Wednesday, August 11, 2010
Hold On Miners! In the End We Just Have Ben...
It is 5:54 AM. Have a cup of hump day joe and get ready to slide down the camel's hump. Yesterday may prove to be a pivotal market day in our rear view mirror. The big event was of course the Federal Reserve mid-day announcement addressing the state of the economy and what they plan to do about it. There was anticipation that recent gloomy data about unemployment and the wobbly pace of our domestic recovery would return the Fed to quantitative easing or "QE" for short. QE is usually interpreted to mean "print more money to buy our own debt" but Federal Reserve Chairman Ben Bernanke is a clever fellow.
Uncle Ben affirmed that the economy was missing on some cylinders but intends to reinvest proceeds from expiring mortgage-backed securities into longer-term U.S. Treasurys. This avoids printing greenbacks (for now) and aids the weakening U.S. economy by keeping borrowing costs and mortgage rates low. I thought PIMCO CEO Mohamed El-Erian summed up the dilemma we face fairly well on CNBC Business News. The probability of providing more fiscal stimulus to the economy is low due to the present political climate so additional aid must come from the Fed and they are running out of of bullets. The Fed target rate is as low as it can go so some form of QE remains one of the few options left. In the end we just have Ben.
The booger bear we're facing down is deflation, generally thought to be a much tougher problem to solve than inflation. CNBC economist Steve Liesman has a simple way to think about deflation and U.S. Treasurys. According to him a rough rule-of-thumb is that core inflation (i.e inflation less food & energy) is approximately the 10-year Treasury yield less 3%. Yesterday the 10-year touched the 2.75% level so by Steve's rule, the bond markets are telling us core inflation is already a negative 0.25% (i.e. we are at deflation's door).
The equity markets initially bounced after hearing Ben's plan because monetary easing is typically perceived as good for "risk trades" which includes commodities. Some folks point to recent run-ups in oil, wheat and copper to show commodity reflation is intact and that global recovery will muddle along regardless of what the U.S. economy does. Maybe not. There are further rumblings about a slowdown in China. Here is another article by Bloomberg London correspondent Anna Stablum on copper:
Copper Drops on Concern About Strength of Economies in China and the U.S. (Anna Stablum, Bloomberg News, 8/11/2010)
This morning commodities are falling with a bounce in gold over the $1200/oz mark (COMEX gold $1207.7/oz). The Report has been wary of this persistent inverse relation for several weeks (Will Gold & Copper Ever Make Up?). The broader markets are open now and it looks like a nose bleed. The DOW is down over 200 points and the S&P 500 has dropped below the key 1100 level. Needless to say, the metals & miners are in the stamp mill.
Stay tuned and grab your saddle horn buckaroos.
Enough talk, let's walk the walk:
The Eureka Miner's Index(EMI) remains above par at 113.30, a further drop from yesterday's 127.77 but still considerably above the 6/7/10 low of 50.7. Remember an EMI greater than 100 is good times for metals & miners.
4-WD is ON - rough roads in the marketplace; The VIX or "fear index" is back above 25; metals & miners return to shaky timber with benchmark FCX dropping to the low-70s after being near its 200-day average of $75.3 (our new warning level, 8/05 update), 10-year Treasurys are safely below 4% preserving a low-interest rate environment but there is some deflationary caution now that we are sub-3%.
The YELLOW light is turned back on for Commodity Reflation. Although copper is trading above $3/lb, the 10-yr T-Note is solidly below 3.00%
The GREEN light is turned on for Stable Markets the VIX below the 30 level (what's this?)
The YELLOW light is turned on for Inflation/Deflation Watch as the Federal Reserves resumes buying back Treasurys
The YELLOW light is turned back on for Investor Confidence as the bond markets signal trouble ahead
The GREEN light is turned on our Fuel Gauge with oil dropping 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, U.S. House committee debates miner workplace safety bill
Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)
NYMEX/COMEX: Oil is down $1.20 in early trading to $79.05 (September contract, most active); Gold is up $9.7 to $1207.7 (December contract, most active); Silver is down $0.083 to $18.075 (September contract, most active); Copper is down $0.0415 to $3.2710(September contract, most active)
Western Molybdenum Oxide is $14.25; European Molybdenum Oxide is $15.45; LME moly 3-month seller's contract is $15.65, LME cash seller is $15.44
The DOW is down 223.94 points to 10,420.31; the S&P 500 is down 27.54 to 1093.52. The miners are getting stamped:
Barrick (ABX) $42.92 down 1.31%
Newmont (NEM) $56.87 down 0.92%
US Gold (UXG) $4.77 down 2.05%
General Moly (Eureka Moly, LLC) (GMO) $3.06 down 3.01%
Thompson Creek (TC) $9.21 down 3.51%
Freeport-McMoRan (FCX) $70.14 down 4.19% (a bellwether mining stock spanning copper, gold & molybdenum)
The Steels are getting poured, (a "tell" for General Moly & Thompson Creek):
ArcelorMittal (MT) $30.99 down 6.49% - global steel producer
POSCO (PKX) $104.43 down 4.20% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is is down 2.68% to $1,363,394.12 (what's this?).
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Headline photograph by Mariana Titus