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Overall market volatility has been low this week with little in the way of economic news until today ahead of the statement by the Federal Reserve. Today’s market tone was set early with the release of existing home sales coming in lower than expected. The weak data put a bid in the bond market pushing yields lower, the U.S. dollar is down versus all the major currencies and stocks are having a tough time posting gains so far this session. Virtually all market participants are expecting the Fed to stand pat on rate changes, but all eyes are watching for the text of their statement to see if they are more hawkish toward inflation or more dovish to support economic growth. The National Association of Realtors said the pace of existing home sales fell for the sixth straight month (14% below last year) and home prices nationally are lower by 2.2% from a year ago. Re-sales of single-family homes fell 1.6% and sales of condos and co-ops fell 3.2%. Purchases declined by 3.7% in the Northeast, 3.1% in the West and 2.8% in the Midwest. In the South, sales rose by 0.4%. Tomorrow the Commerce Department is expected to announce a modest decline in new home sales. The only positive data on the housing front shows the inventory of homes for sale was down 2.4% to 3.75 million units. The lower inventory is good news, but in my mind the bigger development is the increase in foreclosures. I watched a show two nights ago (“Dateline” on MSNBC as I recall) that said many real estate analysts say foreclosures could hit a million units this year. The increased foreclosures are generally blamed on trick financing with teaser starter rates that adjust to much higher payments down the road. All the trick loans out there are probably the reason we are seeing an increase in refinancing activity. Today the Mortgage Bankers Association said their applications index rose by 0.5% with the purchase index lower by 0.6% and the re-financing index higher by 1.8%. The average 30-year fixed rate mortgage moved higher by three basis points to 6.36%. One year ago the 30-year fixed rate was 6.06%; it rose to 6.86% in June this year, and has now dropped back to 6.36%. I am also hearing there is a great deal of stress in the mortgage backed securities market with banks selling the paper at deep discounts due to increasing risks of foreclosure, but I will have to do more digging to get the details. On the energy front, analysts expected crude oil inventories to grow by 2.6 million barrels, but instead the inventories fell by 3.3 million barrels. Similarly, distillates were expected to fall by 1.1mb, but fell a larger 1.4mb, and gasoline inventories were expected to decline 600,000 barrels, but fell by much more with a decline of 2.8mb. In addition to the lower than expected inventories, OPEC members are now falling in line behind Saudi Arabia’s lead to enforce output cuts. Saudi Arabia and Iran have now informed key customers they will cut production in November. On Monday, crude touched a low of $58.15, and as I write the price is now 5% higher at $61.10 a barrel. It appears the bottom is in for crude and all its refined friends! Natural gas is higher by nearly 7% today at $7.60/mbtu’s. Two weeks ago nat-gas was $5.60/mbtu’s; today it is 35% higher just ahead of the heating season. Folks, inflation is here to stay! Gold, Silver & Politics Gold and silver are acting well today with gold higher by $5.00 at $592.60 and silver 10 cents higher at $11.95 an ounce. To put it very bluntly, policy makers around the world have not done enough to contain real inflation. The Fed rhetoric later today will give lip-service to fighting inflation, but they need to allow inflation while containing “inflation expectations” with their words. It looks to me like gold is ready to tear the roof off the $600 level and silver is poised to take-out the $12.00 mark, but some additional patience may be required. I have not expected the metals to breakout this week because we had a 5-year TIPS auction on Monday, a two-year Treasury auction yesterday, the Fed today and a five-year Treasury auction tomorrow….just too much going on politically to allow gold to blast-off If you are gaming the precious metals, I will bring three more dates to your attention. On November 7th we have elections, November 8th and 9th we will get the Treasury’s quarterly refunding with the sale of 3-year and 10-year debt paper. Gold is a political metal and can be considered “anti-Treasury debt.” Treasury debt loses value when gold moves sharply higher. I expect both gold and silver to move sharply higher, but I don’t think it will happen until we get beyond the big political events in a couple weeks. Since the exact timing is not knowable, I have been accumulating precious metals mining shares for myself and my clients at the recent market lows. Fed Stands Pat The Federal Reserve just released their statement and it remained virtually unchanged from their last meeting. Many analysts were expecting an increase in vigilance toward inflation, but the inflation rhetoric was unchanged. The only minor change had the Fed more optimistic on “moderate” growth in the economy. Just prior to the statement the Dow Industrial Index was 30 points in the red and is now seven points above yesterday’s close. Bonds are slightly higher and the U.S. dollar is slipping marginally lower. Overall the Fed is on a “wait and see” basis with incoming economic data. The stock market got an immediate “relief rally” because the Fed did not increase their tough talk on inflation, but it doesn’t look like the rally is getting any legs. The Dow Industrials only stayed in positive territory for about ten minutes, then rolled-over to negative territory again. Any additional near-term gains in the broad stock market will be contingent on earnings announcements and improving economic data. So far, Q-3 earnings have been better than average. According to Bob Pisani of CNBC, as of yesterday 181 companies or 36% of the S&P 500 have reported earnings; so far, 72% have beat Street estimates, while the average each quarter has 60% of companies beating their estimates. The leaders so far have been in the insurance and materials sectors. I especially like the materials sector! Base Metals in Short Supply If the price of copper were to hit another all-time high, we would probably hear reports on the evening news. Copper and aluminum are not far from their all-time highs and as it stands, we keep hitting new, all-time highs in nickel, lead and zinc, but we don’t hear much about it on the evening news. Global mine supply is not keeping up with global demand. Two weeks ago I made the flippant comment, “zinc to zero” taking a jab at falling inventories. Have a look at Kitco’s LME Stock Charts…this time in all time frames offered:
When I look at the charts all I can ask myself is, “What will it take to turn this around?” We either need to see a big increase in supply or a big decrease in demand. Market analysts keep talking about inflation, but fail to include some of the supply demand fundamentals that are driving higher prices. Higher interest rates and a slowing economy will help to reduce demand here in the U.S., but the big drivers of consumption are China, India, Brazil, Russia and other developing nations. Insatiable demand for commodities is a GLOBAL EVENT, and not something the Fed can control with a few interest rate increases. Here are a few recent news articles that help me make my point: Copper,
zinc and aluminium prolong metals rally LONDON (Reuters) - Copper, zinc and aluminium gained more than one percent in London on Wednesday, while tin lead and nickel consolidated after the previous days' rally. "Fundamentally, nickel, zinc and tin are clearly bullish because of supply worries and they are supporting copper and aluminium," a trader in Asia said. Zinc stocks in LME-registered warehouses fell by 1,725 tonnes to 125,675, their lowest level since 1991. Base metal demand was seen to remain strong, traders said. "In China and India, the real powerhouses, I don't see any slowdown of demand," the first trader said. Iron
Ore Prices May Rise to Record on Chinese Demand (Update1) Oct. 24 (Bloomberg) -- Benchmark iron ore prices may rise to a record next year because of surging demand for the steelmaking raw material from China, the world's largest producer of the alloy, JPMorgan Securities Ltd. said. Iron ore contract prices for the year starting April 1 may rise 7.5 percent, JPMorgan analysts in London said in a report. Prices have risen for four straight years and gained 19 percent to a record this year. BHP Billiton Ltd., the world's largest miner, said in June global steel consumption will rise 5.8 percent in 2007, driven by accelerating economic growth and demand from China. BHP, Rio Tinto Group and Cia Vale do Rio Doce, control three-quarters of the world's iron ore trade. ``The Big-3 still have pricing power and don't see any major threat from new entrants as long as there's reasonable demand from Brazil, Russia, India and especially China,'' Jon Bergtheil, head of global metals research at JPMorgan said Oct. 23 from London. Prudential:
Mines remain unable to fulfill global copper demand Prudential Equity said the decision by the world's top gold miner Barrick to hedge $1 billion in copper earlier this month "created unusual short-term selling pressure," which, when compounded by other factors, means mines are still unable to fulfill strong copper demand. In recently published analyses, Prudential Equity Metals Analyst John Tumazos also expressed skepticism that mega-U.S. copper miner Phelps Dodge will actually be acquired in a hostile takeover bid. Tumazos has now raised his estimate of the increase in global copper demand to 2.2% this year. Meanwhile, he lowered global copper mine output by 0.6 mmt "owing to operational setbacks or unrest. …Earlier in this decade we had anticipated more output gains in geologically fertile regions than appear to be developing." For those of you who know how Barrick Gold has operated as a humongous hedger (forward sales of gold and silver), is it any surprise they jumped-in to hammer the copper market? I would like to say more about the damage Barrick has caused the precious metals sector, but I will refrain…most of you probably know the score. In the big picture, compare the declining inventories of nickel and zinc with the projected increase of demand for next year, and it’s a volatile mix. Iron is great, but it rusts easily. Nickel is used to make stainless steel and zinc is used to make galvanized steel. The emerging nations need these materials to continue building-out their infrastructure. That is why the materials sector of the stock market is leading the pack on beating Street estimates for Q-3 earnings! Just yesterday I backed-up the truck and bought my clients a proverbial “boat-load” of shares in a zinc mining company. Based on their cost models, they make a profit with zinc at 34 cents per pound…the price today hit a new record at $1.88 per pound!!! At a dollar a pound, they still make tons of money!! The Fed can blow all the smoke they want with regard to inflation, but when push comes to shove, prices will move higher with inventories at critically low levels. If industrial users’ sense there might be a real supply shortage, they will rush to secure whatever available inventory exists. Without nickel and zinc, steel manufactures are up a creek with no paddle! Again I ask the question, “What will it take to reduce demand in emerging nations?” I don’t know, but for now it appears the trend is increasing consumption of global commodities…anywhere they can get them! At The Close I just tuned in to CNBC, and they are flashing the red banner: “Breaking News: Dow Record Close!” Indeed, the Dow Jones Industrial Average closed six points higher at 12,134…no need to worry about the Fed! The real story has more money moving into Treasury notes and bonds since the statement from the Fed. I suspect the weak housing data and the lack of increased inflation warnings from the Fed has more money moving to the relative safety of Treasuries in light of our slowing economy. We will get more economic data in the next two days with Jobless Claims, Durable Goods Orders and New Home Sales tomorrow; then on Friday we get the first look at Third Quarter GDP and Consumer Sentiment numbers. The demand for base metals is proof in the pudding the global economy has MUCH more room to grow. The housing slump will clearly dampen growth in the U.S., but the global appetite for commodities appears unrestrained as developing nations are hungry to increase their standards of living! Have a Great Evening! Mike Hartman
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