered report shoot me an e-mail to: Dr.Faessel@onthemar.com

 

Here’s one example of the amazing productivity coming out of corporate America in these times when "uncertainty" regarding our government is rampant. Last week Home Depot (NYSE:HD) at a 6.8% jump in Q2 profits even though same-store sales only increased by 1.7%. Amazingly, management raised profit projections, yet cut its revenue forecast.

Support in the S&P 500 (SPX) is 1071, then the next support would be 1058 / 1060 then the deep support lows at 1011.

Resistance will be at (SPX) 1073 then 1080/1090/1100.

 

Key indicators and metrics:

 

·        Friday’s McClellan Oscillator is on the edge of overbought at plus 106

·        The Treasury 10-year yield 2.61%- 16 mo lows

·        Treasury 2-year yield at 0.49%

·        3-month LIBOR slides to 0.318 – 27th straight decline

·        CBOE Put / Call Exchange Volume Ratio at 1.04

·        (VIX) at 25.49

·        Euro at 1.2705 

·        Copper at 3.31 

 

CONTRARY INDICATOR & WEEKLY SENTIMENT:

 

BULLISH longer-term investor sentiment readings have moved to multi-week lows. The BEARISH AAII Investor Sentiment readings are one month highs.

 

(High BULLISH readings in the Investor Sentiment Readings usually are signs of Market tops; low ones, market bottoms.)

 

·       The AAII Investor Sentiment Survey BULLISH read was 30.1%. The prior 15-weeks were ― 39.8%, 30.4%.40%. 32%, 39.4% 20.9%, 24.7%, 34.5%, 42.5%, 34.5%, 37.1%, 29.8%, 41.3 % and 36%.

·       The Consensus Index Bullish investor sentiment survey was 47%. The previous week was at 51%. The prior 15-weeks were 50%, 44%, 34%, (the low of this market retreat) 37%, 39%, 37%, 43%, 49%, 40%, 39% 42%, 44%, 56%, 60% and 76%.

·       The Market Vane (Market Letter Survey) posted a BULLISH read of 46%. The preceding 15-weeks were ― 50%, 48%, 50%, 44%, 46%, 39%, 40%, 47%, 49%, 42%, 43%, 42%, 46%, 49% and 53 %.

·        The AAII Investor Sentiment Survey BEARISH number jumped to 42.5%. The prior 9-weeks were 30.1%, 38.2%, 33.3%, 45%, 37.8, 57.1%, 42%, 32.4% and 30.7%.

 

* The BARRON’s Confidence Index slithered a bit lower again to 73.6 and tells us that while the economic recovery continues its slipping a bit to five-week lows. The prior four weeks were 74.9, 77.4, 78.3, and 77.2. The Index registered new highs of the cycle 13-weeks ago at 79. One year ago it was 66.7.

 

The Confidence Index is the High-grade bond index divided by the Intermediate grade and is a premier measure of how the bond markets many $ trillions are allocated. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the spread ratio since its all-time low in November / December 2008, indicating that bond investors are growing more confident and have started opting for more speculative bonds over high-grade bonds.

 

 

For my list of Best Ideas for 2010 please send an e-mail request to: Dr.Faessel@onthemar.com

 



Disclosure: No position