Month: July 2012

By MoneyMorning.com.au

No one was expecting much from last week’s EU summit.

It was the 19^th of its kind since the GFC began.

And history has taught us that these shindigs are only good for producing promises to make promises to think about fixing things sometime in the future.

But some progress was made, and the markets had an impressive rally. Commodities surged. Copper jumped 4.1%, gold was up 2.9%, and silver was up 4.2%.

The one that really stood out was oil.

Brent Crude oil surged 6.2% in a few hours.

That’s a huge jump. Brent finished the week up 7.5% in all, and has held onto most of this so far this week.

Was this huge weekly surge all about hope for a way through the European debt crisis? It seems hard to believe.

What about the US and EU sanctions on Iranian oil starting this week?

The oil market has known this for months, so surely that was priced in?

Then sure enough – the plot thickened.

Déjà Vu in the Oil Market

We are now hearing stories that Iran is planning to close the Strait of Hormuz. This is the world’s busiest oil shipping super-highway – carrying about a third of the world’s seaborne oil trade daily. Blocking it would be like blocking the door to the bar at the MCG on Grand Final day. Anyone else selling beer and pies could charge what they wanted.

So blocking the Strait of Hormuz would send oil prices soaring.

Anyone having déjà vu yet?

Haven’t we watched this episode before?

Back in January, Iran was threatening to do exactly same thing, but never did.

But now it is back on the menu again. The Iranian parliament needs to vote on this first, so watch out for that. If it looks like it will go ahead, then the oil price could spike as global oil supplies are hamstrung.

The market certainly doesn’t seem to be panicking yet – it’s seen this all before. Not just in January, but many times over the last few decades. The Middle East has held the US and the global economy to ransom over its oil many times in the past.

But the US has had enough of this, and is tired of shaping its national security and defence policies around securing foreign oil.

It’s a popular belief that that oil from the Persian Gulf states make up most of the oil the US imports. This is not true anymore.

The US has slashed its dependence on oil imports from the Persian Gulf. Gulf oil makes up just 15% of US oil imports.

Rather than fight wars to secure Middle-Eastern oil, the US has been importing more from countries closer to home: Canada, Mexico and Venezuela.

That’s not all. The same market conditions that drove this push to ‘buy local’ have also supported a renaissance in the US oil industry: Shale.

The Huge Oil and Gas Energy Shift in the USA

The shale sector has been a game-changer of incredible proportions.

Higher commodity prices – and improvements in technology – enabled the energy industry to perfect the new art of extracting oil and gas from shale formations, to spectacular success.

The US now produces so much ‘shale gas‘ that the US gas price has fallen 80%. This is great for the consumer, and the struggling US economy. A revitalised industry creates hundreds of thousands of jobs, and a new source of cheap energy creates more competitive industry. It will take time, but the flow-through effects on the US economy will be massive.

And thanks to the Bakken shale formation, the little state of North Dakota is now producing more oil than Alaska.

Some analysts reckon that this is just the start. The growing success of ‘shale oil’ could see the US wean itself off Middle-Eastern oil over the next 20 years, and maybe even turn the US into an oil exporter in that time! This all depends on the rate of success of an industry still in its infancy, so time will tell.

Like all the major investing opportunities, shale oil and shale gas is really a story of the interaction between commodity markets and technological changes.

For example, higher oil prices, higher volatility and growing sovereign risk in the oil commodity market, created market conditions that bred the technological changes that drive the shale sector today.

Commodity markets and technology have a ‘predator-prey’ relationship – in which each forces the other to continually evolve.

Back at the start of the 20^th Century, Standard Oil refined crude oil chiefly to produce kerosene for lamps to light homes and streets. Business was good.

Then one Mr Edison came in with a new technology – the electric lamp. It penetrated the lighting market like the iPhone invaded the mobile phone market of today, pushing out the kerosene lamp industry – the Blackberry of its time.

Oil prices fell, and Standard Oil was in trouble. But in answer to its prayers, a new technology evolved that needed cheap fuel – the motor car. And the rest is history.

Picking how technological changes will interact with commodity markets gives investors the big picture opportunities. I’m talking about the investing trends that last a decade, and create fortunes like the Rockefellers.

Profit From Long Term Trends

I’ve been focusing on identifying these decade-long investing opportunities for Diggers and Drillers readers this year.

I’ve recently tipped stocks involved in graphite and lithium, both used for lithium ion batteries in hybrid and electric cars. Now that the Toyota Prius is the world’s third best-selling car, we are really starting to see demand for lithium ion batteries take off. In the worst market for years, these two stock tips have given readers gains of 133% in 2 months, and 12% in 2 weeks respectively.

These Shale Oil Stocks Are Up

And going back to shale oil, I tipped two stocks earlier this year, which are up 25% and 13%; in the same time the rest of the market crashed.

One is a growing producer. The other is exploring. In fact it starts ‘fracking’ shortly – which I believe is why the price has just started moving this week. With a good chance of a higher oil price, and on-the-ground exploration commencing, the next few months should be very interesting for this stock.

Dr. Alex Cowie
Editor, Diggers & Drillers

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‘Big Wednesday’ For the Aussie Dollar

The Big Opportunities in the Oil Market That Will Lead to Profit

By MoneyMorning.com.au

The European Central Bank’s refusal to act dramatically to stem the eurozone crisis has forced politicians to make more effort to find a solution. They don’t like it, but it’s the only hope of finding out if the European ‘project’ will ever actually work.

Similarly, India’s central bank has been standing firm against its government too: interest rates were left sitting at 8% at its last meeting a couple of weeks ago, despite a rapid slowdown in the economy.

The good news is that this could be just the kick in the backside that India’s paralysed government needs to get the country moving again.

And that could be very good news for investors in the Indian economy.

The Mythology of the BRICS

The grouping together of the BRICs countries (Brazil, Russia, India and China) was always more of a crafty marketing slogan than anything else. But while everything was rising together, it was easy enough to just lump all the emerging markets into one big group.

Today, you need to be more discriminating. You probably already know what we think of China – the country has been overly dependent on demand from overseas consumers, who are now in trouble. Its infrastructure-spending boom – which took over as the main driver of growth after the 2008 crash – has run its course too.

So it needs to change strategy again. But trying to run the Chinese economy on internal consumer demand alone is not going to be an easy shift, particularly when the economy is trying to cope with a bursting property bubble.

China’s loss of appetite for raw materials is in turn bad news for commodity-dependent countries. That includes Brazil and Australia, which have both ridden the commodity supercycle higher and now have big consumer credit bubbles to worry about.

As for Russia, it’s cheap, but it’s still too reliant on oil. I’m sure there’s money to be made there, but you have to have your wits about you. In short, most of the big emerging market stories of the past decade have been heavily linked to the commodity cycle, which in turn has been driven by China.

India – The BRIC With a Difference

But one Bric is very different. India’s economic problem, as Rahul Saraogi of Atyant Capital points out, ‘is the exact opposite of China and… [the] commodity-exporting countries’. China’s problem is one of over-capacity – it has over-invested; India on the other hand, ‘has chronic short supply of everything.’

Inflation is high at well over 7%. The government is weak and is making little or no progress in getting rid of barriers to investment, or improving infrastructure. Economic growth fell to 5.3% in the first quarter, against an expected 7%. Meanwhile, the rupee has fallen to a historic low against the US dollar.

That all sounds pretty grim. And it is.

Should You Invest in the Indian Economy?

But the good news is that the Indian economy stands to benefit from falling oil prices. Meanwhile, the weak economic figures are pushing the government to act. Prime Minister Manmohan Singh took over the finance ministry last week; that encouraged investors because he helped India’s economy turn around when he was finance minister in the 1990s.

Saraogi believes it would only take a change of sentiment towards India for the market to rally sharply. Indeed, it has already seen a decent bounce in June, helped by Singh’s move. As Citywire pointed out last week, Sanjiv Duggal of HSBC GIF Indian Equity fund – the world’s largest India fund – has also been buying in.

Sanjiv has previously warned – in December 2007 – against buying India when he felt it was overvalued, so he’s no perma-bull. But now he feels that buying is a good move.

‘This is the worst sentiment has been in the 16 years I have been running the fund,’ he says. ‘Investors should take advantage of the weak currency and the risk/reward profile is very favourable from a medium-term perspective.’

I wouldn’t stake a huge amount of your portfolio on it (5% is what I’d be looking at). The Indian economy will remain tied to the ‘risk-on’, ‘risk-off’ cycle as investor fears over Europe and the US rise and fall. The country’s leaders have also shown a real aptitude for disappointing (although they’re hardly unique one that score).

But as an emerging market which will benefit, rather than suffer, as the commodity supercycle slows, I think India’s economy is worth dripping at least some money into.

John Stepek
Contributing Editor, Money Morning

Publisher’s Note: This article first appeared in MoneyWeek (UK)

From the Archives…

The Hard Lesson of a Stock Trader: No Pain, No Gain
2012-06-29 – Kris Sayce

How Gold Prices Look Set to Climb As Banks Crumble
2012-06-28 – Peter Krauth

‘Big Wednesday’ For the Aussie Dollar
2012-06-27 – Dr. Alex Cowie

Three Reasons Why Silver Could Take Off in 2012
2012-06-26 – Dr. Alex Cowie

Who is Winning the Battle Between the Bulls and Bears?
2012-06-25 – Kris Sayce

Investing in the Indian Economy: Your Best Bet of the BRICs Right Now

By Central Bank News
    The Reserve Bank of Australia (RBA) left its benchmark cash rate unchanged at 3.50 percent, as expected, after already cutting rates by half a percentage point earlier this year.
    “At today’s meeting, the Board judged that, with inflation expected to be consistent with the target and growth close to trend, but with a more subdued international outlook than was the case a few months ago, the stance of monetary policy remained appropriate,” the governor of the Australian central bank, Glenn Stevens, said in a statement.
    Stevens noted that financial markets had responded positively to last week’s agreement by European leaders but added that “Europe will remain a potential source of adverse shocks for some time.”
   
    He also said that Australia’s economy in the first quarter had expanded at a pace somewhat stronger than earlier indicated but there had not been any change in the bank’s outlook for inflation, which is expected to remain consistent with its target over the coming one to two years.
    Australia’s inflation rate (consumer price index) fell to an annual rate of 1.6 percent in the March quarter from 3.1 percent in the December quarter. The RBA’s target is to keep inflation in a target band of two to three percent over the medium term.
     The economy in the March quarter expanded by 1.3 percent from the December quarter for an annual rise of 4.3 percent.
    
www.CentralBankNews.info

By Central Bank News

By The Sizemore Letter

It’s not often that a stock with a $5 billion market cap soars by over 20% in a single trading day, but such is the case for Constellation Brands ($STZ), the largest publically-traded wine merchant, and now the sole distributor in the United States of Corona and Grupo Modelo’s other Mexican beer brands.

Constellation was the unexpected winner in the Anheuser-Busch InBev ($BUD) – Grupo Modelo merger, as Constellation was able to buy out Bud’s 50% share of the companies’ Crown Imports joint venture for $1.8 billion.  Under the new deal, Constellation will have complete control of the distribution, marketing and pricing for all of Modelo’s brands in the United States, while AB InBev will act as supplier.

The deal is a major coup for Constellation—kudos to management for pulling it off—but the company remains one of my least favorite stocks in the alcohol and vice sphere for a one critical reason:

Wine is much harder to brand than beer or spirits.  Think about it; when you go to a bar, you can instantly recognize your favorite beer or whiskey on tap or behind the bar.  Outside of, say, Coca-Cola ($KO), beer and spirits are probably the most recognizable and valuable brand names in existence.  Not surprisingly, premium beer and spirits businesses tend to enjoy high margins and high returns on equity relative to their peers.

Wine is a different story.  The attractiveness of a given vineyard varies from year to year, and few have national or international brand awareness.  Wine connoisseurs know their favorite vintages, but there is little brand loyalty at the mass-market level.  For a company of Constellation’s size, wine is a much harder business to operate.

This is not to say that I dislike Constellation or would never consider owning it.  “Sin Stocks” are some of my favorite long-term holdings due to their defensive nature and due to their tendency to pay high dividends (Constellation currently pays no dividend), and an argument can be made for making room for Constellation in a diversified vice portfolio.  But I would definitely give a higher weighting to premium spirits groups such as Diageo ($DEO), Jim Beam ($BEAM) and Brown-Forman ($BF-B).

One last thing to note: the Crown Imports deal allows Constellation to get a significant chunk of its revenues and profits from the premium beer segment rather than wine.  This is good news.  But it’s also a source of concern due to a certain provision in the deal.  AB InBev has a “call option” of sorts to buy the Modelo brands back in 10 years at 13 times earnings before interest and taxes.  This price does not at all appear unreasonable, but if exercised Constellation will find itself as purely a wine merchant again.

Disclosures: DEO and BEAM are held in Sizemore Capital accounts.

Related posts:

• Harley-Davidson Sputters and German Beer Goes Flat
• Trading Strategies: Playing Europe in the Near Term
• The Cult of Equity Is Dead. Long Live Equities.

Though the Heavens Fall, Let Them Be Strip Searched

By Robert Folsom

Most of us have watched it happen hundreds of times on TV and in the movies: “You are under arrest.” As any fan of Law & Order knows, each episode includes those words.

What most of us have NOT done is watch it happen to ourselves. But people who have been through the experience are quick to remind the rest of us that fantasy has little to do with reality. I’ve been told that fear is the most lasting impression.

About six weeks ago, the U.S. Supreme Court issued a ruling which ensures that the experience of arrest will now often include a memorable dose of humiliation. In a 5-to-4 vote, the court ruled that

“…officials may strip-search people arrested for any offense, however minor, before admitting them to jails even if the officials have no reason to suspect the presence of contraband.”

To be clear on what “any offense” means, Justice Steven Breyer’s dissent cited the strip search of a nun “who was arrested for trespassing during an antiwar demonstration.” He also described the strip search of individuals arrested “for such infractions as driving with a noisy muffler, driving with an inoperable headlight… or riding a bicycle without an audible bell.”

This ruling gives jail officials free rein to do likewise.

I realize that some of what follows may suggest that I am taking a position on strip searches. For the record, my opinion is unimportant. What matters is to understand just how exceptional this ruling is, and to provide an explanation that makes it understandable. Socionomics makes this possible.

Think for a moment about how many procedural hoops law enforcement officials must jump through to make an arrest. Police can’t act on hunches. They typically must establish “probable cause.” Yet even then they can’t enter a home or residence until a magistrate issues a search warrant. The officer who makes an arrest must inform a suspect that he or she has the right to remain silent (etc.). After the arrest comes habeas corpus, meaning authorities have a day or two to appear in open court and show they had sufficient evidence for the arrest — otherwise the judge will release the suspect.

Now, every step of this process is a limit on the government, backed by Supreme Court precedents. Every step also includes great risks. Countless criminals have gone free for the lack of probable cause, or during the wait for a search warrant, or when a cop failed to give a Miranda warning, or when the evidence did not satisfy habeas corpus.

The courts, the police, the politicians and we the people all understand this risk in some way. And we live with it. Most of us see this as the trade-off we make on behalf of the presumption of innocence. The still-deeper trade off is, “Let justice be done though the heavens fall.”

Contrast all of the above with the court’s strip-search ruling. It is indiscriminate, gives all benefit of the doubt to the government, and is unwilling to accept any risk in order to protect the dignity of individuals who are presumed innocent.

Specifically, the court’s logic is to reject the premise that there are too many “false positives“. Justice Anthony Kennedy wrote for the majority, saying “People detained for minor offenses can turn out to be the most devious and dangerous criminals” — and then cited the traffic stops of Timothy McVeigh and the September 11 bombers.

What to make of this ruling from the Supreme Court? Why would the judicial branch — which has done so much to limit government and protect individual rights — give so much indiscriminate authority to the state? More importantly, why now?

Put simply, “authority” is the key idea. Our studies show that when social mood is in decline, governments typically expand their power — even the functions which otherwise resist the expansion of authority. The logic of pre-crime overcomes the presumption of innocence.

At the same time, powerful social forces seek to take back authority the state already has. The polarity between the sides escalates. This is not a trend you want to read about “later” — it’s one to stay ahead of. No publication is better equipped to that end than The Socionomist. Follow this link to learn how to subscribe.

Andrea Dibben contributed research.

If you would like to receive the best of Social Mood Watch and other free socionomics content each week, sign up here.

This article is syndicated by The Socionomist, a publication of the Socionomics Institute, and was originally published under the headline Though the Heavens Fall, Let Them Be Strip Searched. The Socionomist is designed to help readers understand and anticipate waves of social mood. Copyright © 2012 Socionomics Institute.

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London Gold Market Report
from Ben Traynor
BullionVault
Monday 2 July 2012, 07:30 EDT

U.S. DOLLAR gold bullion prices hit $1597 an ounce during Monday morning trading in London – in line with where they ended last week – while European stock markets ticked higher following the release of better-than-expected European manufacturing data.

“Gold still remains in the same range since early May,” say technical analysts at bullion bank Scotia Mocatta, adding that gold “would have to move above trendline resistance [at $1624] to reverse the bearish posture.”

Silver bullion this morning climbed as high as $27.58 an ounce – also in line with last week’s close – as other industrial commodities fell, with WTI crude oil down below $84 a barrel.

US Treasury bonds edged higher, while UK and German government bond prices fell.

Eurozone manufacturing activity continued to contract last month, with the Eurozone PMI staying unchanged at 45.1 – slightly above consensus forecasts.

Germany’s manufacturing PMI dropped from 45.2 to 45.0 – though this too beat expectations.

Eurozone joblessness meantime ticked higher in May, with the unemployment rate rising to 11.1%, up from 11.0% in April, figures published Monday show.

The European Central Bank is expected to cut its main policy rate below 1% when it meets on Thursday, according to a poll of economists by newswire Reuters.

ECB president Mario Draghi said Friday he is “actually quite pleased” with the outcome of last week’s European Union summit, at which it was agreed rescue funds could be used to directly recapitalize banks – but only after the creation of a single banking supervisory body.

“The ball is [now] very much in the ECB’s camp,” says Gilles Moec, London-based European economist at Deutsche Bank.

“We are staunch believers that gold will remain a risk-on asset for the foreseeable future,” says Nikos Kavalis, metals analyst at RBS.

“If we continue to see a more definitive policy response by authorities, gold will continue to benefit…[but] the investment bid will be essential for the price to move up.”

In Vienna, Austria is today expected to become the latest Eurozone country to ratify the creation of the European Stability Mechanism, the permanent bailout fund that was supposed to become operational yesterday and is now scheduled to launch next Monday, when lawmakers vote on the issue today.

The German Bundestag voted in favor of ratification on Friday, although the ESM still needs to be approved by the German Constitutional Court.

Here in the UK, June’s manufacturing PMI came in better-than-expected Monday at 48.6, up from 45.9 in May, though the figure suggests continued contraction in the sector.

Britain is “in the middle of a deep crisis,” Bank of England governor Mervyn King said last week.
“I don’t think we are yet half-way through.”

The Bank’s Monetary Policy Committee announces its latest monetary policy decisions this Thursday, including whether it will launch another round of quantitative easing to add to the £325 billion in asset purchases already undertaken.

“Our working assumption is that the committee will raise the QE limit by £50 billion,” says Peter Dixon, global equities economist at Commerzbank.

“But given the fragility of the economy and financial markets we cannot rule out an even bigger increase.”

Elsewhere in London, some traders at Barclays may have believed the practice of underreporting borrowing costs had tacit approval from the Bank of England, according to newspaper reports.

Barclays was fined £290 million last week after it admitted some of its staff gave inaccurate information about the borrowing costs to the committee that sets Libor – the London interbank offered rate widely used as a benchmark.

Former Barclays chairman Marcus Agius, who resigned Monday, and chief executive Bob Diamond are due to appear before the Treasury Select Committee this week.

Reports suggest that a conversation between Diamond and the Bank’s deputy governor, financial stability Paul Tucker may have led to the impression among some staff that the Bank, concerned that Barclays’ Libor submissions were higher than its peers, was content for Barclays to underreport. The Bank of England denies it was aware of attempts to manipulate Libor.

China’s manufacturing sector grew at its slowest pace for seven months in June, according to official purchasing managers index data published Sunday. China’s National Bureau of Statistics reported last month’s PMI as 50.2 – down from 50.4 a month earlier. A figure above 50 indicates the sector expanded, while below 50 suggests contraction.

“New export orders placed at goods producers dropped at the steepest rate in over three year,” says HSBC in the report accompanying its own PMI figure. HSBC’s privately-produced PMI was 48.2 for June, up from 48.1 the previous month.

“It is all about growth and employment,” says HSBC economist Qu Hongbin.

“Growth is likely to be on track for further slowdown…we expect more decisive easing efforts to come through in coming months.”

“We expect the government to loosen policy further to ensure economic growth rebounds in the third quarter,” agrees Nomura economist Zhang Zhiwei, who predicts the People’s Bank of China will cut banks’ reserve requirement ratio – the amount they have to hold in reserve as a proportion of assets – by 0.5 percentage points this month.

China was the world’s biggest source of gold bullion demand in the six months to the end of March, overtaking previous world number one India.

Over in New York, the so-called speculative net long position of gold futures and options traders on the Comex – calculated as the difference between bullish and bearish contracts held by noncommercial traders – fell 16% in the week to last Tuesday to the equivalent of 360 tonnes of gold bullion, figures from the Commodity Futures Trading Commission show.

“We regard the current skepticism displayed by speculators to be constructive [for gold],” says a note from Commerzbank this morning, adding that most traders’ fears should now be “priced in”.

Ben Traynor
BullionVault

Gold value calculator   |   Buy gold online at live prices

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Senior Strategist at Jyske Bank, Ib Fredslund Madsen, believe that last week’s positive EU summit will rub off on the markets this week.

This week, however, two interesting events can change that picture. ECB announces its monetary policy decision on Thursday and Friday the U.S. job report arrives. Ib Fredslund Madsen believes the ECB will have to come with either a rate cut or other form of relief in order to not disappoint the market. With regards to the U.S. job report Ib Fredslund Madsen believes, that anything under 100,000 new jobs will disappoint. Jyske Bank believes in between 100,000-120,000 new jobs.

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