"The history of Eureka lies in its future." - Lambert Molinelli, 1878


The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO) and Newmont Mining (NEM); together with benchmark miner Freeport-McMoRan (FCX). Please do your own research, markets can turn on you faster than a feral cat.

Friday, June 17, 2011

Is the Bull Just Resting or...?

Morning Miners!

It is 5:57 AM. Let me pour you a welcome cup of Raine's famous Red Label. The ole Colonel has a real family feud on his hands. Sweet Ruby T is skipping the light fandango in bull pasture and Old Miner Woden has high-tailed to bear country. Which of my faithful market compadres is right?

The Bear Case

The bull and bear argument starts and is typically settled in the broader markets. This report tracks the S&P 500 because it represents 500 of America's best companies as opposed to just 30 in the DOW. You may painfully remember that the S&P 500 closed at an all time high of 1,565.15 on October 9th, 2007 just before the onset on the Great Recession which commenced that December.

The Bear Sterns calamity knocked the markets for a loop but it took the Lehman Brothers bankruptcy filing to shove us into a bear market on September 15th, 2008. Conventional market wisdom says that you leave the bull pasture when markets fall 20% from their most recent closing high or, in this case, an S&P 500 of 1,252.12; the S&P 500 opened on September 15th at 1,250.92. Although the S&P would rally above this level briefly in the following days, it soon took a sharp plunge to the depths hitting bottom on March 6th, 2009 for an intraday low of 666.79.

Of course, the latter half of 2009 was the beginning of market redemption and with some fits and starts the S&P 500 switched into bull mode and rallied to a closing high of 1,363.61 on April 29th, 2011. The old expression "sell in May and go away" is especially true this year since we've been in a downhill slide ever since. Here is the troubling part: yesterday the S&P 500 nearly returned to Lehman Brothers territory with an intraday low of 1,258.07. It turns out the 200-day average for the S&P 500 was 1,257.90, a scary level if you're in the down elevator. Almost instinctively, the market bounced and closed at a much safer 1,267.64 for the day.

The broader markets are now open and the latest efforts by the EU to bail-out Greece have have sparked a rally; presently the S&P 500 is up a percent to 1,279.50. A meeting between Angela Merkel of Germany and Nicolas Sarkozy of France resulted in a commitment to find a new deal for Greece and to do everything necessary to protect and stabilize the euro. Ironically, a default by Greece is considered by some to have the potential for a market devastation similar to the Lehman Brothers bankruptcy.

Although Greece is a small economy, many European and some U.S banks are exposed to Greek debt or hold the more perilous credit default swaps that insure debt holders from sovereign insolvency. There is also the fear of crisis spreading domino-style to other peripheral countries with marginal balance sheets. From the market bear's viewpoint, words are the only thing keeping this Greek drama from becoming a global financial tragedy.

The Bull Case

Ruby T could care less about the fortunes of profligate Greece. Since Tuesday, she has pointed to the resilience of copper prices given the latest backdrop of global turmoil. Presently COMEX copper is trading up for the day at $4.1265/lb building some more headroom from the psychologically important $4/lb level.

Inventories at the London Metal Exchange (LME) are also continuing their decline from recent peaks adding some credence to the theory that the Chinese have begun a red metal buying spree in a supply-restricted market. Here's the latest chart:

Ruby and her bullish friends argue that although the dragon is slowing from a run to a trot, there will be sufficient Asian demand to keep copper prices up for the remainder of the year. This is important because copper has proved to be a reliable proxy for global growth. Freeport-McMorRan (FCX) is listening to Ruby and is up 1.2% for the morning at $48.43.

Old Miner Woden says, "Humbug, the Chinese buyer story is nothing but a lot of bull poop - copper prices are going to fall faster than pennies from heaven! And the consequences ain't going to be heavenly!" Woden has some company, "Commodity King" Dennis Gartman has recently predicted that the red metal could dip to $3.50/lb in concert with a broad base metal retreat.

What does the Colonel think? I've lightened up a bit on Freeport-McMoRan on today's rally. Stay tuned.

Oh-oh, I see Ruby headed my way and she looks like she just saw red, "It's not red, Colonel! My bulls are seeing a streak of yeller! Go sit in the shop with that old geezer miner, my herd is heading for clover!"

Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Miner's Index(EMI)

This morning the Eureka Miner's Index(EMI) is above-par at 196.11, up from yesterday's 193.35 and below the 1-month moving average of 258.34. The EMI is down from the high of January 4th and set a new 2011 low yesterday at 193.35. The 1-month moving average continues a troubling downtrend.

The EMI gives us the market temperature for the factors that have the greatest impact on mining in Eureka County. The record high for the EMI is 816.78 set 01/04/2011; the low was set 6/7/2010 at 50.7. An EMI of 100 is the boundary between good lands and bad lands for the metals & miners.

200-day averages are used in the EMI to normalize current mining company share price and are updated monthly. Upper and lower trend lines are updated weekly.

Gold Value Index (GVI)

Our newly minted Gold Value Index (GVI) is below-par at 81.04 setting a new 2011 high, up from yesterday's 80.73 and above its 1-month average of 78.64. Today's Value Adjusted Gold Price (VAGP) is $1,575.7/oz or just $47.5/oz above current gold price.

The GVI gauges the value of gold in relation to oil, copper and silver independent of currency. Although gold prices have been on the rise, the GVI has trended down since 6/7/2010 when it had a value of 100; recently, gold has been gaining value reversing the trend. These three commodities were chosen for relative value comparison because 1) oil is a common cost element for all miners, 2) copper has proven to be a reliable proxy for global growth and 3) silver is a precious metal that now competes with gold for investment and as a hedge against fiat currencies.

The Value Adjusted Gold Price (VAGP) is a level that supports current oil, copper & oil prices based on historical commodity norms. If the daily COMEX gold price is below the VAGP, then gold is undervalued; if above, overvalued.

Daily Oil Watch

Latest Nevada Fuel Prices

On February 1st we identified North Sea Brent crude oil as a good barometer for the developing crisis in the Middle East and North Africa (MENA). It is now above $110/bbl with a large spread from the North American benchmark, Western Texas Intermediate or "Texas light sweet crude", traded on the NYMEX (see note 1). The Report normally follows the latter but will track both until things settle out in the region.

Here are the key front-month contracts as of this morning:

NYMEX light sweet crude $93.56
ICE North Sea Brent crude $113.09
Spread (ICE- NYMEX) = $19.53 (Yesterday, $18.66)

Here are the September contracts* with a narrower spread:

NYMEX light sweet crude $94.37
ICE North Sea Brent crude $112.73
Spread (ICE- NYMEX) = $18.36 (Yesterday, $17.34)

* NYMEX futures contracts have rolled forward, we now show July & September for a 2-month look-ahead

Prices are off their crisis highs but we still have $110+ Brent and $90+ NYMEX in September favoring high oil prices throughout the summer. My December prediction that we would see NYMEX $100/bbl oil before the Fourth of July came true on February 23rd.

Eureka Outlook Dashboard

4-WD is ON - The miners are on very rough roads; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) is still below its 200-day moving average of $51.15 (our new warning level, 06/13 update); 10-year Treasurys are safely below 4% preserving a low-interest rate environment.

The GREEN light is turned back on for Commodity Reflation with copper trading comfortably above $3.50/lb

The GREEN light is turned on for Stable Markets with the VIX below the 30 level (what's this?)

The YELLOW light is turned on for Inflation Watch The Federal Reserve will phase out buying Treasurys in June (aka QE2) but maintain low interest rates for now

The YELLOW light is turned back on for Investor Confidence as some investors avoid commodity-sensitive equities

The ORANGE light is turned on our Fuel Gauge with oil above $90

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, R&R Partners parts ways with Nevada Mining Association, Obama budget includes mining royalty , Mineral commission fights consolidation, Democrats seek to repeal mining tax from the constitution, Rhoads, Ellison oppose repeal of net proceeds tax, Proposal could change net proceeds tax, 'You get to deduct WHAT???' Nevada lawmakers ask gold miners

Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)

Commodity Market Morning Update

NYMEX/COMEX: Oil is down $1.39 in early trading at $93.56 (July contract, most active); Gold is down 1.7 to $1528.2 (August contract, most active); Silver is down 0.189 to $35.370 (July contract, most active); Copper is up $0.0090 at $4.1265 (July contract, most active)

Western Molybdenum Oxide is $16.33; European Molybdenum Oxide is $16.25; LME cash seller is $16.78, LME moly 3-month seller's contract is $16.78

Stock Market Morning Update

The DOW is up 108.00 points to 12,069.52; the S&P 500 is up 11.86 at 1,279.50

Miners are up:

Barrick (ABX) $43.56 up 1.11%
Newmont (NEM) $51.83 up 0.27%
US Gold (UXG) $5.62 down 1.81%
General Moly (Eureka Moly, LLC) (GMO) $4.27 up 0.47%
Thompson Creek (TC) $9.50 up 0.74%
Freeport-McMoRan (FCX) $48.43 up 1.21% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $13.35 up 0.69%

The Steels are up (a "tell" for General Moly & Thompson Creek):

ArcelorMittal (MT) $31.86 up 0.89% - global steel producer
POSCO (PKX) $97.44 up 1.65% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 0.85% at $1,597,792.71 (what's this?).


Colonel Possum

Note 1 - West Texas intermediate (WTI), also known as Texas light sweet, is a type of crude oil used as a benchmark in oil pricing and is the underlying commodity of New York Mercantile Exchange's (NYMEX) oil futures contracts. The price of WTI is often referenced in North American news reports on oil prices, alongside the price of North Sea Brent crude (source: Wikipedia)

Headline photograph by Mariana Titus

Write Colonel Possum at colonelpossum@gmail.com for answers to your questions or to request e-mail updates on the market

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