Sovereign Investor » Eric Roseman

Hogs on Top in Brutal Market for Commodities

Eric Roseman — Tue, 12 Jul 2011 14:44:28 +0000

How You Could Make 150% Gains as Silver Soars to $75

One of the best performing commodities since the first week of May is lean hogs and live cattle. Driven by record imports and expectations of another surge in Chinese demand, hog prices are heading through the roof this summer while most commodities struggle since May.

Seasonal demand (barbeques), Chinese and foreign purchases and a reduction of herds has resulted in newfound support for the worst-performing commodity sector over the past ten years.

Like agricultural commodities, the meats usually harbor a negative correlation to equities in bad months for stocks. Natural gas also shows a similarly negative correlation on bad days for the broader market. These commodities tend to zig when other markets zag – making them ideal diversification tools in a diversified portfolio.

That was the case on Monday as world markets were bludgeoned amid Europe’s debt crisis; lean hogs, live cattle, gold and natural gas rose yesterday while the S&P 500 Index fell 1.8%.

Hog prices hit their daily limits on Monday, rising more than 3%. Iowa hog prices have rallied 20% over the last 12 months while steers have gained more than 16%. With feeder cattle prices at record highs amid soaring corn prices, ranchers are culling their herds. Beef, chicken and pork prices are already much higher across the United States since mid-2010.

But the recent spike in pork and beef prices might be a long-term phenomenon driven by China’s growing appetite for meat-based protein.

China has a smart habit of accumulating raw materials and foodstuffs on price corrections.

This recently occurred in the copper market where inventories on the Shanghai Metals Exchange were drawn down after China hoarded some important metals since last winter. The same story is now working its way through the grain markets as China purchased some serious tonnage of corn last week after prices tanked on June 30 following a bullish USDA crop report.

The bull market in pork has begun. Live cattle will join the party soon.

Europe's Boat Springs another Leak

Eric Roseman — Mon, 11 Jul 2011 12:40:38 +0000

How You Could Make 150% Gains as Silver Soars to $75

Montreal, Canada

The financial press has sprayed so much information about the Greek debt crisis that most investors have probably grown wary of the ongoing malaise. Greece will probably receive another bail-out until this phase of the cash-pile runs dry in 2012.

A Greek default seems imminent but the Europeans continue to delay the day of reckoning. Greek bonds effectively trade at busted levels or yielding 13.59% more than German ten-year bonds or bunds. And German bunds, long believed to be a safe-haven in Europe since the outbreak of the sovereign debt crisis in January 2010, are controversial because Germany is the single largest guarantor of deadbeats in the EUR periphery. That’s another story.

The next chapter of Western Europe’s financial crisis is about to unfold. And Germany can’t backstop the massive Italian bond market – easily Europe’s largest at a combined $2.3 trillion dollars and about three times bigger than Spain’s.

Italy is no Greece. It’s also not Spain. In terms of size and outstanding debt obligations, the Italian bond market is a powerhouse. If the Europeans fail to contain the leak now springing across Italian bonds then another chapter of the 18-month old debt crisis will unfold — and it’ll be ugly. The EUR belongs closer to 1.25 or 1.20 in this ongoing saga, not 1.42 to the dollar.

Credit spreads on Italian ten-year government bonds fetch 2.31% more than benchmark German bonds. That’s up from 1.60% just four weeks ago. Spanish debt, which commands a 2.84% premium over German paper, still trades at a higher risk level. But Italy is catching up quickly.

Italy has a relatively low budget deficit of 4.6% to GDP and its banking system is probably in better shape than Spain’s because more than half of Italy’s debt is financed internally, not externally. But the country has witnessed a stagnant growth cycle for years and its debt-to-GDP ratio at 119% was second only to Greece last year. The markets have pulverized Italian banks recently with stocks in Milan getting trashed last week.

I’m pretty sure the Italians and Greeks fudged their books ahead of EMU or European Monetary Union in 1999. They don’t belong in the euro-zone. At some point in the future it’s not unrealistic to see Greece, Italy, Ireland, Spain and Portugal leave the euro-zone and become part of EMU II or a secondary currency bloc that will command much higher interest rates than its core.

Deflation is rapidly spreading across the periphery, not unlike what occurred in 1992 ahead of the collapse in the European Exchange Rate Mechanism or ERM. By September of that year, the Italians and British had enough; higher German rates suffocated their exports and they subsequently devalued and left the ERM grid.

I’m not sure how this crisis will end or when it’ll draw to a conclusion. Yet it seems reasonable to suggest that Europe’s debt crisis will drag on for years to come, benefiting gold and the Swiss franc. The European Central Bank will launch a QE program at some point.

The dollar will also catch a bid in this mess but not because it’s a safe-haven. It’s not. It’s just highly liquid and for now, able to print its way out of misery. I suspect the dollar is next. The sovereign debt crisis is spreading across Europe and the bond vigilantes will attack the United States eventually in the absence of draconian spending cuts. That won’t happen until 2013, at the earliest.

Poor Brazilian Crop Threatens Sugar Supplies

Eric Roseman — Thu, 07 Jul 2011 15:17:59 +0000

Montreal, Canada

Sugar might be at the cusp of another huge rally for the second time in as many years.

Like corn in the United States, sugar-based ethanol in Brazil is drawing more supply away from Brazilian kitchens and into automobiles. Brazilian sugar-based ethanol is far more popular than corn-based ethanol in the United States and has long been an important input in gasoline blends.

Brazil, the world’s largest producer of sugar, is approaching an output shortfall for the first time since 2006. More than 50% of the world’s sugar supply emanates from Brazil. India is the largest importer of sugar.

But the shortfall isn’t because of blending ethanol into gasoline. It’s Mother Nature.

Over the last 12 months, world sugar prices have rallied 41.5% and are poised to rise higher as bad weather hits Brazil’s cane crop this year.

Sugar is notoriously volatile. The staple crashed 43% from February to May before recovering to $0.27 cents recently.

Once again, volatile weather patterns have adversely impacted an important crop.

Over the past four years a torrent of violent weather worldwide has either reduced or destroyed crops in the Americas, Europe and Asia, including Australia. Climate change is here to stay and the implications are higher food prices longer term. The United Nations Food & Agricultural Organization Index (FAO) hit an all-time high this spring before receding in May and June.
Even without damaged crops, global population growth will continue to exceed arable land production for the foreseeable future; combined with falling water tables the trend is dire.

The correction now underway in the agriculture space, including peripheral themes like potash and phosphate, are great buying opportunities. Grain processors, grain-handling and agricultural trading houses have all been slammed over the past four weeks. And grain prices have consolidated 10% to 30% since June. Now is the time to buy.

The Trouble with Lumber

Eric Roseman — Wed, 06 Jul 2011 14:06:42 +0000

How To Escape From America, and Where to Go

Montreal, Canada

Lumber prices are struggling again. Since hitting a high for the year earlier in March, lumber prices have declined more than 20% and seem to be following a similar pattern that occurred in 2010.

Last year, amid an ongoing depression in housing and construction, demand for lumber declined sharply and proved to be an accurate bell-weather for a weaker economy; the Fed’s QE II program squashed the swoon in lumber and a major recovery ensued consistent with other risk-based assets.

Trends in lumber are similar to those played-out by copper. Both commodities are regarded as heavy cyclical products in the global growth cycle and are sensitive to changes in supply and demand and interest rates.

But the picture unfolding this summer is still indecisive.

Lumber has entered a trading range since May with no clear pattern. The chart below shows a recent break-out above its 50-day moving average and challenging the more important 200-day average.

What’s interesting about lumber is its predictive ability – at least recently. Lumber prices began consolidating last spring before the stock market ran into trouble in May (Flash Crash). It also began correcting sharply in April before broader commodities and equities began a downward trajectory.

If lumber and copper can continue to muster gains this month, then the global economy is likely to survive a soft-patch. Both are pointing upwards recently. If not, there’s always the Fed and QE III, which seems inevitable in an environment of slow consumption, weak jobs growth and the possibility of sovereign debt contagion in Europe.

Increasingly, it looks like the United States economy requires a steady hand of support from the Feds to keep the expansion alive – now almost halfway through its typical postwar expansion in terms of duration. Since this remains a very untypical expansion since 2009, we have to assume that another dislocation lies ahead this year requiring more Federal support. Fiscal support won’t happen. This leaves the Fed as the markets’ only crutch.

The Fed is not telling the truth about QE III. It’s already in the cards and will be implemented either later this fall or in early 2012.

Bond Market Out to Lunch

Eric Roseman — Tue, 05 Jul 2011 14:11:20 +0000

Montreal, Canada

The American dollar might be embarking on another in a series of bear market rallies this summer but it should eventually run out of gas. That’s because the prospect of higher short-term interest rates in the United States is next to nil over the next 12 months and beyond. The Bernanke Fed will keep rates low for a long time.

It’s pretty hard to love the U.S. dollar these days. Just about everyone is a dollar-bear, including my dog, Deutschemark.

Go to investment conferences and you’ll see an overwhelming show of bearish votes against the sad buck. And who can blame the bears? You won’t see a dime in real spending cuts this year or next year (an election year).

Yet despite the hatred of the dollar among the investment savvy, these same people also dislike Treasury bonds. Amazingly, T-bonds have been a great place to park cash since April as bond yields rally south; however, I would argue that perhaps the bond bear market has already started because longer term rates are rising year-over-year while short-term rates are stuck around 0.50%. The 10-year Treasury is up just 1.9% over the past 12 months. Before last week, bonds were down year-over-year.

The plague spreading across Europe’s weak periphery is a disease that’s ultimately coming to the United States Treasury market; this seems inevitable because long-term entitlement spending alone wll bankrupt the nation, in addition to interest expense on the debt that will eventually suffocate the government’s revenue stream.

I’m not sure what the math is exactly, but it’s pretty clear to the most novice number-cruncher that another 2% or 3% (or more) charged on longer term Treasury yields means big trouble for the country. Jim Rogers thinks one of the best shorts in the world over the next several months or beyond is betting against 30-year Treasury bonds. “Who is stupid enough to lend to the United States at 4.4% for thirty years?” laments Rogers. I couldn’t agree more.

In addition to holding some dollars, I would focus on gold bullion as the ultimate inflation hedge and protection against currency wars. It’s very obvious to me that the dollar has lost control as reserve currency anchor and the EUR is now part of the drunken lot; only Germany and Holland offer any real fiscal restraint and prudent economic management. The rest are a bunch of drunks at the bar.

I also like a few surplus currencies. There aren’t many. These include Norway, Sweden, Singapore, Hong Kong and Switzerland. I wouldn’t buy the franc now at these nosebleed levels, however. But I’m finding great values in the Scandinavian units (except Denmark) and Singapore and Hong Kong.

Dr. Copper Doesn't Jive with the Bears

Eric Roseman — Mon, 04 Jul 2011 14:46:22 +0000

How You Could Make 150% Gains as Silver Soars to $75

Montreal, Canada

Investors’ love affair with commodities is over. According to data from Barclays Capital, investors yanked almost $7 billion dollars from commodities markets in June. That’s the biggest outflow since the depths of the financial crisis in late 2008.

June marked another bad month for raw materials with the Reuters-CRB Index falling 5.5%. Every segment of the index posted a loss. Some of the biggest losses belonged to the grains complex where corn and wheat suffered double-digit declines.

The heavily energy-weighted S&P Goldman Sachs Commodity Index, or GSCI, tumbled another 4% in June. West Texas crude oil declined 7% last month.

Since May1st, the CRB Index has now declined a cumulative 9% and the GSCI is down 11%.

But the bearish environment now pervading across commodity markets might be overdone. Sentiment has turned from excessively bullish in April to outright bearish in July on fears of another global economic slowdown in the major economies and weak Chinese manufacturing data.

Yet the markets might be poised for a big recovery over the second half because interest rates remain negative adjusted for inflation and the largest central banks are still widely accommodative. Japanese industrial production is also making a comeback after the tragic March disasters in that country.

A deeper decline in capital markets is likely to force the Fed back into the asset purchasing business and might even include the European Central Bank (ECB), which has not launched a QE program. The Japanese have embarked on something approaching QE 25 since the emergence of deflation in the early 1990s.

The bigger picture in commodities, however, doesn’t show the re-emergence of deflation or demand destruction.

Copper, widely regarded as a barometer of global economic activity and coined Dr. Copper by traders because of its forecasting ability, showed a 2.4% advance in June – quite inconsistent with the trend in raw materials. In fact, copper has been flat since May 1st when commodities have tanked. That’s bullish. This suggests the Chinese have re-entered the market and have started to stockpile once again.

Finally, government intervention and massive manipulation of financial data has caused all sorts of confusion in the commodities pits.

This correction has been especially severe because governments are now clearly attacking free markets and doing everything they can to alleviate commodity price inflation.

Over the past two weeks, the United States and other countries have released strategic oil reserves while the USDA shocked the grains markets with a bearish crop report.

The short-term results of these government-induced actions have been widespread declines in the commodity markets. I suspect most of these policies will backfire as the storm passes by this summer. Global rates are still excessively low and long-term consumption trends are here to stay in the absence of a deep recession any time soon. Inflation remains widespread across most businesses – except housing – and will continue to eat away at paper money.

I’m focusing on gold mining stocks, oil equipment services, agriculture-related businesses, including Latin American farmland, and volatility, which is still very cheap. Managed futures, or Commodity Trading Advisors are in the midst of a steep draw-down and should be accumulated at these levels.

Grains Chopped to Pieces in Ugly June

Eric Roseman — Thu, 30 Jun 2011 14:36:37 +0000

Setting the Record Straight on the Iraqi Dinar

Montreal, Canada

A bowl of Wheaties cereal might make you big and strong, but investors and speculators betting on a recovery in wheat and other grains this week were sorely disappointed following a bearish USDA crop report this morning. The entire grains complex is getting decked.

The grains are pulling back sharply today following an explosive surge from June 2010 through April 2011. Droughts, pervasive floods and soaring demand drew all sorts of open interest from hedge funds looking to ride the bull market; a deep correction in June has sent them running for cover as some contracts suffer hefty losses.

As global equities have mounted a pretty impressive recovery over the last four days, the grains rank as one of the worst performing sectors.

The S&P 500 Index, which is now down 2% in June, is faring much better than a basket of the grains like corn, wheat and soybeans; the iPath Dow Jones-UBS Grains Index ETN (NYSE-JJG) is down a whopping 12% this month. The Tecreum Corn Fund (NYSE-CORN) is down 7.7% in June. A diversified ETN holding a mix of agriculture futures, the iPath Dow Jones-UBS Agriculture ETN (NYSE-JJA), has lost 9.6% this month.

Over the last four weeks the volatile weather patterns that importantly affect crop yields finally turned positive after months of relentless rains or drought. The United States finally got a boost in June as Mother Nature salvaged what was increasingly looking like a bad harvest; the U.S. is the breadbasket to the world and the largest exporter of corn.

The grains were undoubtedly overbought heading into June. But it’s a big mistake to believe the bull market is over just because of a bearish USDA crop report. The long-term secular trends favoring the grains complex remain intact, namely volatile climate change, falling water tables, population growth exceeding arable supplies of foodstuffs and the lowest grain inventories in more than a decade.

Other peripheral trades, including potash and especially phosphate, are great long-term growth stories feeding on the low inventory cycle.

Take advantage of lower prices and dollar-cost average into your favorite ETFs and ETNs this summer. Good harvests won’t last.

Paging Dr. Copper

Eric Roseman — Wed, 29 Jun 2011 15:07:35 +0000

How To Escape From America, and Where to Go

Dr. Copper has been under the weather, as of late. After hitting record highs in mid-February, the metal has retreated close to 12% as of yesterday’s close.

As seen one can see on the chart above, the graph had been in lock-step with the S&P 500 (in green) up until late April, when price levels really began to deteriorate. The dramatic drop brought prices down to the 200-day moving average, where they have been consolidating since early May. A rather ominous feature of the above chart, spelling further potential downside risk, is the forming Death Cross of the 50-day moving average below that of the 200-day.

What has been driving prices lower is a rather slower growth outlook for global demand. According to a recent International Wrought Copper Council (IWCC) report, 2011-2012 demand is expected to drop from a five year average rate of 16.4% growth to just 8.4%.

A main influence in the near 50% decrease in expected demand is due to China. 40% of global copper demand is from China and recent forecasts of a Chinese economic slowdown have certainly contributed in a major way to the slump in copper prices.

Despite the doom and gloom in the technical and fundamental stories of copper, two mining giants are going head to head to fight for strategic copper mines in Africa. Asia’s biggest nickel producer, the Chinese Jinchuan Group Ltd., is taking on the world’s second largest mining company, Brazil’s Vale S.A. The two mammoth miners are looking to take over Metorex Ltd., with current bids putting the deal well above the billion dollar mark. The South African company owns strategic copper and cobalt mines located in the D.R.C. and Zambia.

Perhaps the two companies realize that while Chinese growth is slowing, the 9% growth rate expected in Q3 is still nothing to scoff at. Perhaps they are encouraged about the potential increase in Japan copper demand due to reconstruction efforts. Maybe they realize that copper supplies are being squeezed, with the largest source country, Chile, reporting a 3.9% drop in output during the first quarter. Whatever the case, it looks like we shouldn’t count Dr. Copper out just yet.

Rare Earth Metals in a Bubble?

Eric Roseman — Tue, 28 Jun 2011 13:04:43 +0000

How You Could Make 150% Gains as Silver Soars to $75

Montreal, Canada

Since hitting the market over a year ago, the entire gamut of rare earth metal companies has been on a tear. Many of these stocks have gained several hundred percent over the past year as investors embrace a sector that’s virtually dominated by the Chinese in terms of net supply.

Rare earth metals include names or words that are difficult to pronounce, but they are important components in cell phones, military equipment and other devices that are regularly used by consumers and individuals every day.

Things like yttrium, lanthanum, praseodymium and holmium are but a few rare earth elements embedded in the earth’s crust. Estimates point to China controlling about 95% of the rare earths market.

When you have a commodity or a group of commodities in supply deficit then that’s the recipe for profits. Investors assume that rare earth metals are the next Big Thing and have embraced the sector, driving share prices to “bubble” valuations.

But according to The Wall Street Journal, the party might be over.

Short-sellers are swarming the small rare earth sector this summer compounded by some insider selling at one of the leading North American rare element producers. Some of these stocks are down more than 35% off their peak.

Molycorp (NYSE-MLY), the largest non-Chinese rare earth metals company, trades at more than seven times book and has negative earnings. The company has net cash but its return on equity is negative.

Everyone is pretty convinced that rare earth metals are here to stay. I agree. They’re important components potentially made difficult to secure because China controls such a vast expanse of the minerals. But everything has a price and the big rally for these stocks looks like it’s exhausted. Better to wait for the bust and then build fresh positions.

Don't Bet Against Chinese Commodity Bull

Eric Roseman — Mon, 27 Jun 2011 13:35:19 +0000

How You Could Make 150% Gains as Silver Soars to $75

Montreal, Canada

A correction in asset values is now engulfing the natural resource space. If everyone was bullish just eight weeks ago, then the opposite is true now. Suddenly, the world doesn’t need as much oil, wheat or potash compared to only two months ago.

Even governments are getting into the act. The release of strategic oil reserves is another stupid policy by major leaders of the world at a time when prices are already falling since May.

In the span of almost seven weeks everything from oil companies to fertilizer stocks has been trashed by the herd on fears of a Greek default, a Chinese economic slow-down and a softening American economy. All this bad news is converging at the same time.

Apparently, the global growth cycle is at risk once again and confirmed by the rapid flattening of the yield curve in the United States, a big rally in TIPS (suggesting renewed deflation fears) and another rally in the U.S. dollar – consistent with the “risk off” environment now pervading across world markets.

Focus on China. The Chinese are the number one consumers of raw materials in the world over the past decade and continue to absorb whatever excess supply is left unused by other big consumers like the United States, Germany and Japan.

But the Chinese economy isn’t falling off a cliff. Noted China-bear, Jim Chanos, an excellent short-seller, believes China’s property market is a deluded nightmare in mispricing.

The bears point to a bubble in Chinese real estate, now clearly deflating. I can’t argue with that. But the bears are wrong to assume China’s economy will crash; the People’s Bank of China can mop-up non-performing loans in the banking system with one push of a button.

China sits on more than $3 trillion dollars’ worth of reserves.

Not only can she subsidize non-performing loans overnight but equally impressive is the fact that China is a net creditor nation. Many countries would have no problem lending to China because her external balance-of-payments is in surplus and net debt still very low compared to other nations, especially in the West.

Also, nobody really knows just how much gold China holds in her reserves.

Recently, Hong Kong recalled its gold stash from London. I’m betting the Chinese are quietly but regularly amassing a fortune in gold bullion and absorbing any supply the free market unloads, not including her domestic production, now the world’s largest gold producer.

There’s no debating inflated real estate values are prevalent in China; there’s real trouble. But let’s not forget that even the United States while on the road to becoming the greatest economic power since the Roman Empire, suffered major depressions in the 1890s and 1930s; she still managed to become a powerhouse thereafter. And so China will suffer the same hiccups.

China’s ballooning reserves and massive potential borrowing capacity almost assure that any economic crises will be dealt with quickly. In 2008, the Chinese almost immediately spent more than $500 billion dollars to boost her economy as Treasury had to beg Congress to unload more than $750 billion dollars of stimulus to save the banking system. China’s bureaucracy is socialist; but her economic policies are highly pragmatist.

The United States, however, doesn’t have this luxury and must still rely on external debt financing of more than 2 to 3 billion dollars per day to keep its economy functioning. Deficits are soaring, protests are increasing amid social welfare cuts in some states and big government is getting even bigger. This isn’t the Reagan Revolution. It’s the Obama nightmare.

We could sure use a Ronald Reagan right now…

China will continue to grow and will remain the world’s leading consumer of raw materials. She has the economic resources to keep the party going and I suspect this will continue for many years until the United States engages her militarily as the balance of power in this century shifts from West to East. Follow the money trail; it leads to China.