Friday, August 31, 2012

Base metals mining companies look cheap - for a good reason

The link between stock valuation and base metals price has further broken down. There is a reason for this poor valuation. Costs are increasing and commodity prices are falling. Profits are being squeezed. BHP put appovals for $68 billion in new projects on hold with the dip in profits. Net income for BHP dropped by more than 50% from $13.1 to $5.5 billion over the last year. Spending plans are down with the decline in income. BHP is representative of the industry. There is limited money to be made in mining. The pricing power in coal, iron ore, and other base metals is non existent.

Consumer confidence as a good election indicator


Bloomberg has looked at a simple election barometer, the Conference Board Consumer confidence index. If the consumer confidence is high, the incumbent will win. If it low, the "throw the bums out" mentality will prevail. The switch point is at a reading of 95. Above 95 and you are safe. Below 95 and you should look for another job if you are the president. the sample is small but at a reading of 60.6 suggest that President Obama is in trouble. No wonder he does not want to talk about his economic record or the economy. 

The link between economic growth and confidence is positive, so the consumer confidence is a good proxy for the well-being of the US economy. Consumer confidence has been falling since February. It is higher than when Obama entered office and it is higher than a year ago. These are some of the few positives in the confidence numbers. The issue is whether  consumers have a long or short memory of 2008.

Thursday, August 30, 2012

Draghi - Die Zeit and exceptional measures

Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools. When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens. This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole.

-Mario Draghi  The future of the euro: stability through change in "Die Ziet"

Article has caused a market stir because it talks about exceptional measures by the ECB. however, the article is more important to because it lays out a pragmatism by the Draghi toward the Euro. The Euro should not be broken up and it should not be driven to full integration. There will be bumps in the road towards greater integration and this gradualism was recognized with the start of the Euro. 

There is room for continued gradualism in the current environment which is the policy approach that seems to be reasonable and constructive. Unfortunately, there is not road map to get to a more fully integrated fiscal situation.

Wednesday, August 29, 2012

Exchange rate regimes in one picture

This graphic presented in the The Big Picture tells the story of exchange rate regimes over the last 100 years. It is a nice reference. Some may argue that it is missing some details, but it still provides a good starting point for discussion.The exchange rate regime will be in further flux with the financial power of China rising. There is also further movement to satellite currencies that have strong balance sheets.

Friday, August 24, 2012

Corn ethanol crush and the Midwest drought

There is a crush margin between corn and ethanol. Corn will convert into ethanol and DDGs which can be feed to cattle as feed. This is not different from the soybean crush which converts beans into oil and meal.
Ethanol producers have shut production because the crush is not profitable
Corn ethanol crush  = 1 bu of corn = 2.8 gallons of ethanol 17 lbs of DDG’s; Gross Production Margin formula GPM  = (PDDG*.0085)+(Pethanol*2.8) – Pcorn
Current margin $1.59 = ( 294*.0085)+(2.626*2.8) - 8.26) lowest in years
Crush profit margin (ethanol – corn/2.8); now negative
Crush spread  (ethanol*2.8) – corn; now negative

We can look at current prices to determine the profit margins for ethanol producers. The numbers are not pretty.The gross margin is still positive put at some of the lowest levels in years. Production will hsutdown under these types of margins. The only saving grace is the production of DDGs.

Response of ethanol production to higher prices has been strong:
Corn consumption is down about 12% in the last two months
Ethanol production has fallen to 2-year lows; down 15% to 820,000 bpd
Ethanol stocks have fallen over 20% as refiners have drawn down inventories
Ethanol exports have decreased and imports have come from Brazil
Excess RIN’s have been used to meet refiner compliance