Wednesday, June 2, 2010
Where Do Metals & Miners Go From Here?
It is 6:01 AM. Have a cup of hump day java and let's watch a video before we go back to work. The month of May was a rough-tough for metals & miners and you're probably wondering if June will be any better. For my money, there are few market astrologers that I respect more than Dennis Gartman, the "Commodity King" and author of "The Gartman Letter". He gave a stern market warning yesterday on CNBC Market News which I've included at the bottom of this blog. If you don't have time to watch this video, allow me to give you the short version: stock markets may be in for trouble.
Euro to Go Under $1.20 'Almost Certainly': Gartman (CNBC Business News, 6/1/2010)
Readers of this Report know that the ole Colonel is an optimist but I do believe that when there is a rumble in the shaft it's time to head for the light of day. I reduced my position in General Moly (GMO) yesterday before seeing the Gartman interview but our reason for caution is the same - there's just too much volatility in this marketplace. Gartman recommends not investing in stocks at this time:
"I don't like volatility… when I start to see the VIX going into 35, 40, as a pro, I go into hiding..."
The Report monitors the volatility or "fear" index (VIX) on a daily basis and it is a key factor in setting the warning lights on the Eureka Outlook Dashboard to your right (what's this?). With the VIX over 30 for sometime, we've kept the Investor Confidence light on YELLOW - our trip level for concern is 25. Here is a chart of the VIX for 2010:
The peak VIX for this year was 48.20 on May 21st and this morning it is right around 34. To give this some perspective here are VIX levels during crisis points of The Great Recession - ouch!
03/17/2008 VIX=35.6 Collapse of Bear Stearns
09/15/2008 VIX=31.9 Collapse of Lehman Brothers
10/23/2008 VIX=96.4 Highest VIX, fear of a run on the banks
03/09/2009 VIX=51.3 S&P 500 March closing low 676.53 ("the bottom")
A premise of this Report is that when interest rates and fear levels are low money flows to commodities in search of return. The Fed rate remains unchanged and the 10-year Treasury is at 3.285% this morning, so interest rates are not an issue in the near-term. Unfortunately, with the VIX is at these levels an exit from the "risk trade" typically hammers the metals & miners and rewards safer bets such as staples (Johnson & Johnson will continue to sell baby powder no matter how much smoke is coming from the mineshaft).
Ah, where's your nerve Colonel? Don't the wise invest when others fear? Yup, I said "caution" not "panic" buckaroos. I just believe we've got a little more of this scary movie to go before this ole Colonel starts feeling like a "wise ass" again! Let me leave you with an optimistic flip side. Even with the euro tumbling towards parity with the U.S. dollar and COMEX copper teetering at $3.0010 (July contract) on the fence to base metal bear country, corporate earnings are not bad. Here are the latest earnings estimates for the S&P 500:
S&P 500 (2010) $85.26
S&P 500 (2010) $96.61
If we multiply these by an historical P/E ratio (i.e. stock price divided by earnings) of 15 for a recovering economy, we can estimate levels for the S&P 500 for 2010 & 2011:
S&P 500 (2010) $85.26x15 = 1278.9
S&P 500 (2010) $96.61 x 15 = 1449.2
The Colonel made a bet some time ago that we would see S&P 500 1251 before Christmas and I'm sticking to it. I didn't say I sold all of my General Moly, pardner, just an ounce or two. Hey, the markets are open and the miner's are up...
Enough bubbly-bubbly talk, let's walk the walk:
4-WD is ON - rough roads in the marketplace; The VIX or "fear index" remains in the low 30s, still above our 25 level threshold; metals & miners remain on shaky timber with benchmark FCX trading in the high $60s well below its 200-day average of $75 (our new warning level), 10-year Treasurys are safely below 4% preserving a low-interest rate environment
The GREEN light remains on for Commodity Reflation with copper trading just slightly above $3/lb
The YELLOW light remains on for Stable Markets with the VIX above the 30 level (what's this?)
The YELLOW light remains on for Investor Confidence with the possibility of a greater than 10% correction in the broader markets
The GREEN light remains turned on our Fuel Gauge with oil below $80
A ORANGE light is ON for possible adverse regulation/legislation: Mine Safety Violations, Miner's claim fee, Miner taxation, Cortez Hills, mercury emissions &
General Moly Mt. Hope Water Rights
Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)
NYMEX/COMEX: Oil is up $0.60 in early trading to $73.18 (July contract, most active); Gold is down $7.4 to $1219.5 (August contract, most active); Silver is down $0.331 to $18.220 (July contract); Copper is down $0.0620 to $3.0010 (July contract)
Western Molybdenum Oxide is at $16.00; LME moly 3-month seller's contract is $15.42, LME cash seller is $15.20
The DOW is up 61.29 points to 10,085.31; the S&P 500 is up 7.95 to 1078.66. The miners are up:
Barrick (ABX) $42.79 up 0.47%
Newmont (NEM) $54.65 up 0.02%
US Gold (UXG) $3.87 up 0.26%
General Moly (Eureka Moly, LLC) (GMO) $3.48 up 2.05%
Thompson Creek (TC) $9.41 up 2.84%
Freeport-McMoRan (FCX) $67.78 up 1.94% (a bellwether mining stock spanning copper, gols & molybdenum)
The Steels are down, (a "tell" for General Moly & Thompson Creek):
ArcelorMittal (MT) $29.41 up 1.94% - global steel producer
POSCO (PKX) $95.33 up 3.06% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is is up 0.98% to $1,316,645.23 (what's this?).
Write Colonel Possum at firstname.lastname@example.org for answers to your questions or to request e-mail updates on the market
Headline and series photographs by Mariana Titus