Musings April 6th

China

China announced plans to diversify between USD 200 to 300 billion of its foreign exchange reserves and is considering an investment in strategic assets crucial for its development. This certainly will be positive for commodities and bad for USD as one can expect them to use their USD to buy investment in commodities or related to commodities.
On April 5th China has ordered commercial banks to set aside more money as reserves for the sixth time in 10 months, in an aim to slow inflating prices and curb investments in the worlds fastest growing major economy.
This can certainly been seen as positive in order to calm overheated markets but if annual money supply growth is at 19 % a slowing in inflation is not necessarily around the corner.

Equity markets

Markets had a tendency to weakness basically throughout March. However whenever it got critical the US Market responded favorably and as a surprise (or maybe not so much a surprise) reversed former down trends. Interesting to watch was the fact that on days where the US markets were several points lower, that towards the end of the session the losses were made up and the day closed positive. The Exchange Stabilization Fund and the Working Group on Financial Markets, also known as PPT or Plunge Protection Team, must have had a lot of work and have spent mountains of money. As mentioned in previous posts, this money has to be created and finally will end up in higher inflation which someone has to pay anyway. What to expect going forward? Markets are still overvalued. In that sense a down correction of 20-25% would be in the cards. However PPT will not let it allow to happen. How long will they be able to avoid the necessary? I do not know however at some point the correction will come. Again as mentioned in previous post I still do expect to have the stock market indices at higher marks at the end of the year and of course I do prefer stocks of companies that produce the real stuff or are related to commodities, including commodities as water land and so on. Until then we might see some strong up and down movements.

Debt

The sub prime crisis has already some casualties. Be it delinquencies, foreclosures or what you have, there most probably will be further bad news as the year goes on. It would not surprise me at all to see lots of downgradings by Moody’s Standard & Poors. I believe it can be expected that several still higher grade companies with exposure to Real Estate and Mortgage will be downgraded as well. Fannie Mae etc. do in my opinion already since a couple of years not qualify for AAA rating. Those companies should be rather close to junk. Anyway the impending calamity, mass housing foreclosures, failing financial institutions, millions of personal bankruptcies is dire. It might not come this year but sometime in the future as markets always do correct.
Looking at the Dept to GDP ratio which in the US is already above the 400%, the negative personal savings rate, overvalued currency and so on, the situation in general terms definitely cannot be described as comfortable for the US and its citizens and USD and US debt holders. Somehow the huge pile of debt has to be paid back. None of the possible pay back scenarios that come into my mind are really positive for USD or USD debt holders.

My favorite investments, Gold and Silver

Gold closed above USD 692 and shortly afterwards was under heavy sell pressure. The agents for the PPT did their job well and took gold down more than 7% in practically one day. However Gold is strong, physical demand is still high and the physical production cannot meet the existing demand. The supply deficit of already 1500 tons a year will certainly increase. South African gold production is already down (to levels last seen at the beginning of last century). Furthermore another important gold producer, Peru is down as well. It certainly is more and more difficult to cover the physical demand. So far Central Banks did fill the gap. However lately some of the important Central Bank holding gold clearly indicated that they will not sell and several Central Banks are already or will start soon in the process to buy physical. In fact Central Banks most probably do hold a lot less physical that officially stated. Some people expect the CB holding to be rather in the 10,000 tons area than in the official state 25,000 ton. So I do expect gold to go much higher. Towards the end of 2007 I expect a price of at least above the all time high of USD 850 and it would not surprise me at all to be close to USD 1,000. My mid term target (over max. 5 years) is still a gold ounce price of above USD 2,000.
The silver price did have a even higher down move. From a price of above the USD 14.50 it was pushed down in a day or so to USD 12.50. Silver following gold or gold following silver move back up nicely. I do believe that from now on we will go into higher grounds and therefore expect silver to be close to USD 20 by the end of the year

Commodities

We are still in the secular bull market. The shortest bull market in commodities lasted 15 years while average bull markets lasted 25 to 30 years. Being now approximately 6 years in this secular bull market, there is still much way to go and we will see much higher prices in commodities. Apart from the normal time frame in bull cycles which are; the time until investment decisions by commodity producers are taken, the time spent for finding new reserves and finally to bring the hopefully new discoveries on line by putting the respective infrastructure, a period which in the best case scenario takes at least 15 years, we have this time a fundamental difference compared to previous bull cycles. The fundamental difference is that certain commodities will not be available to be replaced although the race to discover new reserves is on full speed. Oil in my humble opinion is clearly already past peak. There were simply no major new findings over several years. This means that even if a new elephant field would be found it would only delay the peak from past to sometime in the future. However we would talk rather about 1 or maybe 2 years more until peak and not decades.
What has changed in March? Well on the fundamental nothing, although Petrobras announce to have found a new big discovery, which still has to be confirmed. What did change is that the situation of several oil fields being already past peak is now in the mainstream media. This week there was an article on the Wall Street Journal with exactly this topic. So more and more people do accept the fact and are aware of it.


Uranium

Uranium prices are climbing and climbing and it seems there is still much higher prices in the cards. After already 2 important mines that had to close down production due to water (cigar lake because water flooded the mine, and a mine in Australia due to water flooding because of a hurricane), the prices of U went up considerably. It will take some time until the possible new mines will be online. So for the time being the demand is not filled with production or with stockpiles. Power plants are already making long term contracts at higher prices, with the producers in order to have their supply assured. Unlike the power plants using natural gas for the production of power where the price of the commodity used has an important impact on the price, the power plants using uranium will be able to pay much higher prices for the underlying commodity and still the price of production of the power and thus the sales prices for the power will not go up at all. That means the uranium prices can go up to USD 200 and it still would not hurt the power plants.

Derivatives

The higher volatility is already showing up negatively in the performance of some of the hedge funds. I still do not like this casino.

Private Equity

Blackstone’s plan to make an IPO indicates to me that we are close to the end of a positive cycle for Private Equity Funds and possible Stock Markets. Very clever to let other take over the risks of the investments and at the same time guarantee the partners some nice early pay out. Please read the post „Blackstone: House of Cards“
http://www.minyanville.com/articles/Balckstone-IPO/index/a/12442


Geopolitical news

The situation in the major oil producing region is getting more and more tense. A Russian news agency has informed that an attack in order to destroy I’s nuclear capabilities is planned or in the cards for April 6th. Fortunately this did not happen. However the way the situation evolves, any attack at any point has to be expected. If that happens, we will see oil prices above the USD 100 immediately. Let’s cross our fingers and hope that the situation can be solved in a peaceful way. If you like to be updated on what is going on regarding the geopolitics, please check from time to time Asian Times Online, http://www.atimes.com/atimes/Front_Page.html, or Global Research, http://www.globalresearch.ca/index.php?context=home