Commodity News And Mining Stocks

Interview with Ken Norquay, CMT of CastleMoore

2009-11-06T13:13:00.000-08:00

A short conversation with Ken Norquay, CMT of CastleMoore Inc., a portfolio management company.

Bio: Ken is an officer and director and chief investment strategist of CastleMoore Inc., a portfolio management company.

Ken is a graduate of McMaster University in Hamilton Ontario and has qualified as a Chartered Market Technician as well as attaining a number of industry specific qualifications in the trading of Futures and Options.

After serving three years in the Canadian Armed Forces, he entered the financial services industry as a mortgage officer with a large Canadian trust company. Ken entered the investment business and became the manager of the Hamilton and St. Catherines offices of Merrill Lynch Canada before becoming a founding partner and major shareholder of Market Street Investment House, a retail investment dealer. He sold his firm in the first quarter of 2000, realizing his life goal of selling at the top. Ken then became a director of Quest Capital Group, a day trading investment dealer. He subsequently established The Glen Nova Division of The Glen Ardith Company Ltd., an investment counseling firm.

Ken served as the chairman of the Hamilton Investment Dealer's Association and member of the IDA's Ontario District Council, in the late 1970's. He also served on the Board of Directors of the Canadian Society of Technical Analysts and as its President in the early 1990's.

Q: Mr. Norquay, in the face of the recent volatility in the stock market, a number of elliot wave practitioners are calling the recent rally from the lows a bear market rally and that we are now in a secular downtrend, does your analysis concur with this view?

A. Almost. My heart tells me the Elliott Wavers are right. But my best technical model has not yet given a sell signal for the stock market.

Q: What is your near and long term outlook for the Canadian Dollar and the US Dollar? While the general viewpoint of most market commentators calls for a decline in the US Dollar, I have heard a few technical analysts (primarily the elliot wave practitioners again) call for a secular uptrend in the UD Dollar, once again is do you or do you not concur with this view and why?

A: Our view is: CD$ down, US$ up. This time our models agree with the Elliot Wavers.

Q: What are your thoughts on the energy sector that is crude oil and natural gas in the next few months?

A: I have no opinion. Since the big wash out in crude from July 08 to Feb 09, this year’s action looks like a base and a break out. Oil looks higher. But I don’t trust it. Gas is crazy. Wild and volatile. I do not feel confident in the energy sector.

Q: Given that cyclical stocks have outperformed defensives in this rally since March 2009, can you please highlight one sector among Canadian stocks (e.g. can be financials, energy stocks, technology, resources etc.) that you believe to be overbought and due for a correction and one sector that you believe to be oversold and due for a bounce and why?

A: Overbought = Financials, Oversold = Nil

Q: Lastly, can you please highlight 1 stock that you think offers the best technicals moving forward and your reasons for liking it?

A: Deere & Company, usually known by its brand name John Deere (NYSE: DE) looks like a massive head and shoulders bottom.

Thank You Mr. Norquay!

Interview with Constantine Lycos of Lycos Asset Management

2009-11-04T09:56:00.001-08:00

An interview with Constantine Lycos, President of Lycos Asset Management, a registered investment management firm based in Vancouver, Canada

Bio: Prior to founding Lycos Asset Management , Constantine Lycos was a partner, portfolio manager, investment advisor, compliance officer and head of the investment committee at Chartwell Asset Management, where he was the lead manager of the Magna hedge funds and also managed portfolios of high net worth individuals. Before Chartwell he was employed by CIBC World Markets as a Research Associate. Attached to the Private Client Division of CIBC World Markets, he conducted research focused on individual investors' needs and constraints. That research was primarily on equity investments but included asset allocation, hedging and other more sophisticated strategies. Mr. Lycos graduated top of his class in Mathematics from the University of London (B.Sc.), and earned a master's degree in Mathematical Finance from Oxford University. At Oxford he conducted research under world-renowned derivatives specialists Drs. S. Howison and P. Willmott on stock market volatility. Mr. Lycos has completed most courses offered by the Canadian Securities Institute, including the Options Licensing, Futures Licensing, Technical Analysis, Options Strategies and Financial Markets Risk Management courses. He holds the Canadian Investment Manager (CIM) and Derivatives Market Specialist (DMS) designations as well as that of the Chartered Financial Analyst (CFA), the highest designation for investment professionals. Mr. Lycos is a fully registered portfolio manager (meaning he is licensed to advise on any kind of investment (stocks, bonds, GICs, commodities, futures, options, etc), unlike some "advisors" or financial planners that can only advise on mutual funds or insurance products). He is also the fund manager of the Lycos Canadian Hedge Funds. He is a member of the CFA Institute (formerly the Association for Investment Management and Research), CFA Vancouver (formerly the Vancouver Society of Financial Analysts.) and the Social Investment Organization, the Canadian association for socially responsible investment.

Q: Mr. Lycos, in the face of the recent volatility in the stock market, a number of commentators are citing the over-valued nature of the markets based on the economic realities – what would be you’re view of the market right now?

A: Since you started your question with talking about volatility, let’s start by asking ourselves, does stock market volatility (a rather technical term) have anything to do with concepts such as fair value, over-valued stocks and under-valued stocks? The answer is not necessarily an obvious one, but yes, stock market volatility can have an impact on the fair value of stocks: the higher the volatility, the higher the rate of return investors require to own stocks, i.e. the higher the discount rate, and the lower the fair value for stocks. Is volatility the most important determinant of fair value? Obviously not. Stocks are all about profits or earnings, future earnings to be precise. Let’s examine the S&P 500 Index. It is a good proxy for the world stock market as it is made up of large global corporations. On 2nd November 2009, I calculated the book value of the S&P 500 to be approximately 486 index points and trailing 2 quarter plus estimated next 2 quarter earnings to be about 61 points, implying a return on equity (ROE) of about 12.5%. (The index was at 1042 when I performed the calculation.) It’s very tempting to apply a something like a 15x PE multiple on these earnings to come up with a fair value number of 915, but that would be wrong. We seem to be coming out of a cyclical bottom so the earnings are likely to improve a bit faster than normal, so we must rely on the concept of “normalized earnings”, meaning using a projected average ROE number over several years out, rather than just a couple of quarters, of let’s say 15%. 15% of 500 is 73, which is a reasonable “normalized earnings” number to use. Again, an average P/E multiple of about 15 could be used to come up with a fair value estimate for the index of about 1100. At 1042 the market doesn’t look overvalued. However, there are a number of things that bother me with this analysis. I am not convinced that the economic recovery will as strong as one might expect given the magnitude of the decline primarily due to the decreased leverage in the economy, when compared to levels prior to the financial crisis. So if appetite for borrowing doesn’t come back for a number of years perhaps the projected average ROE is lower in the future making the market too expensive or over-valued. Another thing that bothers me is that about half of the book value of the S&P 500 is made up of intangible assets such as goodwill. Goodwill doesn’t deserve a multiple.

Q: What is your near and long term outlook for the Canadian Dollar with respect to its fundamental value and its impact on the Canadian economy?

A: CAD is a currency used by speculators (as well as some other currencies such as AUD and NZD) as a vehicle of choice on betting on the global growth, reflation story. CAD almost never trades on fundamentals, i.e. things such as Purchasing Power Parity (PPP), meaning fair value based on what a basket of goods should cost in Canada versus in other countries, so it almost a waste of time even bothering to calculate the fair value for CAD. As far as making a call on CAD, the call would be pretty much the same as the call for oil and commodities in general, a “game” which I don’t play. Speculating on commodities and currencies is zero-sum game, better left to fools and “sharks”. I am neither.

Q: With the US GDP data coming in better than expected last week and today’s ISM Index rising more than expected in addition to positive construction spending and pending home sales data, what is your read on the US economy going forward and its place in the global economic landscape?

A: I tend to be a bottom up stock investor, not paying too much attention to the economy as a whole. A great bottom up investor, Peter Lynch, said something like “If all the economists in the world were laid end to end, it wouldn't be a bad thing.” The US economy is in trouble now but long term it’s probably about the best place in the world to bet on. Why? It possesses the basic necessary ingredients that are required for optimal wealth creation, first identified by Adam Smith: economic and political freedom for its citizens, respect for property rights and the rule of low. Unfortunately since 9/11 some of the freedoms have disappeared and also the respect for civil rights by governments has gone down a bit, so things could be better, but on a relative basis it is still about the best place in the world. Canada is also pretty good. By the way, all other factors, such as availability of resources (be it human like in China, or natural, like in Russia, Brazil and Canada) are secondary in the quest for wealth creation. Innovation, new ideas, new technologies create wealth and the economies that foster the right conditions to promote innovation will do the best in the long run.

Q: Given that cyclical stocks have outperformed defensives in this rally since March 2009, can you please highlight one sector among Canadian stocks (e.g. can be financials, energy stocks, technology, resources etc.) that you believe to be overbought and due for a correction and one sector that you believe to be oversold and due for a bounce and why?

A: Yes, cyclicals outperform when markets go up, they underperform when they go down, etc. Deep cyclicals are too hard to value – you can’t predict their earnings, can’t put a multiple on them, can’t analyze them. I do not take positions in things I can’t value, neither short nor long. But tied to question number one, if the market is overvalued and corrects, then the cyclicals will correct more. The market is not overvalued and it is not undervalued either. So large moves in either direction are not likely to happen based on fundamentals.

Q: Lastly, can you please highlight 1 stock/theme that you think offers the best value moving forward and your reasons for liking it?

A: The world needs energy and ideally clean energy. We have been talking about hybrid cars and now plug in electric cars for a while. If we all switched to driving plug in electric cars tomorrow all we’ll be doing is substituting burning refined oil (gasoline and diesel) with burning coal to produce electricity. Yes, electric cars are more efficient but burning more coal is not a good idea. Hydro, wind and solar are good but we don’t have anywhere near enough capacity from these sources. As much as I don’t like the only viable alternative is nuclear. A good pure play nuclear electric utility is Exelon (EXC). Stable earnings, a safe bet on growth, a good undervalued stock. It’s fair value is about $68 and will probably get there in 12 to 18 months and it’s only trading at about $47 now. Go long the stock, sell the $65 calls and buy the $35 puts, to have protection in case the unthinkable happens.

Thank You Mr. Lycos!

Interview with Murray Leith, VP and Director of Research at Odlum Brown

2009-11-02T22:03:00.000-08:00

An interview with Murray Leith, Vice President and Director of Investment Research at Odlum Brown

Bio: Murray Leith (BComm, CFA), has over 20 years of experience as an Investment Analyst. He is a Vice President and Director of the Firm, as well as a member of Odlum Brown's Executive and Management Committees. He joined Odlum Brown in June 1994 and has managed the Odlum Brown Research Department since that time.

Mr. Leith formulates the Firm's economic outlook and equity investment strategy, in addition to covering individual companies, primarily in the Financial Services sector. Moreover, Mr. Leith and his team of Analysts established the Odlum Brown Model Portfolio over 14 years ago. This all-equity portfolio showcases how we believe individual investment recommendations should be used within the context of a client portfolio. The Model also provides a basis with which to measure the quality of our advice and the effectiveness of our disciplined investment strategy. Since inception, the Model's returns have outperformed the benchmark S&P/TSX Total Return Index by a considerable margin.

Q: Mr. Leith, in the face of the recent volatility in the stock market, a number of commentators are citing the over-valued nature of the markets based on the economic realities – what would be you’re view of the market right now?

A: It's the market of stocks that matters and not the stock market. From a bottom up fundamental perspective there are a lot of attractively priced stocks.

Q: What is your near and long term outlook for the Canadian Dollar with respect to its fundamental value and its impact on the Canadian economy?

A: The "fundamental" value of the dollar is purchasing power parity, which is around 85 cents. The dollar can stay out of over or undervalued for extended periods of time. Conditions are ripe for our dollar to remain overvalued. The long term implications are negative for the Canadian economy. Recently, the Canadian economy is doing poorly, in large part due to the exchange rate.

Q: With the US GDP data coming in better than expected last week and today’s ISM Index rising more than expected in addition to positive construction spending and pending home sales data, what is your read on the US economy going forward and its place in the global economic landscape?

A: I believe the US and global economy is in the very early stages of recovery. The US recovery will like surprise on the upside over the next few quarters, as there is a ton of stimulus in the system.

Q: Given that cyclical stocks have outperformed defensives in this rally since March 2009, can you please highlight one sector among Canadian stocks (e.g. can be financials, energy stocks, technology, resources etc.) that you believe to be overbought and due for a correction and one sector that you believe to be oversold and due for a bounce and why?

A: The resource stocks were over bought and are therefore experiencing a correction. The Utility stocks have been neglected and are due for a bounce.

Q: Lastly, can you please highlight 1 stock/theme that you think offers the best value moving forward and your reasons for liking it?

A: The best value is in large US stocks, particularly in the Consumer Staples and Health Care sectors. JNJ, KO and WMT are a few examples. A decade ago Canadians fell over themselves getting money out of the country. The results were horrible. Today, they do the opposite and will likely be disappointed again. The lesson from history is to swim against the consensus, because conventional wisdom is often wrong.

Thank You Mr. Leith!

Canadian Market Timer - November 1, 2009

2009-11-01T20:33:00.000-08:00

The embedded report is one I compiled over the weekend to give myself some clarity on the current state of the Canadian equity market.

Canada Market Timer1

Trade For iShares Canadian S&P/TSX Capped Financials Index Fund (XFN)

2009-09-24T20:45:00.000-07:00

As the iShares Canadian S&P/TSX Capped Financials Index Fund (XFN) closed down $0.40 (1.76%) to end the day at $22.29, one large investor purchased 5,025 March 2010 20 calls for $2.85 and 5,035 March 2010 20 puts for $0.93. Volume was through the roof, i.e. several times both strike prices according to the Montreal Exchange's Most Active Options Report.

My quibble with the Montreal Exchange's Most Active Options Report is that while it reports on the volume of the trade it doesnt exactly outline which direction the trade was placed in, i.e. whether the investor bought or sold the calls/puts.

Lets assume, the investor purchased both the calls and puts in the aforementioned transaction, this trade would be known as a Long Straddle.

A long straddle consists of taking a long postion in both a call and a put option on the same asset with the same strike price and expiry date. By doing so, the investor sets lower and upper break evem points for this position. This is a useful strategy when one one expects a highly favourable or unfavourable move in the price of the underlying stock but is not sure of the direction of the move.

With the March 2010 20 calls trading at $2.85, the investor would have had to pony up $1,432,125 for 5,025 calls. With the 5,035 puts being worth $0.93, the investor's out of pocket costs for the puts would have equalled $468,255 bringing the investor's net out of pocket expenses to $1,900,380 ($1,432,125 + $468,255) for a net debit of $3.78 ($2.85 + $0.93).

His lower break even corresponds to the strike price minus the total option premium ($20.00-$3.78) = $16.22; his upper break even corresponds to the strike price plus the total option premium ($20.00+$3.78)= $23.78. This means that the trade will be profitable as long as the price of the stock moves outside this straddle/threshold.

The downside risk of this strategy is known and capped at $1,900,380. If the stock remains inside the straddle/threshold, the investor may lose upto the total premium paid for the options. Conversely, if the stock moves outside the straddle/threshold in any direction, the investor can excercise either the call or the put (depending on the direction of the stock move) or even simply sell the favourable option in the market.

Now, lets assume the investor sold both the calls and puts in the aforementioned transaction, this trade would be known as a Short Straddle.

As a result of selling the March 2010 20 calls trading at $2.85 and the March 2010 20 puts trading at $0.93, the investor would pocket $1,900,380 ($1,432,125 + $468,255) for a net debit of $3.78 ($2.85 + $0.93).

This money is his reward for taking on the risk of a large move in the stock’s price, either up or down. If the stock drops, he will be assigned on his short put position and will be obliged to buy 503,500 shares at $20. If the stock rises, he will be assigned on his short call position and be obliged to sell 502,500 shares he doesn’t own at $20. His break-even point on the downside is $16.22 and his break-even point on the upside is $23.78. This means that the trade will be profitable as long as the price of the stock stays within this range.

Should XFN's stock price close below $16.22, At expiration, the investor will be assigned on his short put position and will be obliged to purchase 503,500 shares of XFN at $20. He will then sell them at a price below $16.22, thereby incurring a loss greater than $3.78 – the amount he initially received for taking on the position.

Should XFN's stock price close between $16.22 and $20.00, the investor would be assigned on his March 20.00 puts and would thereby be obliged to purchase 503,500 shares of XFN at $40.00. He will then sell these shares at the market’s price. Given that the shares are trading above $16.22, he will lose less than the initial amount taken in when he established the position,
thereby making a profit.

Should XFN's stock price close between $20.00 and $23.78, at expiration the investor would be assigned on his March 20.00 calls and would thereby be obliged to sell 502,500 shares of XFN at $20.00. To obtain these shares, he would have to purchase these shares at the market’s price. Given that the shares are trading below $23.78, he will lose less than the initial amount taken in when he established the position, thereby making a profit.

Lastly, should XFN's stock price close above $23.78, at expiration the investor would be assigned on his short call position and will be obliged to sell 502,500 shares of XFN at $20. To obtain these shares, he would have to purchase these shares at the market’s price, thereby incurring a loss greater than $3.78 – the amount he initially received for taking on the position.

Is It Time To Short The S&P 500?

2009-09-18T08:12:00.000-07:00

The ratio of the S&P 500 spot price to its 200 day SMA is sitting at 1.20 currently and the last time it was this high was way back in May 1983. Back then, the index was sitting -2.5% lower one week later.

Vertex One Asset Management Set To Launch 3 Mutual Funds

2009-09-17T21:38:00.000-07:00

Vertex One, a Vancouver based discretionary asset manager with approximately $759 million in assets is gearing up for the launch of 3 new mutual funds according to filings with SEDAR. The company is planning to launch the Vertex Value Fund, the Vertex Enhanced Income Fund and the Vertex Growth Fund, all of which would require a minimum initial investment of $15,000 Canadian in each Fund.

As per the filed prospectus, the Vertex Value Fund would aim to provide long term capital growth by investing in companies the team deems to be priced at attractive levels relative to the market, their competitors and their growth rates. The team cautions that due to the ‘value’ aspect of the fund, the holdings of the fund would often include companies that are out of favour. Companies with annuity like cash flows, strong balance sheets and high dividend yields will be given the greatest weighting as per the prospectus. The team intends to invest in 25 to 30 North American equities and aims to keep the portfolio turnover low. The fund will also be able trade options on a non leveraged basis but there will be no short selling. The Vertex Value Fund class B units will have a 2% management fee and the class F units will have a 1% management fee. Furthermore, 20% of the amount by which the fund outperforms its benchmark (50% S&P 500 Total Return Index and 50% S&P/TSX Composite Total Return Index) will be charged in performance fees provided that the net asset value per unit for each class of units exceeds the high-water mark (the highest daily Net Asset Value per Unit for each Class of Units from time to time establishes a high-water mark for each Class of Units). Investors seeking capital gains over the long term, with a medium to high tolerance for risk would be best suited for the Vertex Value Fund.

The mandate of the Vertex Enhanced Income Fund is to preserve capital while providing high income by investing primarily in Canadian and United States bonds (government as well as corporate) and debentures. The fund will also invest in income securities that the team deems undervalued but no more than 25% of the fund can be invested in common high yield equities and no more than 25% of the fund can be invested in preferred shares. Additionally, no more than 50% of the Vertex Enhanced Income Fund will be exposed to foreign currencies and there will be no short selling in the fund. Once again, trading options will be permitted in the fund. The Vertex Enhanced Income Fund class B units will have a 1.5% management fee and the class F units will have a 0.75% fee. Furthermore, 20% of the amount by which the fund outperforms its benchmark (20% S&P/TSX Preferred Share Total Return Index, 20% S&P/TSX Composite Total Return Index and 60% Scotia McLeod Mid Term Bond Index) will be charged in performance fees provided that the net asset value per unit for each class of units exceeds the high-water mark (the highest daily Net Asset Value per Unit for each Class of Units from time to time establishes a high-water mark for each Class of Units). Investors seeking interest income as well as moderate capital growth over the long term with a medium tolerance of risk would be best suited for the Vertex Enhanced Income Fund.

The Vertex Growth Fund’s primary objective is to achieve long-term capital growth by investing in growth-oriented equities. The fund will invest in equities and equity related secuirites of North American as well as international companies. The strategy will include seeking inefficiently priced companies backed by strong management teams with solid business models that have the potential to benefit from both industry and macro-economic trends. This fund, unlike the previous two, will have the ability to invest in derivative instruments and exchange traded funds to hedge currency exposure. The fund will also have the freedom to trade in securities of distressed issues, participate in special warrant arbitrage situations by purchasing special warrant securities of an issuer while selling short the securities which underlie the special warrants, participate in merger and convertible arbitrage situations and trade in securities of issuers that may be involved in a restructuring. The Vertex Growth Fund will have the ability to employ leverage and it may invest in fixed income securities including preferreds, convertibles, corporate and sovereign debt securities. Lastly, while short selling may be employed in the fund the aggregate market value of all securities sold short cannot exceed 20% of the fund’s total net assets on a daily marked-to market basis. The Vertex Growth Fund class B units will have a 2% management fee and the class F units will have a 1% management fee. Furthermore, 20% of the amount by which the fund outperforms its benchmark (50% S&P 500 Total Return Index and 50% S&P/TSX Composite Total Return Index) will be charged in performance fees provided that the net asset value per unit for each class of units exceeds the high-water mark (the highest daily Net Asset Value per Unit for each Class of Units from time to time establishes a high-water mark for each Class of Units). Investors seeking capital gains over the long term, with a medium to high tolerance for risk would be best suited for the Vertex Growth Fund.

The investment team at Vertex One consists of founder and director John Thiessen, founder and director Matthew Wood, founder and director Jeffrey McCord and portfolio manager Tim Logie. The flagship Vertex hedge fund, which dates back to 1998, is a multi strategy fund, focussed on event driven strategies with a long bias. The fund seeks to garner absolute returns of 10% plus with a Beta of 0.5 or less to market indices over the longer term. The fund has definitely succeeded in maintaining a Beta of 0.3991 over its tenure whilst recording a 18.20% compounded rate of return and a cumulative return of 593.6% since 1998. The Vertex fund has had 69.78% positive months and 30.22 % negative months. Thiessen and his team have managed to record an annualized alpha (a measure of a portfolio's return in excess of the market return, after both have been adjusted for risk) of 20.12% relative to the S&P 500 and 11.36% relative to the Hennessee Opportunistic Index. While the fund did falter to the tune of -40.25% in 2008 it has returned to its winning ways by gaining 54.04% till date.

Having proved their metal in the hedge fund world, it should be interesting to watch how Thiessen and his team manoeuvre the more constrictive and publicly scrutinized world of mutual funds.

Put Buying on the iShares™ CDN LargeCap 60 Index Fund

2009-09-17T09:36:00.000-07:00

As north American equities take a beating, 2 big trades in the XIU - iShares™ CDN LargeCap 60 Index Fund indicate that some very large institutional type investors think that the S&P®/TSX® 60 index is in for a rough time in the weeks ahead.

The Montreal Exchange Most Active Options Screener detected the purchase of 62,500 October 16 and 62,500 October 16.5 puts on the XIU - iShares™ CDN LargeCap 60 Index Fund which seeks to replicate the performance of the S&P®/TSX® 60 index. The Index is comprised of 60 of the largest (by market capitalization) and most liquid securities listed on the TSX. The put buying would seem to indicate that someone is betting or at the very least buying insurance in the instance that the SP®/TSX® 60 index will have lost between 6-8% of its value in the month ahead.

Options Bullish on Talisman Energy (TLM: TSX)

2009-09-16T22:58:00.000-07:00

The Montreal Exchange Most Active Options scanner detected the purchase of 9,901 September 17 calls for about $2.50. In addition, another 9,632 October 19 calls were purchased for about $1.00.

Don Coxe Basic Points September 2009

2009-09-15T17:59:00.001-07:00

Don Coxe Basic Points September 2009 - Dem Blues

To read/download Mr. Don Coxe's September 2009 Edition of Basic Points Click Here

BMO CM Basic Points Sept 2009

Don Coxe Basic Points June 2009

2009-06-11T08:22:00.001-07:00

Don Coxe Basic Points June 2009 - Who Will Really Lead the Global Rescue?

To read/download Mr. Don Coxe's June 2009 Edition of Basic Points Click Here

Basic Points June 2009 BMO CM Basic Points June 2009 BMO CM dpbasic

Publish at Scribd or explore others: Finance Non-fiction money black

Why Gold and Silver Bullion Should Be In Your Portfolio

2009-05-15T23:17:00.001-07:00

In it's annual report, which was filed on May 4, 2009 Sprott Resource Corp. (SCP: TSX) CEO Kevin Bambrough outlined his rationale for purchasing 40,475 ounces of gold bullion at a cost of C$968/oz and 852,478 ounces of silver bullion at a cost of C$12.75/oz in Q4/08.

Bambrough writes:

"The following actions of governments around the world and the state of the global fi nancial system support this approach:

• A large number of fi nancial institutions around the world are insolvent. The extent of toxic debt around the world is unclear, but the estimates keep rising each day. Although the focus to date has largely been on U.S. banks, the problem is clearly global and it is spreading beyond banks to insurance companies, pension funds, endowment funds and other entities.

• Governments around the world are prepared to absorb the losses of many insolvent fi nancial institutions, either through outright nationalization of such institutions, purchases of their underperforming assets and/or capital injections. These actions have dramatically increased global public debt and will continue to do so. In the case of certain large fi nancial institutions located in smaller countries, their liabilities may be too great for their host countries to absorb, in which case larger states will be called on to assist.

• Governments are committed to massive stimulus spending on infrastructure projects and to support industries, such as the automobile industry, which are unable to survive in their current form without government assistance. This spending will further increase public debt.

• Revenues for all levels of government have fallen and will likely continue to do so. Governments are unlikely to cut costs to match their revenue declines. The result will be a further increase in public debt.

Management believes that these government actions and the state of the global economy generally will make it increasingly diffi cult for governments to fi nance their borrowings, as lenders begin to question how such borrowings will be repaid. Ultimately, this should result in higher government borrowing costs, which would be crippling, and/or increased monetization of public debt and a corresponding decrease in the real value of fi at currencies. Such prospects support the Company’s holdings of gold and silver bullion and management believes that, in time, a greater number of people around the world will increase their holdings in gold and silver bullion as they begin to lose faith in fiat currencies. Such a loss of faith should, in time, be supportive of commodities and real assets generally, as holders of low-yielding debt instruments, both private and government issued, exit such instruments and move to hoard commodities and real assets."

Click Here To Download The Sprott Resource Corp. Annual Report

Don Coxe Basic Points April 2009

2009-04-28T17:15:00.000-07:00

Don Coxe Basic Points April 2009 - Where Will America Go to Grow?

To read/download Mr. Don Coxe's April 2009 Edition of Basic Points Click Here

Props: http://www.marketfolly.com

BMO CM Basic Points April 2009

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Don Coxe Basic Points March 2009

2009-04-03T07:45:00.001-07:00

Don Coxe Basic Points March 2009 - The ObamaMama Bear Market?

To download Mr. Don Coxe's March 2009 Edition of Basic Points Click Here

**Hearty Thanks: Reader Bill S.**

Jennings Capital Oil and Gas Focus Picks for 2009

2009-01-15T06:00:00.002-08:00

continued ...

Another one of Ron Coll’s colleagues at Jennings Capital is Gregory Chornoboy. Chornoboy covers the oil and gas sector. His two picks are Tethys Petroleum (TPL: TSX) and Calvalley Petroleum (CVI.A: TSX).

Tethys Petroleum (TPL: TSX)

Tethys drilled 9 successful gas wells in Kazakhstan in 2008, discovered the new Tasaran zone and signed the Tajik PSA for an area nearly four times larger than anticipated. Chornoboy writes “Kokbulak prospect is testing now, with results expected before year end, and the Phase 2 compressors are being installed, which will bring production up to 40+ MMcf/d in the new year.” The company has also announced a strategic relationship with a Russian electrical company that could be both a gas purchaser and a joint venture partner in project development.

Catalysts for 2009

- "Start-up of the Phase 2 compressors in January, lifting production to 40+ MMcf/d.

- First results from workover programs in Tajik fields (Q1).

- Drilling the Akkulka deep test into the Jurassic and Triassic zones (results in April).

- Production increase to 60 MMcf/d (and possibly 72 MMcf/d) in Phase 3 (early - mid Q3).

- Continuous drilling of the leads and prospects already identified in Kazakhstan."

Chornoboy has a $3.00/sh target price on Tethys Petroleum.

Calvalley Petroleum (CVI.A: TSX)

Chornoboy expects Calvalley’s Central Processing Facility to start up “imminently” and that should allow production to double. The company’s main draw and risk for that matter is its pipeline project from Block 9 in the Republic of Yemen that would allow it to connect to a third party pipeline system for the export of crude oil production. While the company has encountered some setbacks with the commerical arrangements in shipping oil to Block 18, it is currently in discussions regarding alternatives for marketing and the pipeline. Chornoboy expects some kind of resolution in this matter in early Q1/09 and “procurement and construction to commence shortly thereafter.”

Catalysts for 2009

- "Central Processing Facility start-up allows increase in production to 5,000 Bbl/d (CVI WI) (Q1).

- Calvalley has received the final version of a reservoir simulation, which has been given to its reserve evaluators. This could result in substantial reserve increases in the Company’s 2008 year end reserves.

- Extended production test results from Qarn Qaymah oil discovery (Q2).

- Exploration wells at South Qarn Qaymah and Rashidah (Q1/Q2).

- Progress on pipeline (initial announcement in Q1, and continuous progress throughout 2009).”

Chornoboy has a $3.35/sh for Calvalley Petroleum

To Download The 20 Page Report Click Here

Macro Market Comment - Salida Capital

2009-01-14T08:15:00.002-08:00

“The Fed is determined to "win" their war on deflation and reflate asset values, and has the conventional and unconventional fiscal and monetary tools to win, although timing of a global economic bottom is difficult given the unique extremes in policy and the global nature of this deep recession. And there is no free lunch for throwing trillions of stimulus at these problems but it de-risks the economy in the short and medium terms. We believe there is risk in treasuries and the US dollar and have positioned the fund accordingly.

With a weakening Fed balance sheet, low rates, a lower US dollar on the horizon and competitive currency devaluation, we believe hard assets are preferable, gold primarily at this stage of the weakened economic cycle. Energy and base metals to follow in that order. Gold has performed below its potential during the drastic deleveraging of Q4/08 (the last I checked the bank isn't taking gold to settle margin calls...yet). Deleveraging has peaked and is starting to decline, which will both independently weaken the US dollar and remove the overhang on gold.”

Source: Salida Capital Multi Strategy Fund December Performance Report

Odds & Bits: Click here to register for a live webcast with Courtenay Wolfe, CEO & President and Brad White, Lead Portfolio Manager of the Salida Multi Strategy Hedge Fund on Thursday, January 15 at 3:00PM EST

Buy, Sell or Hold Sterling Resources (SLG: TSX-V)

2009-01-14T06:00:00.003-08:00

On January 12, 2008 Tristone Capital analyst Toby Pierce released an update on Sterling Resources. Much of the following has been excerpted and/or summarized from that source.

[click graphic to enlarge]

Europe’s dependence on Russia for it’s natural supplies has in recent weeks been highlighted in light ongoing dispute between Russia and Ukraine over gas pricing. In anticipation of European utilities and gas providers turning to additional sources of natural gas supply, Sterling Resources seem ideally positioned to deliver on this prospect. Pierce writes “The company has net best estimate contingent P50 resources of 94 bcf in the Doina development offshore Romania and net best estimate P50 resources of 263 bcf in the Breagh Field in the UK North Sea.” Sterling’s assets, while in need of further development, should in Pierce’s opinion, command a premium in the market place. Furthermore, there is significant exploration potential in Sterling’s asset base and thus opportunities to expand its resource base.

Sterling and its partners are currently in the process on appraising the Breagh fields. Pierce writes “Testing has commenced on the recently drilled 1200 foot horizontal section into the West Breagh well and results are expected in ~2 weeks. The test results of the appraisal well on West Breagh will help the partnership determine potential production parameters. We understand the partnership is looking for a rate in excess of 30 mmcf/d if the total sand interval is tested. With the test results Sterling and its partners will be in a position to monetize either a portion or all of Breagh.”

In December 2008, Sterling announced that it had farmed out 50% of its 65% offshore Romanian interest to Melrose Resources plc in exchange for an initial payment of US $12-million which will be made to Sterling on closing the deal (Pierce expects this to happen in Q1/09) and a further US $12-million will be paid at the time of the Doina area development project sanction or one year from the date of closing, whichever is earlier. Melrose will also carry Sterling for a proportion of their future development costs. The amount of the cost carry will be between US $58-million and US $72.7-million, depending on the gas price achieved for the development project, ensuring Sterling is carried for development activity into 2011. Sterling will retain a 32.5% working interest in the Pelican and Midia Blocks. Pierce considers this a “clearly positive” transaction as it “implies its remaining interest in its Romanian offshore assets is worth at least C$0.71/sh.”

Pierce opines that Sterling is trading at 24% of the company’s break-up value using current transaction metrics (see figure below).

[click graphic to enlarge]

He believes that much of the discount is unwarranted because:

1. Non Distressed Sales of Gas Assets Still Relatively Robust

The recent transaction by which Bow Valley got rid of its Peik Field to Centrica implied a “transaction metric of US$2.17/boe. This distressed sale was at the bottom end of the range for undeveloped assets and clearly reflected the difficult position Bow Valley found itself in.” Given the large size of Sterling’s Breagh and Doina prospects, higher working interest positions and operatorship and as mentioned earlier and the need for European gas providers to procure resources outside Russia means that” Sterling could realize selling its assets would be much higher than we have used in our calculations above (See figure above).

2. In addition to the US $12-million that is due from Melrose Resources plc, Sterling has an agreement under which it may call for a further US $8-million of additional funding in the form of a "top up facility" with Jersey based Gemini Oil and Gas Fund II, L.P., as a supplement to the existing loan agreement with Sterling's UK subsidiary. Furthermore, the company has deferred drilling on its promising Airdh and Midia SE exploration wells, is looking at farming out a portion of its UK offshore assets, including Breagh, and has put up its UK onshore and French assets up for sale.

Catalysts Over The Next 12 Months

- Results from the testing of West Breagh horizontal well are expected within the next week to 10 days. Pierce writes “The partners are hoping for a test of 30 mmcf/d+ which if achieved would significantly reduce the capital requirements to develop the field.”

- The announcement of a sale or farm-out of a portion of Breagh, similar to what was done with Sterling’s Romanian assets and the arrangement with Melrose Resources plc. Pierce expects news to this effect before the end of Q1/09.

- Testing of flow rates at the Cladhan prospect and an additional appraisal well or sidetrack, which is expected to occur toward the middle of 2009.

- Sale of its onshore UK and onshore French assets. The sale should further bolster Sterling’s balance sheet and reduce some of the company’s capital commitment in the future.

- Exploration well on the Midia SE offshore prospect. Price writes “A successful well (fully carried by partners) is due to be drilled prior to year-end and would be worth C$0.23/sh unrisked.”

Valuation

[click graphic to enlarge]

Assuming US$50/b oil and US$7.00 mmbtu, Pierce comes up with a core NAV of C$1.86/sh based on C$0.20/sh in cash and C$1.71/sh in undeveloped assets which are made up of primarily Breagh, Cladhan, and Doina. Pierce pegs a C$2.30/sh target price on Sterling Resources.

Disclosure: I own Sterling Resources.

Westjet Airlines Q4 2008 Earnings Preview

2009-01-13T09:00:00.004-08:00

On January 12, 2009, Starmine, the company known for ranking the accuracy of sell-side analysts released its Earnings Surprise Forecast for Q4 2008. This feature focuses on stocks that Starmine predicts will experience an earnings surprise in the upcoming reporting season. This is done by quantitatively analyzing the earnings estimate accuracy of sell-side analysts and using that data to creating SmartEstimates. StarMine SmartEstimates predict future earnings more accurately than consensus estimates by putting more weight on the recent forecasts of StarMine's top-rated analysts.

Among their Positive Predicted Surprises, Starmine lists Westjet Airlines (WJA: TSX), American Science & Engine Inc. (ASEI: NASD), Copa Holdings (CPA: NYSE), Ship Finance International Ltd. (SFL: NYSE) and McDonalds Corp. (MCD: NYSE)

Given that Westjet is the sole Canadian feature – I shall highlight the reasons for it’s inclusion in the Starmine Positive Earnings Surprise Forecast for Q4 2008.

For Q4/08, the consensus EPS as indicated by Starmine is C$0.29.
The StarMine SmartEstimate is C$0.38, a predicted surprise of 29.8%.

Highlights Of Analyst Notes

5 Star Ranked analyst Jacques Kavafian of Research Capital who has a StarMine “Bold Estimate” of C$0.42 (EPS) for Westjet’s Q4/08 claims that “airlines are a call on the economy and a put on oil, implying that a weak economy may negatively impact airline stocks, but lower fuel prices will compensate for lower traffic.” Kavafian also mentions the highlest load factor in the airline’s 12 year history.

4 Star Ranked analyst David Tyerman of Scotia Capital also has an Q4/08 EPS estimate of C$0.42 for Westjet.

Westjet is scheduled to report it Q4/08 earnings on February 10, 2008.

Source: Starmine (click here to read about the other mentioned companies)

Odds & Bits: I am in no way affiliated or compensated by Starmine - just thought i'd point out this feature.

2009 Base Metal Sector Outlook - Jennings Capital

2009-01-13T06:00:00.003-08:00

continued ...

Coll’s colleague Peter Campbell’s two picks in the Base Metals sector are Globestar Mining (GMI: TSX) and Consolidated Thompson Iron Mines (CLM: TSX).

Globestar Mining (GMI: TSX)

Globestar’s primary asset is the Cerro De Maimón open pit mine in the Dominican Republic, which was commissioned in September 2008. “The mill processes sulphide and oxide ore at 2,000 tpd. Start-up of the 1,300 tpd sulphide plant has gone smoothly and concentrate is being produced. An initial 2,000 tonnes of concentrate was shipped on November 5 and another 2,000 tonnes on November 12, 2008.” Globestar currently delivers weekly shipements of approximately 1,000 tonnes and Campbell expects the company to declare commercial production in January 2009. The company has also completed construction of a 700 tpd oxide plant which is currently being commissioned. Campbell expects an announcement regarding the pouring of gold and silver bars shortly.

Campbell expects the US%69 million Cerro De Maimón mine to produce “25 million lbs of payable copper, 19,000 oz of Gold and 450,000 oz of Silver per year for each of the first three years, and approximately 25 million lbs of copper, 7,000 oz of Gold and 400,000 oz of Silver per year for an additional six years.” Based on the already mentioned Jennings Capital base metal forecasts for 2009, Campbell estimated 2009 EPS of US$0.08 and 2009 OCFPS of US$0.21. That would mean that shares of GlobeStar currently trade at a low 6x 2009 EPS and 2x 2009 OCFPS! Campbell’s target price for Globestar Mining is $1.70/sh.

2009 Iron Ore Pricing

The iron ore price is negotiated annually between Compania Vale do Rio Doce (NYSE-RIO) and a large Chinese steel producer, usually Baosteel. Iron ore is priced on a benchmark system and the “negotiated reference price is for the supply of iron ore fines f.o.b. Brazil.” Other suppliers of iron ore usually follow this benchmark price with minor adjustments. “A similar process is also in effect for other iron ore products such as lump ore and pellets. However, lump ore and pellets normally trade at a more-or-less fixed premium to the price agreed to for fines.”

The reference price for iron ore has steadily increased over the last five years and last year, Australian producers separately negotiated an 85% increase, a departure from historical norms. “Current (i.e. 2008) pricing for iron ore fines f.o.b. Brazil is US$1.344 per DMTU (Dry Metric Tonne Unit). By way of example, emerging Canadian iron ore producer, Consolidated Thompson Iron Mines Limited’s concentrate grading 66.5% iron would sell on this basis for US$89.38 per dry tonne. In years previous to this recent upswing in prices, annual benchmark price changes averaged ±5%. However, the period of rapidly increasing benchmark prices may be over.”

Campbell believes the slowing global economy and worldwide declines in steel demand and output have darkened the outlook for iron ore prices. Campbell’s forecast for iron ore prices is shown in the figure below.

Consolidated Thompson Iron Mines (CLM: TSX)

Consolidated Thompson Iron Mines Limited is developing the Bloom Lake iron ore mine located near Labrador City, Quebec. The project, consisting of an open-pit mine and concentrator, is on schedule to commence production by the end of September 2009. The concentrator is expected to produce 8 million tpa of iron ore concentrate grading 66.5% iron. The company has signed an off-take for all of its concentrate with Chinese company Worldlink Resources Ltd., a subsidiary of Worldlink International (Holding) Ltd.

The company has also singed a rail haulage contract with Quebec North Shore & Labrador Railway which covers haulage for the Company's concentrate production from Wabush Junction (near Labrador City) to Sept-Îles Junction, approximately 400 km away. The only shortcoming is a 31 km rail line that is required from Bloom Lake to Labrador City to connect to the QNS&L railway. However, Consolidated Thompson does have an arrangement with a third party to build and operate the connector line. Environmental approval to build the line has been received, and the Company has advanced C$51 million to the third party for capital to build the rail link.

While the company does have enough funds to sustain construction till Q2/09, it will require additional debt financing to complete the project. In late October 2008, Consolidated Thompson announced that it had received term sheets for debt facilities in an aggregate principal amount in excess of US$250 million which according the the press release, the company expected to be finalized shortly. Meanwhile Campbell is of the opinion that the “Company needs less than $200 million to complete the project.”

Campbell models an average EPS of $0.90 and a CFPS of $1.16 per fully financed, fully diluted share discounted to 2009 at 12%, for the first four full years (i.e. 2010 to 2013), of production. That would mean that Consolidated Thompson currently trades at 1.0x EPS and 0.8x CFPS.

In Campbell’s model, he assumes a 20% decrease in the benchmark price of iron ore for 2009, and incorporates a further 5% decrease in the benchmark for the subsequent three years. His long term benchmark price is US$0.922/DMTU. Campbell’s target price for Consolidated Thompson is $5.00/sh.

oil and gas picks to follow ...

January Early Warning System

2009-01-09T09:15:00.001-08:00

+1.39% is the gain recorded in the first five trading days in January ...

History foretells -

As go the first 5 days
So goes the month of January
As goes January, so goes the year.

All three were a 100% accurate last year.

Here's hoping for a repeat performance !

Source: Jory Capital Technical Review

2009 Base Metal Sector Outlook - Jennings Capital

2009-01-09T05:31:00.002-08:00

On December 15, 2008 the analysts at Jennings Capital released their Focus List for 2009, highlighting their top picks in each sector under coverage.

As the prices of base metals cratered in 2008, inventories started to build as a consequence. Furthermore, as the effects of global economic downturn caught hold, demand for all commodities weakened. Beginning with Nickel which hit a high of US$23.00/lb in 2007 and fell to US$4.00/lb in late 2008, Copper hit US$3.95 in Q2/08 and ended 2008 at US$1.40/lb, erstwhile Zinc declined 56% in 2008 to close at US$0.50/lb and Lead was down 60% to close at US$0.45/lb. Not to be left out, Aluminium was down 50% in 2008 touching US$0.70/lb and Uranium was down 25% to US$55.00/lb. As a result of these swift and drastic price declines, shutdowns of unprofitable mines accelerated, new projects were being delayed and inventory levels were being built up. Loofking forward, analyst Ron Coll opines, “As supply moves back into balance with demand in 2009, while China & the USA stimulate their economies with massive infrastructure funding, the prices for base metal commodities should recover.” Coll also notes that some of the benefits of the current crisis impacting the resource sector include “lower cost of fuel, energy, reagents, consumables, machinery, parts and transportation; availability and cost of geologists, engineers, consultants, operators and skilled trades people; the availability of large mining and processing equipment and a significant reduction in delivery lead-times.”

Coll’s top pick in the Base Metals sector is Mercator Minerals (ML: TSX). Mercator’s primary focus is increasing the production of copper and the resumption molybdenum and silver production at the 100% owned Mineral Park Mine located near Kingman, Arizona. The company recently completed the Phase 1 Expansion at the Mineral Park Mine and a ramp-up to full production (30,000 tpd) is anticipated by early Q2/09, producing 36 million lbs of Copper and 4.3 million lbs of Molybdenum in concentrates. Coll states that “Production could increase in 2010, to 50 million lbs of Copper and 10 million lbs of Molybdenum with the completion of the Phase II Expansion.”

Coll forecasts 2010 EPS and CFPS of US$0.32/share and US$0.58/share, respectively. If Coll’s forecasts turn out to be accurate, that would mean Mercator Minerals is trading at 1.2x forecast 2010 EPS and 0.7x forecast 2010 CFPS. Cheap, Cheap !

Mercator’s proven and probable reserves stand at 520 million tonnes averaging 0.13% Copper and 0.04% Molybdenum (1,386 million lbs of contained Copper and 343 million lbs of contained Molybdenum), sufficient for more than 20 years at planned production rates. Some of the catalysts for the company in 2009 would be: “the successful ramp-up to Phase I capacity of 30,000 tpd; recovery of Copper and Molybdenum prices from the current lows ($1.35/lb for Copper and $10.00/lb for Molybdenum); and the completion of the Phase II Expansion to 50,000 tpd (annual production rate of 50 million lbs Copper and 10 million lbs Molybdenum/year) by year-end, 2009.” Coll’s target price for Mercator Minerals is $2.50/sh.

more picks to follow …

2009 Gold And Silver Price Outlook – Jennings Capital

2009-01-08T06:00:00.002-08:00

On December 15, 2008 the analysts at Jennings Capital released their Focus List for 2009, highlighting their top picks in each sector under coverage. The following is a summary and a few excerpts on their thoughts regarding gold and silver.

The price of gold averaged approximately US$865/oz in 2008, up 24% on the year (after touching a 25-year high of US$1,040/oz in-mid March), compared to gains of 15% in 2007, 35% in 2006 and 20% in 2005. Analyst Ron Coll of Jennings Capital attributes these gains to “weakness in the US dollar, low real interest rates, improving supply-demand fundamentals, limited Central Bank selling, renewed investment demand and a decidedly more negative view of producer hedging.”

The price of silver averaged approximately US$15.00/oz in 2008, up 12% on the year, compared to gains of 16% in 2007 and 57% in 2006.

Historically, Central Bank selling, scrap and producer hedging have bridged the gap between global gold mine supply (2,500 tonnes) and annual fabrication demand (2,800 tonnes). Coll believes that this gap could remain unbalanced for the next several years thereby leading to firmer gold prices. Coll also opines that the effects of an ongoing credit crisis, “out-of-control government spending with associated inflationary pressures,” panic stricken capital markets and a weaker US dollar should translate into higher gold prices.

Coll forecasts an average gold price of US$819/oz for 2009 and US$900/oz for 2010. His silver price forecast calls for an average of US$10.75/oz for 2009, and US$12.00/oz for 2010.

Coll’s top pick in the Gold & Precious Metals sector is Yamana Gold (YRI: TSX). Yamana is a gold-silver-copper producer with activities focussed in South and Central America. The Company holds interests in nine operating mines with gold production of 745,000 ounces in 2008, increasing to 1.2 million ounces by 2010, with two new mines coming on stream and two significant expansion projects in progress. The company’s cash costs are expected to be around US$400/oz. Yamana is expected to cash flow in excess of US$500 million ($0.70/share) in 2009 increasing to US$770 million ($1.07/share) in 2010. In addition to its gold production, the company is also expected to producer 130 million pounds of copper and 11 million ounces of silver annually. Year end cash was estimated to be US$220 million and the company had working capital of US$200 million. Total debt stood at US$600 million. “The Company trades at (or did when this report was published) a low 8.5x 2009 CFPS and 1.0x NAV!” Coll’s target price for Yamana is $12.00/sh.

Coll’s colleague Stuart McDougall’s two picks in Gold & Precious Metals sector were Red Back Mining (RBI: TSX) and Semafo (SMF: TSX).

Red Back Mining is an emerging gold producer, with activities in West Africa. The company has two open-pit mines in Ghana and Mauritania and recently began underground mining at the mine in Ghana. With production expected to rise from 260,000 oz in 2008 to over 400,000 oz in 2010, the company sports an impressive growth profile. The company was expected to have a year end cash balance in excess of US$60 million, which should be more than sufficient to cover the 2009 capex program and repay current debt of US$28 million. In the near term, McDougall sees “potential catalysts in the form of increasing production from relatively the higher-grading Akwaaba Deeps underground mine over the next six months, completion of mill expansions at both the Chirano and Tasiast mills in Q2/08 and continued growth of reserves and resources.” McDougall has a target price of $9.75/sh for Red Back Mining.

Semafo is a junior diversified gold producer also focussed on West Africa. It operates three conventional open-pit gold mines in Burkina Faso, Niger and Guinea. Semafo is expected to increase production from 195,000 oz in 2008 to 260,000 oz in 2010 which should translate into strong earnings and cash flow growth. McDougall considers Semafo’s “exploration upside to be above average, particularly at the flagship Mana mine, Burkina Faso, which is showing the potential to become a new mining camp.” The company also has a strong track record at both replacing reserves and growing resources, having more than doubled the former and increased the latter by 54%, since starting commercial operations at its first mine in 2002. Semafo currently trades at 0.7x NAV, 10x 2009 forecast EPS and 3.4x forecast 2009 CFPS.

To Be Continued ...

2009 Energy Market Outlook – Merrill Lynch

2009-01-07T06:00:00.006-08:00

$50/bbl average WTI crude oil price forecast for 2009

[click graphic to enlarge]

In a report published on November 26, 2008 Merrill Lynch commodity strategist Francisco Blanch (along with some of his cohorts) lowered his average 2009 crude oil price forecast to $50/barrel. He also forecasts a dip in global oil demand of 400,000 b/d or 0.5% in 2009. Blanch notes that the chief downside risk to his forecast would be a downward revision in Merrill Lynch’s GDP growth prediction for China which stood at 806% at the time of this report. Conversely, the chief upside risk to Blanch’s scenario could arise from “excessively loose fiscal and monetary policies around the world.”

Operating costs for oil companies are low, and will not provide much price support above $30/bbl

[click graphic to enlarge]

Blanch expects oil prices to bottom around 1H2009 as producers cut back production, the reactive shock to slowing economic activity starts to fade and seasonal demand eases. As economic activity in OECD countries moderates and starts to bounce back, Blanch sees a rebound in oil prices in the second half of 2009. “In line with this view, we expect WTI crude oil prices to average $43/bbl in 1Q and $45/bbl in 2Q09. Thereafter, we see prices averaging $56/bbl in 2H09 and $70/bbl in 2010.”

Blanch forecasts a marked demand decline for oil in OECD Europe and North American in 2009. However, he sees an increase in oil consumption in the Middle East, Latin America and Africa. In the Asia-Pacific region, he sees demand decreases in Japan and Korea counter balancing the demand increases in China. On a product basis, Blanch sees “RBOB gasoline spreads staying very weak, while we expect middle distillates to hold up better. On aggregate, we expect a large surplus of light products of 1.1 million b/d, a surplus of residual fuels and other products of 930 thousand b/d, and a surplus of distillates of just 164 thousand b/d.”

US natural gas prices have fallen, and remain substantially decoupled from UK and Asian gas prices

[click graphic to enlarge]

With regards to US Natural Gas, Blanch believes writes that “US industrial and electricity gas demand could continue to soften.” Additionally, with the large increase in LNG supply ahead, he lowers his 2009 US natural gas average price forecast down to $6.00/mmBTU, from $8.50.

Global coal prices have further to fall as the market is increasingly oversupplied

[click graphic to enlarge]

Since their peak in early July 2008 European API-2 coal prices had slipped by 65% and stood at $78.50/mt compared to $118.75/mt in January. Blanch reckons that European API-2 and South African API-4 coal prices could fall again due to the deteriorating global economy and as the seasonal inventory build in 4Q comes to an end, with the contango in API-2 and API-4 increasing further. The main risks to Blanch’s views are a very cold winter and large unexpected coal supply disruptions.

To Download The 46 Page Report Click Here

2009 US Equity Strategy - UBS Investment Research

2009-01-06T09:00:00.005-08:00

S&P 500 - At 10.3x trailing EPS (and 8.3x EPS ex. Financials Write-downs) the PE is only slightly higher than the lows of 1974 …

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... but the current earnings yield less 10 yr treasury at 6.1% is as high as the earnings yield less 10yr treasury in 1974

[click graphic to enlarge]

... and the dividend yield less the fed funds rate (proxy for bank deposits) is much higher than in 1974

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The economists at UBS predict a full blown US and global recession with a marked decline in non-financial S&P 500 profits in Q4/08 and little hope of a recovery till late 2009. However, they note that they do not expect the recession to be severe as the market suggests – the key factor being a restoration of confidence. The UBS economists take comfort in knowing that government officials around the world are doing everything in their power to bring back confidence into the financial system.

Potential Catalysts For A Sizable And Lasting Upturn

1. Slow healing of financial system and lower risk premiums

Keep a eye on:

- bank loan and deposit base growth
- loan loss provisions vs. charge-offs – continued reserve build
- tighter TED and credit spreads
- lower mortgage rates, and
- Fed loan officer survey

Since economic indicators such as GDP, unemployment, housing prices and mfg. ISM are likely to trail stocks, investors should look for higher oil prices (a supply shock aside) as a sign of improving global economic expectations.” Lower yields on long-term TIPS would suggest less deflation risk.”

2. Systemic effort to rework troubled mortgages

While injecting capital into the banking system will help ameliorate some of the expected credit losses and supply loan growth, The UBS strategists see the need for further efforts to put home owners into sustainable mortgages, to stabilize their finances and the housing market itself. Measures might include government purchases of troubled mortgages with broad stroke restructuring/refinancing and/or further subsidization of mortgages to drive a boom in household initiated refinancing.

3. President Obama discovers the virtues of supply side economics

The UBS strategists are looking for the incoming administration to oppose any tax increases while providing a reprieve to low and middle income households. They would also like to see permanent income and also business tax cuts (even if modest) as a means to boost investor confidence. While they support increased infrastructure related spending they view tax cuts as a more effective stimulus because the private sector best allocates resources.

Upside Risk: Stronger oil prices

While the ongoing recession has brought down the price of oil to a cyclical low, the UBS strategists expect a recovery in the oil price as the economy recovers (2009E avg. $60/bbl, normal $75/bbl). Since energy equities don’t seem to reflect a recovery in the oil price, the UBS strategists are over-weight the sector. “Strong demand driven oil prices ($70-100) are a big net positive to S&P EPS. Energy companies benefit and most Industrial companies benefit as suppliers to energy companies and providers of energy efficiency.”

Downside Risk: Higher interest rates

The fiscal stimulus packages intended to stimulate the economy will create large Federal deficits. This should not spark inflation as it will be aimed at keeping the economy from falling beneath its output potential. “However, if the spending is misdirected or wasteful it could could cause fears of stagflation and drive long-term interest rates higher. Treasury bond yields above 5% without clear economic recovery would be a big problem to the economy and asset valuations.”

Sector Weights

Overweight: Energy, Technology and Industrials
Equal-weight: Financials, Materials, Consumer Staples, Health Care
Under-weight: Consumer Discretionary, Telecom, and Utilities

To Download The 23 Page Report Click Here

China Manufacturing Purchasing Managers’ Index (PMI) December 2008

2009-01-06T05:00:00.001-08:00

[click graphic to enlarge]

China’s Manufacturing Purchasing Managers’ Index (PMI) rose 41.2% in December, up from 38.8% in November 2008.

Out of the 20 industries measured by the survey, 18 recorded PMI’s under 50%. Furthermore, of the 18 industries, 10 registered readings below 40% and only Beverages and Pharmaceuticals registered readings above 50%. This indicates a weakening manufacturing sector.

The Input prices index rose 6.1% from November to 32.7% in December 2008 indicating the softening of input costs for manufacturers. Other than Tobacco, all remaining industries that were surveyed indicated decreases in input prices in December.

The Employment Index stood at 43.3% in December 2008, down from 44.3% in November. 19 of the 20 industries surveyed reported decreases in employment while Beverages registered increases in employment.

[click graphic to enlarge]

Source: Li Fung Group