Alan's Finance Blog

The Quest for Dividends

The Most Important Part of a
Portfolio’s Total Return

Dear Sovereign Investor,

I still remember the day in the spring of ‘97 when I showed up at a NationsBank branch in Irving, Texas, to deposit a dividend check … in New Zealand dollars.

The bank teller laughed.

I had only recently opened my first overseas brokerage account – in Auckland – and the appliance-maker that I owned had sent me my first dividend check denominated in a foreign currency. Given that NationsBank was a super-regional bank, I figured it could handle such a check.

“Not going to happen,” the teller told me. The bank was simply unequipped to accept checks drawn on a foreign account.

Ultimately, I opened a bank account in New Zealand and tied it to my brokerage account, and never again had to worry about giggling tellers here in the U.S.

And now I tell my friends that story, not because of the challenges of dealing with foreign-denominated dividend checks in America, but because of the dividends themselves. For income-oriented investors, there’s a lesson here.

In a Low-Interest-Rate Environment,
Dividends are All the More Important

The thing about dividends is that historically they’ve been a significant part of the stock market’s total return through the years. It’s sometimes difficult to recognize that when you look across U.S. stock markets over the past decade because U.S. companies typically have been more interested in retaining their earnings for other purposes – usually acquisitions – rather than sharing the wealth with shareholders.

Still, over the past century dividends and dividend-growth have accounted for as much as 90% of U.S. equity returns.

And today dividends are all the more important because of the low-interest-rate environment we’re stuck in for at least another 18 months … or so says Ben Bernanke. Right now bank CDs, savings accounts and Treasury paper are all yielding 1% or less.

The S&P 500 yields about 2.4% – more than 20 times what you’d earn holding Treasury notes for the next year.

But you can earn even better than that by going overseas and owning the dividend-paying shares of big, safe blue-chip companies that trade in markets like Sweden, Australia, Singapore and Canada.

That’s what I’ve been doing. For 16 years now, I’ve been operating from a host of overseas brokerage accounts, and I’ve learned firsthand that foreign companies are far-more likely to pay dividends to their shareholders. Equally important, they’re much-more likely to offer larger payouts.

Alongside the fatter dividends, you also gain foreign currency exposure. As the U.S. dollar weakens, the value of the dividends you receive is even greater in dollar terms, boosting your income even more.

Here’s an example of what I’m talking about…

Swiss insurance giant Zurich Financial, back in May 2001, paid its shareholders a dividend of 17.25 francs. A decade later, in April 2011, it paid shareholders a dividend of 17 francs. Not much changed really … until you look at that dividend in currency-adjusted terms.

In 2001, the dividend amounted to $9.72.

In 2011, a slightly smaller dividend amounted to $19.37 – a massive 105% leap, as you can see it in the chart below.

That was all thanks to the ever-weakening U.S. dollar. As the greenback lost value to the far-stronger franc, the dollar value of Zurich Financial’s dividends soared.

Earn 10% in a Safe Danish Stock

Just recently I began compiling a list of the highest-yielding stocks in 22 markets around the world. I’m doing this to get a feel for global yield these days. So far I’ve found nearly 220 stocks yielding more than 5%. Many yield more than 10%.

And remember, these are blue-chips, stocks that are constituents in the local version of a Dow Jones Industrial Average that exists in every country.

One that I’ll tell you about today is TDC A/S …

TDC is a Danish telecom company with operations in landline and wireless phone service, broadband Internet and pay-TV. It’s a market leader in all its segments.

And based on a likely range of expected dividend payments for 2012, the company is yielding between 9% and 10.8% at current prices.

In May it snapped up low-cost rival Onfone, strengthening its leading share of the domestic Danish market. In so doing, it also changed market dynamics to TDC’s advantage.

Prior to the acquisition, Onfone’s traffic had been running across another company’s network. With its purchase, however, TDC has undercut that competitor by moving Onfone’s traffic onto the TDC network, effectively pilfering the competitor’s revenue stream. The upshot is that the Onfone purchase has quieted competitors and will likely force consolidation among smaller telecom companies so they can better match up against TDC in the future.

For TDC shareholders, the Onfone deal will allow it to raise prices a bit, strengthening the earnings and bolstering the company’s hefty dividend payout.

At the moment TDC trades for about 45 Danish krone (US$8.47). The shares are worth closer to 55 krone (US$10.35). So you have a potential gain of 22% in the shares. On top of that, you get the chunky dividend for an all-in return for 2012 in the 30%-plus range.

And you get the ongoing dividend growth of a major telecom player in a safe currency in northern Europe … plus the likely strengthening of that currency against the U.S. dollar over time. Indeed, over the past decade, the krone has gained about 50% on the greenback.

The shares trade on Nasdaq OMX Nordic under the symbol “TDC.” Any brokerage firm that provides access to OMX Nordic will be able to trade the shares.

Until next time, keep a global view … and don’t overlook the dividends.

Jeff D. Opdyke
Editor, The Sovereign Individual

A Way to Profit from Big, Unpredictable Market Moves

In chess, it is said that you need to think three moves ahead.

I’ve played a lot of chess in my day, and I can tell you this is easier said than done. Just when I thought I’d figured out my opponent’s next move, he’d change things up on me.

I baited him once with my bishop. Instead, he took my pawn. It was an unexpected variable that redefined the outcome of the game.

I quickly learned that it’s much more important to develop strategies that can improve your position rather than trying to predict potential moves.

Investing is a lot like chess in that way.

If you think an asset will go up in price you buy it. If you think an asset will go down in price you sell it.

But what happens when you expect the price of an asset to move big… you just don’t know if it’s going to explode or go in the tank?

That’s the situation commodity investors find themselves in today. With all of the volatility in the markets these days, identifying how a commodity’s price will swing is difficult to pinpoint.

But there is an easy and safe strategy savvy investors can use to profit – even if you don’t know where the market is headed.

History Tends to Repeat Itself

Markets tend to react similarly to technical factors over time. Often, these signals give traders and investors clues as to what triggers an asset’s price to move up or down.

Market volume (the number of trades) and open interest (the number of open positions), for example, can influence markets. When markets become too overbought, they tend to correct and go down. When markets become too oversold, they tend to correct and go up.

That’s why watching technical indicators is so important. It keeps you one step ahead of the pack and puts you in a position to profit.

I didn’t realize the importance of technical indicators until I’d been trading for a number of years. That’s mainly because there’s much more information available today than there was three decades ago.

I relied almost exclusively on fundamental analysis. Understanding how markets operate fundamentally is one of the most effective indicators of an asset’s future price movement. A severe drought, for example, could affect this year’s grain harvest. Tighter grain supplies will likely lead to higher grain prices. Or a transportation snafu can affect an entire market because of late delivery.

But if there’s one thing I’ve learned throughout my 30-year career, it’s that…

Fundamentals Are Always Changing

When my opponent took out my pawn instead of my bishop, it completely altered the way I played the rest of the game.

The same is true in investing. A macro event like the debt crisis in Europe or the economic slowdown in China can drastically change underlying market fundamentals.

Even if the long-term fundamentals of a market are bullish, these macro events can create unexpected volatility in the short term that affects the direction of an asset’s price.

These events are inherently unpredictable.

So, as a trader, what can you do to profit from a big move you know is coming… whether it goes up or down?

Options.

With options you can make money if the market moves dramatically up or down. By using a long volatility position, you’re making a simple bet that the market will move with fury in either direction.

It involves simultaneously buying both a call and a put option. If the market moves significantly higher, the call option will make more money than the put option loses. The trade will be a winner.

If the market moves significantly lower, the put option will make more money than the call option loses. The trade will be a winner.

It’s a strategy that works. Here’s how…

Taking a Long Volatility Position in Crude Oil

The whole world watches crude oil prices. This commodity is a key benchmark that reflects the global economic climate. Crude is also produced in some of the most volatile countries in the world.

Fears of a double-dip recession in the U.S., debt problems in Europe and concerns that China is experiencing a slowdown in growth have caused crude oil prices to fall from a high of over $115 to a low of just under $75 a barrel this year.

A further deterioration in the global economic situation could cause prices to plummet further as demand for the commodity plummets. Oil traded as low as $32.50 in 2008 during the housing and banking crisis in the U.S.

On the other hand, heightened tensions between the major oil-producing countries could cause crude oil prices to skyrocket. Oil traded up to $147 in 2008.

Without a crystal ball, we can’t predict where oil prices will head over the coming months.

March crude oil futures traded on the NYMEX are currently priced at $87 a barrel. These futures have traded in a wide range between $100 and $75 over the past three months. Technical indicators are not telling us much at this point. Crude oil is neither overbought nor oversold, and it has very little momentum at current prices. Volatility, however, is high. This indicates that traders are expecting a big move, but they are not sure which way!

In this situation, a commodity options trader could purchase an at-the-money call and put option, called a long straddle. If you were to buy, say, a March 2012 NYMEX Crude Oil $87 straddle, it would cost around $17. Let’s take a look at an illustration of this long straddle on NYMEX crude oil futures:

How to Profit If Crude Oil Moves Up or Down

Long straddles make money if the market moves by more than the premium that is paid. That means this position becomes profitable if NYMEX crude oil is above $104 (87 + 17) or below $70 (87 – 17) by the expiration date.

Every dollar above $104 or below $70 would be a profit to you.

In options trading, using a long straddle when you don’t know where the market is headed, but you know it’s going somewhere, will make you a winner.

Happy Trade Hunting!

Andy Hecht

Gold Rallies to New 2010-High as Investors Doubt Effectiveness of the Bailout Plan

Comex gold price rallies to a new 2010-high at 1219.4, one more step closer to record high of 1227.5 made in December, as fears over sovereign crisis resurfaces. Moody’s said it may cut Greece’s rating to ‘junk’ in the coming month amid ‘dismal’ economic prospect. Silver also grinds higher to 18.6 while PGMs reverse gains.

Risk assets’ massive relief rally loses steam as investors worry that the stability package may not be sufficient to contain European sovereign crisis. Market sentiment is further dampened after receiving strong Chinese inflation data as it signals more tightening. WTI crude oil price plunges to 75.6 in European session while Brent crude falls below 80 again.

Growth in China remained robust in April. Although industrial production missed market expectations and expanded +17.8% y/y, CPI soared +2.8% y/y, the fastest pace in 8 months. Despite the government’s policy to curb lending, property prices rose +12.8% y/y while new lending also exceeded consensus and reached RMB 774B.

While the Chinese government aims to keep inflation at 3%, recent data shows that it’s hard for this target to be achieved. Escalated inflationary pressure indicates more tightening measures are needed. It’s likely the government will resume RMB appreciation soon, probably in June.

Crude oil imports rose to 21.17M tons in April. With exports remained sluggish, net imports reached a record high of 20.98M tons during the month. However, there are concerns that demand will slowdown as China accelerates tightening.

In its monthly report, OPEC upgraded its global demand forecast modestly. The organization controlling 40% of oil in the world expects demand will rise to 85.38M bpd in 2010 from 84.4M bpd last year. This was slightly higher than last month’s forecast of 85.2M bpd. According to OPEC, China has been among the main drivers behind oil demand growth so far this year, which should continue for the rest of the year. On the supply side, non-OPEC supply will rise to 51.7M bpd, compared with 81.53M bpd projected in April. This signals less oil is needed from OPEC.

Demand/supply in oil market is again in focus and analysts anticipate US crude inventory rose +1.1 mmb in the week ended May 7 with Cushing stocks surging for another week. Gasoline and distillate stockpiles probably climbed +0.8 mmb and +1.3 mmb, respectively. American Petroleum Institute will release its estimates after market close today.

Source: Oil n Gold

Gold Tumbles as China is Uninterested in IMF’s Sales

Crude oil price continues sliding in European morning with the front-month contract extending weakness to 78.3, after a -1.8% Tuesday. Investors remain worried about the unexpected decline in US consumer confidence.

After of Bernanke’s Testimony, the data in focus is Eurozone’s industrial new orders which rose +0.8% m/m in December, compared with a contraction of -1% as forecast by the market. On annual basis, the reading expanded +9.5% following a -0.6% decline in November. In Germany, Gfk consumer confidence slid to 3.2 (consensus: 3) in March from an upwardly revised 3.3 in February.

The slightly stronger-than-expected data help recouping some of the losses the European stock markets incurred earlier in the day. Given the strong direct correlation between stock market and oil, we expect this should give some support to oil price.

The euro also recovers modestly against USD, although it stays at a 9-month low. The rebound is probably due to market expectation that Fed Chairman Ben Bernanke will reiterate the central bank’s accommodative monetary stance in the congressional testimony. Bernanke will likely restate that the Fed will keep the policy rate at 0-0.25% for an ‘extended period’.

A newspaper in China reported that an official from the China Gold Association said the county is unlikely to buy gold from IMF. ‘It’s not feasible for China buy the IMF bullion, as any purchase or even intent to do so would trigger market speculation and volatility’. Rather, the official stated China will increase gold reserves by acquiring gold mines abroad.

The news is disappointing as the market had hoped some central banks or official sectors will absorb IMF’s remaining gold sales of 191.3 metric tons.

Gold price plunges with the benchmark contract breaking below near-term support at 1100. Currently trading at 1190.5, the yellow metal has fallen for a 3th consecutive day.

Source: Oil n Gold Report

Crude Oil Remains Supported in European Morning

Crude oil continues to trade around 71/72 while gold hovers around 1070/1075 in European morning. Stock markets and the euro also stabilize after the slide last Friday.

Oil demand in China looked robust in 2009. According to the International Energy Agency (IEA), the apparent demand (refinery output + net oil product imports) rose +1.6% yoy in November. While the December reading may even be stronger, investors should beware that the impressive performance has been largely driven by jet fuel/kerosene, naphtha and ‘other products’. Moreover, China has turned from a net importer to a net exporter of gasoline and diesel in 2009. Rapid expansions in refinery capacities have raised concerns on fuel surplus.

China is expanding the refinery capacities at a rapid rate. For instance, a new JV by Sinopec, ExxonMobile, Saudi Aramco and the Chinese government in Fujian will more than triple original capacity. Together with the fact that domestic demand will continue to lag behind capacity addition, China’s reliance on oil product imports.

In 2011, we expect china’s demand for crude oil will remain strong. However, as long as the pace of refinery expansion and operation rates remain high, refinery margins will remain suppressed. Moreover, until domestic oil product demand in China catches up with refinery production, the country will continue exporting refinery products, thus pressuring global refinery margins.

We have a relatively light calendar this week. The US will release the monthly budget statement for January later today. Consensus forecasts widening of deficit to -$70B in January from -63.5B the same period last year. Retail sales will be released Tuesday. The report will probably show modest increase of +0.3% mom in January. Sales excluding autos should have grown more strongly. The BOE will publish the quarterly inflation report Wednesday while the Eurozone will release preliminary results for 4Q09 GDP.

Correlation Between Oil and Stock Markets Rises Again

Although oil prices stabilize after tumbling Thursday, the near-term outlook remains weak. The front-month contract of WTI crude oil price is hovering around 73 in European session as stock markets continue to fall. The chart below shows that the correlation between crude oil price and equities has surged again since mid-January.

Natural gas storage dropped -115 bcf to 2406 bcf in the week ended January 29. The decline was less than market expected and widened the difference between current inventory and 5-year average to 6.6%. Gas price slumped after the disappointing result but managed to close flat at 5.416.

Gold price extends the decline to 1050 after the support at 1074/75 was broken. While risk is to the downside in the near-term, cheaper gold price can attract buyers from central banks, especially those in emerging economies.

PGMs’ correction is steeper than gold as they are more leveraged to global economic recovery. Moreover, massive liquidation of long positions over the past few weeks is also a reason for the sharp fall in recent days. Platinum palladium has lost -6% and -11% respectively in this week’s broad-based selloff.

Stock markets slump in both Asian and European session Friday as investors remains worried about debt crisis in the Eurozone and employment outlook in the US. In Asia, the MSCI Asia Pacific Index slipped -2.6%, the biggest single-day decline in 10 weeks. In Japan, Nikkei 225 Stock Average dropped -2.9% to 10057. Strength in Japanese yen dampens export markets in the country. Hong Kong’s Hang Send Index plummeted -3.3% to 19665, the first close below 2000 since September 2009. Benchmark indices for Taiwan and Korea also fell more than -3%.

In Europe, stocks dip for a 3rd day amid concerns about fiscal problems in Greece, Spain and Portugal. Germany’s DAX Index slides -1.6% to 5446 while France’s CAC 40 Index loses -2.6% to 3595. In the UK, the FTSE 100 also drops -1.8% to 5046.

The markets will likely move around current levels ahead of the US payroll report.

Renewed Concerns on European Debt Defaults Weigh on Risky Assets

Investors dump risky assets amid renewed concerns about sovereign default risks in European countries. In Greece, although the government’s plan to reduce deficit received support from the European Commission, it is opposed by local unions, indicating difficulties in implementation of the measures.

There are signs that the worries have been spread to other European countries. Stocks and bonds in Spain, Portugal and Hungary plummet amid worries that the governments may not be able to fund the heavy debts.

The euro dives to 1.3849 against USD, a level not seen since July 2009. High-yield currencies, such as AUD and NZD, also plunge after releases of disappointing economic data.

Commodities weaken as the dollar strengthens. The benchmark contract for gold slides -0.8% to 1103 in European session, following a -0.5% dip on the previous day. In our opinion, gold should benefit in the long-run of sovereign risk concerns persist. In fact, other than these small European countries, the US and the UK are also bearing heavy budget deficits. Investors should later realize that USD is not a safe haven as the US is seeking to expand stimulus measures which will result in a bloated budget deficit of $1.6 trillion this year.

Released Tuesday, the weekly financial statement of the Eurosystem indicated one of the Eurosystem central banks purchased gold, contributing to 1M euro increase in gold and gold receivables reserve. At the same time, sales of gold were minimal (below 2 metric tons) since the start of the 3rd CBGA on September 27, indicating official demand for gold remains stable.

We continue to see capitals flowing into US PGM ETFs. As of February 2, physical holdings of platinum surged to 244.9K oz, up +14% from the prior week. Correspondingly palladium holdings were flat at 399.9K oz, possibly a pause after a 40 times increase since the launch of the ETF.

Investment in ETF helps tightening supply of the metals as it’s physically backed. According to Johnson Matthey’s estimates total platinum supply was 6055K oz while demand was 5915K oz in 2009. During the same period, platinum holdings in platinum ETFs was around 910K oz, around 15% of total supply and demand. For palladium, total supply and demand were 7175K oz and 6520K oz, respectively, in 2009. Total holdings in palladium of 1.3M oz represents 18% of supply and 20% demand last year.

Launch of PGM ETFs should not end here. Rather, it’s just the beginning of a new wave of PGM ETFs. In Japan, Osaka Securities Exchange will list an ETF tracking platinum futures contract, together with an ETF tracking gold futures, in mid February.

Despite slump in 2009, autocatalyst remains a major source of demand for PGMs. Anticipated recovery in auto sector should help tighten the market further. US auto sales surged +12% yoy in January to 10.78M units. Although Toyota’s recall crisis caused a plunge in its US sales to the lowest in 10 years, it should not have much impact on the overall outlook of auto market. China surpassed the US in terms of car sales and became the biggest auto market in 2009. Many auto giants expressed their interests in focusing on China, as well as other countries in Asia, this year. Industry experts forecast Chinese auto market will grow as much as 15% this year while Volkswagen, the largest car maker in Europe, announced plans to raise sales of cars, sport-utility vehicles and vans to 10M units in India and China this year.

Robust growth in auto sake also boosted fuel demand. In 2009, auto sales increased +46% yoy, triggering apparent demand for oil by +3.7%. According to China National Petroleum Corp (CNPC) apparent oil demand may rise more than +5% to 427M metric tons in 2010, in which gasoline demand will surge +7.8% to 72.2M metric tons and diesel consumption will grow +7.7% to 149.7M metric tons.

Energy prices continue to fall. WTI crude oil price slips to 76.2 (-1%), while both of heating oil and gasoline prices are down -0.7%.

Crude Rebounds as Strong European PMIs Halt USD’s Rally

Crude oil rebounds to 73.2 in European morning in tandem with the equity market as strong manufacturing PMI readings in European countries boosted sentiment and buying interest in the Euro. The White House’s spending plan which will increase the country’s deficit to $1.6 trillion made investors worry about USD. Moreover, cancellation in ceasefire in Nigeria raised concerns about supply disruption in the region. However, we believe these triggers will only have short-term impact.

Major European countries reported better-than-expected PMI for January. In Switzerland, the SVME-PMI improved to 56 in January (consensus: 55.4) from 53.7 a month ago. In the Eurozone, the PMI is revised up to 52.4 in January from flashing reading of 52. Both the euro and the Swiss franc rebound against USD after tumbling last week. Unfortunately, the pound’s slump continue despite an unexpected improvement in PMI to 56.7. The market had anticipated a retreat to 53.9 from 54.6 in December. Sterling dives to a 1-month low of 1.585 against the dollar as the market forecasts the BOE will announce to pause the asset purchase program even the UK economy remains fragile.

Today, the US will release the budget plan which likely shows the nation’s budget deficit will reach a record of $1.6 trillion in the fiscal year ending September 30 before reducing to $1.3 trillion in fiscal year 2011. In order to stimulus economic growth and create job opportunities, the government will be spending $3.8 trillion.

In 2009, USD was under heavy selling pressure because the country printed money as a means to stimulate growth. Investors even speculated the euro or a basket of currencies would be replacing the dollar as the dominant reserve currency. However, such speculation diminished recently, especially the Greek fiscal problem caused dumping in the euro.

Last week, MEND, the main militant group in Niger River delta declared to end ceasefire and resume attack in the region’s oil facilities as the government failed consider the group’s demand for ‘the control of its resources and land’. The Niger delta has been facing militant attacks since 2006. Between 2006 and 2009, the country’s oil production has been reduced -25%.

Gold price changes little in European morning although USD halts its rally. Within the precious metal complex, gold has probably lost its appeal to platinum and palladium. For gold price to rally strongly, we may need to see more news about central banks buying the yellow metal and rising inflationary pressure.

Platinum and palladium hold above last week’s lows and rebound. While platinum edges +0.7% to 1519, palladium soars +1.2% to 420.

Source: Oil n Gold

Weekly Fundamental Outlook for Energies and Metals – Worries about Contagious Sovereign Risk Damped Sentiment

Macroeconomic events were the focus of last week and strength in USD put commodity prices under pressure for the second week. The USD index gained +1.5% last week as concerns about sovereign default triggered selloff in risky assets and demand for safe USD and JPY. Reuters/Jefferies CRB Commodity Index slid -3.6%.

Although the Greek government outlined a 3-year plan to cut its deficit, currently at over 12% of the country’s GDP, to below 3% of GDP as required by EU, the market doubted its effectiveness. Greece’s 5-year and 10-year government bond yields rose +12.4% and+14.95, respectively. At the same time, the 5-year and 10-year credit-default swap surged to 3.73% and 3.4% respectively last week. These suggested investors are increasingly concerned about the ability of the country to contain its debts without helps of EU and other countries.

At the World Economic Forum in Davos, the People’s Bank of China reiterated its goal as to curb inflation and to maintain stable RMB. Although the government said it will ‘continue with current accommodative fiscal and monetary policy’, the market still expect it will step up the tightening policy. If China is to limit lending and unwind the stimulus measures, it’s definitely harmful for global economic recovery. China’s economy expanded +10.7% qoq in 4Q09. The IMF forecasts the country will continue to lead world growth this year.

In the January World Economic Outlook, the world lender raised its forecasts on global GDP growth to +3.9% in 2010, compared with previous estimates of +3.1%, se driven by robust growth in emerging and developing economies. China will continue to be the locomotive with annual growth rates of +10% this year.

US GDP expanded +5.7% qoq in 4Q09, the strongest pace in 6 years, with inventories contributing +3.4% to growth. Although the stronger-than-expected reading lifted commodity prices, gains were soon erased due to lack of follow-through and strength in USD.

Other events happened last week include FOMC and RBNZ’s announcements to keep their policy rates unchanged, Obama’s first State of Union address in which he stated job creation will be the number 1 priority in 2010 and Bernanke’s confirmation for a second term as the Fed Chairman.

Crude Oil

Despite brief rebound to 74.82 after release of strong USD GDP, crude oil price dived to 1-monht low at 72.43 amid rally in USD. The benchmark contract ended the week at 72.89, losing -2.2% on weekly basis and recorded the third consecutive weekly decline after surging to 83.95, the highest level in 15 months, in the beginning of January.

Fundamentals in the US energy market remain weak. The US Energy Department reported crude oil inventory dropped -3.89 mmb to 326.7 mmb in the week ended January 22. Cushing stocks also drew-0.69 mmb, the 5th consecutive weekly decline. We believe the main reason for the huge decline in crude stocks was the closure of the Houston Ship Channel, which serves the largest US petroleum port, shut for 2 days because of fog. It was reopened on January 21. Also, the oil-tanker spill in the Sabine Neches Waterway has led refiners to cut back production. We expect to see another draw next week as the oil spill is still impacting imports.

Both gasoline and distillate rose +1.99 mmb to 229.4 mmb and +0.36 mmb to 157.5 mmb respectively. Demand for gasoline edged slightly high on weekly basis but the level at 8.619M bpd remained below last year’s level. Beware that last year’s demand was very weak as it was in the midst of the worst of economic crisis. Distillate inventory built modestly compared with market exception or a draw. Imports surged +142%, on weekly basis, to 0.658M bpd, the highest level never seen since 2006. Demand dropped -2.6% to 3.725M bpd during the week. The level was still -12.5% below last year’s level.

In coming few years, oil demand will be heavily relying on growth in Asian market. According to the International Energy Agency (IEA), preliminary data indicated that China’s total oil demand soared +16.4% yoy in November, driven by both government spending and supply disruption due to cold weather. Demand is anticipated to have increase +7.2% to 8.5M bpd in 2009, followed by a +4.3% rise to 8.8M bpd in 2010. China takes up almost 10% of world oil demand and that’s why market sentiment has deteriorated dramatically after China guided yields higher, increased required reserve ratio and limited bank lending. The market worried that the growth engine will lose momentum this year.

Other than China, India is another hot spot. Total oil demand probably rose +5.4% in 2009, followed by another +3% this year. Robust oil consumption in India was driven by gasoline demand which, in turn, was due to strong car sales.

Natural Gas

Settling at 5.131, natural gas tumbled -11.8% last week. Macroeconomic uncertainty, anticipation of warmer weather and a return to surplus were hurting gas price. According to the US Energy Department, gas storage dropped -86 bcf to 2521 bcf in the week ended January 22. At current level gas inventory was +120 bcf higher than the same period year and +87 bcf (+3.6%) higher than 5-year average. The benchmark contract for natural gas slid for 4 consecutive days from Monday to Thursday, losing almost -12%.

Rally in gas price over the past few weeks attracted more supply. Baker Hughes reported that the number of gas rigs rose to 861 units in the week ended January 29. This was the highest level since March 2009. The US Energy Department believes that supply disruption, driven by the huge plunge in rig counts during from mid-2008 to mid- 2009 will be reflected later this year.

Precious Metals

Although gold price seemed to have found temporary support around 1075, the benchmark contract slid -0.5% last week following a -3.6% decline in the prior week. Strength in USD and shift of demand to PGMs weighed on the yellow metal. In the near-term, gold should remain under pressure as the dollar will probably be boosted higher by sovereign risk problems in Greece. In fact, investors are very much concern about the Greek fiscal problem will be spread to other European nations. Greek bonds and CDS showed that investors are increasing worried that the EU will not assist the nation to come out of debts. The euro plummeted to as low as 1.3861, the lowest level since July 2009.While we believe the EU and IMF will eventually offer some kinds of financial supports to save Greece from going bankrupt, the problem will remain a drag for the euro, and hence gold.

Silver, a metal that is more leveraged to global economic recovery, was sold heavily over the past 2 weeks. Closing at 16.19, the benchmark contract for silver lost -4.3% last week, In fact, silver has been in a downtrend and has corrected -12.3% over the past 3 weeks.

Platinum also declined in tandem with other commodities. However, recovery over the past 2 days signaled near-term support was seen at 1483.1. Palladium showed similar pattern. Although the benchmark contract retreated -6.2% last week, buying interest emerged around 400/410. We anticipate stronger rebound next week.

Source: Oil n Gold

Weekly Fundamental Outlook for Energies and Metals – US/China Policy Uncertainty Weighed on Commodities

The commodity sector got hammered last week as investors worried that overheating in China and US’ bank proposal to curb risk-taking would reduce demand for higher-yield assets. The Reuters/Jefferies CRB Index dropped -2.1% to 275.56, the lowest level since December 22.

Crude Oil

WTI crude oil slid -2% to close at 74.54 Friday in reaction to US’ plan to limit trading banks. Energy demand in the US and China is also at risk of slowing down. The front-month contract plunged for more than -10% over the past 2 weeks.

The US President Barack Obama proposed restrictions on risk-taking at financial institutions. The plan includes limiting the size of financial institutions and to ban some ‘risky’ activities including proprietary trading and internal hedge funds. The news damped investments for risky assets such as commodities and equities.

Having waited for 5 months, investors received the CFTC’s proposal on positions limits on energy contracts (physically settled and cash-settled futures in light, sweet crude oil, Henry Hub natural gas, and New York Harbor gasoline and No. 2 heating oil) on January 14. The purpose of limiting positions is to curb speculations of large banks and swaps dealers in oil, natural gas, heating oil and gasoline markets.

According to the Commission, the aggregate limits are set by formula based on open interest. The AMC speculative position limit would be 10% of the first 25,000 contracts of open interest and 2.5% of open interest beyond 25,000 contracts. The single-month position limit, in turn, is set at 2/3 of the AMC position limit. The position limits would be calculated off of the prior year’s month-end open interest.

Only very bigger positions holders will be affected by the limits and the CFTC showed that 3 unique owners in crude oil market and 1 in the natural gas market were affected during the period from January 1, 2008 to December 31, 2009. However, more traders in heating oil and gasoline markets were restricted.

Apart from the policy side, fundamentals suggested crude oil price should remain within a range of 70-80 in the near-term. Released Thursday, the US Energy Department reported crude oil inventory drew -0.47 mmb to 330.6 mmb in the week ended January 21. Utilization fell to 78.4% for 81.3% but decline in demand was offset by higher reduction (-4%) in imports. Draw in distillate stockpile more than doubled consensus forecasts as extremely cold weather last week raised heating oil consumption. Demand rose +5.8% to 3.823M bpd while production plummeted -10%. Despite the draw, distillate inventory remained +17% above normal. However, gasoline stockpile rose +3.95 mmb to 227.4 mmb as driven by -1.5% drop in demand to 8.602M bpd.

Last year, rally in crude oil price hinged on robust demand growth in China. Indeed, demand in the country was strong as indicated by oil imports which gorse +1.6M bpd yoy in December. The Chinese government reported economy grew +10.7% yoy in 4Q09, the fastest pace since 2007 in 4Q09. For all of the year, the economy grew +8.7%, exceeding the official target of +8%.

However, the data did not send energy prices higher. Instead, the expansion raised worries about further tightening in the world’s third largest economy. We believe Chinese demand in the near-term may slowdown due to policy tightening. However, in the longer-term, imports will pick up again as underlying fundamentals in Chinese economy stays strong.

Natural Gas

After rising on Thursday and Friday, gas price added +2.2% last week. According to the US Energy Department, inventory drew -245 bcf to 2607 bcf in the week ended January 22, sending total gas storage -0.2% below 5-year average. Colder-than-expected weather in the US increased gas consumption. As weather returns to normal in coming weeks, we believe demand will reduce and so will supply. For most of the time In 2010, imports from Canada will weaken while production will be lower than last year as the impact of -60% decline (from peak to trough through September 2008 to July 2009) in rig counts feeds in. However, LNG imports will ramp up rapidly. Over the period of 2010 and 2011, LNG investments such as Yemen, Tangguh and Sakhalin projects will raise total capacity significantly.

Precious Metals

Gold price tumbled amid profit-taking and broad-based decline in commodities. The benchmark contract for gold plummeted -3.5% to close at 1090.8 last week. Although the yellow metal has fell -6.2% from recent high at 1163, we still see further downside risk, particularly as February and March are weak months seasonally.

PGMs slumped Friday. Platinum dived to 1521.1, the lowest level in more than 2 weeks, before recovery. The metal lost -3.2% over the week. Palladium ended the week with -1.7% decline. Price slipped to a 1-week low of 425 Friday before buying interest emerged. However, rebounds after the sharp fall indicates underlying demand for PGMS remain strong.

In China, imports for platinum and palladium grew +115.7% yoy and +215% yoy, respectively, in December. China overtook the US as the bigger auto market by sales in 2009. At the same time, it also surpassed Germany as the largest car exporter last year. With global auto market anticipated to recovery rapidly in 2010. We believe import s of PGMs for auto-catalysts will rise further.

ETF investments in PGMs remained firm last week. According to ETF Securities, platinum holdings in European and Australian Trusts pulled back to 433.2K oz (-17%) in the week ended January 2010. Holdings in the new US ETF surged to 149.9K oz during the period, from less than 10K oz in the first trading week. For palladium, holdings in European and Australian Trusts declined -4.7% to 648.2K oz while that in the new US ETF rallied to 209.9K oz. Holdings in the first trading week was also less than 10K oz. We improved fundamental outlook and strong ETF investment should boost PGMs prices this years.

The CFTC will hold further hearings in March to discuss about position limits on metal markets. We do not think this would dampen metal demands. As metals are non-perishable and easier to store, restrictions on financial markets will direct investors to physical market investment.

Base Metals

Speculations on further monetary policy tightening in China weighed on base metals and the complex recorded broad-based decline last week. Copper proved to be the most resilient metal in the complex with only modest drop of -0.5%. China trade data showed that net refined copper import rose +26% mom in December. At the same time, the country’s inventory slid -3.3% to 97308 metric tons from the previous week. These evidenced China’s demand for the metal stays strong.

LME contract (3-month delivery) for lead plunged -8% to close at 2237. Last, we saw rapid rise in lead production in China. Producers stockpiled plenty of lead scrap in 2008 amid weak price and they released the scrap to the market in 2009 as price recovered markedly. This had led to significantly increase in secondary production of lead. We believe the phenomenon will continue in the first half of 2010 but should turn better in the second half. Therefore, we should be prepared for further weakness in lead prices in near- to medium-term.

Source: Oil n Gold