The MIF Issue
From the May 12, 2017 HRA Journal: Issue 269
Thanks again to all of you who made the effort to attend MIF last weekend. We had a great set of talks and presenting companies. Those of you who couldn't’ make it can see everything by checking the link on this page where all videos from the event will be posted.
Metals in general and gold specifically had a pretty weak couple of weeks. That weighed on everything. Everyone has their own downside targets but it looked like we might be putting in another bottom this week.
While I want to see metal prices higher I’m more concerned with the trading of companies HRA follows. Many of them traded better than their peers, in part thanks to MIF. I also noticed a distinct increase in interest and trading in early stage drill speculations. That’s interesting, as stories like that are often the first victims in a generally weakening trend. The new interest in these stories tells me there are traders out there with dry powder. They recognize that, while admittedly higher risk, drill speculations are less affected by short term metal price moves. That sort of action tells me the market will care if a company releases discovery news.
We’ll have to see if that bravery extends to four month hold paper. Placements might be tougher for early stage companies for a while. Happily, few HRA companies are in need of top ups and I expect most will let the drill bit speak before looking for cheques.
This issue isn’t only about MIF but several of the updates include comments based on company presentations or conversations with management at the event.
Aside from strong attendance, MIF was successful in the immediate impact it seemed to have on the shares of companies which delivered a message that resonated with the audience. Several companies that had a distinct “MIF effect” are noted in the update section.
I hasten to add that this isn’t me blowing my own horn. Most of the companies that saw that sort of buying told us they did and that they had good reason to believe it was a direct result of MIF.
The trading action of several companies after the event tells me a couple of things. One is that there are still traders out there interested in both development and exploration stories. We knew that already based on attendance but it is comforting to see at least some buyers saw no reason to wait out summer doldrums.
The other is that its clear traders favor a cohesive message that has well defined milestones built into it. Developers are less risky than explorers but, even there, it looked like attendees definitely favored companies that laid out specific plans and when they expected to complete and report on them.
That’s not a surprising result but one other companies should heed. It would be worth the time for management groups to watch videos of presentations that had the most impact. There may be lessons there in how to improve their own pitch.
Kitco Insider the taped event. The newsletter writer talks have been uploaded as have several company presentations. The rest will be up in a few days. One of the presentations already uploaded is the one given by the CEO of last issue’s Extended Review, Fireweed Zinc. I expect the IPO for FWZ in about 10 days. Find the videos here:
A separate video crew taped short interviews between the newsletter writers and the companies they invited.
Those are being edited and will be uploaded shortly as well. Remember, the following companies on the HRA list presented at the latest MIF (some invited by others) and all should have their presentations and short interviews uploaded in a few days:
Tough Two Weeks for Gold and Commodities
Since the last issue, the gold market struggled. The chart below shows how quickly things turned nasty (nastier?) once we entered May. I wasn’t expecting as much weakness as we saw in part because I thought Q1 US growth would prove to be weak and that the US Dollar wouldn’t see much of a rally.
Both of those predictions turned out to be correct but didn’t matter since they were overtaken by other events. Even though equity markets haven’t advanced much since the start of May the tone changed markedly. Equity traders went full “risk-on” and bond traders returned to assuming (at least) two more rate increases this year.
So, what changed? Politicians in Washington cut a deal to stave off a government shutdown. I considered this a minor detail but others may not have. Traders were bolstered by an above consensus payroll report and a Federal Reserve meeting viewed as neutral.
None of the above seems that important itself. The bigger impact came from, bizarrely, that potential rather than actual events.
Markets appeared to react quite strongly to the Atlanta Federal Reserve starting its Q2 GDPNow calculation at 4.3% growth. As you know, I’m a fan of this survey since it gives you a running growth estimate based on incoming data, and they tend to stick to “hard” data.
I guess lots of other traders are fans too. The market seemed to take the starting GDPNow calculation as proof of one of the most popular memes on Wall St, “Q1 Exceptionalism”.
Wall St, and bullish commentators everywhere, have decided that Q1 growth in the US will always be understated “because reasons” and so can be ignored. I think there is some negative bias to Q1 numbers myself though I don’t have a better explanation for it than anyone else. The key word here is “some”, however. I still think the number is mostly an accurate reflection of current economic activity.
That’s why I find it strange that everyone shrugs off a deceleration to 0.7% growth in Q1. Its not the end of the world but it makes current valuations in the major market hard to justify.
The second “thing” that got Wall St briefly excited was the passage in Congress of a health care bill. Wall St, which seems surprisingly unaware of how government works, started cheering on the idea of tax cuts and infrastructure coming soon, now that the legislative roadblock has been “fixed”. Political commentators soon disabused Wall St of that notion. It sounds like the health care bill could be stalled in the Senate until approximately the time Hell freezes over, and that stalling will be getting handled but Trump’s own party. Don’t hold your breath waiting for those tax and infrastructure bills. It could be a long wait.
In terms of where we stand now, I’ll defer to the chart below. This is a qualitative chart that overlays the JP Morgan Macro Surprise Index on the trace for the S&P 500. The Macro Surprise Index tracks actual economic data releases against the consensus estimates of how the data would look. If a data point comes in above consensus it’s a positive surprise, if it comes in below it’s a negative one.
You can see from the chart that the Surprise Index has been diving for the past two months. The divergence between the index and the SPX which it usually closely tracks, is historic. No one seems to know why, other than the TINA (there is no alternative) trade. That, or traders all assume the current data points are wrong and things will actually accelerate to the upside “soon”.
As I have noted a couple of times in the past two months, divergences this large rarely last long. The current one can end either because the hard data improves or the market falls. I think we get a bit of both though major market indices falling may make up more of the gap than improving economic stats.
In the past 2-3 weeks, we’ve seen increasing assurance that the Fed would raise rates. While plenty of economic readings missed consensus, they weren’t horrible. Payrolls, which heavily influence the FOMC, were decent even though hourly earnings were—again– not accelerating. But economic theory says they should so I expect the Fed will pull the trigger again next month.
Actual rate hikes have marked bottoms for gold the last three times so we may see another instance of “sell the rumor, buy the news”. Gold, and metals generally, haven’t been trading against the USD lately. This too might change again which should help metals prices since the USD looks prone to weakness again.
One thing that has maintained a negative correlation with gold prices is real interest rates. In the past couple of weeks, real rates in the US have flipped from negative to positive. I think that is the real driver here.
The chart below plots gold prices against the (inverted) 5 year TIPS (Treasury Inflation Protected Securities) yield, a proxy for real (inflation adjusted) interest rates. As you can see from the chart there has been a strong move up in real yields in the past month. This has been putting pressure on gold prices.
Ironically perhaps, it doesn’t appear that faster growth is the reason behind higher real rates. Those have come up because inflation continues to trail off after rising late last year. Oil is the main culprit, along with the sudden belief on the part of bond traders that the Fed will move again next month.
I expected oil prices to fall, though they may not go a lot lower. Any stability in the oil market could stem the drop in inflation expectations. Relative weakness in the USD implying higher import prices could help too.
The bond market seems to have made most the adjustment to price in another rate hike. Complacency abounds. We’ll only see how this plays out as more economic data comes in but it seems the TINA trade is alive and well again. It’s a bit strange for the market to price in low interest rates as far as the eye can see while also pricing in higher odds of US rate hikes. It’s a strange market out there.
One place that isn’t complacent is China, and I think that accounts for most of the pull back in base metals. Beijing, unlike Washington or Brussels, hasn’t been just talking when it comes to tightening financial conditions. China is cracking down on capital outflows again and pushing yields higher. They seem to be trying to squeeze the “grey market” in Wealth Management Products” that generate higher rates by using extreme leverage.
The 10-year yield in China has moved up 50 basis points since late April. A move like that in the US or Europe would have equity markets dropping like a stone but Western traders seem to be ignoring it.
The war on leverage by Beijing accounts for some of the fall in prices for materials like iron ore, and perhaps copper too. It’s long been suspected traders in Shanghai were taking long positions as a bet on economic growth. I’ve never though the iron ore market justified higher prices. Copper is more balanced though and zinc is still in deficit so I don’t expect losses in bulk materials to be fully mirrored by base metals.
One place China isn’t cutting back is in its Silk Road initiative. Beijing is pushing hard to get that going and it will create huge metals demand if they succeed. Barring really bad economic news it feels like both base and precious metals have seen most of their correction.
While the overall tone of the market has been weak I’ve noted a distinct increase in interest in drill plays. Companies with superior targets have been trading much better in the past couple of weeks. How that ends for individual companies obviously depends on exploration results. Still, trader’s willingness to bet on the high risk end of the resource space bodes well for sector as a whole.
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