Fiscal Cliff Navigation Tactics

Nov 20, 2012

  1. Earlier this year, Goldman Sachs’ Peter Oppenheimer said that compared to bonds, US stocks were the cheapest in 50 years.
  2. If Peter is correct, that could be good news for your gold stocks, because there is an ongoing correlation between the Dow and most gold equities.
  3. Unfortunately, Goldman also believes that the fiscal cliff situation could drive stock markets 8% lower by year-end.
  4. You are looking at the daily chart for the Dow, and you can see that it made a small top in mid-September. It has declined about 8% from the high.
  5. Gold stocks are more volatile than the Dow. GDX declined about 18%, during the period in which the Dow fell 8%. There is a lot of symmetry between these two charts.
  6. If the Dow is set to fall another 8% from the lows of last week, GDX could fall another 18% from its recent lows. That would put GDX at about $37, and below the May-July lows.
  7. Some of the largest gold companies are already trading near their summer lows, which is somewhat alarming.
  8. If you own a home, it is wise to purchase home insurance. If you own gold stocks, carrying some cash and short positions is a form of insurance. That’s the daily chart of DUST, which is effectively a triple-leveraged bet against GDX. The performance is calculated on a daily basis. I’m a buyer, moderately, in the $28 and $22 areas.
  9. What would happen to gold stocks, if Goldman Sachs is correct about the Dow falling another 8%, and then they called for an even harder fall, instead of a rally?
  10. The situation could get quite ugly. A small position in DUST may help gold stocks investors to professionally manage fiscal cliff fear.
  11. Gold recently sold off along with the other so-called “risk on” markets, but it bottomed quickly. The daily chart shows a nice head and shoulders bottom pattern in play.
  12. The daily gold chart looks superb. The H & S pattern sits near the demand line of a beautiful rising channel.
  13. HSR (horizontal support & resistance) at $1758 is the initial upside target, and then $1800. A “price pop” to the $1825 price zone could be a game changer for gold stocks.
  14. Silver looks even better than gold. Yesterday’s price action was important, because it took silver above the neckline of a head and shoulders bottom.
  15. At this point in time, gold has yet to rise above its neckline, so silver is clearly the leader.
  16. Silver seems eager to race to $35.50, and if gold can rise above $1800, that could catapult silver into the $40 range.
  17. There’s more good news. Ben Bernanke makes a speech in New York today, and he may give more hints about ramping up QE3. Currently, QE3 is being “diluted”, because the Fed is selling short term Treasuries.
  18. There are rumours that the Fed may cut back on that practice, or even halt it, before the end of the year. If “Big Ben” speaks boldly about ending the dilution of QE3, gold and silver could spike higher, very quickly.
  19. Most investors in the gold community like speculative resource stocks. If you are looking for action, my favourite play right now is the “Global X Gold Explorers” fund.
  20. At about $8 a share, the GLDX ETF is something that is probably priced “just right”, for action-oriented investors. In contrast, GDXJ is trading at about $22.
  21. It’s a lot easier to look down from $8, than it is from $22. Aggressive investors should considering accumulating GLDX on every 25 cent decline, inside the highlighted $7-$9.75 “price box”.
  22. I like both GDXJ and GLDX, but there’s no question that GLDX is a lot easier to handle, emotionally.
  23. A move above $1800 in gold could be the catalyst that takes GLDX above $10. From there, the target would be $13, which is about 50% higher than today’s price!

Indian Gold Demand Picks Up

Indian Gold Demand Picks Up

The love for gold has been reignited in India, according to the World Gold Council (WGC) in its Gold Demand Trends for the third quarter of 2012. India regained its title as the strongest performing market, overtaking the greater China area, as the country experienced a bounceback in demand due to improved sentiment during the festival season.

Compared to the third quarter of last year, Indian gold jewelry demand grew by 7 percent while gold bar and coin demand rose 12 percent. Total consumer demand was 223 tons, compared to 205 tons this time last year. The second largest market was Greater China, which consumed 185 tons in the third quarter of 2012. This was less than the 201 tons consumed in the third quarter of last year.

Together these markets in the east made up 55 percent of the world’s jewelry and investment demand, according to the WGC. indian-gold

Although India experienced a setback earlier this year when gold shops boycotted a proposed tax on the yellow metal, imports recovered by July “as inventory levels were bolstered (aided by a well-timed dip in the local price) and the market adjusted to the customs duty,” says the WGC.

The third quarter has historically been a strong seasonal time for the Love Trade to come alive in the east. Monsoon rains and the festival season in the fall are generally associated with the buying and giving of gold. Still, for the year, don’t expect the Love Trade in India to be as strong as it was in 2011, as gold demand remains subdued with the ongoing weakness of the rupee.

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Reform boost to commodity mkt as cabinet clears FCRA Bill

 

Giving a reform boost to commodity markets, the government today approved the FCRA Bill that seeks to provide more powers to sectoral regulator Forward Markets Commission (FMC) and allow a new category of products.

  

Giving a reform boost to commodity markets, the government today approved the FCRA Bill that seeks to provide more powers to sectoral regulator Forward Markets Commission (FMC) and allow a new category of products.

 

“The Cabinet has approved the Forward Contract Regulation Act (Amendment) Bill. It will give more teeth to FMC. Farmers will also benefit,” Food Minister K V Thomas told PTI.

 

The Forward Contract Regulation Act (FCRA) Bill, considered vital for the development of futures trade, aims to provide financial autonomy to the regulator. FMC can become self-sufficient by collecting revenues in form of fees from exchanges after the passage of this Bill in parliament, Thomas said. The retirement age of FMC chairman and its members will go up to 65 years from 60 years, if parliament passes the Bill. The number of members in FMC has also been proposed to increase from four to nine. The Bill also seeks to facilitate entry of institutional investors and pave the way for introduction of new category of products, like Options.

 

The bill seeks to increase penalty on defaulters to Rs 50 lakh from the existing Rs 25 lakh. At present, the country has five national and 16 regional commodity exchanges. Recently, FMC had given its approval to the Universal Commodity Exchange to operate as a national bourse. The cumulative turnover of the commodity exchanges is about Rs 80.30 lakh crore till September 15 of the current fiscal.

Check out key amendments to the Insurance Laws Bill

Following are the key amendments proposed in the Insurance Laws Bill 2008, chief among them being increasing the cap on foreign equity in insurance companies to 49% from 26% earlier.

 

Following are the key amendments proposed in the Insurance Laws Bill 2008.

 

1. Foreign equity cap is proposed to be kept at 49 per cent as provided in the Insurance Laws (Amendment) Bill, 2008 as against the 26 percent.

 

2. Foreign reinsurers will be permitted to open branches only for reinsurance business in India and cannot invest directly or indirectly outside India the funds of policyholder.

 

3. In order to encourage health insurance in India, the capital requirement for a health insurance company has been proposed at Rs 50 crore instead of Rs 100 crore for General Insurance companies.

 

4. The definition of ‘health insurance business’ has been revised so that health insurance policies would cover sickness benefits on account of domestic as well as international travel.

 

5. Regarding the obligatory underwriting of third party risk on Motor Vehicles, a separate Motor Vehicle Insurance and Compensation Legislation is being proposed by the Government.

 

6. The period during which a policy can be repudiated on any ground, including misstatement of facts etc. has been confined to three years from the commencement of the policy and no policy would be called in question on ground of misstatement after three years.

 

7. Public sector general insurance companies and GIC will be permitted to raise capital from the market to meet future capital requirements, provided that the government’s shareholding does not fall below 51 percent.

 

 8. Appointment of agents is proposed to be done by insurance companies subject to the agents meeting the qualifications, passing of examinations etc. as specified by IRDA. While the licensing of agents be no longer with IRDA, the Authority is empowered to take action against agents.

 

9. To specify fine on intermediaries and insurance companies for misconduct of intermediaries and to make appropriate provision in the legislation to effectively deter multilevel marketing of insurance products in the interest of policyholders, and to curtail the practice of mis-selling.

 

10. In order to improve the functioning of surveyors and bring in greater transparency, certain modifications are made to provide for regulations on qualifications regarding appointment of surveyors and to strengthen the Institute of Indian Insurance Surveyors and Loss Assessors

 

11. The commission structure and the Code of conduct for agents is to be specified by regulations by the IRDA and accordingly, ceilings on commission in the Act have been done away with and the insurance companies along with the agents are made liable for any violation of the regulations and stiff penalties have been provided for mis-selling, rebating and marketing of products through multi level marketing schemes.

Monsoon to End in India: Cement, Fertilizer & Electricity Impacted

The Monsoon season hit India late. America was not alone in feeling the drought, India also got hit. When the needed Monsoon came, it was a bit late. Now weather forecasters expect the Monsoon to end. What was the economic impact of the late Monsoon?

Monsoon India

Impact on Cement prices

With pickup in monsoon, cement prices weakened in most of the regions. Prices fell sharply in Bhubaneswar (~INR50/bag), Hyderabad (~INR44/bag), Lucknow (~INR30/bag) and Jaipur (~INR25/bag). Prices were relatively more stable (down by INR1-5/ bag) in Chennai, Mumbai, Ahmedabad, Kolkata and Chandigarh.

Grain

Kharif food grain output may be lower than last year’s 130 mn tonnes, as scanty rain in the early part of the monsoon hit plantings

Impact on politics

If the President does not call a special Parliament session, the Government can very well decide to do away with the winter session. Constitutionally, Parliament has to meet at least once in six months. The last session ended on 7 September, 2012. So, the government can choose to avoid a Parliament vote until the Budget session. While this would surely result in howls of protest from the opposition, washout of almost the entire monsoon session would lessen public outcry against this move.

Electricity

The Economic Times reports that electricity rates in short-term markets dropped to a record low of INR1.20/unit on Sunday from INR3 a year ago, as the late revival of monsoon rains has reduced agricultural demand and improved hydropower generation, luring more market participants to power exchanges and providing an opportunity to industries such as cement, textiles and steel that had suffered in the summer because of power scarcity.

The Consumer Education Research Society has complained that Gujarat State Electricity Corporation’s PLF dropped to 39.15% in August as against 71.26 % in April. The newspaper said that CERS is of the opinion that GSECL must have a shutdown of many units for planned maintenance due to the monsoon season, while this year’s poor rain resulted in increased demand of power.

GDP

The Indian Economy relies largely on the agriculture sector (over 15% of GDP, employs 52% of population), and this sector depends largely on the production and quality of monsoon which is highly unpredictable.

Urea

Urea volume declines 5% y-y in August, affected by a weak Monsoon: Urea saw a volume decline of 5% y-y, leading to a 3.8% y-y decline in FY13 YTD. Given the improved sowing patterns aided by a Monsoon recovery, the MSP increase for the current season expected to boost farm income and the government delaying the increase in urea MRP (increased urea-complex differential), we expect ~ 4% volume growth in FY13E, with a strong demand pickup in 2H FY13.

Fertilizer

Complex fertilizer volume down 19% y-y but sees a 8.8% m-m improvement: Complex fertilizers reported a 19% y-y decline in August, leading to a 19.6% y-y decline in FY13 YTD. Although Monsoon recovery has stabilized the inventory levels, the sharp price hikes implemented in June are exerting pressure on volume in addition to the lower production levels, given a lack of raw materials.

High retail prices of complex fertilizers to change consumption patterns in favor of urea: Although the impact of a weak Monsoon will not be felt on agriculture with sowing recovering with a decline of just 5% y-y YTD, demand recovery expected currently would be in favor of urea players, where the price differential with complex is at an all-time high and a weaker rupee is beneficial.

Finally and most importantly, Water

Monsoon water by regions in India