Time to Jump Into South Africa?

The South African Reserve Bank (SARB) has cut interest rates by 100bps, inline with market expectations, but the near term impact on the FX and rates markets is likely to be limited.

Much of the move was factored into the market in recent days, following and awful Q1 GDP release (falling 6.4% and pushing the country into a recession), but it continues to reinforce the idea that South Africa is an very interesting domestic market.

Most exposure in the index is materials, though banks and domestic retailers are also prominent. The MSCI South Africa Index (EZA) ETF is great exposure to South Africa, but also look at the following heavy gold and mining players: Barrick Gold Corporation (ABX), Gold Fields Limited (GFI), Harmony Gold Mining Company (HMY).

Local costs are in South African Rand which has been devalued over the last few months, but the export revenues are in U.S. dollars, so profit margins are sky high.

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EM: Not So Risky Business After All

Emerging markets are often viewed by investors as riskier than U.S equities, but data on risk-adjusted returns proves otherwise.

Volatility for in the MSCI Emerging Markets Index this year peaked at a lower level than the MSCI U.S. and has seen a steeper decline, according to Bloomberg, and thus EM investors would have seen a higher degree of certainty on returns.

Emerging economies are also on track to grow much quicker than developed nations, with the International Monetary Fund predicting that the GDP of developing nations will grow 1.6 percent compared to a contraction of 3.8 percent for advanced economies.

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China is Everywhere... Even the NBA

No, we are not talking about Yao Ming.

The Cleveland Cavaliers have sold a minority piece of the club and arena to a Chinese investment group, one of whom has been actively involved in U.S sports franchises like the New York Yankees.

Are they setting up to defend a run by the Knicks at LeBron James when he turns to a free agency? This type of deep pockets and global reach (to maybe the greatest endorsement hound ever with LeBron) may be enough to keep James from the lights of Broadway.

Ming and James have both already garnered quite a following in the country, but will the Chinese now start altering the U.S. sports landscape? Bet on it. Money will sway anyone.

North Korea Nuke Puts China in Spotlight

The markets were rattled this week after news that North Korea tested a nuclear weapon as powerful as the one that destroyed Hiroshima, but have proven unfazed.

Political instability clearly exists in the region and in various spots in the world (including Iran which has its own nuclear game going on with the West), but what does this mean to the current economic recovery? Nothing.

What is important is the role China will play in the region. It has been unwilling to take a strong stand against North Korea despite its necessary role as regional police. If China does not lead the charge, this will be a greater signal to where China will engage and work with the West on the issues that do matter, i.e., its currency appreciation and the impact its under valued status has had on the liquidity bubble created globally as well as its way of handling a gradual transition away from the U.S. dollar as a global reserve currency.

The U.N. Security Council has reacted within a day, faster than they did during the April rocket launch. Sanctions/actions should come fairly quickly. If you are looking for a harsh reaction, don’t expect to get it from NATO whose secretary said they should stop these tests "as soon as possible" and get back to six party talks.

Some other thoughts on the testing and political/economic implications:

• This event complicates President Obama’s efforts to reign in Kim Jong-il as North Korea has fulfilled a threat to retaliate for U.S. led sanctions after April.

• Depending on how you measure the region, it is potentially 15%-20% of the global economy.

• There is grandstanding by Jong-il to cement power to engineer succession, and he wants his third son to take over.

• The testing raises concerns about nuclear proliferation and Obama's ability to stop it or prevent a sale to Syria or Iran.

• Tough resolutions are necessary as the credibility of the U.N. Security Council is at stake, but don’t make threats you can't keep or you risk losing more of that credibility.
  

• China won’t support anything tough on U.N. Security Council. China wants to get North Korea back to the six party talks on which they previously bailed. Give up nuclear weapons in exchange for massive aid and food, and end the pariah state status.

• So far, no threats have been thrown out that can not be kept. North Korea is already impoverished, so economic sanctions are almost meaningless.

• The launch was same place North Korea fired on Japan in April.

• China's response was stronger than in April and the same as stated in the 2006 test blast.

• Meanwhile, Iran’s nuclear program trudges onward.

This is an early test for Obama, and the U.S. cannot attack North Korea because of the South. Obama's policy needs to speak swiftly and strongly by holding the big stick but not threatening and letting China take the lead.

Rio Tinto Heats Up Iron Ore Price Negotiations

U.K./Australian-based miner Rio Tinto (RTP) has agreed to a 33% cut in contract prices in iron ore with Japanese steel makers including Nippon Steel Corp. and JFE Steel Corp., the first decline in seven years.

Historically, Chinese steel makers -- typically responsible for 45% - 50% of global steel production in 2009F -- accept the price set with the Japanese, but they may be looking for more aggressive levels.

This news clearly also affects Companhia Vale do Rio Doce (VALE), BHP Billiton (BHP) and other major iron ore producers. Vale will seek better prices than RTP, according to mining analysts.

RTP is still looking for alternatives to the Aluminum Corp. of China/Chinalco (ACH) deal to improve its balance sheet. Chinalco is also reportedly looking at a modified deal, which is proposed as buying $12.3 billion in asset stakes and paying $7.2 billion dollars for bonds later convertible to shares in the company.

We would argue selling a piece of the company to Chinalco is akin to doing a deal with the devil.

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OPEC Unlikely to Cut Production Deeper

The Organization of the Petroleum Exporting Countries (OPEC) is scheduled to meet this Thursday in Vienna to discuss production targets, and despite sinking demand, we don't expect the petroleum cartel will cut production any further than the the 4.2 million barrels a day it announced last year.

With so much uncertainty remaining in respect of the economy and how it all will pan out, it's not unlikely that the oil price will take a breather after nearly doubling (WTI) since the low seen earlier this year. There is one thing, however, that we are quite convinced about and that is that we will look back at this period as the time when "decoupling" (global debt rebalancing) started in earnest.

Oil prices rebounded to a 6-month high on Tuesday, up 78 cents and closing at $62.45 a barrel.

China's May PMI Will Test Markets

Watch China's purchasing managers' index (PMI) which will be reported later this week for pullback and a scare on global recovery. Don't read too much into a move down after a tremendous move off November lows to a rowing economy.

We have flagged the seasonal effects of the PMI on metals buying, including both the Import and Export Fair and the Chinese New Year. A drop below 50 isn't necessarily attributed to sinking demand or a sign of deterioration.

The world is nervous after a big run in risky assets and this latest PMI will test that resolve.

Both the China Federation of Logistics and Purchasing on behalf of the National Bureau of Statistics and the CLSA will release indexes on June 1.

Sugar Output Not So Sweet

Indian sugar output will plunge to 16.8 million tons, contributing to a decline in global inventories this year of 11 percent from last year, according to a new report by the U.S. Department of Agriculture.

Mills will process about 148.7 million metric tons by September compared to the previous forecast of 158.8.

The news caused a slight spike in sugar futures in India, the second largest supplier behind Brazil, but spot demand remains low. CEO of Cosan SA Industria e Comercio, one of the world's largest cane producers, predicts prices could rise as much as 20% by the end of the year.

Talk of Downgrade in US Credit Rating = Gold Rally

There's been a bit of speculation lately about the United States potentially losing its AAA credit rating after news that Standard & Poor's altered its outlook in the United Kingdom to "negative" from "stable."

Both analysts and the White House don't seem to think this is a likely scenario, but the best bet is to look at which assets have no liability against them. If U.S. can no longer issue money, people will not only flock to gold, but also those assets that are traded like oil and metals. Watch the Long Platinum ETN (PTM), the SPDR Gold Trust ETF (GLD) and the Gold BUGS Index (HUI).

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China and Brazil Cozy Up

China, which has already surpassed the U.S. to become Brazil's largest trading partner, has agreed to loan state-owned Petroleo Brasileiro SA (PBR) $10 billion to fund offshore oilfield exploration.

In return, Petrobras will supply 200,000 barrels of oil a day for the next 10 years to China's state-owned Sinopec (SNP). This is just the the latest foreign investment for China which is looking to diversify its global supplies.

The loan-for-oil deal was reached in meetings this week between Brazilian President Luiz Inacio Lula da Silva and Chinese president Hu Jintao. Petrobras has said that it needs about $174 billion to increase reserves and production capacity, following one of the biggest finds in history in the Santos basin which has the potential to position the country as one of the largest oil producers in the world.

In addition to the oil deal, Lula has been pushing to ditch the U.S. dollar in trade with China, who has become very interested as of late in Brazil's natural resources. China's central bank governor Zhou Xiaochuan has also suggested replacing the U.S. dollar as the global reserve currency with a new standard run by the International Monetary Fund.

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China's PMI: Watch for Seasons of Change

Watch the May Purchasing Managers Index (PMI) in China for extreme seasonality and sentiment adjustment on the resurgent global demand theme. May 31 is the reading by the government and CLSA, which conducts a less state org-focused survey that many feel is more accurate.  

There were contradictory reports of growth in March, but both reported expansion in April with a PMI above 50.

Do not be surprised to see a pullback in PMI for the month. Just as global industrial metals markets are familiar with the impact of the Chinese New Year, investors must also understand China's domestic seasonality.

One element with which to be atuned: China's massive Import and Export Fair in Guangzhou, which is by far the most important trade fair in the world taking place twice a year. The April fair is much more important than the one in October. More export orders are signed at this fair than any other time of year, boosting PMI for April. 

Another source of seasonality is, of course, the Chinese New Year which falls in either January or February and boosts PMI for March.

Oil Rallies on Inventory Report

Oil prices were up above $62 a barrel Wednesday after the release of new data from the Department of Energy confirming steeper-than-predicted drawdown in crude and gasoline inventories as reported earlier by the American Petroleum Institute. 

This is huge for emerging markets and supports a rally that is waiting for any sign of western demand to rally even higher.

Here are todays results -which are unmistakably bullish:

DOE Crude: -2.1M vs -1.2M forecast

Gasoline:-4.3M vs -1.2M forecast

Distillate:+672K vs +1ME

Capacity Utilization: 82.8% vs 84.1%E

Distillate Demand: +16K bpd to M bpd

Gasoline Demand: +321K bpd to M bpd               

EMs: Where They Stand - May 20, 2009

Korea and Mexico are the most leveraged into a recovery of the G3. The Mexican Peso reached a 6-month high Tuesday, and the Won traded near the highest level in 3 months this week, as Asian currencies climb in general.

Taiwan: International investors are covering their underweight, and China relations still have plenty of room to bring greater demand. Inflating P/E multiples could be underestimated. Short covering should lead to real capital flows based on rising valuations. Taiwan is more than just a tech story. 

China: Neutral. The Chinese economy is recovering but the recovery is somewhat lopsided with weak exports and strong domestic demand.  This is clear evidence that there is more to China than just the export sector, and this is reducing equity risk premium in emerging markets. 

The BRICs overall look to be in a good position.  India had a great election result and structural bearishness on Russia has proved misplaced.  Brazil's story is powerful and retail significant.

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EM Strategy: Where We Are in the Rally

We have reason to be rallying and challenging the view that emerging markets are due for a pullback.  

PMIs are rising with record-low interst rates and cost of production in the EM economies, yield curves are steepening, and analyst earnings measures are turning positive.

But what are the risks? Is this a bear market rally, built upon the fundamental factors of the stabilization in the G3 and acceleration in demand in emerging markets?  There is an extraordinary stress test to the decoupling arguement.  EM economies are last into a recession and, convincingly, the first out. But while the degree of decoupling is without argument, the degree to which is measure for debate.  

Will we go back to levels of September last year prior to Lehman's fall? Personal savings rates moving from 4-9% (average of 1970 -1980s) will be a global demand shock. The estimates of personal savings rates understates the actual number, which may be above 4%.  The pace of unemployment or underemployment is increasing. This will have a bigger effect on consumption. And a longer term increase in fiscal deficits (which leads to higher taxes and interest rates in the G3) will lower returns from these economies.

Brazil Becomes Global Poultry Leader

Brazilian food processing companies Perdigao (PDA) and Sadia (SDA) have announced plans of a merger, making Brazil the largest poultry producer in the world in market value surpassing Tyson Foods. PDA is the stronger of the two and the one "forced " by the government to bailout the balance sheet of the impaired SDA.

The new company will be called BRF-Brasil Foods SA and boast $11 billion in annual revenue.

SDA reported its first loss in 65 years on wrong-way currency bets, and both companies have faced overall demand dropping from fears of  a swine flu pandemic.  They plan to tap into other markets, and are already a step closer to China with a new deal Tuesday allowing direct imports from Brazil for the first time.

Synergies from the firms abounds, and there is interest by the government in making sure this is a leading global company.

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Global Autos: Troughed?

With global auto share prices still down 45% from peak levels vs. 30% at worst in previous recessions (and by any measure at record lows), there is opportunity with global demand that is both real and happening.

Production cuts have taken huge supply overhang off of the market, and balance sheets are improving -- Renault just raised money at 6%, not bad for a junk-rated company. Watch global ISMs (supply manager surveys) as PMIs are expected to reach 50 by Q4.

Demand in mature markets is already below replacement levels and so we see little downside to current (unsustainable) levels. Indeed, U.S. car sales per-capita are at 1961 levels, but emerging markets are cruising: China overtook the US as the world's largest auto market in Q1, car sales in April were up 37% y/y, and China's auto penetration is only 3% of their population.

Players to watch: Honda Motor Co (HMC), Toyota Motor Corp (TM), Tata Motors (TTM).

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Gold Loses Some Sparkle in Short Term

Improved risk appetite is weighing on gold prices, including retail ETF-based selling. But there have been no major outflows despite an 8-week rally in assets that might have typically derailed this rally. Gold prices are +5% month-to-date and expect to hold here.

Many investors continue to allocate capital to bullion as a hedge on their wider portfolios or taking directional views. A look at most recent 13F filings (required quarterly listings and disclosures of top positions required by the SEC for investors with $100m or more in assets) show some of the biggest investors in the world with gold as their core or even largest position. Paulson and Co. as well as Eton Park Capital Management, Tiger Management and many other top managers list gold or specific miners (FI, HMY, AU) as core holdings.

Gold may struggle in the short run but don't expect a major pullback. Why? Inflation returns, physical demand is changing with China adjusting its reserve mix, speculation is coming back into commodities and commodity-based mutual fund inflow remains strong.

Brazil Rally, Anything Left?

It's not over. Brazil rebounded from last week as the mood in the market improved across the board and inflows continue to force investors to put their money to work.

The local index, the Bovespa, has traded above the important 50,000 level. Telcos and consumer sector names have led the moves recently as record-low interest rates drive domestic demand.

But do not underestimate the buying by China to help drive the resource sector to higher valuation levels (upgrades by analysts, etc...). I've said it before and continue to maintain the Chinese are diversifying away from the USD and USD assets in the longer term. Part of this process is through the accumulation of commodity reserves and inventory building. Brazil will be a main beneficiary of this approach, and it will not be a one-month event.

Players to watch here: Petrobras (PBR), Cia Vale do Rio Doce (VALE), Gerdau SA (GGB), and Cia Siderurgica Nacional SA (SID).

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Oil: The New Gold?

There are about 4 million barrels-per-day of sustainable capacity in Saudi oil and what is coming out of Brazil - even after weighing the realities of production slowdown in Iraq and Iran, according to Morgan Stanley.

When the global economy churns higher, the GDP expansion phase can last a maximum of three years before oil prices will likely spike again to levels where demand is neutralized. Also expect increased pressure from "green" alternatives taking hold.

Oil fundamentals are not, however, what the market was trading on when oil hit $147/bbl. Despite real demand from GEM and increased stress on supply in Nigeria and Venezuela etc..., oil has become a speculators game and will trade like gold as an alternative to holding cash, or more importantly, the US dollar.

If you like oil, you like emerging markets.

Oil prices rose above $59 a barrel Monday on the NYMEX.

India Valuation: Not Cheap Anymore?

After a 20% move today, India could be considered expensive on a historical basis, but a lot of growth is now expected. To what extent should India valuation price that in?

Remember: EM always overshoots on valuation and prices in growth expectations as opposed to current earnings.

According to Merrill Lynch's Michael Hartnett, here are the EM forward PE's as of close Friday. SENSEX rallied 21% in U.S. dollar terms today putting MSCI India on a forward PE of 17.4X, roughly a 40% premium to EM. Note that in the past 10 years, the average India premium over EM has been 24%.

Mkt 12mnth fwd PE
Taiwan 27.1x
India 14.4x
China 13.5x
Korea 12.7x
EM 12.4x
Israel 11.9x
Mexico 11.5x
Brazil 11.5x
South Africa 9.8x
Turkey 8.5x
Russia 7.8x

India: A Lesson in EM Investing 101

Politics will always reign in GEM markets. Prime Minister Manmohan Singh became India's first prime minister since 1962 to win a second term in office. India is a rally based not only on the political mandate for the Congress party and smooth political transition in the world's largest democracy, but also on an expectation that there will be necessary reform that translates into economic growth.

The mandate now gives Singh the ability to push through three key reform agendas: insurance overhaul, private ownership in the banking sector, and pension reform. How quickly they move will be imperative to the sustainability of the rally, but it is reminiscent of recent election rallies.

Kuomintang's Ma Ying-Jeou won the presidential election in Taiwan last year, with the the promise of closer ties with neighboring China. In the first year, his administration has already reached agreements with Beijing to to allow direct flights across the Taiwan Strait. And Vladimir Putin, who was elected president of Russia in 2000, implemented a flat tax and worked towards the return of assets to the state.

It's dangerous to be short through an election cycle, even when the expectations were neutral to negative. India is not cheap at 16-18X forward PE, but one could argue that this market’s earnings have been dragged down by five years of government inaction to economic growth.

Buy high beta Indian stocks -- those with impaired balance sheets and corporate governance problems. This may sound strange, but they will outperform.

Here is a basic list of Indian ADR names to add to a watch list for India, which all trade in the US:

ICICI Bank (IBN)

Tata Motors (TTM)

Infosys Technologies (INFY)

Cognizant Technology Solutions (CTSH)

HDFC Bank (HDB)

Sterlite Industries India (SLT)

Wipro (WIT)

Sify Technologies (SIFY)

Rediff.com India (REDF)

Dr Reddys Laboratories (RDY)

Mahanagar Telephone Nigam (MTE)

Patni Computer Systems (PTI)

WNS Holdings (WNS)

Tata Communications (TCL)

Satyam Computer Services (SAY)

Mexican Airports Could See Take-Off Soon

Mexico's economy took quite a hit on top of a recession as swine flu panic swept through North America, but its central bank is taking a step towards recovery cutting interest rates (as expected) by 75 base points to 5.25 percent.

Tourism revenue (one of Mexico's largest sources of foreign currency) could see a drop of about 41 percent this year because of the effect of swine flu on travel reported Tourism Minister Rodolfo Elizondo.  But pressure on the U.S. to lift travel warnings before the summer could bring some relief. 

The U.S. Centers for Disease Control and Prevention already downgraded its recommendation to avoid travel to Mexico Friday to a "Travel Health Precaution."

Mexican airports are outperforming, especially Grupo Aeroportuario del Pacifico (PAC) and Grupo Aeroportuario del Sureste (ASR), two plays well-known by dedicated Latin American investors.

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An Emerging Flow of Funds

This is the 10th consecutive week of inflows into emerging market equities, totaling about $18.8 billion for the period, according to fund tracker EPFR Global.  The $3.5 billion for the week ending May 13, 2009 surpassed U.S. inflows of $2.6 billion.

Year-to-date total retail inflows into long-only emerging market equity funds are $17.7 billion. Total assets under management in long-only emerging market retail equity funds on April 1, 2009 were $329 billion versus $652 billion in April 2008.  

This is a very positive data point, but one question to ask is: has it all been priced?  We think not and point to the extraordinary outflow of funds that preceeded this move over the last 2.5 months.  The previous six months saw 70 percent of all funds that flowed into GEM between 2003 and June 2008 flow out.

Russian Economy Shrinks on Industrial Slump

Russia's economy shrank 23.2 percent in the first 3 months of the year compared to the previous quarter according to new figures released Friday by the Federal Statistics Service. The GDP was down 9.5 percent from last year.

This was the first decline in a decade for Russia with both plunging oil prices and industrial production.

Russian assets have rallied 100 percent off the lows, so it could be time to take a profit.

We still like natural gas giant OAO Gazprom (GAZP:RU) and Russian cellular companies on the 6 month view, but do not try to day trade these.

Turkish Banks: Q1 Even Stronger

Some positive news coming out of Turkey.

On interest rates: The Central Bank of Turkey (CBT) cut just 50bps this time to 9.25%. This is in line with the consensus, but is getting very attractive for banks and domestic names. Expect rates to be down to 8.5% in June and bottoming around 8% (historically first!)

On the banking results: They are out, strong and even better than high expectations. The street has lagged and will upgrade soon.

Turkish banks are now up to 8.6/7.9x  09/10 PE, 1.25/1.1x PBV, with the upside to go. Garanti Bank (GARAN.IS) is your highest quality name. It posted a 44 percent net profit Thursday. The only negatives are at the loan loss provisions level, which were pretty much expected. 

TUR is a Turkish ETF, which is heavily weighted to banks and is the cleanest play for U.S. investors. Otherwise, these banks typically only trade locally. 

[Let us know if you are interested in trading local Turkish markets (only serious inquiries please, as we may be beta testing this feature.)]

Three Peruvian Stocks Added to MSCI EM

MSCI has announced the following changes in the MSCI Emerging Markets, according to the May semi-annual review:

Country      Stock             Weight Change (%)      Proforma Weight (%)

Chile           Cencosud                 0.008                   0.092

Chile           Gener                       0.03                      0.03

Chile           Copec                       0.031                    0.231

Peru            Buenaventura        -0.211                    0

Peru            Southern Copper  -0.186                    0

Peru            Credicorp               -0.166                    0

Peru            Milpo                      -0.048                   0

Colombia    Suraminv                0.008                   0.076

In addition, three Peruvian companies worth watching have been added through its American Depository receipts (ADRs):

Buenaventura (BVN), a mining company which recently posted $100.3 in Q1 profits despite low metal prices; Southern Copper (PCU); and financial services holding company Credicorp (BAP).

Global Demand for Food Originates in EM

Nobody seems to talk about the global food shortage anymore, but the secular trends behind it remain intact.  The world may not need as much steel or copper over the next few years, but the number of diets in emerging market countries and demographics are changing rapidly, especially towards beef, poultry and higher protein.

Fertilizer demand has been under pressure but will return as well; demand is only delayed - not avoided.  Farmers have been skipping re-ordering as they work off inventory and are not ready to blink ahead of Chinese price negotiations.                                             

Nutrients drained from the soil each year, require replenishing or else yields suffer. The U.S. Department of Agriculture this week predicted grain inventories would fall to multi-year lows, so higher prices will encourage farmers to break out the checkbooks. 

The longer the wait, the sharper the demand backlash becomes.  Big players include K+S (SDF), Europe's largest supplier of fertilizer who reported strong demand and good numbers yesterday, Potash Corp of Saskatchewan Inc (POT), ICL (TASE:ICL), Intrepid Potash Inc (IPI), Uralkali (URKA:MM) and Silvinit (SILV:RTS) in Russia.

SEYGEM News - May 14, 2009

Emerging Confidence in EEM

A good sign for emerging markets as 29 puts (with a Friday expiration) went through on the iShares MSCI Emerging Markets Index ETF (EEM), which shows that investors want to stay long and are protecting their books. Emerging markets have had a great run and are not done, so this may be a good buy at these levels. EEM closed Wednesday at $29.93.

Also watch EM FX for continued breakdown.  EM currencies were the key to the last pullback – they will be key again. South Korean won (KRW), Brazilian real (BRL), Turkish lira (TRL), and the Russian ruble (Rub) will tell you the story. EM was trading weaker this morning and a move lower overnight in oil and other commodities will not help sentiment further into today’s trading.

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China’s Growth Eases in April

China’s industrial production was weaker than expected for April, according to a new report released this week by the government statistics bureau. Factory output rose 7.3 from last year, down from 8.3 percent recorded in March.

While growth slowed in industries like computers, iron and steel, it was stronger in automobiles, cement and chemicals.

Data points from the past few days show that the current economy recovery is mainly driven by government-led fixed-asset investments (up 30.5 percent in the first four months of 2009), but today's IP number suggests that the pace of corporate sector recovery is weak.

“Until the corporate sector picks up steam, the economy as a whole cannot be recovering on a sustainable basis," said Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong.

We think the final, sustainable corporate sector recovery (led by company FAI) will occur in the second half of next year.

Exports fell 22.6% from a year earlier, but retail sales were up 14.8 %.

The next big numbers to watch are the Purchasing Managers Index (PMI) reports due out May 31. These will give you the next read on the economy. Despite positive data, the question remains on sustainability. The Shanghai index traded well last night despite the continued pullback in global and merging markets. Shanghai is now 44% off the lows.

Taiwan Tech Hurting From Sluggish Electronics Performance

In the U.S., Intel (INTC) shares were flat following the news that the E.U. has fined the chipmaker for antitrust violations (paying firms not to use Advanced Micro Devices), even with comments from the CEO condemning the accusations.

But the sluggish growth in electronics, PCs, and telco equipment overall is have a negative effect on chipmakers globally, including Taiwan where we are seeing a lot of selling off. FBR analyst Mehdi Hosseini is encouraging taking a profit on Taiwan Semiconducter (TSM) in particular. And the recent news of weak industrial production (especially on computers and mobile phones) coming out of neighboring China isn’t helping the sector.

Hard Times for Steel

Steel prices are down 10-15% over the past 6 weeks, 51% year-over-year, and Nucor Corp. (NUE) CEO Dan DiMicco thinks the downward trend is far from over saying that “we have not hit bottom in the drop-off in steel demand.”

Brazilian steelmaker Usiminas (USIM5.SA) posted a loss for Q1, China’s output was weaker than expected, and big names are pulling back resources like Luxembourg-based ArcelorMittal (MT) which just announced major layoffs in the US.

The prolonged global crisis is also resulting in increased dumping. A number of domestic producers in the U.S. including U.S. Steel Corp. have already filed a trade complaint against China alleging $2.7 billion of Chinese pipe steel was unfairly imported into the U.S. market in 2008.

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Keep an Eye on BHP

These are your three top global integrated miners: Companhia Vale do Rio Doce (VALE), Rio Tinto (RTP) and BHP Billiton Limited (BHP) which was down 5.26% Wednesday, but would be a good buy when it drops 10% lower.

The current pullback affords opportunities to own the biggest miners in the world. Pick targets closer to the 50 moving day average for return to entry points. RTP continues to roil investors with its plans to raise new capital as an alternative to doing a deal with China’s Chinalco. Stay clear of this name until there is clarity on the balance sheet and its alternate plans on going to bed with the Chinese. VALE remains.

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Petrobras Closer to Digging into OPEC

Brazil's state-controlled oil company Petrobras (PBR) could be ready for drilling rig bids on the Tupi field in the Santos Basin in as early as four months, according to the energy giant’s CFO Almir Barbassa.

Two companies that could benefit from this news are Diamond Offshore Drilling, Inc. (DO) and Transocean (RIG), the second-largest offshore drilling contractor in the world which is looking to construct new rigs in Brazil to satisfy a requirement from Petrobras that they are domestically built.

Transocean reported a lower quarterly profit for Q1, but shares rose as earnings beat estimates.

Petrobras recently uncovered what it believes holds 5-8 billion barrels of oil and gas in the area, which CEO Jose Sergio Gabrielli now also says is not as difficult to tap as was earlier predicted.

With a successful dig, Brazil is poised to become a bigger oil producer than 90% of the Organization of the Petroleum Exporting Countries (OPEC) in five years.  The United States needs this oil, and it will be developed.

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Global Crisis Presents A Golden Opportunity in ETFs

The deep economic crisis is being fought with global monetary and fiscal reflation, which will lead to a devaluation of the U.S. dollar and an appreciation of the Chinese Yuan. 

As a result of the uncertainty on Wall Street, gold as a monetary asset is going though the early stages of investment diversification and proving to be a popular hedge helped by liquidity through the creation of exchange traded funds (ETFs).  Gold prices rose to a six-week high above $925 on Wednesday an ounce on the COMEX division of the New York Mercantile Exchange.

There are currently about 1.6 thousand tonnes of gold in these ETFs (equivalent to the sixth largest commodity basket) according to the World Gold Council, but this is expected to grow to about 8-10 thousand tonnes of gold in investor diversification.

Gold mine production is at an 8-year low, and China is aggressively buying and stockpiling gold. The country announced back in April that it had secretly doubled its gold reserves to 1,054 tonnes, up from 600 tonnes in 2003. China now ranks fifth in global gold reserves, behind the United States, Germany, France and Italy.

The dollar index (DXY) recently broke below the 200-day monthly average and is at a four-month low. Gold is the only asset that is not someone else’s liability so there’s no credit risk.

Market Vectors Gold Miners - ETF (GDX) has been seeing gains, but was down 2.62% Wednesday closing at $37.94 and has not been upgraded on the Street.

One of the world's largest gold producers based in South Africa, Gold Fields Limited (ADR), is cheapest on p/npv, closing at 12.25 down 3.01%.

SEYGEM News - May 6, 2009

EM Markets Up, Currency Weak

Emerging markets were up for the sixth day in row with strong follow through coming in today off the People's Bank of China (PBOC) announcing Q1 better-than-expected earnings and the stimulus package working.  Dollar strength gives some macro pressure.  Oil is flat and awaits inventory data in the U.S. while earnings in Russia and Latin America continue to be decent. 

All major foreign exchange currencies (Brazilian Real,  Mexican Peso,  South Korean Won, Russian Ruble, South African Rand...) were .50-1 percet weaker today. Watch for any extended weakness for signs of trouble.

Stress Tests Spark Caution with Commodities

Aluminum was up about 3 percent, while Copper prices fell around 3.3 percent after a two week high on Tuesday as new reports on the government stress tests indicated that 10 U.S. banks may need additional capital. The results are scheduled to be released on Thursday. The CRB is still only 15 above its 20 year low.  

Tim is liking silver plays here and is expecting continued outperformance in the sector.  Despite any derailiment from banks – we are at very early stages of cyclical recovery, or at worst in a pause from a long term structural commodities boom cycle.  There is great value here if you believe this theme. 

This morning, Brazil claims it found the world's third largest potash deposit. Brazil normally imports 90 percent of its potash needs. The bottom line here is very negative for pricing of potash if the size is accurate. Potash Corp of Saskatchewan Inc. (POT) has long been coverted by BHP Billiton Ltd. (BHP), could this merger happen? BHP has been thwarted in other recent takeover efforts – but they may be hungry.

Federal Reserve Chairman Ben Bernanke also offered a little optimism this week, however, saying that the housing market is bottoming out. The CRB had its first down day in a week and the DXY surged up above 84.129, from 83.753 from Monday.

Seymour also says to watch out for the latest earnings report from mining giant Companhia Valedo Rio Doce (VALE), the world’s largest producer of iron ore, to get a good indicator on the actual demand for the metal (as well as coal) from China. Vale saw production fall about 37 percent for the first quarter as it shut down mines because of lower demand and a decline in steel production.  China has said it would hold out for lower prices. The company also had a big run up 49 percent from March 9, and Goldman is predicting that steel destocking is waning and could end in Q3.

Latin American steelmaker Ternium SA (TX) rallied Tuesday on decent earnings and an improvement in its balance sheet. 

The company, based out of Mexico, Argentina and Venezuela, reported poor revenue, but also a free cash flow of $341 million (up from a negative $98.8 million in Q1 of last year) to pay off $1.8 billion in debt. (down $345.4 million from December 2008). It's a cheap buy at $9.78, and was up 3.1 percent at close Tuesday. TX had been a victim of President Hugo Chavez interference last year, and this Venezuelan hanover still weighs on the  stock. Any improvement there is a catalyst to a bigger upside.

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Both silver and gold gained earlier this week with news of the stress tests and and a weakening dollar. Seymour says gold isn't likely to stay in the position.

Dryships' Ship Has Sailed

Seymour says he has sold his shares of Dryships Inc (DRYS) after positive reverberation from a $630 million, 3-year deal with Petrobras (PBR) to explore drilling in the Black Sea, as well as a better-than-expected Q1 earnings report. Dryships was up 2.64 percent at close on Tuesday.

Signs of Easing in Latin America

Expect the strong performance in Latin America to continue, says Seymour, with a focus on domestics and a target of 900 (up 36 percent) on the MSCI EM Index (MXEF). Valuations are not stretched, and only a 30 percent rally has people scratching their heads.  In the absence of technicals, buyers would be lining up on fundamental valuation and demand resurgence.

Israeli Drug Maker Looks Good Long Term

Teva Pharmaceutical Industries Ltd. (TEVA) reported better than expected Q1 earnings Tuesday with an EPS of $0.71 but with lighter revenues from a negative foreign exchange effect of about $200 million on its top line.

This was the first quarter that included consolidated results with U.S.-based, generic-drug maker Barr Pharmaceuticals, which it acquired in mid-2008 for $7.5 billion.

It was a solid beginning to the year despite the negative foreign exchange impact, making it difficult to forecast. The U.S. continues to be driven by Copaxone, ProAir and several key generic products including Lotrel, Yasmin, Protonix, and the launch of Solodyn while growth overseas was very solid with strong performances in Spain, Poland, Germany, Russia and Croatia. The Barr acquisition had a better-than-expected impact on the gross margins (58.4 percent) and quarterly profits tripled.

Teva didn't do much in the recent market rally as investors rotate away from defensives (down .63 percent at close). This may continue in the near term. However, Seymour thinks the stock will move slowly higher in the long term as the company keeps putting up numbers throughout the year.

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China Emerging as Top Auto Market

The Japanese car manufacturer Toyota (TM) plans on easing cuts in Camry and RAV4 sport-utility-vehicle production as the auto market slump stabilizes. It decreased its output last year from its plants in the U.S., Canada and Mexico in anticipation of weak demand.

And in China, General Motors (GM) has seen sales hit a new high up 50 percent from last year. Vehicle sales in China have thus far outpaced those in the United States and could eventually bump China up as the world's largest auto market.  But Congress is also actively working to implement a "scrappage" plan (which GM has agreed upon) which would provide vouchers in exchange for older automobiles and potentially boost new sales.