Friday, April 28, 2006

Reuters: Commodities hold key to economic power

According to Pratima Desai of Reuters, ``Raw material resources will determine country rankings in the world economic pecking order in years to come as strong demand and limited supplies ensure commodity prices hold their upward trajectory.”

"But in the main, investments will be concentrated on things to do with commodities, whether they be stocks, bonds or currencies such as the Canadian or Australian dollars." Notes David Murrin, chief investment officer at hedge fund Emergent Asset Management.

Sunday, April 23, 2006

Oops, Record High Oil Prices Means Higher Mining and Oil Stocks!

I have to admit, the recent “euphoric” bouts of buying activities in the mining and oil sector has given me some apprehensions about a possible “top”. In fact, I’ve taken such opportunities to liquidate some of my trading positions. Yet it appears that the gravity defying momentum of oil and mining stocks appears to remain solid amidst an overbought backdrop.

Technicians or price action watchers known as Chartists have been blown off by the recent surge. Most of them have sold out or have been left behind, following the two week frenetic run, where the Mining and oil index have gained by almost 1,000 points or about 25% (and is up about 77% up from the first week of the year). Such is the flaw of trying to “time” the markets, because markets can remain irrational than one can remain solvent to paraphrase the preeminent economist John Maynard Keynes.

Nonetheless, in the past three trading sessions, from April 11-17, the Mining and Oil Index took the top spot in terms of Peso trading volume relative to the different sectors! Moreover, the mining and oil index appears to have generated its distinct sentiment relative to that of the Phisix. Put differently, the performance of the sector has been independent to that of the Phisix. Apparently, these are seminal manifestations or indications of the times to come.

At present, the Mining and oil index appears to be at still overbought levels, hence, a trading sell, in my view. However, despite the overbought conditions, one may be compelled to buy back ASAP due to Friday’s noteworthy surge to nominal RECORD highs by the world oil benchmarks, the West Texas Intermediate Crude (WTIC), as shown in Figure 1, and the Brent Crude, accompanied by a broadbased metal rebound. In New York, WTIC closed at $75.15 per barrel while Brent crude closed at $74.56 in London.

Figure 1: WTIC Crude courtesy of

Of course, rising crude also translates to rising prices in other commodities. After a severe one-day profit taking last Thursday, Copper and Gold staged a dramatic reversal on Friday with Copper on a FRESH RECORD high, up 11.38% for the week to $3.0985 per pound! Gold, the metal sibling of oil, likewise stormed back to over $630 per oz also at milestone highs!

One has to keep in mind that rising commodity prices could be indicative of declining values of Paper based money or the present US dollar standard system. Even the proponents of deflation have now been raising concerns about the attendant emerging incidence of growing inflation.

You see by theory, paper based money and credit can be issued infinitely relative to the finite supplies of commodities, ergo, too much supplies means falling values of paper money or as manifested in the present case, the surge of commodity prices. For instance, while media has noted of rising Gold prices quoted in US dollars, what has not been said is that Gold has surged across the spectrum of major Fiat Currencies, as shown in Figure 2. Even against the top performing Canadian dollar, Gold still asserting domination.

Figure 2: Gold Surging against the Canadian "Loonie" Dollar and the Japanese Yen (courtesy of

This means that global investors have been slowly monetizing gold as an alternative currency, something we have argued about since 2003. The public has taken gold as a safehaven against the loss of purchasing power by the overissuance of paper based money and credit.

Now, since the locals have gradually imbued of these developments and learned how to price mining and oil stocks with that of its underlying products; with the present surge in commodity prices, you can expect another round of frenzied buying frenzy at the Philippine Stock Exchange next week.

Notwithstanding, the nominal record high set by Crude Oil prices, aside from the inflationary manifestations, are also about investment cycles and geopolitical considerations, something we discussed last May 2 to 6, 2005, The Cure Is Worse Than The Disease. One can expect that, with the present imbalances that have led to a tight margin exacerbated by present geopolitical conditions, these are recipes for new RECORD oil prices...Think $100 per barrel!

For instance, the 15 permanent and elected members of the United Nations Security Council are scheduled to meet on April 28 at its New York Headquarters. The US and Britain have been rallying for support on tougher actions against the largely defiant Iran. A sanction against Iran could be imposed and the drums of war can now be heard from a faint distance.

We must not forget that an estimated 743 billion barrels (see Figure 3) or over 66% of accrued world oil reserves are held by the Mid-East countries. Such that any military conflict or escalating unrests, e.g. Iraq’s majority Shia is supported by Iran, in the region could affect or risks cutting off or destabilizing the world’s oil supply link.

Figure 3 Distribution of World’s Reserves courtesy of Martin Weiss of Money and Markets

Furthermore, any events that may lead to the closure of Strait of Hormuz (see Figure 4) where 40% of the internationally traded oil’s passes through could cause an oil price spiral to over $100 per barrel!

Figure 4 Strait Of Hormuz courtesy of

Notwithstanding you have further tensions in Nigeria, Chad, and Latin American States as Venezuela. Aside, you have news about the declining or “peaking” of oil output from major oil field as the Burgan oilfield in Kuwait, and the second largest producing oil field in the world, the Canterell oilfield in Mexico. In short, whether you believe about the Peak Oil theory or not, present demand and supply conditions are so tight that any incidences or events that may snap or tilt the present imbalances may lead to spiraling oil prices! The greater risks is for an upside rather than a downward move for oil.

To repeat the my above quote of Albert Einstein “We must learn to differentiate clearly the fundamentally important, that which is really basic, from that which is dispensable, and to turn aside from everything else, from the multitude of things which clutter up the mind and divert it from the essential.” What is essential to understand with the current developments is that the publicly listed oil companies act an insurance against any risk of an oil price shock which may worsen as geopolitical conditions have been threatening to escalate. Put bluntly, it pays to be invested in oil explo companies as an insurance against escalating oil prices.

Since oil exploration and production companies have existing reserves, even when most of them are not operational, rising prices of oil would translate to an increase of their asset values and should likewise be reflected in the share prices.

As discussed last year see August 1 to 5 edition, Hidden Wealth in Philippine Black Gold Stocks, oil stocks remained at the fringe for quite a time until its recent renaissance.

For the week, local investors bidded up domestic oil companies as Oriental Petroleum (+33%), Philippine Overseas (+29.03%) and PetroEnergy (+82%). With oil prices carving out new highs, one can expect these companies to shadow oil prices and similarly outperform together with the movements of their siblings, the mining stocks.

As for me, I would be compelled back into the market given the present circumstances regardless of what the technical indicators say. Besides since commodities are presently in a bull market, any mistakes should easily be covered, to quote the veteran Richard Russell, ``A bull market tends to bail you out of all your mistakes. Conversely, bear markets make you PAY for your mistakes.”

For one to achieve outsized returns, it takes to know WHEN to have the fortitude to take the necessary risks. And Time is NOW! Posted by Picasa

Saturday, April 15, 2006

Philex and Copper: Testing the Limits!!!

Interesting times indeed. Defying gravity and chart indicators, the exemplary strength exhibited by Philex has been simply amazing. Aside from leading the Mining index, its present price dynamics has now turned parabolic!

Figure 1: Philex B

In trying to figure out why Philex has behaved in such bizarre manner, your analyst stumbled on a paragon that appears to resemble its present comport. Philex’s major product Copper has likewise done an equally breathtaking stunt! A historical record run out of severe fundamental imbalances....

Figure 2: Copper Prices courtesy of

Notice that while copper has consolidated sometime February, Philex, after having peaked in January, has basically mimicked its moves with both breaking out of the area of indecision by March to carve fresh record heights.

In short, Philex has been priced by the market, thus far, as a proxy to copper such that for as long as copper continues to defy gravity, outperformance from the Philex can be expected should the correlation persist. As the illustrious John Maynard Keynes once said, the market can remain irrational longer than you can remain solvent. Posted by Picasa

Monday, April 10, 2006

Philippine Mining Index; We’ve Only Just Begun!

``The best investment opportunities come from an asset class where those who know it best, love it least, because they have been disappointed most.” Donald Coxe, BMO Financial Group

I smell sweet absolute vindication. Since my Rip Van Winkle in Gold series in 2003, I have fulfilled partial projections (such as Philex “A” a mere 15 cents away from its 1987 high of 3.30), I predicted that all, if not most, previous highs of publicly listed mining issues would be topped and that the Mining index would surpass its 1987 high (see October 11 to 14, 2004 Philippine Mining Index: The March to 9,000-levels)!

Today, since the euphoria brought about by the Supreme Court’s ratification of the Mining Act in 2004, it appears that the mining index has gotten its second wind with an industry-wide charge lifting the mining index close to its 2005 high.

My conviction is that the Mining/extractives industry (including oil) would generate the best returns simply stems from the following premises:

One, it has been a global trend. The measures of the industry are on a macro aggregate basis and not on a localized scale.

Second, the industry comes from a very low base. The mining industry has been depressed by over a decade. The huge surge in commodity prices worldwide represents imbalances in the demand-supply equation that necessitates our resources to be tapped or brought on stream to meet existing deficiencies. According to an industry official, of the 9 million mineral rich hectares only 1.4% of the potential mining sites have been covered by permits! In short, risks have been basically limited relative to the commodious upside potentials.

Third, the investment cycle for the industry has just turned in to its favor or the commodity cycle is at its pristine state yet.

Aside from demand growth emanating from the rapidly expanding emerging market economies at the margin, increasing investment and speculative activity has exacerbated the present cycle, according to analyst Martin Spring, ``One indication of this is that investment in commodity index funds has risen from less than $30 billion to an estimated $80 billion currently, and is forecast to reach $140-150 billion by the end of next year.”

Moreover, there is the supply side underscored by plunging inventories, according to Donald Coxe of BMO Financial Group who writes in his Basic Points, ``The next years of this bull market will be driven by the Supply Side.”

Infrastructure bottlenecks highlighted by the shortage of manpower (mining engineers, geologists and etc.), and materials (tires, rigs, et. al), rising costs (wages, cost of materials and interest rates!), reserves coming from politically risky zones (To quote Mr. Coxe, ``As for those billions of tons of ore in potential greenfield projects, they are scattered across the globe, mostly in Third World locations, and mostly in politically risky Third World locations, such as the Congo.”), severe undercapitalization or lack of investments (According to Mr. Coxe, ``The industry is consolidating rapidly, not growing rapidly”~ which means mining and oil companies have been tethered by the ‘rear view mirror’ syndrome or the fear that “good times may not last”), environmental restrictions and political interference. What took a new mining project to open or operate in 5 years has now been extended by about 8 years. So the good times are about to continue rolling. Again quoting Donald Coxe (emphasis mine), ``At current consumption growth rates, the world is going to need major new supplies of copper, zinc, lead, tin, aluminum, and nickel by the end of this decade.”

Finally and most importantly is that the industry has the CRITICAL MASS to attract foreign investments and contribute to the development of the domestic economy. According to analyst Doug Casey, the country is ranked second in gold reserves, third in copper and sixth in chromite.

Figure 1 Philippine Mining Index and the CBOE GOX index

The Chicago Board Options Exchange Gold index (GOX) a benchmark comprising several key mining issues has been on an uptrend since end 2000, as shown in Figure 1 (Blue line and blue arrow). While the Philippine mining index has started its ascent in only at the end of 2003! In short, a THREE years lag! CBOE’s GOX has returned 5x compared to the local mining index which is up only 3x!

I got scoffed at, laughed at and ridiculed when I preached this contrarian investment theme about 3 years ago. Such denials came from some clients and friends until even last year especially after the initial bout of euphoria failed to sustain its rise. To quote IBM founder Thomas J. Watson, Jr. ``There's a fine line between eccentrics and geniuses. If you're a little ahead of your time, you're an eccentric, and if you're too late, you're a failure, but if you hit it right on the head, you're a genius." It certainly proved difficult to be seen as an eccentric, when the public’s inclination is to assume of the short term perspective.

Albeit, I understand how investment mavens Jim Rogers and Dr. Marc Faber felt, having preached the same theme earlier or since the late 90s (Warren Buffett bought his 130 million ounces of silver in 1998!). Now it looks as if it is payback time, as the commodity theme gets conspicuously diffused into the public psyche!

Figure 2: From Denial to Gradual Acceptance?

I have been saying that the financial markets are fundamentally psychological more than anything else, such that investment themes permeate through the public via several stages. The boom bust stage cycle as defined by billionaire philanthropist George Soros as 1) The unrecognized trend, 2) The beginning of a self-reinforcing process, 3) The successful test, 4) The growing conviction, resulting in a widening divergence between reality and expectations, 5) The flaw in perceptions, 6) The climax and finally 7) A self-reinforcing process in the opposite direction.

With indicators such as business headlines ``Stocks at Par with Gold price trend”, faddish analysts taking up the Bullish outright “buy” calls from previously “speculative” buy calls on mining issues and local buying amidst foreign selling yet propping up price levels to 1987 highs (particularly in Philex Mining), it appears that we are in at the stage 2 “The beginning of a self-reinforcing process” gradating into the stage 3 “The successful test” of the Soros cycle. In short, from the fringe our investment theme has slowly evolved to the social convention or is, in other words, turning mainstream! From one the songs of the late Karen Carpenter, We’ve only just begun!

Figure 2 shows of the recent major or deep corrections in the mining index (blue arrows) have signified the massive denials by the public on the recrudescence of the once downtrodden industry. Yet despite such rabid denials your prudent analyst/investor remained steadfast, as British author Aldous Huxley once wrote, “Facts do not cease to exist because they are ignored.”

Today, the technical picture manifests of a gradual improvement in the investing public psyche as exhibited by our favorite pattern the “J.LO” bottom (named after actress Jennifer Lopez). Moreover, corrections or counter trend moves has been to a lesser degree compared to the previous.

Figure 3: The Big Picture! Massive JLOs!

Figure 3 shows of the Mining index since 1958. The highest the Mining index has reached was in 1987, which paradoxically was counter to the rapidly declining prices of commodities then. Today, the rise of the mining index has coincided with the spectacular jump in commodity prices see Figure 4, meaning that the global investing dynamics has filtered into the pricing of domestic mining stocks in anticipation of its renascence.

And since commodities operate under an investment cycle like any other industries, its record high prices driven by asymmetries in the marketplace are bound to remain in place for sometime; possibly a decade or more, although NOT in a straight line.

Some market participants or prospective participants deem analysts ‘can read the future’ or the ‘investing public’s mind’. Conventionally, they ask for a specific date or time frame, normally a short time at that, when considering to jump into the marketplace. Let it be known that we (analysts) do not control the market and are not clairvoyant nor are we psychic; we operate on the realm of probabilities and possibilities.

Figure 4: courtesy of Martin Weiss, Money and Markets

Finally, I’d like to warn you that the frenzied rally in the mining index indicates that some index members, in particular the apparent leader Philex Mining has been into deep overbought territories for sometime and could see some correction anytime soon. With faddish analysts throwing a buy call on the issue, we take such signs of bullishness as indicators of near ‘tops’. One analyst in the print media made a similar call last January 25th 2005, in the heat of the Mining run spawned by the Supreme Court ruling and in less than a month the mining index collapsed following such euphoria.

While I remain bullish on the industry over the long term, there would be a better time to accumulate at much attractive prices than today. BMO’s Donald Coxe makes a worthwhile recommendation to the public (emphasis mine), ``The longer-lived the reserves, the more a company is worth. A deep value investor should not price these stocks primarily on their current p/e ratios, but on the values deep in the ground that will be realized over coming years—and coming generations.”

Figure 5: Courtesy of Adam Hamilton’s

As a final reminder, contrary to the pabulum spouted by conventional analysts, mining stocks are less valued by P/E ratios as shown by sky high P/E valuations in Figure 5 by mining stocks components of the Amex Gold bugs HUI and the Philadelphia Gold Silver XAU, but by operating leverages and reserves.

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Thursday, April 06, 2006

CBS Market Watch: Gold hits $600 an ounce

Gold hits a milestone!

NEW YORK (MarketWatch) -- Gold futures powered higher early Thursday, setting a fresh 25-year high at $600 an ounce, pulling other metals to multiyear levels and helping copper to a new all-time high.

"Gold is exploding and silver isn't far behind," said Kevin Kerr, trader and editor of Global Resources Trader, a newsletter published by MarketWatch, the publisher of this report.

Gold for June delivery rose to $600 an ounce in official trade on the New York Mercantile Exchange, having earlier hit a high of $601.90 in electronic trade.

Silver traded at a new 22-year high of $12.01 an ounce, after peaking at $12.08 in electronic trade.

The metal has rallied sharply in recent weeks as excitement has built about the pending launch of a silver exchange-traded fund, that's expected to boost physical demand for the metal.

Copper was last up 2.20 cents to $2.618 a pound, after trading at a new record of $2.621 in official trade and $2.64 a pound in electronic trade.

Platinum rose $17.40 to $1,098 an ounce and palladium was up $13.35 at $356 an ounce.

Sunday, April 02, 2006

The ``Philippine Mining Industry's Inevitable Rise” Watch

I have recently argued that geopolitical developments would be shaped by resource based securitization. Some events leading towards the validation of these assumptions...

1. Recently, Zimbabwe has attempted to nationalize its mining industry. According to a report by, ``Under intense pressure from South Africa's mining houses and the International Monetary Fund (IMF,) the Zimbabwe government has been forced to backtrack on its proposal to nationalize mines in the country.”

2. According to a Bloomberg report, Cia. Vale do Rio Doce, the world's largest iron-ore producer said the amount of mining exploration and investment in South America may be overtaken by spending in Asia as companies are lured by the prospect of bigger finds. Asia accounted for 17 percent of global investment in mining exploration last year, from 8.7 percent in 2001, Fabio Masotti, Vale's head of exploration for Asia and Oceania, said at the three-day Annual Asia Mining Congress in Singapore. This increase occurred in the face of ``restrictive mining laws, red tape, social and economic instability'' in many Asian countries, Masotti said in a speech. Rio de Janeiro-based Vale has budgeted $180 million for exploration this year, with more than half of it to be spent outside Brazil, said Masotti.

3. Mexico might even attempt at denationalizing its oil industry! According to this Bloomberg report, ``Mexico risks a drop in oil output unless lawmakers allow for private investment in the industry, according to the chief executive officer of state-owned Petroleos Mexicanos, the world's third-largest producer.

``Pemex, as the company is known, will leave billions of barrels untapped in deep Gulf of Mexico waters and in a costly onshore field without partners to provide technology and share risks, said Pemex CEO Luis Ramirez Corzo. Mexican law allows only Pemex to extract crude and natural gas and to refine oil, barring companies such as Exxon Mobil Corp. and Royal Dutch Shell Plc from investing in the industry.

``The country since 1979 has pumped the majority of its oil from Cantarell, the world's second-biggest field by production, and reinvested little on other deposits, Ramirez said. With Cantarell supply declining for the first time this year, Pemex must emulate state-controlled companies such as Norway's Statoil ASA to drill in more remote areas.

``We're worried,'' Ramirez said in an interview from the 44th floor of Pemex's Mexico City headquarters. ``The problem is that today we have to begin making decisions that affect us 10 years from now.''

Listen To Your Barber On Higher Rates and Commodity Prices!

``If you don't know where you're going, you'll end up somewhere else.” Yogi Bera

Figure 4: Since 2004 Philippine (ROP) Sovereign Instruments have Soared!

A client asked me last week whether it would be more prudent to invest in bank products which invested mainly on ROPs instruments yielding a rate in the high 10s in percentage or the stock market. Naturally, I would have to admit that considering the equities market as my m├ętier, I would be biased to answer in favor of the latter. As Warren Buffett once remarked, ``Never ask a barber if you need a haircut.”

Figure 4 courtesy of again of tells us that since 2004, benchmark coupon rates for ROPs have collapsed by about 40%. In short, ROPs have been on a BULL MARKET! Yet, much of these improvements I have likewise attributed to overflowing money and credit supply or the inflationary cycle adopted by global central banks since 2003 (discussed extensively in our November 14 to 18, 2005 Inflation Cycle A Pivotal Element to Global Capital Flows). I have argued that global investors has lumped the Philippines as part of the emerging market class, such that investing on the aforementioned rubric means a spillover to Philippine assets, thereby contributing to the conspicuous inflation of asset prices.

Now times have changed. Global central banks led by the US Federal Reserves has began to siphon off liquidity, since 2004, from the global financial marketplace as it hiked its interbank rate for the 15th time to 4.75%. To wit, we have also reported of the recent rate hike undertaken by the Euro last December (with more forthcoming) and the end of the accommodative money policies in Japan with the end of the Quantitative Easing (QE) (see March 6 to 10 Rising US Yields; Japan’s End to Quantitative Easing).

In essence, we have concurrently a global trend of rising interest rates which does not bode well for our peso sovereign debt class. The Philippine 10-year US denominated instruments is merely 230.9 basis points away at 7.159% from its US 10-year counterpart at 4.85%. Such low spreads makes it unlikely for the Peso debt instruments to surge further, especially under the environs of constricting monetary conditions.

I have been expecting a divergence in the price performance among asset classes however since the Fed flushed the world with excess dollars in 2003, almost in synchronicity, global asset prices have risen across all spectrums.

Today, as the scaffolds of liquidity are gradually being withdrawn; it could be observed among the financial marketplace that some tolls are being exacted not in the equity or commodity markets but in the bond markets...

Figure 5: Lehman Bond Composite (Global) and the Salomon Brothers Emerging Market Debt Fund Inc.

As shown in figure 5 courtesy of the Lehman Bond Composite – Global (red line), representative benchmark of global bonds and Salomon Brothers Emerging Markets Debt Fund Inc (black line) for emerging markets have been on a recent decline.

Figure 6: Dow Jones Corporate Bond Index (red line) and the Morgan Stanley Dean Witter U.S. Government Securities Trust (black line)

And it is almost across the board, as shown in Figure 6 Morgan Stanley Dean Witter U.S. Government Securities Trust, representative of US sovereign debt as well as the Dow Jones Corporate Bond Index, representative of corporate debts.

Moreover, if government trends are of any indication, the recent surprise delivered by Iceland’s central bank to raise interest rates by three quarters of percentage point may herald to similar activities in the financial marketplace, something unexpected by the conventional investors.

Since 2003, I have stated that rising gold prices have not been consistent with rising equity and bond prices as gold prices signify an increased degree of uncertainty (geopolitics, monetary, financial, or economic stress) and/or hallmarks of higher inflationary environment.

Figure 7 shows (courtesy of and the correlation of rising gold prices in the past in tandem with rising interest rates (as shown in the lower window).

The recent surge of gold prices to a 25-year high alongside precious metal sibling silver, as well as record highs of other metals as copper, zinc (see Figure 8) and platinum, and even sugar to a 24 year high, has been accompanied by a breakout of the 10 year yield of the benchmark US Treasuries to its highest level since May 2004.

If past were to assimilate itself then we are off into seeing higher rates conflate with higher commodity prices (see Figure 9 represented by the CRB Reuters Index).

While bonds may not be the place to be, as higher inflation rates erodes yields or locking in at low rates would translate to capital losses, higher commodity prices equates to higher reserves valuation and increase in earnings for the extractive industries. Further, if eroding purchasing power brought about by monetary inflation is concerned, amidst a “stagflationary” environment, then in parallel to commodities, hard assets could be the place to be. In short, under the Philippine setting it’s best to stay invested with short term bonds or preferably long the stockmarket (mostly in real estate and mining/oil).

I guess its time to listen to your barber and have that haircut!

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