Video: Morality of Profits; Should We Give Back Wealth to the Society?

Billionaire-philanthropist Bill Gates says that the we should pursue the idea of giving back wealth to the society.

In this video the illustrious Tom Palmer explains the morality of profits by distinguishing between wealth obtained from voluntary and involuntary (pelf) exchanges.

As Ludwig von Mises once wrote,

Profit is the reward for the best fulfillment of some voluntarily assumed duties. It is the instrument that makes the masses supreme.

Are Internet Stocks A Bubble?

That’s an interesting question posed by the Economist in a recent article.

They note of three powerful forces among many influencing the evolution of the internet world particularly, rapid advance in technology, wider range of willing investors and globalization

Read their explanation here.

Nevertheless they also point to the following as beacon...

Lofty prices in the secondary markets.

The Economist writes,

Their task has been made easier by the advent of secondary markets in America, such as SharesPost and SecondMarket, that allow professional investors to trade the equity of private companies more efficiently. They have also made it simpler for employees and angel investors to offload some shares—and have enabled the world at large to observe a remarkable rise in valuations

And the winning streak of technology stocks.

I talked about the potentials of the technology sector as a source of bubble where I used the Charles Kindleberger model of dislocations.

Here is what I wrote in July 2010

Some factors that may prompt for a technology based dislocation (Kindleberger model) bubble are the following:

-less government intrusion in the market clearing process of the previous dot.com bust,

-swift obsolescence rate of the technology cycle and or rapid rate of innovation could mean new applications

-globalization means more consumers of technology products and services, thus a wider reach and bigger markets, albeit a more niche oriented one (another potential source of dislocation)

-importantly, freer markets which allows for more intensive competition could spawn heightened innovation from which new products with widespread application could emerge.

Yet there are many factors from which technology should play a role in shaping markets and the economy. Fundamentally this involves greater dispersion of knowledge and the deeper role of specialization, which some have labeled as the Hayekian Moment.

The impact of which should include vastly improved business processes via the development of organizational capital, provide for more real time activities which immensely reduces transaction costs thereby generate an explosion of commercial or commercial related activities, and significantly flatten organizational hierarchy which becomes attuned to the dynamics of a more competitive environment.

Economic development trends appear to be tilted towards having a greater share of technology based service sector. The more competitive an economy is, the greater the share of the technology based service economy.

This, essentially, is the running transition away from the industrial age towards the information age.

Thus, free market based competition has been directing economic development towards more specialization, or in Austrian economics terms-the lengthening of the production structure.

So a Kindleberger bubble should be on our watch list.

Given the above plus the artificially suppressed interest rates and credit easing policies (a.k.a. quantitative easing), this essentially combines segments of the Austrian Business Cycle with the Kindleberger’s model, which means the answer is a likely yes; the internet sector would seem like candidate of an inflating bubble.

But remember bubble cycles signify a process. This means that internet/technology stocks can stretch higher until it reaches its maximum point of elasticity where eventually it snaps.

Besides that’s what US authorities have been looking for, a replacement bubble.

The Ten Growing and Dying Industries in the US

The Wall Street Journal compiles a list, from a study of IBIS World, of the rapidly growing industries, as well as, dying industries in the US.

First the sad news.

The Dying Industries

According to the WSJ Blog,

The dominance of the Web and digital media also puts Newspaper publishers, record stores and video-rental companies on the list. Meanwhile, photofinishing also takes its place among the top 10 dying industries thanks to the growing influence of digital photography.

Cheap imports are blamed for a decline in mills and apparel manufacturers. Companies that rent formal wear are also counted among dying industries amid both competition from abroad and lower prices making owning your own formal wear a more attractive option than renting.

The only clear recession casualty that makes the list is manufactured home dealers. The housing boom led to a surge in the industry, but now years after the bubble burst the sector has continued to struggle.

I have a different view from the political correct undertones of the above narrative.

The dying industries illustrates how the US economy has been evolving from commoditized (highly price sensitive) low value industries to high value technology based industries.

Now for the good news.

The Sunshine ‘Thriving’ Industries

Again the WSJ Blog

Unsurprisingly, the list is led by the tech and environmental sectors, which take up eight of the ten spots. There’s some good news for some of those in the top 10 dying industries. While wired telecom carriers dominated the dying list, voice over Internet protocol leads the list of thriving industries, illustrating the shift from one technology to another. Similarly, while newspaper publishers are among the dying industries, Internet publishers are counted with the thrivers.

Meanwhile, demographic shifts are also adding to the list of fastest-growing industries. Insurance-claims adjusters are in a growing sector as the Baby Boom generation ages. Unfortunately, a growing population also increases the need for prison guards, as correctional facilities make the list of thriving industries.

I observe two major factors from the fast expanding sectors:

One: creative destruction has been working her wonders.

Second: favored government sectors has been benefiting from political largesse.

As for creative destruction, let me quote Joseph Schumpeter Capitalism, Socialism, and Democracy (1942) (p. 83)

The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. [emphasis added]

Bottom line: Despite segments of cronyism, the dynamic process of ‘Creative Destruction’ plays a very substantial role in providing benefits to consumers.

In short, capitalism still weaves her magic despite the US government’s very visible hands.

Global Equity Markets: Signs of Exhaustion; What US Outperformance Means

Bespoke Invest has an updated table of the year-to-date and the month-to-date performances of global equity markets.

I will only show the year-to-date chart.

The month to date chart you can go directly to Bespoke here

Only 18 out of the 78 countries or 23% of the countries in Bespoke’s tally posted positive returns from April 15 to May 15 2011.

Major economies and the BRIC bourses have all been in the red. But the BRIC has underperformed the G-7.

ASEAN bourses largely outperformed most of the world.

On a year to date basis the picture changes; about half of the global equity markets are still in the black or registered positive gains.

Nevertheless the continuing weakness in the markets as a result of many political events is likely to weigh on the above standings.

Again, y-t-d the G-7 economies have outclassed the BRICs, while ASEAN bourses remain slightly above the mean.

Venezuela's Stagflation

An irony is that Venezuela whom just popped out of the recession leaped 10% in May to grab the 2^nd spot.

Venezuela’s recovery could merely be statistical considering that the country, despite being an oil exporter, has now been rationing electricity in the face of rolling brownouts.

Nationalization policies have led to a material drop in foreign investments that has contributed to such social blight.

Venezuela’s inflation at 22.9% has hardly been affecting stock price levels.

I’d say the so-called Venezuelan outperformance is a result of government’s money printing in preparation for 2012 Presidential elections.

Venezuela looks more like the movie The Curious Case of Benjamin Button. Venezuela stagflationary environment has exhibited an interesting phenomenon of a rising stock market amidst a recessionary environment and high unemployment.

As stated before, for me, the Venezuela's Chavez regime seems like a prime candidate for Zimbabwe 2.0.

Implication of the Changes in the Ratio of Emerging Market-US Equity

Yet the outperformance of the US relative to Emerging Markets should be seen from the bigger picture.

Again chart above courtesy of Bespoke.

EM bourses have largely bested US markets at the start of the recovery or since November 2008 until its peak on November 2010 (see red trend line).

Presently such trend seems to have reversed. (see blue line which forms a wedge)

I am not sure if this means that EM would start underperforming over the coming months or if this represents plain consolidation or a pause prior to the next up leg. Although I am inclined to think the latter.

Besides it’s no good news to suggest that the US outperforms the world considering that globalization has been reducing the US share contribution to the global economy. (in 1960 US share is 39%, in 2009 it was 24.23%)

This only implies that perhaps tightening of money conditions could have been taking hold outside the US, and may affect the global economy, which appears to be exhibited by current stock market performances. And this may eventually will get transmitted to the US.

One would further note that the previous market top in 2007-2008 was defined by a consolidation phase between the EM economies and US markets before the Lehman crash in October 2008 (see green oval).

So while home biased US managers see this as good news, this ain’t one for me.

Let me be clear: This isn’t a case to be strongly bearish yet. Although this should serve a yellow flag, which requires more confirmation or falsification.

MENA Uprisings: Iran Sends Flotilla To Bahrain

If there is one risk that seems to have been overlooked by the marketplace is this: a potential escalation of Middle East tensions.

The Reuters reports,

Shi'ite-ruled Iran sent a flotilla to Bahrain on Monday to show solidarity with mainly Shi'ite Muslim protesters, escalating tensions with the island kingdom that is home to the U.S. Navy's Fifth Fleet.

It was not clear when the convoy might reach Bahrain, which has a majority Shi'ite population but is ruled by a Sunni king.

Bahrain, which has cracked down on pro-democracy protesters in recent weeks, has criticised the decision to send the flotilla and accused non-Arab Iran of interfering its affairs.

Iran's English-language Press TV said 120 activists, including professors, students and clerics, were aboard the convoy, sent to condemn the killing of Bahraini protesters.

The MENA unrest has earlier spread to Bahrain from which Saudi Arabia earlier sent troops to help quash the mounting opposition.

Kuwait has likewise declared in the same article that

“Kuwait will not hesitate to defend the Kingdom of Bahrain against any danger that may threaten its security," the al-Watan daily quoted an unnamed senior Kuwaiti source as saying.”

Ruling autocracies has been linking arms in the face of growing dissent from her constituencies.

Moreover this isn’t about Christian-Muslim conflict but about Muslim inter-religious or sectarian schism. The point I would to make is for those who tunnel on the view that the world operates as religious black and white conflict, obviously this isn’t one of them.

In addition, the Bahrain episode is more of a consequence of foreign meddling on what is a local political disorder. And the meddling of Saudi Arabia has similarly triggered a counter response: Iran implicitly applies symbolical intervention by sending a flotilla.

What used to be a local problem has now gravitated to a regional predicament a risk I earlier pointed out.

We hope that this won’t turn into a full scale conflagration, because if it does, there will be much turmoil especially in the energy markets.

This is one development that requires vigil.

Ron Paul Slams IMF on Strauss Kahn

From the Right Perspective, (bold highlights mine)

US Presidential candidate Ron Paul says the arrest of IMF boss Dominique Strauss-Kahn shows why economic sovereignty and control of the money supply should not be handed over to an international body.

“These are the kind of people that are running the IMF and we want to turn the world finances and the control of the money supply to them?,” Paul rhetorically asked on FOX News Sunday. “That should awaken everybody to the fact that they ought to look into the IMF and find out why we shouldn’t be sacrificing more sovereignty to an organization like that and an individual like he was.”

US Rep. Ron Paul has referred to proposals for a global currency that would serve as substitute to the US dollar which according to the proponents would be represented by the IMF’s SDR (special drawing rights).

The fact is that the IMF’s SDR, as a global currency, has long been a fantasy for Keynesians.

As Murray Rothbard pointed out,

At best, the Keynesian Dream is a long shot. It is always possible that, not only British opposition, but also the ordinary and numerous frictions between sovereign nations will insure that the Dream will never be achieved. It would be heartening, however, if principled opposition to the Dream could also be mounted. For what the Keynesians want is no less than an internationally coordinated and controlled world-wide, paper-money inflation, a fine-tuned inflation that would proceed unchecked upon its merry way until, whoops!, it landed the entire world smack into the middle of the untold horrors of global runaway hyperinflation

Perish the thought of an IMF SDR as global currency!

Twilight Zone: Zimbabwe Considers A Gold Backed Dollar!

It’s always a reasonable advice to expect the unexpected.

Zimbabwe, whom has been the latest country to endure a stunning gut-wrenching episode of hyperinflation as shown below (previously posted here)....

….has reportedly been considering…hold your breath…a Dollar backed by GOLD!

Reports the New Zimbabwe (hat tip Bob Wenzel)

THE central bank says the country must consider adopting a gold-backed Zimbabwean dollar warning that the US greenback’s days as the world’s reserve currency are numbered.

Government ditched the Zimbabwe dollar in 2009 after it had been rendered worthless by record inflation levels and adopted multiple foreign currencies with the US dollar, the South African Rand and the Botswana being the most widely used.

Finance minister Tendai Biti says the country needs at least six months import cover and a sustainable track-record of economic growth, inflation stability and above 60 percent capacity utilisation in industry before the Zim dollar can be brought back into circulation.

However central bank chief, Dr Gideon Gono said the country should consider adopting a gold-backed currency.

“There is a need for us to begin thinking seriously and urgently about introducing a Gold-backed Zimbabwe currency which will not only stable but internationally acceptable,” he said in an interview with state media.

“We need to re-think our gold-mining strategy, our gold-liberalisation and marketing strategies as a country. The world needs to and will most certainly move to a gold standard and Zimbabwe must lead the way.”

Gono said the inflationary effects of United States’ deficit financing of its budget was likely to impact other countries to leading to a resistance of the green back as a base currency.

Has this tergiversation talk of Dr. Gono, the man responsible for Zimbabwe’s hyperinflation, imply of a genuine conversion? I doubt so.

Yet, as earlier pointed out in my previous post where Steve Forbes has predicted the return of the Gold Standard in 5 years, it usually takes a calamitous event for politicians to embrace what is seen as politically repulsive.

Could Dr. Gono be the trendsetter?

Global Equity Markets: Sell in May and Go Away?

Some experts have been talking about selling in May and going away.

The premise of this precept is fundamentally seasonal.

Chart from Equityclock.com

One expert even cited the Tobin Q which implied for high valuations, as one of the 'fundamental' reasons to do so.

Chart from Greg Mankiw

As I have been saying since 2008, it has been politics that has essentially driven financial markets more than corporate valuations or economics. And that’s why many experts, relying on the former metrics as guidance, have got it all so wrong.

Anything can happen in the markets. Most especially that today’s financial markets have been heavily distorted by various government interventions.

And as I have repeatedly been pointing out, the stock market have been a target for government policies where the US government has even less been coy about this, which they claim represents “success” in policymaking.

This means politics will continue to determine market outcomes or its directions (via the boom bust cycle).

Say for instance, if the US Federal Reserve decides to “covertly” bolster the US Democratic Party to negotiate for the vote on the debt ceiling, all the Fed has to do is to allow 'some' market volatility to pervade by withholding QE or by selling some market securities held by the Fed.

And the ensuing market volatility, as the politicians will point out, will be imputed to the uncertainty from the unwillingness to increase the debt ceiling by the opposing Republican Party.

But the truth is the US Fed has been instrumental in shaping the conditions of the equity markets. It’s been part of Ben Bernanke’s ‘crash course to central bankers’ dogma.

Market volatility, thus, adds to the leverage of politicians in negotiating vital policies.

Also the war on commodities may have ripple effects on global financial markets not limited to equities, as I pointed out in my latest observation on the possible ramifications of global price manipulations on the commodity markets to the Philippine Mining index.

So there are many complex interrelated and intertwined factors that may influence global stock markets more than seasonal factors.

I’d rather use the actions taking shape in major commodity markets, global equity markets, yield curves of major economies and of Asia, and the unfolding geopolitical events as guidance.

War on Commodities: Falling Prices Equals Ballooning Demand For Gold Coins

The implied price controls conducted by some the major governments have apparently been meant to forestall the rise of statistical inflation via the commodity transmission.

Yet instead of the markets freaking out of commodities, physical demand instead has reportedly been swelling.

From Bloomberg, (bold highlights mine)

Sales of gold coins are on track for the best month in a year amid the worst commodities rout since 2008, a sign that bullion’s longest bull market in nine decades has further to run, if history is a guide.

The U.S. Mint sold 85,000 ounces of American Eagle coins since May 1 as the Standard & Poor’s GSCI Index of 24 raw materials fell 9.9 percent. The last time sales reached that level, bullion rose 21 percent in the next year...

It’s not just the U.S. Mint that saw accelerating sales. Rand Refinery Ltd., which makes the Krugerrand, said May 13 that sales are heading for their best month since August. Demand for physical gold on May 6 was the strongest since early February, Standard Bank said in a report May 11. The U.S. Mint sold 62,000 ounces of American Eagles in the first week of May, as the S&P GSCI slumped 11 percent, the most since December 2008.

UBS AG, Switzerland’s biggest bank, had its second-best day this year for physical sales on May 9, according to a report the following day. The bank’s sales to India, the world’s top bullion consumer, are more than 10 percent higher than in 2010.

So like my earlier post on declining silver inventories, we seem to be witnessing markets taking advantage of the government orchestrated turmoil.

And this has not been an all the private sector affair; Emerging market governments have reportedly joined the frenzy to accumulate.

From the same Bloomberg article, (bold highlights mine)

Another warning sign for the rally may be central banks adding to their reserves for the first time in a generation. Mexico, Russia and Thailand bought about a combined $6 billion in February and March, International Monetary Fund data show. Central banks hold 30,575 tons, equal to about 18 percent of all the metal ever mined, the data show.

The banks were also boosting holdings in 1980 when gold rose to a then-record $850, only to fall for most of the next 20 years. That high is equal to $2,299 in inflation-adjusted terms, according to a calculator on the website of the Federal Reserve Bank of Minneapolis. Prices tripled from 1999 through the beginning of 2008 as the banks sold more than 4,000 tons.

It would seem that the current ploy implemented by the US could be benefiting emerging market economies. Has the rigging of the marketplace also been meant to give EM economies ‘friends’ a discount?

Needless to say, the effect of the price manipulation seems becoming more evident—a policy failure.

Has the Magic of Technology Ebbed?

Marketing guru Seth Godin thinks so. He writes, (bold emphasis mine)

Arthur C. Clarke told us, “Any sufficiently advanced technology is indistinguishable from magic.”

Head back to the 1800s with a Taser or a Prius or an iPad and the townsfolk will no doubt either burn you at the stake or worship you.

So many doors have been opened by technology in the last twenty years that the word “sufficiently” is being stretched. If it happens on a screen (Google automatically guessing what I want next, a social network knowing who my friends are before I tell them) we just assume it’s technology at work. Hard to even imagine magic here.

I remember eagerly opening my copy of Wired every month (fifteen years ago). On every page there was something new and sparkly and yes, magical.

No doubt that there will be magic again one day... magic of biotech, say, or quantum string theory, whatever that is. But one reason for our ennui as technology hounds is that we’re missing the feeling that was delivered to us daily for a decade or more. It’s not that there’s no new technology to come (there is, certainly). It’s that many of us can already imagine it.

The current generation, whom have been key beneficiaries of the transformative technological innovations, may seem to be less appreciative of the contributions of technology to our current welfare. That’s because technology has been giving us constantly more for less.

Thus, the diminishing returns on expectations from the impact of technological progress: the perceived loss of magical touch.

But I think it goes more than that.

Perhaps most people may be a lot less familiar with the antecedent of today’s state of technology. Or, people may have forgotten the roots of today’s progress: our ancestors compounded efforts or actions.

As the great Ludwig von Mises once wrote, (bold highlights mine)

Nobody denies that technological progress is a gradual process, a chain of successive steps performed by long lines of men each of whom adds something to the accomplishments of his predecessors. The history of every technological contrivance, when completely told, leads back to the most primitive inventions made by cave dwellers in the earliest ages of mankind. To choose any later starting point is an arbitrary restriction of the whole tale. One may begin a history of wireless telegraphy with Maxwell and Hertz, but one may as well go back to the first experiments with electricity or to any previous technological feats that had necessarily to precede the construction of a radio network. All this does not in the least affect the truth that each step forward was made by an individual and not by some mythical impersonal agency.

When people forget about history; the contribution of a multitude of individuals in today’s progress through the years, then they became less appreciative of the blessings that has been happening.

Many people today seem to think that the progress from technology is just a given. It is not.

For as long as people are allowed to trade, trade will then function as the main driver of technological progress.

Writers like me will try to keep that magic alive.

IMF Head Arrested For Sexual Molestation

From New York Daily News

A top French politician nicknamed "the great seducer" was dragged off a flight at Kennedy Airport Saturday after he was accused of sexually assaulting a Manhattan hotel maid.

Port Authority cops grabbed Dominique Strauss-Kahn, the head of the International Monetary Fund and a presidential hopeful in France, moments before his Air France plane took off about 4:45 p.m.

Strauss-Kahn, 62, allegedly crept up behind a maid after she entered his room and forced her to perform oral sex on him, sources said.

The woman broke free and ran out of the room. Strauss-Kahn quickly headed for the airport, sources said.

Charges against Strauss-Kahn, who is married to well-known French TV journalist Anne Sinclair, were pending Saturday night, sources said.

Hours before Strauss-Kahn was pulled from the flight, a close Socialist Party ally claimed he was the target of a smear campaign by French President Nicolas Sarkozy.

My two cents.

Politics is a dirty game.

While this sorry event shows how officials are subject to the same frailties as anyone else, the difference is that the political class have the tendency to abuse their powers just to meet their personal desires.

Besides, the law applies differently to everyone. Remember this? (hat tip Charleston Voice)

Or that maybe too much of economics can increase one's libido too?

Phisix: Why I Expect A Rotation Out of The Mining Sector

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.-Charles Mackay

Let me open by saying that I remain a long term bull on the mining sector.

However given the current ‘blitzkrieg’ seen in most of the major mining issues, which has substantially bolstered the Philippine mining index, I am inclined to believe that bigger profits premised on lesser risk can be made on other sectors, over the interim.

Mining Index’s Remarkable Outperformance Needs A Reprieve

Even as most of the world’s major equity markets appear to stagger, ASEAN equity markets have remained buoyant. The biggest gains over the week had been posted by Thailand (+3.25%), Singapore (+2.07%), Philippines (+1.73%), Malaysia (+1.67%), Vietnam (+1.47%) and Indonesia (+.88%). Asia was largely but tentatively positive with decliners seen only in Bangladesh, Australia and Japan’s benchmarks.

Such buoyancy had likewise been reflected over the broad markets of the Philippine Stock Exchange.

Advancers modestly eclipsed decliners (376-309), while most of the sectoral averages registered positive except for the financial industry.

The Mining and oil sector remained the leader, whose gains were matched by the Holding sector (powered by the peripheral issues—JGS Summit +7.42% and DMC Holdings +6.84%) followed by the service sector (led by the heavyweights PLDT +2.98% and ICT +3.13%).

The turbocharged mining sector has unwaveringly advanced for 7 consecutive weeks!

In addition, the mining sector has assumed the market’s leadership (also co-leadership as the above) in the last 4 out 5 of the weeks.

Year to date, the mining sector, has exhibited such domineering trait: While the Phisix has been up by a meager 2.17%, the mining sector has skyrocketed by an astounding 27.98%! The rest of the other sectors have only to watch helplessly as they get left behind.

Yet such grand performance is likely to draw in much of the crowd. It is when the impulsive and emotionally driven crowd steps in is when we should exercise cautiousness. The greater fool theory works in a crowd driven trade.

In observing the crowd phenomenon, a popular quote attributed to author Gustave Le Bon[1],

When popular opinion is nearly unanimous, contrary thinking tends to be most profitable. The reason is that once the crowd takes a position, it creates a short-term, self-fulfilling prophecy. But when a change occurs, everyone seems to change his mind at once.

Given the above, there are two investing axioms to keep in mind:

One—no trend goes in a straight line

Second—never get married to an investing theme

Given such axioms, there are four factors which I think should make the mining sector vulnerable to a correction:

1. Buy the rumor sell the news,

2. seasonality,

3. war against commodities and

4. rotation

Buy the Rumor, Sell the News

‘Buy the Rumor, Sell the News’ is a popular trading strategy built around the premise where stock prices in reaction to rumors (based on myriad issues such as new products, new markets, mergers and acquisition, joint ventures, new investors and etc...) substantially rises. And once the rumors gets either confirmed or denied, the stock prices falls.

‘Buy the rumor sell the news’ functions like a miniature boom bust cycle applied to specific issues. Only that this phenomenon occurs mostly during bull market cycles which accentuates sharp gyrations of the marketplace given the underdeveloped state of the local equity markets underscored by the lack of depth, sophistication and alternatives.

The ranking of the Philippine mining index based on weightings as of Friday’s close are as follows, [this includes the year-to-date performances]

Philex Mining 26.6% [22.73%]

Lepanto Consolidated 26.06% combined [A-76.08%, B-80.22%]

Semirara Mining Corp 18.72% [15.03%]

Atlas Consolidated 10.62% [23.19%]

Manila Mining Corp 6.64% [A & B-108.7%]

One would easily note that the gist of the fantastic gains of the Philippine Mining Index revolves around two issues: Manila Mining [MA, MAB] and Lepanto Mining [LC, LCB].

In addition, the one year chart shows that three issues have relatively strong correlations—particularly Philex (blue line), Lepanto (red line) and Manila Mining (black candle) where the undulations appear to be synchronized. The difference is in the magnitude of price actions.

On the other hand, Atlas Consolidated (green line) has only partly shadowed the actions of her peers. While coal mining energy based Semirara has fundamentally distanced its price actions with activities of the precious metals group.

Last week, following a voluntary trading halt, the three companies with strongly linked movements disclosed that they have closed a deal[2].

Philex Mining [PX] will reportedly get a 5% interest of the Kalayaan Copper Gold Resources which is 100% owned by Manila Mining [MA], in exchange for $25 million. Philex has the option to expand its stakes to 60% in Kalayaan in the condition that the feasibility and other pre-development expenditures will be shouldered by the company.

Incidentally, Lepanto [LC] owns a 20% share of Manila Mining.

We see overbought technical conditions for mainly Manila Mining and Lepanto and partly with Philex. Such signs of euphoria combined with the confirmation of the rumor—which is now a news could be negative for their share prices. Without further developments to speculate on, profit taking will likely take hold.

Should my prediction hold true where a corrective phase on these 3 issues would occur, it is unclear if Atlas [AT] or Semirara [SCC] will follow their footsteps, as they have not been part of the event based actions.

As said above, “buy the rumor sell the news” are issue specific activities that may not necessarily influence the price actions of the contemporaries.

Considering that the weightings of participants of that deal constitutes about 59.3% of the Mining index, then any significant correction will likewise be reflected on the bellwether.

To add, given the variances in the degree of gains, the correction phase will also respond accordingly.

Seasonality

Based on seasonal performances, the precious metal groups appear to be most senstive to price corretions during May to September.

This is not limited to the metals as exhibited by the gold future[3] seasonals see top window in the above chart, but also to the Material sector[4] (S&P 500) (also see window below).

And since the metals function as the main drivers of the stock prices of mining securities then perhaps such seasonal forces may add to the profit taking mode.

Over the past 8 years the Philippine mining index has shown some semblance of seasonally influenced performance.

The Mines strengthened mostly during the last quarter then peaked during the first or second quarter then downshifted or consolidated. The timing may not be perfect or that there may be variances but the cyclical essence holds.

This applied in 5 out of 6 years, except in 2008, where the mining index responded to exogenous forces more than the seasonality flows.

One would also note that price declines (based on peak-trough) from anywhere 25-40% (ex-2008) delineates the downcycle phases of the mining index.

War Against Commodities

US, Europe and China has openly engaged in a supposed campaign[5] against so-called “speculators”.

These governments have actively or indirectly intervened in the marketplace by changing the rules of the game, particularly for the US and China, in abruptly raising of the credit margins of commodity trades.

This hasn’t been a one-time affair, but appears to have been deployed successively to almost the entire commodity sphere.

Such ‘Pearl Harbor strategy’ has been meant to “shock and awe” speculators to forcibly bring down prices.

Similar to the failed coordinated interventions by central banks against speculators to stem the rise of the yen last March[6], I expect these intrusions to have short term effects.

To add because such interventions does not address the fundmanental reasons why commodities have been rising, government actions will only exacerbate imbalances already put in place by earlier polcies. So this seems like another case where the cure is worse than the disease.

Since we should expect global governments to persist on such actions for unstated political goals, commodities will, thereby, be subjected to sharp gyrations.

So far the war on commodities has diffused to global mining indices such as the S&P/TSX Global Mining Index (SPTGM) and the Dow Jones US Mining Index (DJUSMG). This should serve as a temporary headwind against local mining industry.

Nevertheless such intrusions may also engender “regime uncertainty’, or an aura of regulatory risks which may also affect the general marketplace.

By June, the US Federal Reserve is scheduled to end QE 2.0 (Quantitative Easing or a.k.a. ‘Credit Easing’ policies).

I am not sure that the US Federal Reserve will automatically reengage in QE 3.0, since this seems largely a political issue. Although, I suspect that QE 3.0 will be implemented sometime within the year. Of course the other issue will be the controversial vote on debt limit which will likely be associated with QE 3.0. A vote to raise the US debt ceiling implies of more pressure for the US Federal Reserve to put QE 3.0 on the pipeline.

Besides, part of the ‘signaling channel’ or one of the tools used by central bankers to control or manage inflation expectations could be to project some market “volatility”. This may be used to justify the next round of money printing measures. Thus, for the interim, the marketplace could be subject to more of politics than of market based action.

Promoting fear seems as the best way to advance policies of social control.

Market volatility may be an outcome of deliberate tactical operations, or as unintended consequences in the battle being waged against the “inflation”.

Rotational Process

A prominent symptom of inflation is that prices are affected unevenly or relatively.

Eventually prices in general moves higher, but the degree and timing of price actions are not the same.

It’s the same in stock markets, which represents as one of the major absorbers of policy induced inflation.

Prices of some issues tend go up more and earlier than the others. At certain levels, the public’s attention tend to shift to the other issues which has lagged. This brings about a general rise in prices.

These are the spillover effects which I call the rotational process.

I have been predicting that the mines will outperform the rest of the equity markets[7] since 2003. Yet while this has been fulfiled, in retrospection, the path towards attaining today’s conditions hasn’t been straightforward.

The early periods had been marked by refusals and denials which gradually segued towards slow acceptance and finally transiting into today’s mid-cognizant phase. Yes even today’s boom has not fully convinced many disbelievers.

The path to glory isn’t without pain.

One would note that mines gyrated steeply from 2007-2010. And this period hallmarks the gradual acceptance stage.

Yet while the mines had racked up the biggest gains as exhibited by the index overtime, it suffered periods of the deepest losses (2008) and periods of ennui or underperformance (2010).

People tend to see what is recent (anchoring bias), and project the present into the future. That’s how I think many see them today.

Yet given the above outlook: war against commodities, overheating on several mining issues, buy the rumor and sell the news, the seasonality phases, and signs of euphoria—all these seem to point to a possible correction.

Importantly even if the Philippine central bank, the Bangko Sentral ng Pilipinas recently raised interest[8] for the second time this year, local policies still seem very accommodative as policy rates are considerably below previous[9] and projected (from 5[10]-7%[11]) economic growth rates.

Also I also believe that inflation rates have been meaningfully underestimated.

If the promulgated reason for raising interest is to “to control inflation expectations amid rising oil and food prices”, then the rates of increases of food and gas here and abroad would seem far been greater than current levels of interest rates.

This, essentially, points to a ‘negative real interest’ environment[12], the implication of which is throw more fuel to the boom phase of domestic financial asset markets.

This means that if the mining index declines, then some sectors would have to pick up the slack.

Trade The Opportunity

Bottom line: No trend moves linearly.

I predict that the local Mining index will undergo a corrective phase over the next quarter or so. But eventually should pick up steam anytime during the late 3^rd quarter or during the last quarter of the year.

One could take some profits off the table while leaving most of one’s mining holding positioned for the long term or in the event of my miscalculation.

Proceeds from the profit taking could be used for repositioning to other sectors in anticipation of a rotational process or to relish the fruits of one’s triumph.

---

[1] Nowandfutures.com Some favorite quotes, A world of Possible Futures. I say attributed because I can’t find it in Gustave Le Bon’s The Crowd

[2] PSE.com Lepanto Consolidated Mining Company Agreement between MA and PX for exploration and development of Kalayaan Project; Lifting of trading suspension, May 12, 2011

[3] Equityclock.com, Gold Futures Seasonal Chart

[4] Ibid., Material Sector Seasonality

[5] See War On Commodities: China Joins Fray, Global Commodity Politics Intensifies, May 14, 2011

[6] See Did the Joint Currency Intervention for a Weaker Yen Succeed? May 14, 2011

[7] See Philippine Mining Index Surfs The Commodity Tide, April 24, 2011

[8] Philstar.com BSP hikes interest rates by 25 basis points, May 6, 2011

[9] Abs-cbnnews.com Philippines posts record 7.3% economic growth in 2010, January 31,

[10] Mb.com.ph Latest WB forecast puts Philippine GDP growth at 5% to 5.4% for 2011 and 2012, January 14, 2011

[11] Breakingnews.ph NEDA chief confident of 7-8% GDP growth, February 10, 2011

[12] Wikipedia.org Negative real interest rates

Did the Joint Currency Intervention for a Weaker Yen Succeed?

Japan’s triple whammy calamity, last March, pushed the yen to the stratosphere. This prompted global finance ministers to jointly intervene in the currency markets to stem its rise.

This from UK’s Guardian.co.uk last March, (highlights mine)

Finance ministers and central bankers from the world's developed nations decided late on Thursday night to send a firm message to financial markets that they would not stand by and watch the yen continue to strengthen

The Bank of Japan began selling yen overnight to depress its value. Other central banks are expected to follow suit as their markets open through today, in a rare concerted move.

The intervention signified as war against speculators: central banks versus speculators.

Over a month since the intervention, the New York Federal disclosed yesterday its participation in the joint action:

The U.S. monetary authorities intervened in the foreign exchange markets on one occasion during the first quarter, on March 18, buying $1 billion against Japanese yen, the Federal Reserve Bank of New York said today in its quarterly report to the U.S. Congress.

During the three months that ended March 31, the dollar depreciated 5.5 percent against the euro but appreciated 2.5 percent against the Japanese yen. In this period, the dollar’s trade-weighted exchange value depreciated 3.7 percent as measured by the Federal Reserve Board’s major currencies index.

The coordinated G-7 intervention was carried out by the foreign exchange trading desk at the New York Fed, operating in conjunction with Japanese monetary authorities, the European Central Bank (ECB) and the monetary authorities of, Canada and the United Kingdom. The intervention amount was split evenly between the Federal Reserve System Open Market Account and the U.S. Treasury’s Exchange Stabilization Fund (ESF).

The blue arrow marks the date when the US government (US Federal Reserve and the Treasury) intervened along with central banks of other nations in a grand scale of collaboration against speculators.

Over the short term, the intervention proved to be a success; the yen weakened.

Today, the yen is seen back at the level where the global governments intervened. In short, billions of dollars of taxpayers money went down the drain.

Bottom line:

Interventions did have immediate effects (which resonates with today’s war against commodities). However, eventually the effects wear out.

Yet who bears the losses from such interventions? Obviously taxpayers!

The battle was won by the central banks in March, but they appear to be losing the war.

Humor: How to Make a Pass at an Economist

From Modified Rapture

The Top Ten Lines for Hitting on an Economist

1. You’ve got the curves to supply my demand!

2. Let’s go to bed and try to disprove the law of diminishing marginal utility.

3. You’re my very favorite kind of moral hazard.

4. I have a feeling you really understand the “nature of the firm.”

5. Baby, I love you so much I’m willing to forgo my exit option.

6. Wanna talk about our private goods?

7. You’re an economist. I’m an economist. How about a little horizontal integration?

8. Now those are some tangible assets!

9. I’ll reveal my preferences if you will.

War On Commodities: China Joins Fray, Global Commodity Politics Intensifies

The Europeans have reportedly been breathing down on profits by the banking sector from commodity trades.

The US has been rigging the rules of the game by apply a Pearl Harbor strategy via a spate of margin hikes in the commodity markets over a short period of time.

Now, China joins the bandwagon on the assault on commodity prices.

Reports the Marketwatch,

The Shanghai Gold Exchange said Thursday it will raise margin requirements for silver futures as part of risk-control measures, its third round of increases in less than a month, according to a statement posted on the exchange's web site. Margin requirements will rise to 19% of a contract's value from 18%, while the daily price limit for the one kilogram silver forward contract will rise to 13% from 10% above or below the previous session's close. The new trading requirements will be effective from May 13.

China has been combating her inner demons during the past 2 years and seems as the most problematic nation among major economies in dealing with inflation (aside from India).

Since China has been a key player in the commodity markets then it’s apparent that coordinating policies with her major trading partners might mean more success in attaining price control goals.

From Hostra University

The above chart reveals of the China commodity consumption story as of 2009, relative to the world. And it’s the reason why China’s growth story has partly been tied with commodity price trends.

There is also the supply side story which we won’t be dealing here.

Relative to China’s silver’s price margin hikes:

China’s industrial demand for silver comprises nearly half of the world’s silver consumption.

According to Goldcore,

Today industrial uses account for 44% of worldwide silver consumption and in conjunction with investment and store of value demand, industrial demand continues to grow.

And China’s silver imports have exploded over the years which turned her from an exporter to a major importer.

According to the Wall Street Journal, (bold emphasis mine)

China's net imports of silver hit a record high of 400% in 2010 to 3,500 tonnes .

China used to be a silver exporter now China has become the importer of silver

About 70% of China's silver demand comes from the industrial sectors. Silver is widely used in the China is the third largest producer of mined silver in the world.

China also is a major consumer of silver, absorbing large and rapidly growing volumes of silver in its manufacturing sector.

Chinese silver mining witnesses significant growth and development in recent years, fueled by technological strides in exploration and an increase in production in response to steady growth in domestic and international demand China is a major global producer and consumer of silver-based brazing alloys.

China has some of the world's largest manufacturing facilities for home electronics and electrical appliances, which utilize various type of silver-based solder.

China is the world's largest producer of solar power and electronics.

Silver price increased more than 80% in 2010.

Silver demand in China is soaring thanks to increasing use for industrial and jewelery purposes.

About 70% of China's silver demand comes from the industrial sectors. Silver is widely used in the China is the third largest producer of mined silver in the world.

So controlling silver prices from spiking could mean ‘less statistical inflation’. This should also represent subsidies to her industrial users. Hence the incentive to join the price control bandwagon.

According to the Financial Times,

Chinese speculators have emerged as a big driver of silver’s spectacular rally and subsequent crash with trading in the metal in Shanghai soaring nearly 30-fold since the start of the year.

The commodity, nicknamed “the devil’s metal” for its wild price swings, surged 175 per cent from August to a peak of almost $50 a troy ounce two weeks ago. Since then, it has plummeted 35 per cent, hitting a low of $32.33 on Thursday.

At the same time, silver turnover on the Shanghai Gold Exchange, China’s main precious metals trading hub spiked, rising 2,837 per cent from the start of this year to a peak of 70m ounces on April 26, according to exchange data.

The number of contracts outstanding, an indicator of investor exposure, doubled over the same period.

Manipulating silver’s prices also means punishing savers who buy silver in the form of hedging against currency debasement. As the article above implies, about 30% of silver’s demand in China have been due to “jewelry”. Given the underdeveloped conditions of China’s capital markets, hedging may come in the form of jewelry.

The global war on commodities is becoming more evident by the day...

Reports the Reuters (highlights mine)

There's no question pressure from Washington is growing.

A group of 17 U.S. senators on Wednesday called on the Commodity Futures Trading Commission to crack down immediately on excessive speculation in crude oil markets, demanding the agency's plan to impose position limits within weeks.

...as we see more and more calls for interventions from politicians around the world.

And the assaults on the commodity markets have also been expected to cover agricultural futures soon.

So we should expect continued volatility until governments would run out of ammunition or once commodity demand and supply backfire on their policies.

Yet for as long the US Federal Reserve pursues the policy of inflationism (this includes other major central banks or even China)…

Chart from Minyanville

…the outcome will be higher commodity prices!

Scapegoating speculators and intervening in the markets may temporarily achieve political goals. However, such actions would only worsen the economic balance and lead to even higher prices—the law of unintended consequences.

It is just a matter of time.

In my view, this telling chart forebodes on why the concerted intervention in commodity markets.

Printing money does not equal higher inflation, that’s what’s being portrayed. Why? Because the Fed and their acolytes think that they need more of these, since government spending, for them, is holy grail to resolving socio-economic problems.

Money printing is the way to prosperity, so it is held.

I see higher inflation.