Highlights of the period of May 24 – 31, 2013

Bull-Bear Market 2End-of-QE

Dear PGM Capital Blog readers,

In this weekend blog edition, we want to discuss with you some of the most important events that happened in the global capital markets, the world economy and the world of money which are:

  • The Bank of Israel cut interest rate to 1,25 percent on Monday, May 27 2013.
  • Widespread protests against Monsanto in the weekend of May 25 2013.
  • Moody’s cut Alcoa credit rating on Wednesday May 29 2013, to junk.
  • Brazil raised rates on May 30, 2013, to 8% in order to tame inflation.
  • USA markets fell sharply, in the afternoon of Friday May 31st 2013.
  • Minutes of meeting of the USA Federal Advisory Council, published on May 31 2013.

The Bank of Israel cut interest rate to 1,25 percent on Monday, May 27 2013
Bank of Israel’s Governor Stanley Fischer PhD, in order to keep up with the battle against the shekel appreciation, decided to reduce Israel’s key interest rate by 0.25 percentage points to 1.25% on Monday May 27 2013,

This rate decrease by the Bank of Israel, which has brought the rate to its lowest level since March 2010, is its second rate decrease within 2 weeks.

Wide-spread protests against Monsanto in the weekend of May 25 2013.

As can be seen from below picture, thousands of people in more than 330 cities in over 40 countries all over the world have organized marches and rallies against agricultural company Monsanto, (NYSE: MON) to raise awareness of the potential health and environmental risks of genetically modified seeds and organisms, (GMO’s)

World_Wide March against Monsanto

About Monsanto:

Monsanto Company was incorporated in 2000 and is headquartered in St. Louis, Missouri, USA. The company, together with its subsidiaries, provides agricultural products for farmers worldwide. It operates in two segments, Seeds and Genomics, and Agricultural Productivity.

  • The Seeds and Genomics segment produces row crop seeds, such as; corn, soybean, cotton, canola seeds and also vegetable seeds consisting of tomato, pepper, melon, cucumber, pumpkin, squash, beans, broccoli, onions, and lettuce seeds.
  • The Agricultural Productivity segment manufactures herbicides for agricultural, industrial, ornamental, turf, and residential lawn and garden applications for weed control, as well as for control of pre-emergent annual grass and small seeded broadleaf weeds in corn and other crops.

The company is employing over 22,000 employees worldwide and made a profit of
USD 2 billion at a revenue of over 13.5 billion in Fiscal year 2012.

As can be seen from below chart, Monsanto stock, has appreciated with approx 740% since it went public in the year 2000. Its dividend payment increased in the same period form its first dividend payment of USD 0.045 a share a quarter in January 2001 to USD 0.375 a quarter in April of this year, an increase of its dividend payout of approx 733%.

Monsanto all time Chart

Based on its business model, strong balance sheet we have BUY rating on the stock.

Moody’s cut Alcoa credit rating on Wednesday May 29 2013, to junk.

On Wednesday, May 29, 2013, Alcoa (NYSE: AA), one of the world’s largest aluminum producers, lost the investment grade it has held for decades to junk status, after its debt was downgraded by Moody’s to Junk Status.
In a statement Moody’s said:

  • The downgrade was prompted by the weak outlook for aluminum prices, caused by additional capacity scheduled to come on stream over the next few years, high inventories and signs that global economic growth is flagging.

Source:

As can be seen from below 10-year chart, Alcoa’s shares has been treading water since October 2008, when the stock price fell from an all time high of USD 47.50 a share on July 9 2007 to USD 8.50 a share on Friday May 31st 2013. During the last 10 years the company also reduced its quarterly dividend from USD 0.17 a share to currently USD 0.03 a share.

Alcoa 10 year chart

Based on the above we have a SELL rating on the stock and believe, that it will be removed from the prestigious DOW-30 Index, the next time this index is re-organized.

Brazil to raise rates on May 30, 2013, to 8% in order to tame inflation.

Fearing high inflation, Brazil’s Central Bank on Thursday May 30th, voted unanimously to hike its benchmark rate by 50 basis points from 7.5 to 8.0 percent. The decision followed disappointing first quarter growth.

In a short statement, the bank said:

The decision will contribute to lowering inflation and ensuring that the trend continues next year.

Following the decision the Brazlian Real fell to a 4-year low of
BRL 1.00 = USD 0.4675 on May 31st 2013, as can be seen from below chart.

Screen Shot 2013-06-01 at 6.15.11 PM

The Bovespa Index, fell 2,530 points or 4.51 percent, from its close of May 28 to 53,508.6 points on the close of the market on Friday May 31st 2013.

USA markets fell sharply, in the afternoon of Friday May 31st 2013.

A lot of USA Economic data came out in the week of May 27 -31, 2013, most of them confirming our point that the USA Economy isn’t recovering, like USA policians and monetary policy makers are pretending.

The USA Q1-2013, GDP growth was revised down to 2.38 percent, from the previously announced 2.5 percent growth. From this report (click to read the report) we can read that:

  • The savings rate plunged to 2.3 percent, the lowest USA household savings rate since Q3-2007.
  • The April household spending data shows, that incomes were flat and that spending decreased with 0.2 percent.
  • Disposable income decreased with 4.4 percent and  personal income decreased with 3.2 percent.
  • Housing prices increased YOY with 10.9 percent

Beside the above negative data, the USA consumer confidence currently is at a 5-year high. We believe that the only reason that consumer confidence is at 5-year high is only due to the fact that (they think) their house is more valuable.

On Friday, May 31st 2013, Major indexes closed down, ending the four-day trading week with a loss. Markets, mainly based on the above mentioned information were very volatile on Friday.

  • The Dow Jones Industrial Average fell 208.96 points, or 1.36 percent, to 15,115.57 points, of which 70 of those 200 points were lost in the last 5 minutes of trading, as can be seen from below chart,
    DOW May 31 2013
  • The S&P recorded a 23.67 points loss or 1.43 percent, to close at 1,630.74.
  • The Nasdaq fell points 35.39, or 1.01 percent to close at 3,445.91 points.

Another catalyst for the falling USA Indexes, was rising interest rates and falling bond-prices.

Bond prices fell 1.7 percent for the week,  sending the yield of the 10-year note to an intraday high of 2.22 percent for it to close at a yield of 2.164 percent, on Friday May 31st, from 2.01 percent on Friday May 24th 2013, as can be seen from below chart.

Yield USA 10-year note May 24 - 31 2013

On the other hand, Gold prices were relatively flat during the week,  but the Gold-stocks Index, the ^HUI rose with 6.42 percent from Friday May 24 – 31 2013, as can be seen from below chart.

NYSE Arca Gold BUGS Index

This is the biggest gain for Gold stocks in one week since January 2012, as can be seen from the above chart, which shows that this gain happened during the last 15 minutes of trading last Friday.

The above may prove our case that we have seen the lows for the Gold prices and the high of the bond market, which is obvious, because the bond market and the Gold Bug Index are moving in opposite directions.

The Minutes of meeting of the USA Federal Advisory Council, published on May 31 2013

The most important news of the week however is the minutes of the meeting of May 17, 2013 of the USA Federal Advisory Council (FAC), a body composed of representatives chosen by each of the twelve Federal Reserve Banks that “consults with and advises the Board of the FED, on all matters within the Board’s jurisdiction.

Highlights of this report:

  • The aggressive rate of asset purchases, helped maintained low, short-term and mortgage interest rates and liquidity in the markets, this in terms has increased prices of debt and equity securities, consumer confidence and spending and confidence in the financial markets.
  • The effectiveness of the policies in producing a healthy employment and economic growth is not clear.
  • Economic growth has remained sluggish and uneven while some monetary policies may not be accommodating enough. Others believe that consistent injections of new reserves have not returned the economy to the vibrant upbeat model it used to be and that current monetary policy is ineffective.
  • Furthermore they stated that deposits may be at risk and that they don’t know how markets will re-establish normal valuations when the FED withdraws from the market. Due to this it may be difficult to unwind accommodation.
  • The end of monetary easing may be painful for consumers and businesses.
  • Given the Fed’s balance sheet increase of approximately $2.5 trillion since 2008, the Fed may now be perceived as integral to the housing finance system.

Source:

The abovementioned report has much in common with our view on the state of the USA Economy. We therefore believe that this report may well be the trigger for the big wakeup call for traders and investors, depending on the interpretation by investment experts and the financial media.

Consequently, we are anxious to see how the Gold market and Equity markets in Asia will react to this, when they open on Sunday June 2nd 2013.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely,

Eric Panneflek

 

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