Investing Themes

PDP: Breakout-Failure

noreply@blogger.com (Oliver Schwindler) — Sun, 05 Aug 2007 07:47:00 +0000

The sharp drop in the stock price of Petrolifera Petroleum (TSX: PDP) crushes the promising breakout above its trading range. Since the stock is again trading in its trading range between $16 and $20, I recomend traders to close their positions and cut their losses to a minimum, keep the stock on their watchlist and wait for a confirmed breakout in the near future.

Disclosure: The author has a closed his long position in PDP.

Promising Junior Oil Explorer

noreply@blogger.com (Oliver Schwindler) — Tue, 24 Jul 2007 04:00:00 +0000

As the price of Oil has been rising steadily since the beginning of the year and is nearing its all time high in the $78 range, there could be some promising profit opportunities in small cap junior oil explorers. A very interesting one is Petrolifera Petroleum (TSX: PDP), a Canada-based company engaged in petroleum and natural gas exploration, development which has production activities in South America. The company, which completed it's IPO in November 2005 and is 26%-owned by Connacher Oil and Gas Limited (TSX: CLL), has operations in Argentina, Peru and Columbia.

Oil Projects
In Argentina Petrolifera currently lifts Oil in the Puesto Morales/Rinconada region, located onshore in the Neuquen Basin some 965 kilometers southwest of the city of Buenos Aires. Currently the management is trying to develop additional exploration opportunities in this region (Salinas Grande I, Vaca Mahuida, Gobernador Ayala II) to use its economics of scale. In Peru, which is relatively underexplored, Petrolifera owns two major licenses over large onshore blocks in two separate basins. Block 106 in the Maranon Basin in northern Peru covers approximately two million acres and is prospective for medium gravity crude oil accumulations. Block 107 in the Ucayali Basin of southern Peru covers over three million acres and is on trend with the giant Camisea natural gas and condensate field. A contract for 2D seismic over the block in the Ucayali Basin was recently awarded and drilling is expected to commence in early 2008. The 2D seismic over the block in the Maranon Basin is planned later this year and drilling in mid-2008. In Colombia, Petrolifera has recently formally received its 100% working interest on the Sierra Nevada and the Turpial TEA and is currently negotiating an additional license in the Sierra Nevada region. The chart below shows that most of Petrolifera’s revenues come from crude oil sales as natural gas sales are negligible small. The chart also reveals that at the current cost structure Petrolifera earns approximately $35 per barrel crude oil sold.

Fundamentals
During the first quarter of 2007 Petrolifera’s progress continued as the company increased year-over-year revenues by 458%, cash flow by 617% and net earnings by 877%. Beside the significant growth the company’s balance sheet remains strong with over $59 million of cash and no debt. The chart below shows the superior financial development of revenues, cash flow and earnings over last eight quarters.

As the company has issued 50 million shares (53.4 million fully diluted) it has currently a market capitalization of $1 billion ($1.07 billion fully diluted). Given the constant cash flow and profit from its current operations, if we take last quarter’s cash flow and earnings as guidance for the coming three quarters we obtain a cash flow per share prediction of $2.24 ($1.96 fully diluted) and an earnings per share prediction of $1.36 ($1.20 fully diluted) for the fiscal year 2007, both on fully dilution. This means Petrolifera is currently trading at a trailing PE of 14.7 (16.6 fully diluted). The stock is currently covered by three analysts, which estimate earnings per share will be at $1.53 (lowest at $1.42 and highest at $1.67) for FY07 and $3.12 for FY08. All three have out performance rating on the stock with a mean price target of $28 (lowest at $25 and highest at $30). However a strong Canadian Dollar could hurt Petrolifera's profits.

Technical
The chart below shows that Petrolifera’s stock recently broke out of its tight trading range between $16 and $19 with a strong rise backed by hefty volume up to $22. The stock is currently pulling back a little bit by testing its support area between $19 and $20. However, from a technical perspective the stock could even dip to $18 for a short time. The test of its support area could provide a good entry point for a long position in the stock.

Disclosure: The author currently has a long position in PDP.

Cotton Pulls Back: Second Entry Point?

noreply@blogger.com (Oliver Schwindler) — Mon, 23 Jul 2007 07:18:00 +0000

As I recently took a long position in cotton, I want to highlight that cotton is currently falling back after its strong advance above $61. From a technical perspective the support area is around $55 as it can be seen in the weekly chart below. If cotton can bounce off from that level this would be a good point for a late entry on the long side.

Disclosure: The author has a long position in COTN.L.

Bottom in Oilsands Quest

noreply@blogger.com (Oliver Schwindler) — Fri, 13 Jul 2007 09:38:00 +0000

Oilsands Quest Inc. (AMEX: BQI) (formerly CanWest Petroleum Corporation) is engaged in a variety of projects with an emphasis on oil sands and oil shale exploration in Western Canada. Its lead project is its Axe Lake Discovery, an oil sands deposit the company has identified through exploration drilling success on its permit lands in northwest Saskatchewan. This is the first major oil sands discovery in the province’s history. Yesterday management increased its estimated resource potential of the Axe Lake Discovery (area A in figure below) from 1.5 billion barrels (released early April) up to 2.5 billion barrels. Management also released it's estimate of resource potential for selected areas outside the Axe Lake Discovery area (areas B and C in figure below) and for the adjacent permits in Alberta (area D in figure belwo) which is 3.0 billion barrels and 4.5 billion barrels repsectively.

On a fully-diluted basis the company has currently 250 million shares, of which management owns 19%. If we take the aquisiton price of the former privately held North American Oil Sands Company paid by Statoil on April 27th this year at $0.91 per barrel recoverable reserves and apply it to BQI' 10 billiion of estimated reserves (assuming 50% is recoverable) we get an estimated market value of $4.55 billion for Oilsands Quest or $18 per fully-diluted share. Beside the favorable valuation the company has top notch management with a track record of building an oil sands company (CEO, Chris Hopkins founded Synenco (TSX: SYN)).

The sharp price jump yesterady indicates that BQI could have reached its bottom at the $2.50 level (see chart below) because the move was accompanied by an extremly high turnover.

Disclosure: The author has currently no position in BQI, but intends to buy shares of BQI in the comming weeks.

Term Structure Hurts Commodity Investors

noreply@blogger.com (Oliver Schwindler) — Thu, 05 Jul 2007 14:10:00 +0000

As Tom Lydon from ETF Trends recently pointed out more investor education on contango and backwardation - the two forms of the term structure of commodity futures markets - is necessary. As an investor in commodities you have the choice between buying the physical commodity or a derivative (e.g. a futures contract) on a commodity to profit from the price appreciation of the commodity. However, normally investors discard the first choice as they would have to care about warehousing and other costs of carry. Therefore, most investors invest through commodity futures contracts or through exchange traded funds which in turn also normaly hold commodity futures contracts. The return from a collateralized portfolio of commodity futures contracts comes from three main sources:

Total Return = Spot Return + Roll Yield + Collateral Yield

The spot return is simply the price appreciation in the spot price, which is based on immediate delivery, of the commodity. As an investor in futures contracts has to roll contracts he has to deal with contango (longer-dated futures are more expensive than near-month contracts) and backwardation (longer-dated futures are cheaper). If the term structure is in backwardation the roll yield is positive whereas it is negative when the term structure is in contango. The final source of return is the collateral yield which is the return accruing to any margin held against a futures position and which is normally the US T-bill rate.

A look at a long-term chart of the ratio between the S&P GSCI Total Return Index (SPGSCITR), which inclues all return components of a passive commodity investment as mentioned above, and the S&P GSCI Spot Index (SPGSCI), which tracks only the spot price appreciation of the commodities in the GSCI, reveals that the roll yield is negative since the begining of 2004 as the ratio has peaked in 2004 and is currently in a steep decline. Last year Spencer Jakab pointed out that unlike prior commodity price booms, this one is seemingly being driven by an influx of capital seeking out passive, or indexed, commodity exposure. He also addressed the possibility that such a dramatic influx of capital could changed the equation in the futures market thereby negating the roll yield as a major source of returns for fully collateralized commodity futures. However, Jim Rogers - one of the strongest commodity bulls in the markets - seems not to be alarmed by the commodity-wide contango situation.

Deutsche Bank offers a broad-based and several sector-based commodity ETFs, which try to maximise the roll yield by a rules-based formula for replacing an expiring futures contract with a new contract. Lets take a look at the DB Gold Fund (DGL), which in contrast to streetTRACKS Gold Shares (GLD) - that creates exposure to Gold by holding physical Gold - holds futures contracts on Gold, revelas that the roll yield optimization seems to work quite well as the ratio between the DB Gold Fund (DGL) and streetTRACKS Gold Shares (GLD) is quite constant over time, notwithstanding Gold is typically one of the commodities which stays most of the time in contango and has normally a negative roll yield.

However, the investor should never forget that the selection of the constitutes, which make up the commodity index, determines the spot return and is at least as imporant as the optimization of the roll yield. The chart below clearly shows that the underperformance of iShares GSCI Commodity Trust (GSG) against PowerShares DB Commodity Index Fund (DBC) comes from it's overweight in the Energy Sector, as Crude Oil - mostly the biggest position in the Energy Commodity Sector - has been declining over the last eleven months.

To summarize, beside the roll yield, which has been negative for most commodities in the last 3 1/2 years (see the first figure: ratio between S&P GSCI Total Return Index and the S&P GSCI Spot Index) the spot yield, which is exclusively determined by spot price appreciation of the commodities in the index, is of particular importance for the total return of the investment in commodities. Beside PowerShares DB Commodity Index Fund (DBC), which currently is composed of 55% Energy, 22.5% Metals and 22.5% Agriculturals, the investor has the choice between iShares GSCI Commodity Index Trust (GSG or GSP), which holds 69.3% Energy, 12.12% Agricultural, 13.7% Metals and 4.89% Livestock commodities, and iPaths Dow Jones-AIG Commodity Index Fund (DJP), which has the lowest Energy proportion at 34.7% and 28.46% in Agriculturals, 28.29% Metals and 8.54% in Livestock commodities.

Disclosure: The author has a long position in an ETF issued by ABN Amro which tracks the Rogers International Commodity Index.

Jim Rogers and Marc Faber on CNBC World

noreply@blogger.com (Oliver Schwindler) — Wed, 04 Jul 2007 08:40:00 +0000

Some interesting discussion from investment legend Jim Rogers and Marc Faber, author of GloomBoomDoom.com, on CNBC World on July 2. Watch the videos about the following topics:

U.S. Debt Bubble

In Favor of Agricultural Commodities

China Not a Stock Bubble

Credit Bubble

Investing in China’s Infrastructure

Bullish on Gold

New Blog: The Relative MarketView

noreply@blogger.com (Oliver Schwindler) — Fri, 22 Jun 2007 06:17:00 +0000

I have lunched a new website called The Relative MarketView. The focus of my new website is on directional market neutral spread trades like a long/short trade in the S&P 500/Citigroup Value and Growth index. The biggest advantage of Relative Value Investing is its promising risk/return profile, as it has high returns relative to its risk, which are normaly significant lower than long only strategies. The Relative MarketView reports and comments on the newsworthy market action with a relative point of view. Its focus on the relative market action provides the reader unique insights into the current market action and helps the investor to get the entire picture about the latest developments in the equity markets. I hope you find my new website interesting and visit it on a regular basis at www.relativemarketview.com.

Commodity Investment: Cotton

noreply@blogger.com (Oliver Schwindler) — Thu, 21 Jun 2007 08:21:00 +0000

Commodities are still on the run and just under their all-time high as the chart of the Goldman Sachs Commodities Spot Index (GNX) below shows. There are some signs which indicate that the longterm bull-market in commodities is not yet over:

A sustained and strong world economy with China and India as its engines,
Chinas and Indias unsatisfying appetite for natural resources and its result of rising dry freight rates,
inflation fears which recently caused a bond sell-off around the world,
and last but not least, huge capital inflows in passiv commoditiy investments.

A look at its sub-indices - GSCI Energy (GJX) (weight: 69,66%), GSCI Industrial Metal (GYX) 11,61%, GSCI Agricultural (GKX) 11,4%, GSCI Livestock (GVX) 4,94%, GSCI Precious Metal (GPX) 2,37% - reveals that the agricultural index recently broke out with a strong move to new highs.

Inside the agricultural commodities group, Cotton looks the most promising commodity as it may be at the beginning of a sizable upward move as in the last 6 months Corn already exploded by 100% and Soybeans and Wheat each by 50%. Recently Art Samberg in Barron's Midyear Roundtable (2007) (subscription required) pointed out that:

"Despite U.S. inventories are high at more than 10 million bales, inventories get depleted or added to based on Chinese demand and the timing of China's orders, and for several months China didn't place many orders. However, inventories are finally beginning to drop. Additionally, there is currently dry weather in Georgia and Texas, and according to the data 20% less cotton was planted this year."

As Chinese demand could be the catalyst, both factors could drive the price for cotton higher. The monthly chart of the cash price of Cotton below shows that Cotton has been trading in a tight trading range between $0.44 and $0.55 per pound for the last 3 1/2 years. However, the sharpe increase in the last two weeks indicate, that Cotton might by ready for a strong move to the upside, which should lift cotton to at leat $0.70 per pound.

As an investor the investment possibilities in Cotton are limited. You can by futures contracts on the NYBOT or you can by the Exchange Traded Fund issued by ETF Securities, which is listed on the LSE under the symbol COTN.L and is designed to track the Dow Jones AIG Cotton Sub-Index, a total return index. However, both investments will be influenced by the roll yield embedded in the term structure of futures contracts of Cotton. A comparison of the GSCI Spot Index (GNX) and the GSCI Total Return Index (GTX) reveals that the roll yield had been negative since the beginning of 2006 as most of the commodities are in contango and therefore the GTX has been lagging behind the GNX.

As Spencer Jakab recently pointed out in a comment in Barron's, given the huge sum of money which has entered the commodities market in the recent years, there could be a shift in the contango/backwardation situation of the commodities markets, which could influence future returns of passive commodity investments.

Disclosure: The author has a long position in COTN.L.

Investment Managers Foresee Soft Landing

noreply@blogger.com (Oliver Schwindler) — Thu, 28 Sep 2006 12:23:00 +0000

Slower growth lies ahead for the United States, say investment managers who responded to Russell Investment Group's September quarterly survey, as none of the managers believes that a recession is likely in the U.S. and half believe the U.S. will experience slower growth in the next six months compared to the annaul growth rate of 2.9% in the second quarter 2006. However, 10% of the managers believe the U.S. will grow at a stronger rate whereas a little more than 40% of the managers believe the U.S. will grow at a similar rate to the 2.9% at which it grew in the last quarter.
At the same time, more managers view the market as undervalued than at any time since the survey began, although that number still trails those who see it as fairly valued. Those who believe the market to be overvalued has risen slightly, from 8% to 10%.

Although managers have raised their outlook U.S. Treasuries and corporate bonds to their highest levels since the survey began. This view, combined with moderate bullishness toward equities, seems to indicate that some managers are expecting that stocks may move sideways for a while before turning upward once more when it becomes apparent that recession fears have dissipated and that favorable earnings reports from many companies are ready to be rewarded in increased stock prices. However, large-cap stocks are still favored over small-cap stocks.

Although managers have raised their outlook for bonds, they have lowered it even further for real estate investment trusts, which now occupy last place in terms of bullishness. The outlook for the energy sectors, too, is the lowest since the survey began. Clearly managers believe that oil prices have peaked, at least for now, with tensions lessening in the Middle East and the 2006 hurricane season appearing to be mild. Their outlook for high-yield bonds remains low, as the managers appear to be anticipating defaults on bonds will grow.

Most managers remain convinced — as they have over the last two years — that it is only a matter of time before large-cap growth stocks take off. Managers continue to be more bullish on this asset class than any other. They point, too, to relatively low valuations among growth stocks as an indication that they are good buys at these levels. But even the outlook for large-cap growth stocks — which has held the top spot on the list of bullishness since the survey began — has slumped from a high of 80 percent in the last quarter of 2005 to 58 percent now. However, as the monthly chart below shows, large-cap growth stocks have underperformed large-cap value stocks for the last seven years.

Crude Oil Seems to be Oversold

noreply@blogger.com (Oliver Schwindler) — Tue, 26 Sep 2006 11:36:00 +0000

Oil has dropped under $60 on Monday morning, to reach a 6 month low at $59.59 per barrel. Prices have dropped more than 23% since hitting a record $78.40 in mid-July. Yesterday, Barry Ritholtz pointed out that he finds the mainstream explanations for the sharp correction of crude oil unsatisfying and concluded:

"Oil is in the midst of a major correction, and by the traditional measure of 20%, can be defined as in a Bear market. The mainstream explanations are greatly over-simplified."

A look at the long-term chart below reveals that the recent sell off was the fastest one in the last 3 1/2 years whithout a noteworthy interruption. Thus curde oil is currently trading $9 below ist 50 day moving average.
As crude oil traded in the last four days in a somewhat tight trading range between $60 and $62, after falling below its downward sloping trend channel, it seems that crude could have found support at the $60-level and could be ready for a mean reverting correction. A significant break to the upside of the $62-level could signal a short-term correction-rally out of the oversold condition, which could lift crude oil to $67-$69 per barrel.

Disclosure: The author is long in Crude Oil.

Update on Gold

noreply@blogger.com (Oliver Schwindler) — Wed, 20 Sep 2006 08:13:00 +0000

As Gold could have touched its upward sloping trendline and is near its key-support at the 570-level, I suggest to take profits on half of the position. The possibility of a short-term up-swing, which could bring Gold back almost to the the 600 mark, seems to have risen in the last days, as Gold still seems to be oversold. However, the target zone between $540-$560 per ounce remains valid and could be reached in mid October.

Disclosure: The author is short in Gold.

Confirmation From The Dow Theory?

noreply@blogger.com (Oliver Schwindler) — Tue, 19 Sep 2006 10:33:00 +0000

The divergence between the Dow Jones Industrial and the Dow Jones Transportation indexes began in mid-July, as the Industrials continued to climb higher and the Transports slided steadily lower. The dispute pver the outlook of the economy and earnings growth began in mid-June, with the Industrials taking the optimistic view, and the Transports becoming decidedly negative.
However, the sudden and un-expected plunge in crude oil prices, below the upward sloping trend-line at $66 per barrel, triggered a fast run-up in the Transports up to their resistance around the 4,450-level backed by high volume. The Transports seem to have formed a "double-bottom" at the 4,150-level. However, with the fast up-move to the 4,450-level, they have reached a critical technical level as they touched their resistance at the 4,450-level and their upward-sloping 200 day moving average.

In the last three days, the Transports have been trading in a tight trading range between 4,400 and 4,475. A breakout to the upside backed by higher volume can be interpreted as confirmation by the Dow Theory.

However, the seasonal threat to the Dow Jones Industrial and Transports could still strike in the second half of September. Any possible setback in the Industrials should go no lower than the 11,250-levle, while the Transports should not fall below 4,150.

Tankers in Need for Near-term Support

noreply@blogger.com (Oliver Schwindler) — Thu, 14 Sep 2006 07:57:00 +0000

Shipping stocks took a hit in the last five days, with Frontline (FRO) losing 7%, Nordic American Tanker (NAT) weakening by 9.8% and O M I Corp (OMM) closing 8.7% lower. Even though Bank America raised its six-month oil tanker forecasts by 40% and its targets by 5% supported by steady transport volume, a global trend to maintain high oil storage, and extended interruptions in Alaskan oil production on September 1st:

"We believe a 25% increase in tanker equity values since early June versus essentially no change in the Standard & Poor's 500 index reflects shipping strength to date, but has not fully priced in further upside over the next six months."

"We believe the forward six-month outlook could exceed consensus by 40% and support further equity value increases from 10% to 20%."

"September hurricane activity will likely help shape the direction of shipping rates over the near term since the appearance or absence of hurricanes affects not only shipping traffic but also the continuing trend for U.S. oil refiners to carry high oil inventories and demand more oil from overseas."

On September 2nd Elliott Gue, Editor of The Energy Letter, highlighted that tankers have been one of the best-performing groups in the energy space this summer and finds out that the tanker industry is this year doing better than last year, as tanker rates are running much higher this year than last year (see chart below).

The seasonality in tanker rates is obvious. Note, in particular, the spikes, which occur at the end of each year and the beginning of the year. These spikes represent the seasonal effect. Demand for tankers is highest in the first and fourth quarters. Therefore, spot tanker rates are also highest in these quarters. During the summer months, day-rates reach their lows. Tanker firms often use this seasonally slow period to repair their ships or perform upgrades. After all, it makes sense to take your ships offline when there's little demand.

On the demand side, China has currently the biggest impact on charter rates, as China is a huge oil importer, and hauling all that oil from the Middle East means hiring out more tankers. Accroding to the International Energy Agency (IEA), Chinese oil demand grew by 2.6 percent in 2005 and will grow by 6.1 percent in 2006 and 5.5 percent in 2007. The chart below reveals that in July Chinese oil imports unexpectedly fell by 3.9%, but rebounded strongly in August with a year over year (yoy) increase of 34.9%.

On the supply side, one factor overhanging the tanker group last year was the idea that a big chunk of new ships being built would be delivered during the next few years, leading to a glut of tankers. But other factors are mitigating this effect. Older tankers are being scrapped and retired; all single-hull tankers are being phased out. Notably, BP has decided to only lease out the most modern tankers (double hulls) going forward; this decision was made years ahead of the official deadline for phasing out single hulls.
Moreover, tankers have been pressed into other duties. Some are being refitted as floating production platforms, and others are being used as temporary storage facilities in the Middle East and Asia where storage capacity is lacking. If a tanker becomes a production platform, it's no longer a part of the global tanker supply.

The weekly chart below shows that the leading shipping stocks, Frontline (FRO), General Maritime (GMR), Nordic Amer. Tanker (NAT), OMI Corp. (OMM), Overseas Shipholding (OSG), Tsakos Energy Navigation (TNP) and Knightsbridge Tankers (VLCCF) have on average lost 12.5% since their 52 week high in August.

If tanker stocks are getting support at their 100 day moving average at around 36, and shipping rates will be above average in the coming months, tanker stocks should rebound strongly and make new 52 week highs until the end of the year.

Disclosure: The author has currently long positions in FRO, GMR OMM, OSG, TNP and VLCCF.

Gold Fundamentals and Technicals Are Weakening

noreply@blogger.com (Oliver Schwindler) — Sun, 10 Sep 2006 10:51:00 +0000

Accoring to the latest data from the producer-funded World Gold Council (WGC) total end-user demand fell in the second quarter by 16% to 801.6 metric tonnes from 959.8 tonnes a year earlier. That was the third straight quarterly decline, and the lowest level of demand since the third quarter of 2004. Jewellery demand, which accounts for 70% of the total end-user demand, showed also it's third straight quarterly decline and fell even by 24% to 562.5 tonne, a three-year low. Gold consumers from India, which account roughly for 30% of the total jewellery demand, reduced their purchases in the second quarter by 43% after a reduction of 38% in the first quarter. Investment demand rose only by 19% in the second quarter and only by 3% in the first half of the year 2006. Nevertheless, spending on Gold hit record levels due to the strong price increase of Gold in the first half year. The spending on Gold increased in the second quarter by 23% to 16.1 billion dollars and by 16% in first half of 2006.

On the supply side, the total supply increased in the second quarter by 2% to 989 metric tonnes after falling by 9% year over year in the first quarter. However, hedging activity of producers has dramatically increased in the last two quarters. It more than doubled to 157 metric tonnes in the second quarter after a sixfold increase in the first quarter.

As of September 1, the 15 central banks within the European Gold Agreement (EGA) have reportedly sold roughly 340 tonnes. In order to hit the maximum amount of gold permitted by the agreement, the banks would have to sell about 160 tonnes in just under a month to hit the yearly quota of 500 tonnes by the September 26 deadline. The European Central Bank’s (ECB) weekly financial statements have been showing weekly sales of less than 5 tonnes for the past month or so. As Jon Nones highlights, there are currently a lot of rumours surrounding the central bankes sales activities in the market, but nothing is concrete. Tuesday September 12th is the next day for publication of the ECB weekly financial statement.

From the technical perspective, Gold is currently trading in a descending triangle, which is a bearish formation that usually forms during a downtrend as a continuation pattern. An indeed, as the chart below reveals, Gold is currently in a downtrend. As such a pattern develops, volume usually contracts. And this is currently happening in Gold, both the volume in the futures market an the volume of the biggest EFT, which tracks Gold (AMEX: GLD), has considerably declined in the last six weeks.

Additionally to the bearish action in the price of Gold, the Amex Gold BUGS Index (AMEX: HUI), which is a modified equal dollar weighted index of companies involved in gold mining that do not hedge their gold production beyond 1.5 years, tried to break out of an ascending triangle, which normally is a bullish formation, but sharply reversed it's course and fell back to the lower trendline. To speak in technical terms, the break out attempt last week seems to be a bull trap.

Given the weakening demand for Gold and the recent bearish action in Gold and the HUI, if Gold breaks below it's key support zone between $600-$607 per ounce and the HUI breaks below it's trendline, both Gold and gold mining stocks should head lower.
Components of the HUI are as follows: GFI, NEM, FCX, GLG, KGC, HL, AEM, IAG, GOLD, CDE, GSS, EGO, MDG, GG, HMY.

Disclosure: The author is short in Gold.

For a detailed chart analysis with an estimated price target of Gold, look at my Weekly Chart Book.

Weekly Technical Review

noreply@blogger.com (Oliver Schwindler) — Sat, 09 Sep 2006 18:52:00 +0000

Last week all U.S. stock indices lost ground with the Dow Jones Industrial losing -0.6%, the S&P 500 -0.9% and the Nasdaq 100 -0.9%. The S&P 100, which made on Tuesday a new 52-week high, lost till Friday -0.8% over the week. Two interesting points about last weeks trading action in the equity markets are worth mentioning:

The small cap indices, which last week broke out of their intermediate downtrends, lost more than the large cap indices, as the S&P 600 lost 1.5% and the Russell 2000 lost even 1.8%.
The volume on the down-days was for all indices higher than the volume on up-days. Especially the volume on Friday, which was the first up-day following the 3 down-days in a row, was for some indices the lowest one in the week.

Both the Dow Jones Industrial and the S&P 100 broke their steep upward trendlines to the downside and found support at their somewhat more flat trendlines.
There are also news from the Dow Theory perspective, as the Dow Jones Transportation Index was losing ground on all four trading days. Till Friday the loss summarized to 2.7% under the heaviest volume compared to the last three weeks. The index couldn't climbe above the 4,300-level and fell back to it's short-term support at the 4,200-level.
As the small cap indices lost more than the large cape indices, the rotation out of small cap stocks into large cap stocks is still going on and the ratio between the S&P 500 and the Russell 2000 found support at it's trendline.
And last but not least - the VIX broke it's intermediate down-trend by jumping 20% till Thrusday and closing at 13.13 on Friday with a weekly gain of 10%.

Gold lost in the last three days over 4% after touching the upper trendline of it's descending triangle on Tuesday and reached it's support zone between $600 and $607 per ounce on Friday. Crude Oil fell below it's 200 day moving average at 67.90 after losing almost $3 ber barrel or 4.3% in the last week. As Gold and Crude Oil were falling, the CRB Index reached it's key support at the 320-level.

For the coming week there are several key levels to watch:

Dow Jones Industrial: 12,600-13,000 (key support zone)
Nasdaq 100: 1,550 (short-term support level)
S&P 100: 598 (short-term support level)
S&P 500: 1,290 (key support level)
Russell 2000: 700-710 (key support zone)
VIX: 14 (key resistance level)
CRB: 320 (key support level)
Gold: 600-607 (key support level)

The interested reader can have a look at all the mendtioned charts in my Weekly Chart Book at Stockcharts.com.

Technical Look at EUR/USD: Trading Opportunity?

noreply@blogger.com (Oliver Schwindler) — Thu, 07 Sep 2006 13:47:00 +0000

The Euro has gained roughly 8.5 percent against the U.S. Dollar in 2006, mainly due to the differences in the interest rate cylces. The FED already began raising rates in June 2004 by 0.25 basis points and stopped after it's 17th rate hike in August 2006. However, the EZB began raising rates not until December 2005 and has since then increased it's key interest rates on 4 sessions by 0.25 basis points. Some market participants belief that the FED is done and the EZB will further raise rates in the coming months. On this outlook the Euro should be strong against the U.S. Dollar.

A look at the daily chart of the Euro Currency Trust (FXE) reveals, that since May the Euro is trying to break above it's resistance at 1.29 against the U.S. Dollar and is recently trading in a tight trading range between 1.29 and 1.27 since the beginning of August.

The data from the Commitments of Traders Report (COT) from the Commodity Futures Trading Commission (CFTC) reveals, that speculators' long positions are extremly high compared to the last 52 weeks, whereas commercial buying remains low. Both signs suggest, that the Euro is topping out against the U.S. Dollar.

However, sometimes large positions of speculators indicate a continuation of the prevailing trend. Therefore, it could be wise to wait for an break out above the 1.29-level or below the 1.27-level before taking a position.

Housing Crisis: Housing Bubble or Lending Bubble?

noreply@blogger.com (Oliver Schwindler) — Wed, 06 Sep 2006 07:58:00 +0000

The increase in home prices cannot be explained by fundamental factors, such as rising incomes and population growth. The growth in income over this period has not been especially rapid. The rate of income growth is considerably slower than in the years from 1950 to 1973, when the rise in home prices just kept pace with the overall rate of inflation. The growth in population over this period has not been especially rapid. The most rapid growth in the number of new households actually took place in the 1970s and early 1980s, when the huge baby boom cohort was first forming their own households.

Most importantly, there has been no significant increase in rents, which would be expected if the run-up in house prices were explained by the fundamentals of the housing market. Rents and home sale prices have always moved closely together, since families can freely switch between renting and owning depending on the relative prices, and landlords can sell off rental property if home sale prices rise substantially relative to rents. Rents had increased somewhat more rapidly than the overall rate of inflation from 1998 to 2002, and are currently rising again. However, these small increases in rents compared to the large increases in home prices, could indicate that the run-up in house prices is not being driven by fundamental factors in the housing market.

Lon Witter, founding partner at Witter & Westlake Investments, recently pointed out that

"by any traditional valuation, housing prices at the end of 2005 were 30 percent to 50 percent too high."

The biggest difference between the recent rup-up in home prices and the one in the 70s is the financing of these home purchases. In the 70s home owners owned roughly 68 percent of their homes, whereas today they only own 57 percent of their homes.

However, as the chart below shows, only the strong price increases in the recent years prevented that home owners lost more of their homes.

In the recent years home owners seem to have used their homes for financing their consumption needs as they have extracted large amounts from their home equity.

The strong increases in house prices and historical lows in mortgage rates have definetely fuel this evolution. The result is, that 73 percent of houesholds total liabilities are currently mortgages.

If substantial price decreases in the coming months cause a free fall in housing prices, which would be the direct consequence of a housing bubble, the data above would suggest, that there could be a big problem in outstandig mortgages as borrowers will get in financial difficulties.

A Portfolio of Small Australian Mining Stocks

noreply@blogger.com (Oliver Schwindler) — Mon, 04 Sep 2006 12:37:00 +0000

As Steve Towns recently pointed to an interesting article about investing in small Australian mining stocks from the Wall Street Journal, here is a list of some promising mining stocks in the "land down under".

Zinifex Limited (ASX: ZFX)
Marketcap: 5,794.2 Mio. AUD (4,426.2 Mio. USD)
Metals: Zinc, Lead, Silver, Gold and Copper
PE 2006: 3.9
PE 2007: 6.2

Oxiana Limited (ASX: OXR)
Marketcap: 3,864.7 Mio. AUD (2,952.2 Mio. USD)
Metals: Zinc, Lead, Silver, Gold and Copper
PE 2006: 7.4
PE 2007: 9.3

Minara Resources (ASX: MRE)
Marketcap: 1,637.1 Mio. AUD (1,250.6 Mio USD)
Metals: Nickel and Cobalt
PE 2006: 7.7
PE 2007: 10.9

Kagara Zinc Ltd (ASX: KZL)
Marketcap: 1,051.5 Mio. AUD (803.2 Mio. USD)
Metals: Copper, Zinc, Lead, Silver and Gold
PE 2006: 8.6
PE 2007: 9.2

Unfortunatelly, Minara Resources (ASX: MRE) has recently broken out and skyrocket almost 40% in the last four weeks.
However, Kagara Zinc (ASX: KZL), which recently got above it´s all time high of 4.50 AUD, has been consolidating in the last week and could be a buy at this point, except it falls again below the key-support at the 4.50AUD-level.
Zinifex (ASX: ZFX) and Oxiana (ASX: OXR) are still inside their consoliation patterns. As Zinifex recently got above it´s resistance at the 11.20AUD-level, a breakout above the resistance at the 12AUD-level would be a bullish sign.

Microcap Pick in the Pollution Control Industry

noreply@blogger.com (Oliver Schwindler) — Sun, 03 Sep 2006 15:38:00 +0000

CECO Environmental Corp. is a leading vertically integrated provider of systems and parts to the air pollution control industry. The Company focuses on engineering, designing, building, installing and monitoring systems that eliminate airborne contaminants and control emissions from a variety of industrial facilities. The Company operates through seven subsidiaries which together have in excess of 1,500 active customers in industries including automotive, pharmaceuticals, metal working, foundries, paper, food, and chemicals.

Although the company has incurred a net loss over the past seven years, now it seems to be the right time to invest in this company. In the last 6 months, CECO Environmental experienced an extraordinary demand of its products and services. Year over year, it´s revenues increased in Q1 by 62% and in by Q2 59%. The strong demand and improvements in it´s operating margin pushed the company into profitability, as it reported a net income of 0.12 cents a share in Q2.

Management holds more than 50% of the outstanding common stock of 12,8 Mio. shares and various hedge funds hold over 70% of the free float of 4.8 Mio. stocks.

Management:

Phillip DeZwirek (CEO): 2.6 Mio.
Jason DeZwirek: 3.9 Mio.

Hedge funds:

Sandler Capital Management: 1.55 Mio.
Tontine Associates: 0.9 Mio.
Dynamis Advisors: 0.47 Mio
Stark Asset Management: 0.44 Mio.

As the company`s backlog, which was at the end of Q2 $43.7 Mio. (an increase of 66% over its backlog of $26.3 Mio. at the end of Q205), and it´s bookings, which were at the end of Q2 $87 Mio. (an increase of 64% over its bookings of $53 Mio. at the end of Q205), are still growing at a remarkable high rate, the earnings should improve hopefully at a higher rate if the latest improvements in the operating margin will sustain. Higher margined international contracts, which made up 3% of sales over the last two years (or roughly $2.5 Mio. in 2005), have increased significantly in fiscal 2006, comprising over 10% of bookings to date.

However, the biggest risk seems to be the high leverage (189% long-term debt/equity) with its loans secured by substantially all of its assets, which may make it difficult to obtain additional debt financing on acceptable terms. Admittedly, accoring to William Gregozeski, a analyst at Capstone Investments, the company is working to pay off its debt by the end of the year and has received a new credit line, which includes interest rates 175 basis points below its previous rate and less restrictive covenants.
Due to the nature of its contract-specific business, the latest cash flows from operating activities were negative (Q1: -2.0 Mio., Q2: -2.4 Mio). Sluggish cash flows from operating activities in the coming quarters will be a warning sign, that the managament is unable to transfer revenues into earnings.

The stock is currently rated by only one analyst from Capstone Investments who has issued a Strong Buy rating with an price target of $17. William Gregozeski estimates that CECO Environmental will earn $0.37 in 2006 and $0.70 in 2007.

From a technical perspective, the stock seems to be quite strong:

It had a strong run-up from $2 in May 2005 to nearly $13 in April 2006.
The consolidation was a little bit to hefty as it lost almost 50% from it´s high in April. However, the stock found a very strong support at the 200 day moving average, which is a positive sign.
The stock consolidated 3 months in a trading range between $7 and $9.
The breakout on Friday, which was backed by a strong increase in trading volume, above the key-resistance at the $9-level and it´s 100 day moving average, could signal that the stock will climb to it´s recent high at $13.

However, given the strong constitution from a technical perspective an investor should watch closely the improvements in the cash flows from operating activities and possible sales of the mentioned hedge funds.

Disclosure: The author has a long position in CECE.

RAB Capital Increases Stake in African Copper Plc to 10.7%

noreply@blogger.com (Oliver Schwindler) — Fri, 01 Sep 2006 14:45:00 +0000

The hedge fund manager RAB Capital increased it´s stake in African Copper Plc, a UK incorporated copper prospector with projects in eastern Botswana. African Copper trades on London´s AIM under the symbol ACU and has currently a marketcap of 90.9 Mio. £ (173.2 Mio. $). Recently, Merrill Lynch bought 6.3% and Goldman Sachs increased it´s stake from 2.3% to 8.45%. David Jones, the CEO of the company, holds 1.2%.

RAB Capital Increases Stake in Delling Group to 14%

noreply@blogger.com (Oliver Schwindler) — Fri, 01 Sep 2006 14:04:00 +0000

The hedge fund manager RAB Capital increased it´s stake in Delling Group Plc, a leading supplier of marketing support services for marketing and communication departments throughout The Nordic countries. Delling Group trades on London´s AIM under the symbol DLG and has currently a marketcap of 15.2 Mio. £ (29 Mio. $). Geir Lolleng, the CEO of the company, holds 24.10% and Mr. Bjart Dysthe holds 26.7% of the outstanding shares.

Housing Boom´s Full Impact on GDP

noreply@blogger.com (Oliver Schwindler) — Thu, 31 Aug 2006 23:45:00 +0000

Residential construction has been a significant source of jobs and growth for the past four years. In the last four years residential construction contributed about a sixth of the annual average real GDP growth of 2.8 percent, compared to a twentieth over the previous six years.As the housing market is weakening, so is the economy slowing. The direct influence of the slowing residential construction activity should not be a big concern for the overall economic perspectives.

However, there is another direct influnce of the housing boom on the economy, which seems to have had a much larger impact on the econmic growth in the last five years. As pointed out by Lynne Montgomery in the latest FDIC Outlook homeowners have been substituting mortgage debt for consumer debt in the last 5 years, as the growth for mortgage debt has clearly outpaced that of consumer debt (see figure below).
Source: Northern Trust

In recent years, the combination of low interest rates and rapidly appreciating housing values resulted in a surge of mortgage equity withdrawals (MEW), which also called Home Equity Withdrawal (HEW). Mortgage debt grew by nearly $4 trillion from year-end 2000 to yearend 2005, with an estimated one-half of this growth resulting from the refinancing of existing mortgages. Many homeowners who refinanced were able to take advantage of the low mortgage interest rates, taking cash out and still reducing their monthly payments. William Gross, managing director at PIMCO, commentated these changes in PIMCO´s October 2005 Investment Outlook:

"Houses were then turned into ATM machines as refinancing, equity extraction, and a plethora of funny money mortgage innovations placed cash in the hands of consumers."

Dean Baker, co-director of the Center for Economic and Policy Research (CEPR) commented on the latest GDP numbers:

"The weak consumption growth is directly related to the weakness in the housing market. Consumers have borrowed heavily against the growing equity in their homes over the last four years, as the savings rate declined from 2.9 percent in the first quarter of 2002 to -1.5 percent in the second quarter of 2006."

Using Goldman Sachs estimate of about 2/3 of MEW flowing through to personal consumption expenditures, it is possible to estimate the impact of MEW on GDP. The graph below clearly shows the importance of MEW over the last few years.
Source: Calculated Risk

Bill Gross summarized his "sequence for house bubble popping or froth skimming" in PIMCO´s October 2005 Investment Outlook as:

1) Housing prices will cool/stop going up very much/even go down in some cities, WHEN...

a. Interest rates rise to a high enough level to make the purchase of a new home a burden instead of a boon for first time buyers.

b. Mild regulatory pressure begins to reduce the amount of funny-money lending.

c. Speculators sniff the beginning of the end.

2) Home equitization should retreat shortly thereafter.

3) Consumption/the U.S. economy will then weaken when the house ATM starts running out of fresh new $25,000/$50,000/$100,000 home equity loan dollar bills.

4) The Fed will cut interest rates in order to start the game all over again.

Let me state categorically that the above sequence is barely questionable, almost inevitable, 99% unavoidable, and in modern parlance - "slam-dunk."

Now lets see what has happen in the housing and credit market in the past 9 months since Bill Gross stated his predicition.

As the figure below clearly shows housing prices have truly colled/stoped going up.Source: Northern Trust

Econ 101 tells us that when supply exceeds demand ex ante, the price will weaken. The existing home market exemplifies this tenet.
Mortgage rates have been rising so strong, that mortgage loan applications for purchase have decreased by 16 percent from their all-time high in August 2005.
Source: Northern Trust

Regulatory pressure seems to begin to reduce the amount of funny-money lending, as on December 20th Federal Financial Regulatory Agencies proposed Guidance on Nontraditional Mortgage Products. Already in May 2005 they had released a Credit Risk Management Guidance for Home Equity Lending to commercial banks, thrifts and credit unions.

Robert Toll, chief executive of luxury home builder Toll Brothers (NYSE: TOL), told the Wall Street Journal, that speculative buyers, who accounted for about 10 percent of demand one year ago, are now sellers.

Unfortunately, to verify whether the retreat in home equitization has already started, we have to wait until to September 14th when the FED's flow of funds report will be published and the latest MEW figures can be calculated. However, the recent noticeable reduction in home equity loans could be a indication that the retreat in home equitization has already started.

Source: Northern Trust

Additionally the meager gain of 2.5% in consumer spending during the second quarter suggests that the house ATM starts to run out of fresh cash.

So Bill Gross´s sequence for house bubble popping has come true. And he predicted:

"If real housing prices decline in the U.S. in 2006 or 2007, a recession is nearly inevitable."

Data from the National Association of Realtors (NAR) shows that the median sales price of existing 1-family homes is already falling.

Source: Northern Trust

Thus, the question will be:

"When will the Fed start to cut interest rates?"

Hedge Fund Manager Trading Below Value

noreply@blogger.com (Oliver Schwindler) — Thu, 31 Aug 2006 13:27:00 +0000

Absolute Capital Management is a hedge fund management company focused on delivering investment returns through the management of absolute return funds. On March 3rd 2006 Absolute Capital Management Holdings had a successful float on the London Stock Exchange (AIM) under the symbol ACMH and has currnetly a marketcap of 112 Mio. £ (213.5 Mio $). It´s main shareholders are:

CSI Asset Management Establishment: 54.2%
Doyne Investments: 12.1%
Troy International Investments: 5.7%
Dierk Siewert: 4.9%

Assets under management currently exceed 1.2 billion € and are allotted in the following funds:

447.2 Mio. Absolute Return Europe Fund (Launch: March 2002) CAGR: 17.6%
218.2 Mio. European Catalyst Fund (Launch: October 2003) CAGR: 22.3%
199.2 Mio. Absolute Germany Fund (Launch: January 2004) CAGR: 22.7%
94.1 Mio. Absolute East West Fund (Launch: July 2005) CAGR: 28.7%
215.4 Mio. Absolute Octane Fund (Launch: July 2005) CAGR: 70.9%
53.1 Mio. Absolute Large Cap Fund (Launch: February 2006) CAGR: 37.9%

On July 1st, they launched 2 new Funds, the Absolute India Fund and the Absolute Activist Fund.

On August 21th, Absolute Capital Management announced spectacular earnings after it has been awarded 'Best Hedge Fund Group 2006' at this year's Hedge Fund Review European Awards:

Assets under management up 125% since 30 June 2005, and up 46% since 1 January 2006
Pre-tax profit up 142% (compared to 6 months to 30 June 2005)
Industry leading margin of 56% (excluding share-based payments)
Basic EPS excluding non-cash items up 153% (compared to 6 months to 30 June 2005)
Combined management and performance fee income up by 137% (compared to 6 months to 30 June 2005)

With an actual price of 2.03 £ and the estimated earnings for 2006 at 0.31 £ the hedge fund manager trades at a PE of 6.5 and the forward PE based on 2007 earnings is currently at 4.8. Compared to its competitor RAB Capital which trades at a 2006-PE of 16.5 and a 2007-PE of 13.2 the stock of Absolute Capital Management is currently quite cheap.

After its fast run up of 128% in the first three days of its trading, the stock traded lower and reached 1.40 £. The latest action suggests that the stock seems to have bottomed out at around 1.60 £ and is starting to rise after breaking above its key-resistance at the 1.80-level. Given the good fundamentals and the recent strength in it´s stock price Absolute Capital Management seems to be cheap buy at the current levels.

Biggest Emerging Market: Russia

noreply@blogger.com (Oliver Schwindler) — Wed, 30 Aug 2006 10:31:00 +0000

Russian stocks are approaching $1 trillion in value, an emerging-market record, mostly because of the country's oil and gas industry. The Russian Trading System Index (RTSI) has surged 88 percent over the past 12 months. Russia's market capitalization on Aug. 16 reached a record $946.2 billion, 15 percent larger than South Korea, the next biggest emerging market, at its peak in May, according to data compiled by Bloomberg.

Russia´s biggest company, OAO Gazprom, ranks as the world's third-largest company at $276.9 billion, behind Exxon Mobil (NYSE: XOM). and General Electric (NYSE: GE) and ahead of Microsoft (NASDAQ: MSFT) and Citigroup (NYSE: C). Shares of Moscow-based Gazprom, the world's largest natural-gas producer, have jumped 60 percent this year. The country's biggest companies outside the oil and gas industry include OAO Sberbank, Russia's biggest lender; OAO Unified Energy System, the national power utility; OAO GMK Norilsk Nickel, the world's largest nickel miner; OAO Cherkizovo Group, Russia's largest meat producer; and OAO Mobile TeleSystems, eastern Europe's No. 1 mobile-phone operator.

Unfortunately, there are only some Russian comapnies listed on U.S. exchanges:
Mechel Steel Group (NYSE: MTL)
Mobile Telesystems (NYSE: MBT)
Rostelecom (NYSE: ROS)
Tatneft (NYSE: TNT)
Vimpel Communications (NYSE: VIP)
Wimm-Bill-Dann Foods (NYSE: WBD)

Additionally, there are some companies traded on the London Stock Exchange (LSE):
Amtel - Vredestein (LSE: AMV)
Comstar United Telesystem (LSE: CMST)
Evraz Group (LSE: EVR)
Lukoil (LSE: LKOD)
Novatek (LSE: NVKT)
Rosneft (LSE: ROSN)

However, a lot of Russian ADRs are traded OTC in the U.S. Bank of New York provides a detailed list.

Decoupling of Stock Markets and Commodities?

noreply@blogger.com (Oliver Schwindler) — Mon, 28 Aug 2006 10:02:00 +0000

For the past few years, Reuters´s Commodity Index (CRB index) has tracked Morgan Stanley's World Index (ex USA). But does its latest 6 percent decline signal a global economic downturn, or just the unwinding of over-extended speculative positions? Right now the economic outlook is mixed. The Japanese and US economies shifted into lower gears in Q2, but China expanded 11.3 precent, it's fastest in a decade, and the Euro zone economy grew at a 2.4 precent annual rate, its best in six years. Furthermore, Gary Dorsch recently pointed out that global monetary conditions still remain super-easy despite the recent round of global rate hikes.

Last week however, the CRB index and the MSCI World (ex USA) went separate ways, threatening the tight relationship between the two markets. Global stock markets rose, celebrating a 10 percent slide in crude oil prices towards $70 per barrel, while the CRB index was hammered due to its 45 precent weighting in energy and gold. Such divergences have popped-up from time to time however, but over the long-term, the close relationship hasn't ruptured into a full divorce.

A similar divergence developed in March 2006, when the CRB index fell 8 percent, while the MSCI World (ex USA) index was left relatively unscathed. Two weeks later, the CRB index rebounded strongly and caught-up with elevated global stock markets. Another divergence occured in the 4th quarter 2004, when the the MSCI World (ex USA) index rose 15 percent, while the CRB index traded sideways. Two months later, the CRB index shot up 15 percent. In both instances the CRB index held up above it´s key support levels, before catching up with elevated stock markets.

If global stock markets stay elevated, projecting a strong global economy, and the CRB index stays above it´s current key support at the 330-level, then the CRB index could easily reclimb it´s latest highs at the 360-level. However, if the CRB index breaks significantly below the 330-level it should find some support at the 320-level. As the chart below shows, a break of the 330-level jeopardises it´s long-term uptrend.