Highlights of the Week of November 4, 2013

Hollande and Downgrade of FranceDebt

Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of November 4, 2013.

  • VALE S.A. Q3-2013 earnings report.
  • USA GDP and Employment data.
  • ECB lowers interest rates.
  • Standard & Poor’s cuts France Credit rating from AA+ to AA.

VALE S.A. Q3-2013, EARNINGS REPORT:
On Wednesday November 6th, 2013, Brazil’s Vale SA  (NYSE: VALE), the world’s second-largest mining company, reported its Q3-2013, financial results.

 Vale

Highlights:

  • In Q3-2013, the company reported its second best quarter ever for iron ore production along with all-time high volumes for copper, coal, phosphate rock and gold.
  • Nickel production has also experienced a strong performance this year, reaching the second highest mark since 2008 for 192,000 tonnes for the first nine months of this year, compared to 173,000 tonnes for the same period of 2012. Total third-quarter 2013 nickel production was 62,000 t, 27.5% up from 49,000 t for the third-quarter 2012.
  • Iron ore production came to 85.9 million metric tons in the third quarter, up from 84 million metric tons for third-quarter 2012.
  • Gold production achieved an all-time high figure of 76,000 ounces in the third quarter, up 66.2 percent from 46,000 ounces for the third-quarter 2012. For the first nine months of this year the company reported 197,000 gold ounces of production, up 68.1 percent from 117,000 gold ounces for the same period of last year.
  • During the third quarter copper output set a new production record at 94,600 tonnes, up 40.1 percent from 68,000 tonnes for the third-quarter 2012. For the first nine months of this year the company reported a copper production of 275,000 tonnes, up 30.7 percent from 211,000 tonnes of copper output reported during the same period of 2012.
  • Coal output during the third quarter of the year was 2.4 million metric tons, the same level as last quarter, which was a record. For the first nine months of this year the company reported 6.5 million metric tons of coal production, up from 5.13 million metric tons for the same period of 2012.
  • Net sales, or total sales minus sales taxes, rose 11 percent from a year earlier to US$ 12.7 billion.
  • The company reported net income of US$ 3.51 billion or 68-cents per share, more than double the net income of US$  billion or 32-cents per share reported during the third-quarter 2012.
  • Adjusted earnings rose in the quarter to US$ 5.88 billion in the third quarter from US$ 4.28 billion in Q3-2012.

Source:

USA GDP AND EMPLOYMENT DATA:
On Thursday, November 7, 2013, the USA Bureau of Economic Statistics gave an estimate that the country’s Q3-2013 increased at an annual rate of 2.8 percent, compared with a real GDP growth of 2.5 percent in Q2-2013.

On Friday, October 8th, the U.S. Bureau of Labor Statistics, provided preliminary October 2013 jobs data, which shows, that the country’s economy have added 204,000 jobs in October of this year.

USA 12 month Employment Report

The unemployment rate is a different story, however. The shutdown pushed the jobless rate higher to 7.3 percent from 7.2 percent in September. That’s the first increase in three months. The unemployment rate is derived from a separate Labor Department survey of households rather than the payrolls tally.

ECB LOWERS CUTS INTEREST RATES:
On Thursday, November 7, 2013, the European Central Bank surprised financial markets by reducing interest rates and saying more cuts could come—underscoring the risks that the recent inflation plunge in the euro zone poses to the region’s fragile economy and the global recovery.

The ECB cut the interest rate at which it lends to banks at its normal facilities to 0.25% from 0.5%, and reduced a separate rate for overnight loans by the same amount to 0.75%. It kept the deposit rate on bank funds parked at the ECB at zero. It said it would make unlimited loans available to banks until mid 2015, a year longer than before.

With Thursday’s reduction—a move that came despite German resistance—the ECB joins other central banks, including the USA Federal Reserve and the Bank of Japan, in setting interest rates close to zero, an unthinkable prospect before the global recession five years ago and Europe’s subsequent debt crisis.

STANDARD & POOR’S CUTS FRANCE CREDIT RATING FROM AA+ to AA
On Friday, November 8th, 2013, credit rating agency, Standard & Poor’s downgraded France’s credit rating for the second time in less than two years, citing risks over the country’s economy and government finances.

The ratings agency cut its debt grade from AA+ to AA, the third tier of debt quality. It said its new outlook for the grade was stable, against a previous negative watch for the AA+ rating.

In a statement S&P said:

“We believe the French government’s reforms to taxation, as well as to products, services and labour markets, will not substantially raise France’s medium-term growth prospects and that ongoing high unemployment is weakening support for further significant fiscal and structural policy measures.”

PGM CAPITAL COMMENTS:
VALE S.A. and Outlook for diversified mining companies:

Beside VALE, the world’s largest mining company, BHP Billiton, raised its full- year iron-ore production forecast on October 22, after first-quarter output of its biggest earning unit jumped 23 percent. World’s third biggest mining company Rio Tinto, the biggest iron-ore shipper after Vale, reported on October 15 record iron-ore production at its mines in Australia’s Pilbara region.

Iron ore entered a bull market in July as users in China replenished stockpiles that shrank in March to the lowest level since 2009. Prices at Tianjin measured by The Steel Index Ltd. have rallied 23 percent from this year’s low on May 31 to US$ 135.30 a ton on November 1st, the highest level since September 5th of this year.

The stock of BHP closed on Thursday November 7th 2012, in Australia at its highest level in one year as can be seen from below chart, signalling a recovery in the mining sector.

Rio Tinto and BHP 1 year chart

USA Employment and GDP data:

As our readers may remember in July of this year, the USA Bureau of Economic Analysis, BEA, changed the way that US economic activity will be reported, which will differ significantly from the way other countries report their GDP figures.

Source:

Due to the above, the question most investors will be asking themselves is “How trustworthy are current USA GDP reporting and how does it compare with those of other countries, that didn’t change the way they calculate their GDP”

Due to this we’ll provide below some fundamental data that are straightforward, cannot be manipulated or misinterpreted, which may give the investor the real picture in the direction of the Global and USA GDP growth.

World-Oil-Supply-World-GDP-Growth

As can be seen from the above chart, the world’s annual oil supply growth declined, and so did the global GDP growth rate.  In the beginning of the 1970′s decade the global oil supply grew more than 7 percent annually while the global GDP growth rate increased approximately 5 percent during that time period.

However, during the 2007-2011 period, the world’s oil supply annualized growth rate fell to just 0.5 percent, while the global GDP growth rate was down to little more than 1 percent.

Thus, energy has everything to do with determining the growth rate of the world’s economies.

That graph below reveals how changes in energy consumption paralleled the rise and fall in the U.S. GDP growth rate:

U.S.-Energy-Consumption-vs-Annual-GDP-Rate

Below chart shows energy consumption in the industrial and transportation (logistic) industry in the USA, which should have a direct relation with GDP growth/decline in that country.

U.S.-Industrial-Transportation-Energy-Consumption

Regarding the USA employment data released on Friday, November 8, 2013, these data fail to show how the labor force participation rate plunged from 63.2% in September to 62.8% in October –the lowest since 1978 as can be seen from below chart.

USA Labor Force Participation Rate

But more importantly, the number of people not in the labor force in the USA, exploded by nearly 1 million, or 932,000 to be exact, in just the month of October, to a record 91.5 million Americans! This was the third highest monthly increase in people falling out of the labor force in US history.

Labor Force

If these trends continue, the people out of the labor force will surpass the working Americans in about 4 years.

ECB Rate Cute and France Downgrade:

Regarding this we can be very short. Central banks in the WEST are CHECK-MATE and have no other choice but to keep on stimulating their economies with rate cuts and money printing.

With a Debt to GDP of over 92 percent, sluggish Economic growth and an unemployment rate of over 10 percent we believe that France AA credit rating is too High and that this country will see further credit rating cuts further in the near future.

After reading the above, it should be clear to you that official straight forward economic data, which cannot be manipulated, show a totally different picture of the Economy of the USA and the West, than the ones of official government institution in those countries.

This means that in order to keep throwing sand in the eyes of the public, the Central Banks in the West must continue supporting their Economy by printing money and or rate cutting rates.

Due to the fact that precious metals are a store of value, we believe that the longer and larger degree in which the GDP data and employment date are being manipulated, the higher the revaluation of the precious metal values will become.

On top of this (Central) Banks in the WEST, are playing with fire by pushing the price of gold and silver down to the level of their production costs.

It is worth mentioning, that, this is the first time in the history of mankind that the price of gold and silver have been driven below their cost of production for an extended period.

Finally, as the U.S. economy stands at the edge of a cliff, very few are prepared for what is coming.  The Fiat Monetary QE to Infinity System has an expiration date.  Of course it is impossible to know what day that will be.  However, the fundamentals and the value of real money always win out in the end.

Until Next Time

Eric Panneflek

 

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