Bonds & Interest Rates

US GDP Beats Estimates, But that is Not the Real Story

Posted by Chris Berry MBA - Morning Notes

on Friday, 2 August 2013 14:09

  • The ISM Manufacturing Index also exceeded estimates, delivering a reading of 55.4 – it’s highest reading since June 2011- indicating growth in the US manufacturing base

  • The overall numbers are good, but not great; today’s release of the non-farm payrolls data should help confirm whether or not the US recovery is set to continue and perhaps accelerate

  • If the economy does “find its legs”, higher interest rates are a given. What to do? 

In light of the uncertainties surrounding global growth, the 1.7% Q2 GDP growth reading from the US earlier this week, was a welcome surprise. Estimates for growth were closer to 1.2%, so the upside has many now wondering if the US has turned a corner and better days are ahead. 

Screen Shot 2013-08-02 at 7.05.49 AM

The ISM Manufacturing Index (shown below), a widely watched gauge of manufacturing activity, topped economist estimates of 53.1 and blew past June’s reading of 50.9. In the report, new orders, production, employment, imports, and export orders all showed strength to varying degrees. Interestingly, delivery times were reportedly up as well – a sign of a clogged (read: increasingly active) supply chain.

I’ve discussed my preference for PMI and similar manufacturing-centric data, and looking at this type of data from not just the US, but other parts of the world – notably the Euro Zone – recently makes appear that manufacturing activity is accelerating. 

Screen Shot 2013-08-02 at 7.07.40 AM

Additionally, the ADP Employment Report, typically a reliable precursor to the nonfarm payroll data, beat expectations of 179,000 new private sector jobs by showing a gain of 200,000. The June number was also revised upwards to show a gain of 198,000 private jobs. It’s important to remember that this report is only an estimate of data coming from 400,000 businesses employing approximately 23,000,000 citizens, so there can be wide variations from month to month when comparing the report to actual nonfarm data. Nevertheless, it has served to be a reliable indicator of what to expect from the “jobs number” and therefore many are expecting a positive surprise from this morning’s announcement. 

Screen Shot 2013-08-02 at 7.08.15 AM

 

Have We Turned the Corner?

Unfortunately, no. At least not yet. Though the initial Q2 GDP number came in above estimates, the Q1 number was revised lower to 1.1% (from 1.8%). Looking over the past nine months, the US economy has grown at .9% – hardly enough to get excited about.

The primary culprit appears to be the sting of sequestration, whose automatic spending cuts have clearly made themselves felt. I am not one to argue that government spending is the panacea for growth, but the absence of spending has clearly had an effect on US economic growth. Looking forward, the FT reports:

“On Tuesday, the non-partisan Congressional Budget Office said the sequestration will cost 900,000 jobs and .7% in GDP growth in the next year if it stays in place.”

Two other threats to growth later this year and into 2014 include the need for the US congress to come to terms on a budget for the 2014 fiscal year (in September) and the pending expiration of the debt ceiling – thought to be reckoned with (in November). A delay or outright refusal in resolving these two issues is a clear impediment to sustaining the economic recovery. Give the partisanship on display in the US Congress in recent years, the odds of speedy resolutions to the above issues are long, to say the least.

If the Economy Does Strengthen, Get Ready for Higher Interest Rates

An interesting takeaway from this week’s GDP report was the announcement that the Bureau of Economic Analysis (BEA), responsible for calculating GDP, has revised their data back to 1929. The BEA does this to “better reflect the evolving nature of the US economy.” This makes sense as the US economy grows and evolves to take account for changes in various factors like research and development of technology, for example.

Based on these revisions, there were two primary takeaways. First, GDP in Q1 2013 was revised higher by 3.4% totaling an increase of $551 billion. Essentially, we are wealthier than we were first led to believe – though it may not feel that way! Of course, this is only true if you trust the methodology the BEA uses to calculate GDP. There are several million US citizens out of work who would likely disagree with the BEA’s assessment. 

Screen Shot 2013-08-02 at 7.12.35 AM

Second, as the chart shows above, the economic contraction during the Great Recession wasn’t as bad as we thought, and the resulting recovery has been stronger than reported. Again, this is likely to spark heated debate – and it should. During the recession, GDP fell by 4.3% versus a 4.7% initial drop and has risen by 9% since versus an 8.1% increase previously calculated.

Debates aside, as the economy continues to recover it would appear that higher interest rates, a consequence of economic growth, are in the offing. The current US 10 Year Treasury yields 2.71%, versus 2.48% one month ago and 1.52% one year ago. It seems likely that the increase in yields is due to some degree to economic expansion and less so to Chairman Bernanke’s “taper talk”. 

Screen Shot 2013-08-02 at 7.12.49 AM

 

What to Do?

If higher interest rates are in the offing, what strategies should one employ to diversify from interest rate risk? Clearly, hard assets must play a role in your Discovery portfolio in a rising rate environment. Despite the downdraft in precious metals (gold and silver) prices, I still believe they can serve as a reliable and rational hedge against higher rates and the inflationary pressures higher rates imply. 

Purchasing physical bullion seems to be preferable, but with the punishment that gold and silver miners have endured in recent months, buying cheap miners who can operate as the lowest cost producers is a prudent way to leverage the possibility of any increase in precious metals prices while hedging against higher interest rates. Billions of dollars in write downs are one indication that share prices may have bottomed and discipline in capital spending and operations can lead shares higher.

In light of this week’s economic data dump, it would appear that we may be at an inflection point, auguring higher interest rates. When the FOMC met earlier this week, the takeaway was that there would be no change in stated policy or rates. Given the economic numbers we’ve witnessed over the past five days, that stated policy may be about to change.

2. Quaterra Resources (QMM AMEX NYSE)

Quaterra (QMM) announced yesterday a $1 million non-dilutive cash infusion from Freeport McMoran (FCX NYSE). This is a long weekend in Canada so perhaps few will see this significant transaction.

Freeport paid Quaterra $1 million for the right to explore Butte. A small monetization but significant in this environment where money is hard to come by. Freeport may now explore the Butte complex and can, hopefully, take it to feasibility with drilling on the property. If so, QMM can take either a 70/30 working interest in the property (QMM 30%) or take a 2% royalty on the property.

We understand this is the third joint venture (JV) between Freeport and Quaterra, the others being the Utah’s South West Tintic and Cave Creek Moly potential in West Texas. Not many Juniors have 3 JVs with a major. Further Goldcorp owns 8% of Quaterra’s shares.

This $1 million non-dilutive contribution is significant to the company’s plans to move forward on its major target which is the Yerington copper property. We expect the company to focus on Yerington.

Terraco Gold’s Todd Hilditch also recently completed a largely non-dilutive $1 million deal. Please see Tuesday’s Morning Note for a description of this transaction by Terraco.

 

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The material herein is for informational purposes only and is not intended to and does not constitute the rendering of investment advice or the solicitation of an offer to buy securities. The foregoing discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (The Act). In particular when used in the preceding discussion the words “plan,” confident that, believe, scheduled, expect, or intend to, and similar conditional expressions are intended to identify forward-looking statements subject to the safe harbor created by the ACT. Such statements are subject to certain risks and uncertainties and actual results could differ materially from those expressed in any of the forward looking statements. Such risks and uncertainties include, but are not limited to future events and financial performance of the company which are inherently uncertain and actual events and / or results may differ materially. In addition we may review investments that are not registered in the U.S. We cannot attest to nor certify the correctness of any information in this note. Please consult your financial advisor and perform your own due diligence before considering any companies mentioned in this informational bulletin. 

Top 5 Catalysts for Small-Cap Energy Equities

Posted by Jocelyn August via Brian Sylvester of The Energy Report

on Friday, 2 August 2013 13:52

Catalysts are a little like earthquakes: They shake things up. These announcements of drill results, production starts and resource estimates can influence stock prices, sometimes for the better, sometimes for the worse. In this interview with The Energy Report, Jocelyn August, senior analyst and product manager for Sagient Research’s CatalystTracker, explains which catalysts have the biggest effect on small- and large-cap companies and identifies upcoming events that could move the needle in the oil and gas and uranium spaces.

Screen Shot 2013-08-02 at 6.48.21 AMThe Energy Report: Compared to oil and gas, do you think uranium is the best place to be among the small-cap energy commodities?

Jocelyn August: Not necessarily. Oil and gas is also an interesting space, particularly the small caps. Just in the last six months, there have been a lot of catalysts in that area. The large institutional investors are investing a lot in oil and gas and not in uranium.

TER: What are the most important catalysts for larger companies?

JA: Generally, earnings announcements, drill results, production decisions and go/no-go decisions. Anadarko Petroleum Corp. (APC:NYSE) and the Tweneboa-Enyenra-Ntomme (TEN) cluster is a good example. A production decision there will help it a lot. Another good example is Noble Energy Inc. (NBL:NYSE) and its Leviathan project in Israel. Announcements about that are big movers simply because of the project’s size.

TER: What are some patterns among large, private institutions investing in energy equities?

JA: During H1/13, private institutions invested in oil and gas and in alternative energy. There’s not much investment in the uranium space.

TER: What are the top catalysts for small-cap energy equities?

JA: Drill results, with about a 9.6% average stock movement, are number one. The second is the announcement of further drilling on a currently producing site; those announcements move companies about 8.8% on average. For smaller companies, the announcement that drilling is beginning brings 8% on average. Production starts are number four. They’re 7.5% for the small companies, but they generally don’t move the stock much for the larger energy stocks because they’re already baked into the stock price. Third, we notice that large movements occur around announcements of investments by a strategic partner or investment bank. That creates an average stock price change of about 8.5%. The last one is an earnings announcement, which moves prices almost 6% on average.

TER: Is the percentage of movement similar for small- and large-cap energy equities?

JA: Generally, the larger a company is, the less it will move. Percentagewise, stock prices move a lot more for those under $500 million ($500M) than for those over $500M. And the ones over $5 billion ($5B) won’t move very much.

TER: It will cost almost $60B to clean up the site of the Fukushima Daiichi nuclear disaster. Do you think news of that will push uranium equities prices even lower?

JA: Japan’s election of a new prime minister, who is a known proponent of nuclear energy and has plans to accelerate the startup of currently offline nuclear reactors, is positive news for the uranium industry. The amount of money it will take to clean up the Fukushima site is a negative, but we’ve had a shortage in the uranium supply, and there’s a rising demand for it. Weighing those factors, I think uranium is poised for an upswing. But companies that can keep their costs lower will be able to operate in all types of market environments.

TER: Do you see any catalysts in the uranium space beyond the election of the Japanese prime minister?

JA: In terms of specific companies, Uranium Energy Corp. (UEC:NYSE.MKT) has the Goliad project in Texas, which it expects to bring on-line soon, probably in August.

TER: That will add roughly 30 thousand pounds to its annual production?

JA: Yes, and its cash costs are estimated to be at $18/pound, which is good.

Lost Creek in Wyoming, which is Ur-Energy Inc.’s (URE:TSX; URG:NYSE.MKT) project, is expected to come on-line soon and to add 1 million pounds per year at its peak. The operation underwent its pre-operation inspection in June as required by the Nuclear Regulatory Commission.

TER: What small-cap oil companies have near-term catalysts?

JA: Ivanhoe Energy Inc. (IE:TSX; IVAN:NASDAQ) and its Tamarack oil sands project. A permit approval decision and field-testing results should happen within the current quarter.

TER: Ivanhoe recently put out a release saying that one of the First Nations in that area, the Mikisew Cree First Nation, wouldn’t object to the project’s development. Is an announcement like that a significant catalyst or just a nonfactor?

JA: It’s definitely a factor. We generally add that information to our coverage of the specific permitting catalyst. This project has been delayed significantly; the original date range was H2/12. Now it has successfully negotiated letters of nonobjection from four of the seven stakeholders who previously filed statements of concern, and it’s trying to resolve the final three statements of concern.

TER: Ivanhoe’s Tamarack is a heavy oil play north of Fort McMurray in Alberta, Canada, but a lot of investors have gotten out of the heavy oil sands plays. Would a catalyst for Ivanhoe have had more impact a few years ago than now?

JA: A couple of years ago, when the price of oil was higher, it would have had a larger impact. Investors have gotten out of the heavy oil plays because it costs more to get that heavy oil out of the ground than to get some of the lighter oil out.

TER: Would the approval of the Keystone XL pipeline be a big catalyst for Canadian energy plays?

JA: Obviously, you need some way to distribute the oil. Having more distribution options and another way to get the oil from Canada to the United States will help companies lower their costs.

TER: What small-cap gas names have some near-term catalysts?

JA: FX Energy Inc. (FXEN:NASDAQ) can have large-moving catalysts, whether positive or negative. FX had a positive catalyst in May. Good news on production tests at the Tuchola-3K well put it up almost 19%. A negative catalyst in July, some test results for Plawce, sent the stock down 15.5%. There were basically noncommercial levels of gas.

We’re looking for more drill-test results in the Fences area, where these are located, including those for the Lisewo-2 and Szymanowice-1 wells. We’re also looking for results this quarter from a couple of its wells in Poland.

TER: What other companies in the energy space with either near- or medium-term catalysts would you like to share with us?

JA: We have a couple of catalysts for projects in the North Sea. We have one for Endeavour International Corp. (END:NYSE.MKT) for the West Rochelle project. Its partners are Nexen Inc. (NXY:TSX; NXY:NYSE) and Premier Oil Plc (PMO:LSE). It had some problems with the Rochelle project; a big storm in February did some major damage to the first well, which was the East Rochelle well. Now, it’s working on West Rochelle. We expect a production-start catalyst this quarter for West Rochelle.

We expect Sterling Resources Ltd. (SLG:TSX.V) to have a production start for phase two of its Breagh gas project, also in the North Sea, in August.

TER: What other tips regarding catalysts for energy companies do you have for investors?

JA: You should continue to watch uranium and keep an eye on what’s going on with it in Japan and the United States. Keep an eye on the reactors in Japan and the projects coming on-line in the United States.

TER: You mentioned Anadarko and Noble Energy as being big companies with near-term catalysts. Any others?

JA: We’re obviously still looking for information on Davy Jones, which is a project of McMoRan Exploration Co. (MMR:NYSE) andEnergy XXI (EXXI:NASDAQ). It’s in ultradeep water in the Gulf of Mexico. We’re waiting for some flow-test results, which could happen as close as August, definitely by the end of the year.

TER: Would that be a production decision?

JA: It’s more a testing-result decision. It was so close to production and then had that blowout last year. At this point, we’re looking for information as to whether it can proceed. The flow-test results will be a deciding factor. It’s an interesting project because no other companies have tried to go that deep in the Gulf of Mexico; it has pretty big implications for that type of drilling.

TER: Leave us with one great piece of insight into this space.

JA: If you’re interested in long-term investment opportunities and long-term growth, look at some of the larger-cap companies because their share prices aren’t as volatile. But if you want to make more money in the short term or pursue short-term opportunities, some of the smaller-cap companies are doing good things and have upcoming opportunities for making money on short-term catalysts.

Jocelyn August is currently the senior analyst and product manager for CatalystTracker, a proprietary research product focused on identifying and analyzing the future events that will materially impact publicly traded companies. In her five years at Sagient, she has developed expertise in the highly event-driven medical device and diagnostic sector. In addition, she spearheaded the development of a new Natural Resource Industry product within the CatalystTracker product line with the publication of the “Catalyst Impact Study: Natural Resources Sector.” Outside of Sagient, August was named the director of communications for the San Diego Professional Chapter of MBA Women International. August received a master of business administration from the Rady School of Management at University of California, San Diego, and graduated cum laude from the University of California, San Diego, with a bachelor of arts degree in sociology.

Want to read more Energy Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Interviews page.

DISCLOSURE: 
1) Brian Sylvester conducted this interview for The Energy Reportand provides services to The Energy Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: FX Energy Inc. and Energy XXI. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Jocelyn August: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent. 
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. 
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

 

Gold futures quickly recovered from their overnight weakness Friday after the government issued a weaker-than-forecast U.S. jobs report.

The metal initially slid overnight largely when sell stops were triggered on a break below $1,300 an ounce, with the initial impetus being the idea that stronger U.S. economic data in recent days pointed to a probability of the U.S. Federal Open Market Committee scaling back on its bond-buying program this fall, observers said.

However, at the start of the New York trading day, a Labor Department report said non-farm payrolls climbed by 162,000 in July. This was below consensus forecasts of 175,000 to 185,000, enabling gold to pop higher.

As of 8:50 a.m. EDT, gold for December delivery was up $4.60 to $1,315.80 per ounce on the Comex division of the New York Mercantile Exchange. It was at $1,285.30 five minutes prior to the jobs report.

September silver was up 50.1 cents to $20.125 an ounce. The contract was at $19.385 just ahead of time.

“We got a bounce on the jobs data because it’s all about the dollar and whether stimulus will be less or not,” said George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures.

Presumably, less-robust jobs growth means less chance of some stimulus being withdrawn in the foreseeable future. The euro was up to $1.3269 from $1.3209 late Thursday.

Sterling Smith, futures specialist with Citi Institutional Client Group, said the jobs data was soft enough to help gold avoid any further weakness for now. There were some so-called “whisper” numbers that the payroll number could have been as much as 220,000, he said.

“That might be sparking a little buying interest,” he said of the softer data.

However, he attributed much of the bounce to short covering ahead of a weekend.

Gero said, however, that he looks for gold to remain range-bound for now due to not enough worries in the market about inflation, especially with other commodities such as copper and grains down for the year so far.

Overseas traders said gold’s decline accelerated overnight in Asian trading on the break of $1,300 an ounce, triggering sell stops. These are pre-placed orders triggered when certain chart points are hit. The $1,300 area had offered nearby chart support for gold over the last two weeks, as the December futures climbed through this level on July 22 and held above it until overnight trading.

Whereas gold poked its head back above $1,300 after the data, Smith said a failure to close above here could portend further technical weakness.

The overnight move was encouraged by stronger-than-forecast U.S. data in recent days that included second-quarter gross domestic product and the Institute for Supply Management’s manufacturing survey, analysts said.

Gold & Silver – Seasonal Low Imminent

Posted by Equity Clock

on Friday, 2 August 2013 13:25

On its wednesday report, the Fed remained committed to its present bond buying program.   The FOMC cited two risks to its “modest” growth outlook: rising mortgage rates and stubbornly low inflation.   The Fed’s statement noted that “the Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.”   The Treasury Inflation Protected ETF (TIP) jumped on the statement, firming up recent gains since the low charted in June.   Inflation expectations, as gauged by the ratio between the Treasury Inflation Protected ETF (TIP) and iShares Barclays 7-10 year Treasury Bond Fund (IEF), have been trending lower all year, resulting in a rare divergence with equity markets.  

The recent rebound in inflation expectations is conducive to strength in the price of Gold, which benefits from a period of seasonal strength between the end of July through to October.   Gold finished the session with minor losses, reluctant to trade away from its 50-day moving average line.

 

image thumb-1

The above chart represents the seasonality for Gold Futures (GC) Continuous Contract for the past 20 years.

 

  • Date range: January 1, 1990 to December 31, 2009
  • Type: Commodity Futures – US
  • Symbol: GC

 

Gold Futures Continuous Contract Seasonality

Analysis has revealed that with a buy date of September 13 and a sell date of May 23, investors have benefited from a total return of 183.61% over the last 10 years. This scenario has shown positive results in 9 of those periods.

Conversely, the best return over the maximum number of positive periods reveals a buy date of September 16 and a sell date of May 20, producing a total return over the same 10-year range of 159.82% with positive results in 10 of those periods.

The buy and hold return for the past 10 years was 125.11%.

**Results shown are compounded

How to Invest

UBS E-TRACS CMCI Gold Total Return ETN (Public, NYSE:UBG) – Info – UBS E-TRACS CMCI Gold Total Return is designed to track the performance of the UBS Bloomberg CMCI Gold Total Return, less investor fees. The CMCI Gold TR measures the collateralized returns from a basket of gold futures contracts. The commodity futures contracts are diversified across five constant maturities from three months up to three years.  Expense Ratio: 0.30%

 

silver

The above chart represents the seasonality for Silver Futures (SI) Continuous Contract for the past 20 years.

  • Date range: January 1, 1990 to December 31, 2009
  • Type: Commodity Futures – US
  • Symbol: SI

 

Silver Futures Continuous Contract Seasonality

Analysis has revealed that with a buy date of September 16 and a sell date of April 11, investors have benefited from a total return of 314.85% over the last 10 years. This scenario has shown positive results in 7 of those periods.

Conversely, the best return over the maximum number of positive periods reveals a buy date of September 14 and a sell date of September 23, producing a total return over the same 10-year range of 55.36% with positive results in 10 of those periods.

The buy and hold return for the past 10 years was 105.43%.

**Results shown are compounded

How to Invest

UBS E-TRACS CMCI Silver Total Return ETN (Public, NYSE:USV) – Info – UBS E-TRACS CMCI Silver Total Return is designed to track the performance of the UBS Bloomberg CMCI Silver Total Return, less investor fees. The CMCI Silver TR measures the collateralized returns from a basket of silver futures contracts. The commodity futures contracts are diversified across five constant maturities from three months up to three years.  Expense Ratio: 0.40%

 

About Equity Clock

Equity Clock is a division of the Tech Talk Financial Network, a market analysis company that provides technical, fundamental and seasonality analysis on a daily basis via TimingTheMarkets.com andEquityClock.com.   Equity Clock’s mission is to identify periods of reoccurring strength among individual equities in the market using methodologies presented by some of the top analysts in the industry, including that of Don Vialoux, author of TimingTheMarkets.com.

Feel free to use any of the content or seasonality studies (charts, timelines, or otherwise) presented as long as a link-back to this site at EquityClock.com is provided.

For further information on indicators used in reports presented on this site, please visit our reference page.

 

 

 

Employers added fewer workers than anticipated in July and the U.S. jobless rate dropped to 7.4 percent, indicating uneven progress in the labor market.

 
The 162,000 increase in payrolls last month was the smallest in four months and followed a revised 188,000 rise in June that was less than initially estimated, Labor Department figures showed today in Washington. The median forecast of 93 economists surveyed by Bloomberg called for a 185,000 gain. Workers spent fewer hours on the job and hourly earnings fell for the first time since October.

“This isn’t a disaster of a report but it shows the U.S. remains vulnerable to a slower economic growth performance,” said Julia Coronado, chief economist for North America at BNP Paribas in New York, who had projected payrolls would rise by 165,000. “This isn’t the kind of progress the Fed would like to see. At the margin, it keeps them cautious.”