Monday, October 26, 2009

Metal Mining edge

For all the angst about the collapsing U.S. dollar in the past few months, the greenback is now trading essentially at the same level it did before the financial crisis imploded capital markets and sent economies worldwide into recession. Although many financial institutions are far from sound, investors have taken apocalyptical risk out of the equation and have shifted back to their usual modus operandi of maximizing relative returns on capital. However, faith in the store of value represented in the international reserve currency is highly strained, and capital flows show the lost confidence could send the dollar spiralling further. This fear is currently driving commodity markets and the gold sector. The question for equity investors is how best to play this bet against the greenback?

Currency and commodity exchange traded funds are direct investments that small investors can now trade. There are funds, too, that specialize in markets of commodity strength – which would include Canadian equities – or non-dollar denominated markets, especially Euro-zone. Emerging markets, too, are a magnet for capital wary of the declining U.S. currency. Even the stocks of multinational U.S. corporations, like Coca-Cola Co. (KO-N) and Caterpillar Inc. (CAT-N), that derive much or most of their earnings from foreign markets are considered dollar-hedging investments.

In this monetary environment Canadian investors are again sitting in a sweet spot thanks to the heavy commodity bias of our market. The mining sector is outperforming the broad TSX market by 26 per cent since mid-summer and is not yet showing signs of relinquishing its leadership role. Gold stocks are comparatively unspectacular – up by no better than the 11 per cent that the S&P/TSX Composite Index has advanced over the period. However, “black gold” producers – the energy sector – are showing some relative strength, outperforming the market by 7 per cent. Investors should start to look at the relative movement of these sector plays on the falling U.S. dollar, which fell another five per cent against a basket of currencies represented in the U.S. Dollar Index (DXY-I) over the past three months. In times of dollar instability there are appreciable but varying effects on the stocks of the producers of both hard commodities and oil.

During the last Stock Trends Bearish trend of the U.S. Dollar Index from the summer of 2006 to the trembling of the financial crisis two year later metal mining stocks were largely in a strong bullish trend. Gold stocks, though, were in a flat trend throughout the period. So, too, with energy stocks – although they rallied strongly when crude oil prices peaked and put a stranglehold on global economic growth. Investors can learn from the last stint of dollar devaluation: commodity inflation can be largely benign until it hits energy prices. The current market stock market performances of these sectors suggest a similar scenario. Investors can continue to weight in the bullish mining sector, but beware the return of triple digit crude oil prices.

While the relationship of gold and oil is typically a commodity focal point of investors worried about currency fluctuations, metal mining stocks are also showing the relative value of other commodity hard assets, like copper and iron ore. Generally, these industrial-use commodities do not have the allure of traditional stores of value found in precious metals, and move cyclically with the global economy. Certainly, the strength of the mining sector is a strong vote of confidence in the economic recovery likely in place. But investors are also responding to dollar weakness by bidding up these assets even further. Mining stocks will continue to attract investment flows while the greenback remains in a bearish trend.

The relative performance of metal mining stocks versus energy stocks took an about face at the end of last year in the pit of the financial crisis. This shows that investors started to favour these industrial commodities over the bleaker energy fundamentals. In fact, mining stocks have performed much better than gold stocks since the March stock market bottom. Charts of the price movement of the S&P/TSX Mining Index versus the price movement of the S&P/TSX Energy Index show just how favourably investors have fared in hard commodities relative to investors weighted in another dollar denominated commodity – crude oil. When compared on the same basis, investors in gold stocks have not benefited as well during this period of dollar weakness.

Saturday, October 17, 2009

Shippers leaving port?

A notable lagging group in the stock market’s recovery has been marine shippers. While the rest of the transport sector shows the wheels of commerce once again turning, the shares of shippers have been stuck at port, victims of excess capacity and uncertainty about global shipping demand. The Baltic Dry Index, a measure of international shipping prices for dry bulk cargoes, has recovered from its 2008 low, but still remains 78% shy of its high in the summer of 2008. Although this price weakness reveals that marine transporters are still in a difficult position, investors seem to be awakening to a hope that the demand part of the equation is improving for the shippers. After months under water, some of these shipping stocks are floating again.

The Claymore/Delta Global Shipping Index (SEA-N) exchange traded fund tracks the performance of marine shippers, both dry bulk, container ships, and tankers. Although lacking the trading volume and price momentum that fuelled a rally in the second quarter, the ETF is Stock Trends Bullish. Of particular interest, though, is the dry bulk shipping stocks. The share prices of carriers of crude oil and liquefied natural gas have been comparatively buoyed – the stock of Teekay Corp (TK-N), for example, is up 37% in the last three months and is hitting new 52-week highs. A resurgence of the depressed dry bulk shippers (transporters of raw materials like iron ore, coal, and grain) and container ships (generally carrying consumer and industrial finished goods) - is a signal that the global economic recovery is real, and not an illusion of economic wishful thinking. Judging by a nascent recovery of some of these stocks, investors are gradually betting that reality will be catching up with our prayers.

Although it is too early to declare a solid shift in trend for the group, the appearance of certain dry bulk and container shippers in the Stock Trends filters for Weak Bearish stocks, as well as strong recent price moves suggests that investors should keep an eye on the progress of their developing trends. Among stocks currently alerting of trend changes are Seaspan Corp. (SSW-N), TBS International Ltd. (TBSI-Q), Paragon Shipping Inc. (PRGN-Q), and DryShips, Inc. (DRYS-Q). Recent price moves by Diana Shipping Inc. (DSX-N), Danos Corp (DAC-N), and diversified shipper Frontline Ltd. (FRO-N) reflect a sign of hope, too. International Shipholding Corp. (ISH-N), Overseas Shipbuilding Group (OSG-N), Navios Maritime Holdings Inc. (NM-N), and Safe Bulkers, Inc. (SB-N) have been trending bullish since mid-summer – all adding to the encouraging signal coming from the shippers.

Most of these names may be unfamiliar to the average investor. However, they represent an important bellwether of the vitality of the global economy. Although the precariously fragile U.S. economy factors heavily in a clean bill of health, the global economy and international trade to emerging markets will be a key indicator of demand factors that will continue to drive the materials and industrial sectors. The same factors that drive up the price of raw materials will eventually make its way to filling the shipping capacity that has dragged on maritime haulers since the 2008 global collapse. When the Baltic Dry Index and the stocks of dry bulk shippers start to trend bullish investors can begin to rest more comfortably.