Why the Commodity ‘Supercycle’ Might Only be Halfway Done

By MoneyMorning.com.au

What if I told you that mining boom hadn’t even got started yet?

…Or that commodity prices have another fifteen years to keep rallying?

It’d be music to the ears of resource investors who have had a tough few years.

It’s tough to imagine in this bearish environment, but this is exactly what we heard from an expert in an exciting new presentation with our buddy Dan Denning recently…

Phillip J Anderson, of businesscycles.biz, sat down in front of the cameras with Dan a couple of weeks ago. Most of the talk revolved around Phil’s theory on property cycles.

It’s a cracking interview. We haven’t been exactly bullish on Australian property here at Money Morning. But Phillip made an interesting bullish argument based on a predictable 18-year cycle.

He sees the US property market leading the Australian market by about a year and a half, and as US prices are starting to pick up slightly, he’s very bullish on Australian property.

In a way he’s more of technical trader of the property market — less focused on the fundamentals, and more on the technical aspects of property. I don’t want to steal his thunder. Watch the video if you get a chance (it’s available as a Strategy Session for all subscribers of any of Port Phillip Publishing’s paid services).

But I’ve got to admit, that it wasn’t his view on property that interested me.

He has an interesting take on the commodity price cycle too.

The Bull Market is Not Over

According to Phil we’re only 15 years into a 30-year upswing in commodity prices. That would mean that having started around the year 2000, commodity prices won’t peak until 2030.

Commodities to Rise?

Source: StockCharts

The theory behind his thinking is that of ‘Kondratiev waves’.

This is the idea that 60-year cycles are common in a capitalist society. So in the case of commodities, that would be thirty years up — which we are halfway through — and then thirty years down.

Although I should note that mainstream economists don’t accept Andre Kondratiev’s theory…which probably means it’s a good one.

We doubt he worried much about acceptance. What probably upset Kondratiev more was being executed by the Soviets in a concentration camp in 1938, because they didn’t like his theory. That might have stung a bit more.

I like the sound of Phil’s view on commodities, though I have a different reason for thinking the same thing.

My reasoning is that there are a lot of populous countries that are getting much wealthier, and very rapidly too. As they do so, they increase the demand for raw commodities — the building blocks of a new society.

China is obviously the biggest player in this story. In the last twenty years, 400 million people, out of the 1,400 million population, have moved into cities. This has added to the 300 million already in cities. That means about 50% of China is now ‘urbanised’.

The Growth Story in Asia Continues

This migration of people from subsistence existence to city life has been the heart of the China story. It has driven an unprecedented construction boom, and demand for iron ore, coal, copper and basically all key materials.

And the thing is that this process is only halfway through.

China plans to reach 70% urbanisation by around 2030. And in fact get to 80% by 2050, which would be comparable to the US.

It’s not just China. India is on the same path too. Urbanisation is still just at 30%, but is heading for 50% in 2030. That means building cities for another 280 million people.

Let’s look at China and India another way. This chart form ETFS shows where they are in the journey. It tracks time in years along the bottom, and wealth in national income per person on the y axis. Using post-war Japan as a template, you can see that China isn’t just following the same path, but is very early on in the story — as is India.

Source: ETFS

If the Chinese economy continues developing at its current pace, and its citizens keep urbanising, then its commodity demands have only just begun.

And as you’d expect, it’s in the early stages of urbanisation that demand is the most intense. Once everything is built, and the country enjoys the fruits of its hard work, the demand begins to slow.

India never gets much airplay in the commodity discussion, but is already creating strong demand for key commodities. Its gold demand has long been a feature of the gold market, and as incomes rise, its gold imports rise with it. We’re going to see the same thing for copper, and components of steel.

Another country that will increase commodity demand is Indonesia.

This 846 billion dollar economy is growing at 6–7%, and has been for most of the decade. At current rates, it will be bigger than Australia in fifteen years. The country is becoming rapidly more prosperous. In the last year, luxury property in Jakarta gained 38% in value!

With a population of a quarter of a billion people, it’s double Japan’s population of 127 million. As it develops, it will make an impact on the commodity markets. It already makes up 3% of Australia’s bilateral trade. I don’t want to simply say ‘China ten years ago’ but, well, it’s like China ten years ago!

You could say something similar about the rest of the ASEAN (Association of South East Asian Nations) members on our doorstep. The Philippines is another one to watch. There are 100 million people there enjoying growth of 7%.

My point is that there are almost four billion people across China, India, Indonesia and other ASEAN members that are all enjoying economic growth. And they’re all in the very early stages of raising their living standards to modern levels.

Meanwhile the mining sector, provider of the raw commodities to fuel this ambition, isn’t keeping pace. In fact, the supply of many commodities has flat-lined.

In the long term, this is a very bullish scenario for commodities. With the mining sector limiting investment, it’s not hard to see commodity prices soar much further in the coming decade, which also neatly fits in with Phil Anderson’s Kondratiev Cycle theory.

Dr Alex Cowie
Editor, Diggers & Drillers

Join me on Google+

Ed Note: Phil Anderson says the Aussie property market is set to begin a multi-year bull market. He claims that the Aussie market historically follows the US, which has already begun to rebound. In today’s Money Morning Premium, Kris disputes that a growth spurt is on the cards, but he does reveal the one condition that makes some Aussie property worth buying today. Click here to upgrade now.

From the Port Phillip Publishing Library

Special Report: TORRENT SIGNAL 3

Daily Reckoning: The Kamikaze Rally That Could Drive Stocks Higher

Money Morning: Here’s the Real Reason Why Stock Market Prices Go Up

Pursuit of Happiness: Is There More to Life Than Money and Investing?

Diggers and Drillers:
Why You Should Invest in Junior Mining Stocks

Botswana cuts rate 50 bps, inflation outlook positive

By www.CentralBankNews.info     Botswana’s central bank cut its Bank Rate by 50 basis points to 9.0 percent, its first rate cut since December 2010, to reignite economic growth while the medium-term inflation outlook is positive.
    The Bank of Botswana (BoB) said economic growth is below potential and unemployment is high and forecasts suggest that a more accommodative policy stance would be consistent with the achievement of the bank’s 3-6 percent medium-term inflation objective.
    In the short term, however, the BoB said inflation is expected to remain above the bank’s target range due to transitory factors.
    But weak domestic demand and forecast low external inflationary pressures means the “underlying trend is forecast to be downwards, and this means that inflation is anticipated to converge to the medium-term objective range in the second half of 2013,” the BoB said.
    In March Botswana’s inflation rate rose to 7.6 percent, up from 7.5 percent in February, but down from 8.0 percent in March 2012.
    The BoB said domestic output grew by 3.7 percent in the 12 months to December 2012 with the non-mining sectors slowing to growth of 5.8 percent from 7.8 percent in 2011, while the mining sector contracted by 8.1 percent.
    The central bank expects that non-mining expansion will remain below potential in the medium term and therefore exert minimal inflationary pressure. In addition, the impact of demand on economic activity is forecast to be modest, reflecting trends in government spending and personal income.


Profit from the Biotech Boom

By MoneyMorning.com.au

The biotech sector is on a roll. Anyone who has invested over the last couple of years will have made some very respectable profits.

But we think there’s legs in this boom yet — so it’s not too late to climb aboard…

As Kopin Tan notes in Barron’s magazine, the biotech sector ignited about two years ago after ‘going nowhere for more than a decade’.

What’s changed? One factor, Morgan Stanley’s Adam Parker tells Tan, is the falling cost of decoding the human genome.

The Key to Biotech’s Latest Bull Market

Your genome — basically your own individual design blueprint — contains lots of valuable information about the sorts of diseases you might be prone to, and also about how you might react to various treatments.

The genome was first decoded around about the turn of the century. Everyone had been very excited about all the things we would be able to do. Of course, as with all these things (the internet, for example), the market expected too much too soon.

In fact, the last biotech bull market ended alongside the popping of the tech bubble, just as the early draft of the genome was being unveiled.

The simple act of decoding the genome didn’t mean the entire secret of human biology was instantly unrolled like a red carpet to usher in an era of miracle cures. Good science takes time. And the genome raised a lot more questions than it answered.

It was also expensive and time-consuming to decode. So investors grew bored and disappointed, as high spending on research and development (R&D) didn’t instantly yield results.

But now, says Parker, that’s all changing. As it gets quicker and cheaper to decode the genome, R&D spending is starting to pay off. One of the big buzz-phrases in healthcare at the moment is the idea of ‘personalised medicine’.

The idea is that as it becomes possible for each of us to have our own genomes decoded, medicines and treatments will increasingly be tailored to the specific needs of the individual.

That’ll create a new lease of life for the medical industry, with a swathe of new treatments becoming feasible.

Already, the number of treatments approved is rising significantly. In 2012, the number of drugs approved by the US regulator — the all-important Food and Drug Agency (FDA) — hit a 16-year high.

As Parker puts it, ‘We could be witnessing a substantial re-rating, where instead of a discount on R&D being embedded into healthcare stocks, a premium could ultimately be awarded for the potential option value of curing a disease.

Translated into English, what he’s saying is that investors have gone from thinking: ‘R&D is a colossal waste of money that these companies could be paying me in dividends’…

To thinking: ‘Wow! This company could make an incredible amount of money by discovering new drugs, and the more money it spends doing so, the better.’

If you’re thinking — gosh, investors are a fickle bunch — I’ll not disagree with you. That’s why markets boom and bust, few more so than rampantly speculative sectors like biotech. But it’s also the reason why investing in these sectors can be so profitable when they do happen to take off.

The whole demographic picture also supports the biotech sector, the argument goes. In short, developed world populations are getting older. American baby boomers are retiring in their droves. That means more demand for more treatments.

For those who want to invest in individual stocks, it’s worth remembering that biotech is a highly speculative area. So if you want to have a hope of making consistent profits, you’ll need to do lots of research, and you can’t put all your eggs in one basket.

John Stepek
Contributing Editor, Money Morning 

Join Money Morning on Google+

From the Archives…

The Market Rebounds, but We’re Still Not Selling…
26-04-2013 – Kris Sayce

Is This the Last Hurrah for the Australian Dollar?
25-04-2013 – Murray Dawes

Here’s Proof the Silver Bullion Market is Alive and Well
24-04-2013 – Dr. Alex Cowie

Stand By for the Recession Rally in Resource Stocks: Take Two
23-04-2013 – Dr. Alex Cowie

A New Take on Hard Asset Investing
22-04-2013 – Kris Sayce

Asian Buyers, Goldman Guys and the Wizard of Oz

By MoneyMorning.com.au

‘Buyers Scour Asia for Physical Gold’, proclaimed a headline in the Financial Times — in a story buried on page 18, because it relates favourably to gold and gold bugs.

Though it was exiled to newspaper Siberia (Section II, to be precise), the Financial Times article vividly detailed a scramble across Asian markets for yellow metal.

Indeed, per the FT report, ‘Asia is witnessing one of the strongest waves of physical gold buying in thirty years.’The FT article used terms like ‘feverish buying’, as well as ‘gold rush’, just a week after a massive sell-off of paper gold…
News of Asia’s frantic gold buying raises a legitimate question. What happened to the ‘gold is dead’ meme from the week of the crash?

Wasn’t the apparent selloff supposed to mark a turning point for gold? Isn’t the tide receding for what every good student of Economics 101 has learnt is merely a ‘barbarous relic’, per John Maynard Keynes?

Yet strong Asian gold demand is contrary to Western convention. When the price of something falls, goes the rule, it’s because people are selling product, not buying it, right? Then again, what exactly tumbled in price last week?

There’s a new truth apparent in the marketplace. There’s paper gold, reflecting so-called ‘contracts’ that change hands on a trading venue operated by CME Group, called COMEX. And then there’s the real McCoy of physical metal, which trades hands on gold exchanges across the world. These are two quite different things.

Of course, in its recent news account, the Financial Times described the scramble for physical metal. The sense of surprise in the Times — of an overall market disconnect — may be because that newspaper’s celestial view of macroeconomics is fixed upon ‘stars that went dark and cold a decade ago,’ to quote the inimitable Conrad Black.

In other words, the Financial Times has never been much of a trumpet for gold as more than just another asset class, like orange juice futures or real estate investment trusts. You buy gold, sell it, trade it. But there’s no need to take delivery. It’s not as if gold is money, right?

Yet now, when it comes to the market for the real element — atomic number 79 — and holding it in your hand: what do those gold-loving Asians know?

No Fools, Those Goldman Guys

Perhaps the physical buyers, in Asia, were merely ahead of the curve of respectable opinion, so to speak. Because not long after buyers from Mumbai to Shanghai started snapping up gold with complete enthusiasm, the nice people at Goldman Sachs posted the following announcement:

‘We have closed our recommendation to short COMEX Gold, as prices moved above the stop at $1,400/toz. We have exited the trade significantly below our original target of $1,450/toz, for a potential gain of 10.4%. The move since initiation was surprisingly rapid, likely exacerbated by the break of well-flagged technical support levels. Our bias is to expect further declines in gold prices on the combination of continued ETF outflows as conviction in holding gold continues to wane as well as our economists’ forecast for a reacceleration in US growth later this year.’

Oh, you don’t say?

Gold’s Disconnect, and Blowback

When people dumped ‘paper gold’ over the past few weeks — sellers that included the aforementioned Goldman — they made quick gains, but they also committed a strategic error. That is, as people dumped COMEX gold contracts in unison, some apparently engaging in naked shorting, or ‘selling’ gold over which they had absolutely no control. Then came the golden disconnect.

Perhaps initially, the market plan was to break (if not ‘brake’) the rising demand for physical gold, by knocking down the price of paper gold and pocketing a fast gain. It’s like robbing liquor stores, but without having to wear a ski mask. And of course, one should never do anything dishonest unless it’s perfectly legal.

Still, sellers — perhaps unintentionally — triggered a new run on physical gold that shows no sign of diminishing. The new buying spree in Asia appears to be the physical gold blowback. Is this the beginning of the end of paper gold? As gold shines, is paper burning?

A Cross of Paper – Death of COMEX

Just to be clear, sellers drove down the paper price of gold, and inflicted grievous wounds across the rest of the metal space, too — silver, copper, platinum, etc., and almost all of the mining plays.

The pullback was awful, across the overall resource sector. Sellers left proverbial pools of blood in the streets — Wall Street, Bay Street, Howe Street and Main Street. Long-holders got nailed to a ‘cross of paper’, to paraphrase William Jennings Bryan.

But those COMEX contract sellers must not have foreseen that physical demand for gold in Asia (and across the world, truth be told) would spike after a pound-down. Whoops.

Look at it from another angle. There’s no way that any physical gold market — CME Group, especially — can arrange delivery of enough product to cover all the contracts out on the street.

We have a disconnect from the ‘market’ price of paper gold, versus what people will pay for physical metal in the souks of the world.

In this respect, the paper gold market — embodied by COMEX — has been exposed as a mere platform for price manipulation. (Some people might call it a ‘fraud’, but I’m not here to quibble over semantics.)

It’s like Dorothy pulling away the curtain in the Wizard of Oz — a book about the gold standard and bi-metallism, by the way.

Off to See the Wizard

Let me digress for a moment. Author Lyman Frank Baum wrote the original book, The Wonderful Wizard of Oz. The book, published in 1900, was whimsical. But among other things, it poked fun and caricatured the gold and silver debate in the US in the 1890s. More broadly, Wizard was an allegory about life and political populism in the US in the 1890s.

Author Baum had a keen eye for the gold-silver debate because he knew something about the subject. Baum was wealthy, and heir to serious family money that came from the 19th-century oil fields of Pennsylvania. So he took the idea of debased currency and ran with it.

Just look at just the title, The Wonderful Wizard ofOz, where ‘Oz’ stands for ‘ounces’. I’ve heard that in the real story, the ‘Emerald City’ of Oz was a city of gold. (It became emerald when MGM Studios made the famous Depression-era movie in 1939.) The yellow brick road was a metaphor for gold. Dorothy’s slippers were silver in the book, and changed to ruby in the movie.

The Tin Woodman stood for the urban workers of America, who were left out in the cold and rain by the forces of banker capitalism. The Scarecrow stood for the farmers — and recall that he had no brain, because many East Coast snobs thought farmers were dumb hicks, ripe for the picking.

The Cowardly Lion was a dead ringer for William Jennings Bryan, who made good speeches, but could not stand up to the entrenched big guys.

The Wizard was all smoke and mirrors, reflecting the political classes as a bunch of charlatans who promised much and delivered little.

Hey, Wizard is a children’s story. It’s not a cookbook for what ails us today. If there are any real answers in the book, it’s along the lines that things aren’t what they may at first appear. And the common people — workers and farmers — are smarter and nobler than the elites think.

At the end of the day, COMEX is revealed as just a shadow market. The curtain has been pulled and there’s nothing to back it up. COMEX is okay for ‘trading’ gold, as long as your only goal is cash settlement. But if you want delivery? Real metal? Elemental gold? No way.

Looking ahead, let’s watch what happens. The next step in the paper gold market is to alter the rules for COMEX settlement. I expect to see any semblance of a ‘delivery’ requirement will simply vanish.

The COMEX is just a paper exchange now, with people trading computer code. There’s more ‘real’ economic activity generated by betting on horses, because horses are flesh and blood critters. Now, COMEX gold contracts have turned into something like the stuff that hired hands shovel out of the stables.

The recent gold crash was the beginning of emancipating real gold from paper gold. We’re about to see a ‘real’ price for gold, coming from the bottom up and not the top down. I suspect that we’ll see a solid price rise for gold, over time. The market bullies who deal in paper products have just punched themselves in the nose.

Gold’s Lehman Moment?

The scenario actually reminds me of 2008, when Lehman Brothers crashed and burned. The fall of Lehman set off a modern financial crisis of historical proportions.

The recent crash in the price level of paper gold established nominal prices far below the international physical price. To the extent that COMEX has any product for delivery in the pipeline, this gold price excursion will drain it out. COMEX is toast, at least for gold.

What comes next? Will COMEX be the next Lehman? Will it crash and burn, too? Maybe, but in the end it doesn’t matter if you’ve been buying and holding physical metal — as I’ve been advising for over six years. Or perhaps COMEX ‘gold’ will just fade away, because it has lost credibility as a trading platform. At this stage, who needs it?

Looking for Protection

Still, as the big elephants fight this out, where does the small investor go for investment safety? Well, own physical metal, to the extent you have it and can obtain it. Cash is good, at least in the short term. But cash may not do so well, as the gold price rises in a relative sense.

We also get back to shares in ‘hard asset’ companies — large, mid-sized and (some) small mining firms with high grades, cash in the bank, low costs of production (or a short pathway to production), and cash flow. That, and management that’s not too slow or stupid.

One day, we’ll look back on this period as the Great Gold Train Robbery of 2013. The sellers thought they were getting away with a quick heist — sort of a smash and grab of COMEX contracts. Yet instead, the bust appears to have freed gold from its paper constraints. Looking ahead, gold prices could rise beyond your wildest expectations.

Byron King
Contributing Editor, Money Morning

Join Money Morning on Google+

From the Archives…

The Market Rebounds, but We’re Still Not Selling…
26-04-2013 – Kris Sayce

Is This the Last Hurrah for the Australian Dollar?
25-04-2013 – Murray Dawes

Here’s Proof the Silver Bullion Market is Alive and Well
24-04-2013 – Dr. Alex Cowie

Stand By for the Recession Rally in Resource Stocks: Take Two
23-04-2013 – Dr. Alex Cowie

A New Take on Hard Asset Investing
22-04-2013 – Kris Sayce

UK Ministry of Defense Deems Wind Towers a National Security Threat

By OilPrice.com

Twenty-plus years on, the collapse of the USSR in 1991 threatened massive Western defense budgets, bereft of a major enemy like the “Evil Empire.”

Western militaries conveniently found a new global enemy a decade later following the terrorist attacks on 11 September 2001, and since then, they have struggled in the light of invasions of Iraq and Afghanistan to adapt their strategies to cope with the new threat, making defending the “homeland” the highest priority.

While the U.S. created the “Department of Homeland Security,” Washington’s less prosperous European allies have been forced to seek solutions to indigenous defense largely by themselves beyond NATO.

Except that the NATO charter Chapter 5 stipulates that an attack upon a member state will be met by the entire coalition.

European democracies have scrambled to define both national and European Union security issues, particularly since the global economic downturn, which began in 2008, forcing hard choices amongst European defense ministries.

Furthermore, many European nations now have significant post-colonial immigration populations, ramping up security concerns, from both indigenous citizens and ongoing concerns of foreign aggression. Defending the United Kingdom’s territorial, maritime and aerial space is the primary mission of Britain’s Ministry of Defense.

A laudable objective, but, in a time of declining MOD revenues amid energy imports, perhaps, a wind farm too far?

Needless to say, security encompasses protecting the country access to energy, so anything that reduces the kingdom’s dependency on foreign energy imports must be a good thing, correct?

Apparently not.

The latest threat to Britain?

Wind power, apparently.

The MOD has come out against two proposed 115 foot wind power towers in Cornwall, which they assert are so big they could look like planes on monitoring equipment.

The MOD assert that the wind towers green energy devices could confuse computer systems designed to protect the UK and identify the turbines as a threat , triggering the MOD to send in fighter aircraft to investigate, and while the RAF was preoccupied, allowing real enemies to sneak into British airspace, and accordingly, are against their construction.

The unpatriotic British citizens attempting to undermine British aerial defense are Richard and Ian Lobb, who want to install the 50 kilowatt towers on their adjacent farms in St Ewe, Cornwall. The ever vigilant MOD which warned the installation would cause “unacceptable interference” to an air traffic control radar 30 miles away in Wembury, Devon.

According to the MOD, “Wind turbines have been shown to have detrimental effects on the performance of MoD ATC radars. These effects include the desensitisation of radar in the vicinity of the turbines, and the creation of ‘false’ aircraft returns which air traffic controllers must treat as real. The desensitisation of radar could result in aircraft not being detected by the radar and therefore not presented to air traffic controllers. The creation of ‘false’ aircraft display on the radar leads to increased workload for both controllers and aircrews and may have a significant operati onal impact. Furthermore, real aircraft returns can be obscured by the turbine’s radar returns, making the tracking of conflicting, unknown aircraft much more difficult.”

A tad of history and geography here.

Radar installations along the English Channel were crucial in Britain winning the crucial Battle of Britain in 1940 against Hitler’s Luftwaffe, so Britain’s RAF is hardly unfamiliar with the principles of radar, more than seventy years later.

Secondly, how does a stationary object generate a hostile radar signature, unlike an incoming aircraft moving at hundreds of miles per hour?

Thirdly, virtually all of the RAF’s interception missions during the Cold War and after were against Soviet, and now Russian military aircraft approaching from the northeast, across the North Sea.

Cornwall, in Britain’s extreme southwest, is geographically rather distant from this area.

So, who’s to send the threats?




The people of Cornwall deserve their green energy, and the MOD officials should be chastised for their ramping up of a non-existent problem.

The Armada was over four centuries ago, World War Two over 70 years ago – the people of Cornwall deserve electricity from renewable energy sources, as it hardly seems to be a threat to national security beyond those MOD boffins who have apparently spent too much time at the pub over lunch hour.

Source: http://oilprice.com/Alternative-Energy/Wind-Power/UK-Ministry-of-Defense-Deems-Wind-Towers-a-National-Security-Threat.html

By. John C.K. Daly of Oilprice.com


What Does the Big Money Say?

By The Sizemore Letter

74% of money managers are bullish on U.S. stocks, according to Barron’s, an all-time high by the magazine’s measurement.  Only 7% were bearish.

Uh oh.

“All-times highs in bullishness” is not something I generally like to hear.  If these managers are talking their book—and we have to assume they are—then this means they are likely already invested aggressively and thus have little in the way of new buying to do.

Sentiment indicators generally fall into one of two camps: “dumb money” indicators that use the sentiment of rank-and-file investors as a contrary indicator and “smart money” indicators that seek to tag along with big, successful investors.

Barron’s Big Money poll definitely falls into the “smart money” camp, though off-the-charts readings like that give me cause for concern.  Still, the fact that the Big Money managers are significantly more bullish than the investing public is a good sign; it’s when the smart money is bearish and the dumb money is bullish that you should be most wary.

What else did the Big Money have to say?

They consider energy, financials, and technology to be the best bets for the next 6 to 12 months and are pretty bearish on utilities.  Apple (Nasdaq:$AAPL) and Google (Nasdaq:$GOOG) are simultaneously rated as  “favorite” stocks for the next 6 to 12 months and as two of the most overvalued.  Go figure.

90% gave a “thumbs down” to the battered JC Penney (NYSE:$JCP), though this was before it was announced that legendary speculator George Soros had taken a large position in the stock.  And 96% gave fellow retail also-ran Sears Holdings (Nasdaq:$SHLD) a thumbs down—not exactly a vote of confidence in principal shareholder Eddie Lampert (see “Is Sears the Next Berkshire Hathaway?”).

Interestingly, 62% were bullish on perennial train wreck Japan, whereas only 35% were bullish on Europe—despite the fact that the crisis appears to have been stabilized for the time being.  And 83% expect the euro to fall relative to the U.S. dollar.

What conclusions should we draw from this?  Truth be told, we should be careful not to draw too broad of conclusions.  The Big Money poll, like all sentiment indicators, is a snapshot of the market’s mood at a particular point in time.  This is not revealed gospel truth that you should use as the foundation of a major investment decision.

All the same, if you are bullish, it is reassuring to see that a lot of smart people with a lot of assets under management agree with you.

This article first appeared on MarketWatch.

SUBSCRIBE to Sizemore Insights via e-mail today.

Can E-Cigarettes Relight Big Tobacco?

By The Sizemore Letter

Has Big Tobacco stumbled into a new growth market in electronic cigarettes?

Well, sort of.  Use of e-cigarettes—which produced a smokeless water vapor infused with nicotine—is expected to more than double in 2013, which might ordinarily be good news for the major tobacco giants. Altria (NYSE:$MO), Reynolds American (NYSE:$RAI) and Lorillard (NYSE:$LO) are all active in the market or have concrete plans to be active. 

But the increasing popularity of e-cigs has come at the expense of the smoky originals.  By Morgan Stanley estimates, e-cigarettes replaced 600 million “stick equivalents” last year and will replace 1.5 billion in 2013.  Varying estimates have e-cigarettes accounting for 0.5% to 1.5% of all cigarette sales.

Growth is not something we’ve come to expect from the tobacco industry.  Yes, cigarette stocks have produced fantastic returns for investors in recent years, but these stock market returns have come even while unit cigarette sales have continued their drift lower.  American cigarette sales fell by 6.2% last year to 289 billion sticks; as recently as 2001, the number was well over 400 billion.

What does this mean for Big Tobacco and its investors?

The tobacco industry has been very effective at managing the economics of decline, much to the benefit of shareholders.  Altria and Philip Morris International (NYSE:$PM) were core holding of the Sizemore Investment Letter for most of 2010 and 2011, and our readers enjoyed fantastic returns driven by the relentless search for yield by investors in the low-rate world of quantitative easing.

There is absolutely nothing wrong with investing in an industry in decline, so long as the right conditions are in place.  As I wrote last week (see Are Coke and Pepsi the New Big Tobacco?), those conditions are:

  1. There should be substantial barriers to entry for new competitors.
  2. The company should be financially healthy (i.e. strong balance sheet, low debt).
  3. Management should be committed to rewarding shareholders via dividend hikes and/or share repurchases.
  4. The stock price should be cheap relative to the broader market.

How do e-cigs affect these criteria?  To start, they erode those all-important barriers to entry.

Outside of military armaments, Big Tobacco might be the most highly-regulated industry on the planet.  Though it sounds onerous, it’s actually quite good for the large existing players because it makes it virtually impossible for new upstarts to come in and undercut the established brands on price.

There is one big problem here.  The legal regime is still being formed for e-cigarettes, and right now it is something of a free-for-all that doesn’t necessarily favor existing Big Tobacco.  It varies from city to city or bar to bar, but e-cigs are also generally free of the indoor smoking restrictions that have helped to curtail tobacco use.

Would smokers be likely to pay a premium for an e-cigarette branded with the Marlboro label?  Maybe.  Maybe not.  But I’m betting the answer is no.

Rather than being a durable growth business for Big Tobacco, e-cigarettes seem to be yet another way to help people stop smoking—a trendier version of a nicotine patch or Nicorette gum, if you will.

Patches and gum did not destroy the tobacco industry, and neither will e-cigarettes.  But they may speed up its long-term decline.  According to the Wall Street Journal, e-cigarettes might have been a major reason that cigarette sales declined by over 6% last year rather than the usual 3-4%.

But in the end, the only aspect that matters to tobacco investors is how much of this is factored into current prices.  Remember, item #4 above—for an investment in an industry in decline to make sense, it has to be priced accordingly.  And right now, Big Tobacco stocks actually trade at a slight premium to the broader S&P 500.

I could be wrong, of course.  Rather than hasten the decline of traditional cigarettes, the e- variety may offer a real avenue for growth.  But given how quickly the industry is shrinking, it is hard to see any growth of this front offsetting the declines in unit sales.   And none of the above justifies a premium multiple.

If you’re looking for sustainable dividend growth at a reasonable price, Big Tobacco is not your best option at the moment.  As I wrote earlier this year when I called semiconductor maker Intel (Nasdaq:$INTC) my favorite “tobacco stock,” you’re a lot more likely to find value in Big Tech.

Sizemore Capital is long INTC.

SUBSCRIBE to Sizemore Insights via e-mail today.

Thailand to take action to curb rising baht

By www.CentralBankNews.info     Thailand’s central bank is worried over the rapid rise in the value of its bath currency and will take  action – as yet unspecified – together with the Thai finance ministry when needed.
    The Bank of Thailand (BOT) said the rise in the baht was “largely attributable to foreign investors’ confidence in the strength of the Thai economy” and this had spurred businesses into raising their productivity, the BOT said in a statement following a regular macroeconomic briefing of its Monetary Policy Committee where exchange rate developments were discussed.
    However, the rise in the baht has also had a negative impact on Thai exporters, particularly small and medium-sized firms, the BOT said, adding that “despite the exchange rate appreciation, the committee expects the Thai economy to remain resilient.”
    “The MPC expressed concern over recent volatility and rapid appreciation of the baht, which, at times, have not been justified by economic fundamentals,” the BOT said, adding:
    “The committee therefore agreed on the need for a timely implementation of appropriate policy mix as warranted by circumstances, in close coordination with the Ministry of Finance and other agencies.
   The Thai bath rose by close to 7 percent against the U.S. dollar early this year but then declined early last week following speculation in foreign exchange markets that the BOT would intervene.

Central Bank News Link List – Apr 30, 2013: UTCC expects Bank of Thailand policy rate cut

By www.CentralBankNews.info Here’s today’s Central Bank News link list, click through if you missed the previous link list. The list comprises news about central banks that is not covered by Central Bank News. The list is updated during the day with the latest developments so readers don’t miss any important news.

Dollar Remains Under Pressure Due to Low Liquidity

EURUSD – The EURUSD Increases Above 1.3070


This time, the EURUSD has a good start of the new trading week: the rate has increased above the resistance at 1.3070 and reached the level of 1.3116. The 1.3070 level is the support level this time, and the pair have managed to stay above it so far – this is a positive technical factor for the euro. However, weak dynamics of the pair gives reason to doubt the bulls’ ability to develop the upward movement and overcome the resistance around 1.3170 level, thus it will confirm the uptrend development. The decrease below 1.3070-1.3040 would jeopardize the support around the 30th figure.

GBPUSD – GBPUSD: Support at 1.5485 Constrains the Bears’ Onslaught


The GBPUSD was slightly appreciated yesterday and tested the 1.5545 level, then returned to its original positions near the level of 1.5485. This support continues to carry out its functions, not allowing the air bears drop below. Thus, the pair is trading above the 20-day MA. In addition, the 50-day MA crosses the 100-day MA, even though the Parabolic SAR was higher than the price chart, the GBPUSD may continue increasing. This will be contributed by the fact that the pair is trading above the 100-day MA on the daily chart. The drop below the 54th figure would worsen prospects of the GBPUSD pair.

USDCHF – The USDCHF May Drop to 0.9218


The U.S. dollar continued to lose ground against the Swiss franc, which led the pair to the 0.9350 support, enhanced by the 100-day MA. The Parabolic SAR has bee conveniently located above the price chart, the pair is not oversold, thus the bears may test the major support at 0.9218. In turn, the decrease below the 94th figure has worsened the pair’s outlook and the bulls need to return above 0.9400 this time – this will give them an opportunity to test the 95th figure again.

USDJPY – The USDJPY Keeps Trying to Develop a Downward Correction


The USDJPY dropped to 97.35, then returned to the level of 98.20, which limited the growth efforts. The whole day and during the Asian session, the pair was trading between these levels, having entered a consolidation phase. The 20-day MA has confidently crossed the 50 and 100-day moving avareges, the Parabolic SAR is above the price chart, thus the downward correction seems quite possible to continue. However, the bears need to break below 97.35 to make their correction dreams come true. Then, they will be able to count on the reduction towards the 96th figure.

provided by IAFT