Credit deflation and the reflation cycle to come.

[Barnsey]

2 hours ago, sancho panza said:

The Fed cutting with UB at near record lows,wage inflation ticking over and GDP buzzing really goes to show how protecting the 1%'s assets is their raison d'etre

Not just about the USA though, a stronger $ is going to act as a violent accelerant for the global downturn underway, and they'll be forced to cut harder and faster later this year. 25bps just wasn't enough, and due to crazy lags (credit card rates still rising based on tightening from last year) if they wanted to get ahead they should have started cutting end of last year. I'm a big advocate of looking through the MAGA rhetoric and seeing the cracks appear. Chicago PMI shock number released earlier was a shock even for me. Employment/consumer confidence always last to know, also the obsession with 2yr/10yr inversion being needed, well if you look at the swap curve it's already hit very close to the 0 level where it always stops prior to recession. I think we're a matter of just a few months away now (Oct?).

Also, the dollar rally today has more than offset the weakening effect of the rate cut and earlier end of QT, so actually looks like they tightened today to the rest of the World 

[MrXxxx]

16 hours ago, Iamcynical said:

Great thread this one everyone. So now I need to ask a few questions if I may:-

I have a sizeable sum currently spread across two cash ISAs.

I also have an even more sizeable sum sat in cash across a few bank accounts.

I want to get it spread about a bit across funds/shares/ETFs whatever. 

I've got little confidence having it sat in sterling. 

I'm currently out of work so have time on my hands, so what I'm hoping you guys can help me on is what broker/whatever to use to do this investing ?

I've currently looked at HL and ajbell. Can anyone advise if these are good, good app etc ?

Thanks in advance !

In addition to others, if its all new I would recommend a) Monevators website, and b) reading at least one book (see `The Library` thread for reviews), my suggestion would be the book by Yoram Lustig.

[Democorruptcy]

17 hours ago, Festival said:

This is the link I mentioned yesterday to Brian Reynolds - I found it enlightening as to why the US market continues to go up despite worsening company fundamentals and the economy. He believes the individual states and mayor public pension schemes in the US are driving the stock market boom there, with its funds chasing a 7% plus return to cover unfund pension liabilities, then flowing into private credit funds who then lend to BBB rated corporations who then buyback their own shares leading to the stock market rising even though the economy and credit quality is deteriorating at the same time. He sees this going on for 3-5 years yet and a further 2 years from the UST 2-10 year yield curve inverting which I dont believe it has yet. Not sure this is my view but the scale of the funds flowing in to the markets via this route (before leverage is applied) in quite something. Worth a watch/listen if you have time.

He talked about money cycling into different asset classes suggesting it's commercial real estate this time. A bit on valuations:

https://www.bloomberg.com/graphics/2018-commercial-real-estate-bubble/

https://www.nar.realtor/blogs/economists-outlook/commercial-real-estate-prices-still-trending-up-in-2019-q1

[Festival]

23 minutes ago, Democorruptcy said:

He talked about money cycling into different asset classes suggesting it's commercial real estate this time. A bit on valuations:

https://www.bloomberg.com/graphics/2018-commercial-real-estate-bubble/

https://www.nar.realtor/blogs/economists-outlook/commercial-real-estate-prices-still-trending-up-in-2019-q1

He seems to be making the case which has been made elsewhere on here for a melt up - from the point of the 2 to 10 year yield curve inversion - via the use of increased leverage chasing riskier yields to keep meeting the requirements for 7.5% returns with commercial real estate being one route to achieving these returns. I agree with DB flow is key here - how does the tap get turned off and how do we know in time to change tack investment wise.

[DurhamBorn]

7 hours ago, Barnsey said:

Not just about the USA though, a stronger $ is going to act as a violent accelerant for the global downturn underway, and they'll be forced to cut harder and faster later this year. 25bps just wasn't enough, and due to crazy lags (credit card rates still rising based on tightening from last year) if they wanted to get ahead they should have started cutting end of last year. I'm a big advocate of looking through the MAGA rhetoric and seeing the cracks appear. Chicago PMI shock number released earlier was a shock even for me. Employment/consumer confidence always last to know, also the obsession with 2yr/10yr inversion being needed, well if you look at the swap curve it's already hit very close to the 0 level where it always stops prior to recession. I think we're a matter of just a few months away now (Oct?).

Also, the dollar rally today has more than offset the weakening effect of the rate cut and earlier end of QT, so actually looks like they tightened today to the rest of the World 

Agree Barnsey,Fed are behind the curve by a long way and cutting far too late,and too shallow.They are following the market with a lag and thats a mistake.Companies might have 6 months or less to get their debt profile right.Margins are going to go to the bone and clean out a lot of zombie companies and then the inflation begins.

[subutai80]

Fresnillo testing 2015 lows. Back then silver was approx £9.35/oz now approx £13.21/oz.

[sancho panza]

8 hours ago, Barnsey said:

Not just about the USA though, a stronger $ is going to act as a violent accelerant for the global downturn underway, and they'll be forced to cut harder and faster later this year. 25bps just wasn't enough, and due to crazy lags (credit card rates still rising based on tightening from last year) if they wanted to get ahead they should have started cutting end of last year. I'm a big advocate of looking through the MAGA rhetoric and seeing the cracks appear. Chicago PMI shock number released earlier was a shock even for me. Employment/consumer confidence always last to know, also the obsession with 2yr/10yr inversion being needed, well if you look at the swap curve it's already hit very close to the 0 level where it always stops prior to recession. I think we're a matter of just a few months away now (Oct?).

Also, the dollar rally today has more than offset the weakening effect of the rate cut and earlier end of QT, so actually looks like they tightened today to the rest of the World 

I'm still of the view the $ will weaken first and then strengthen as we head into the big kahuna.There's no way out of this wave,it's going to hit us.I'd like to think the Fed is picking how it enters the water but I've lost hope in Powell as this cut is straight from the Bernanke playbook.All Bernanke did was make the end recession even worse.

We could be entering recession now or it may take 6 months,with the way they readjsut GDP figures,we'll only know in the rear view officially.

here's the PMI pic and one from China

China: The July official manufacturing PMI ticked higher but remained below 50.

 

Source: The Daily Shot

1 hour ago, Democorruptcy said:

He talked about money cycling into different asset classes suggesting it's commercial real estate this time. A bit on valuations:

https://www.bloomberg.com/graphics/2018-commercial-real-estate-bubble/

https://www.nar.realtor/blogs/economists-outlook/commercial-real-estate-prices-still-trending-up-in-2019-q1

IYR has buzzed higher since 12/18 and for the life of me,given the way High St retail in the US has been pummelled,I was struggling to see why.

 

Then I read you second link and it dawned on me that like in the UK,the tertiary market may be seeing uplifts in activity by small scale landlords entering to bolster their pension or because the price only goes one way (in the bull market tradition).

Also worth noting from that second link that vacancy rates are quite steep at 11% so whilst outlook is positive to the author,it doesn't take a great mathematical brain to work out that a slight uptick in vacancy rates would take cap rates to record lows.

'According to REALTORS® who participate in the small market survey, cap rates in the small market continue to tend downward.  One reason may be that demand is moving towards suburban areas where commercial properties are less expensive. According to Real Capital Analytics, commercial prices in non-metro areas rose at a faster pace in 2019 Q1 than prices in the six major metro areas of New York, Boston, Washington DC, Chicago, Los Angeles, and San Francisco: in March 2019, commercial prices were broadly up by six percent in non-major markets compared to 4.5 percent in the six major metro areas.

Among property classes, vacancy rates were lowest in the multi-family market, at seven percent, followed by the industrial market, at eight percent. Retail and hotel properties had on average double-digit vacancy rates.

'

[sancho panza]

1 hour ago, DurhamBorn said:

Agree Barnsey,Fed are behind the curve by a long way and cutting far too late,and too shallow.They are following the market with a lag and thats a mistake.Companies might have 6 months or less to get their debt profile right.Margins are going to go to the bone and clean out a lot of zombie companies and then the inflation begins.

The debt deflation was baked in in 2007/8.Policy response from then just guarantees that the end result will be worse for the man on the street.On a short term view you and barnsey are both right possibly,but the Fed are treating the symptoms not the underlying illness.

[DurhamBorn]

9 minutes ago, sancho panza said:

The debt deflation was baked in in 2007/8.Policy response from then just guarantees that the end result will be worse for the man on the street.On a short term view you and barnsey are both right possibly,but the Fed are treating the symptoms not the underlying illness.

Fed cant treat the illness really SP because its political.Fed only control the liquidity in the economy.Government controls the rest.People blame the Fed for the money going to the 1%,but thats not their fault its the government.Government can tax Amazon 50% tomorrow,but they choose not to.Government can introduce mortgage laws capped at 3 times income no self cert etc but they chose not to.The Fed and the BOE look like the villains of the show but they are just the guy who sweeps up before and after the audience.Brown here in the UK caused rates to hit almost zero,not the BOE.

Iv never seen so much wealth around me here in the north.The amount of top cars etc and people on massive amounts of benefits is incredible.Its a different world to the 80s.The problem is the people in the middle paying for it all are being crushed.Pension taken away so that carrot gone.Job security mostly gone,house prices up even here to levels where servicing the mortgage is fine at these rates,but paying the capital off a distant dream for everyone but the most frugal and driven.

That is why the west has swung to popular leaders like Trump and Boris.Debt deflation is certain like you say.It can play out quick in a huge crash,or it can play out slowly as people and companies de-leverage,or the 3rd way,a quick shock,followed by a long de-leverage.I think the 3rd way is likely,and that governments will take up the slack.

As we know and repeat on here,for people and companies,free cash flow is going to be critical going forward.A reflation is pretty certain now as well after the debt deflation.Governments will have no choice.

[sancho panza]

18 minutes ago, DurhamBorn said:

Fed cant treat the illness really SP because its political.Fed only control the liquidity in the economy.Government controls the rest.People blame the Fed for the money going to the 1%,but thats not their fault its the government.Government can tax Amazon 50% tomorrow,but they choose not to.Government can introduce mortgage laws capped at 3 times income no self cert etc but they chose not to.The Fed and the BOE look like the villains of the show but they are just the guy who sweeps up before and after the audience.Brown here in the UK caused rates to hit almost zero,not the BOE.

Iv never seen so much wealth around me here in the north.The amount of top cars etc and people on massive amounts of benefits is incredible.Its a different world to the 80s.The problem is the people in the middle paying for it all are being crushed.Pension taken away so that carrot gone.Job security mostly gone,house prices up even here to levels where servicing the mortgage is fine at these rates,but paying the capital off a distant dream for everyone but the most frugal and driven.

That is why the west has swung to popular leaders like Trump and Boris.Debt deflation is certain like you say.It can play out quick in a huge crash,or it can play out slowly as people and companies de-leverage,or the 3rd way,a quick shock,followed by a long de-leverage.I think the 3rd way is likely,and that governments will take up the slack.

As we know and repeat on here,for people and companies,free cash flow is going to be critical going forward.A reflation is pretty certain now as well after the debt deflation.Governments will have no choice.

To be fair,you're absolutely right.I've hgihlighted one or two bits where you're bang on the money........I for one am guilty of misdirecting my ire at CB's rather than their enablers..It was Clinton repealing Glass Steagall that set the train in motion not Greenspan.The miscalculation of inflation is done by the ONS etc etc

I remember watching an hour long lecture by Elizabeth Warren on the US middle class getting crushed in 08/09,fine lady ,good brain(although I struggle to see how her solutions follow from her correctly identifying the symptom)) and all that's happened since 08 is that those same people have got crushed even more.

I've tried to expalin to my Remainer family that Brexit was about declining real wages and rising real rents so many times but they just want to obsess about a few lies politicians (how can anyone be surprised by that) have told.

The third way is the most realistic option politically and most likely given that a fair chunk of the bubble is in illiquid hosuing stock

 

 

 

On another matter,I'm running my slide rule over big oil & gas.I've wanted some Statoil for some time.   @Cattle Prod if you're around. and @Harley on the technicals??

 

[Harley]

1 hour ago, sancho panza said:

....and @Harley on the technicals??

Maybe a bit early to buy based on momentum.  Stochastic still below 20 and MACD still going down on both weekly and monthly charts.  Could have been caught out a few times recently with a couple of bounces. 

That said, one to watch as may turn soon as it approaches its post boom prices.  Nice 5%+ dividend, although I'd need to check the fundamentals.  Not sure why their price has been in freefall and whether the Norwegian Sovereign Fund declared divestments affected them.

Big picture, I'm liking the energy sector for my income portfolio and am feeling a bit better about BP technically since my post earlier this week.  Another to watch.  I would still like some exUK stocks so will add  Equinor ASA to my watchlist.

I've also been meaning to look at the smaller players, upstream, downstream and services in my search for yield.

BTW, I'm a big oil brat.  Quite an adventure.  Even lived on a refinery once so guess oils's in me blood, literally!

[kibuc]

New Gold Q2 results are in. Big miss on EPS, who would have thunk it? Rainy River still mining at loss, copper from New Afton keeping them aflost.

For 2020 this is hugely interesting, though:
 

Quote

• In addition to the current corporate hedging strategy for 2019, the Company has entered into gold price option contracts covering 168,000 ounces of gold production for 2020 that provides downside price protection of $1,300 with upside to $1,355 from January to June and $1,415 from July to December. Details of these contracts are included in the Company’s Second Quarter Financial Statements.

 

It might prove to be one hell of a move if we get the bust late 2019/early 2020 and gold drops with everything else. Still, I'd rather they focused on mining than suddenly playing the market roulette. I think they are already in enough trouble on that front.

[dgul]

12 minutes ago, kibuc said:

New Gold Q2 results are in. Big miss on EPS, who would have thunk it? Rainy River still mining at loss, copper from New Afton keeping them aflost.

For 2020 this is hugely interesting, though:
 

 

It might prove to be one hell of a move if we get the bust late 2019/early 2020 and gold drops with everything else. Still, I'd rather they focused on mining than suddenly playing the market roulette. I think they are already in enough trouble on that front.

It isn't market roulette.  Leaving their profits to the vagaries of the market is roulette.  They've fixed their gold price (and probably energy cost, though that isn't given) such that their profits are more secure.  This is exactly what the futures markets were invented for -- it allows them to focus on what they do best, mining, without having to worry (so much) about commodity price fluctuations.

[kibuc]

1 minute ago, dgul said:

It isn't market roulette.  Leaving their profits to the vagaries of the market is roulette.  They've fixed their gold price (and probably energy cost, though that isn't given) such that their profits are more secure.  This is exactly what the futures markets were invented for -- it allows them to focus on what they do best, mining, without having to worry (so much) about commodity price fluctuations.

Ups and downs are the natural part of any business. However, while NGD took an almighty beating when gold was down, they are signinging themselves out from any compensation when/if the gold recovers. Hedging is no less of a bet than just going with spot price, and AISC tend to go up along with spot price as workers demand higher compensations and companies turn to lower-quality ores which suddenly become economically viable. In that light they might be fixing their losses instead of profits. I'd expect a mining company to have much more expertise in digging ounces from the ground (admittedly, against their recent track record ) in the environment they know and control than in predicting future market moves, so sticking to one's guns sounds safer and more responsible to me.

[MvR]

Some more details from New Gold's financial statements about their hedging strategy.. a "collar" whereby they sell call options and buy put options with the proceeds.

http://s1.q4cdn.com/240714812/files/doc_financials/2019/Q2/Financial-Statements-Q2-2019-FINAL.pdf

 

Quote

 

(b) Copper price option contracts

In December 2018, the Company entered into copper price option contracts by purchasing put options at an average strike price of $2.50 per pound and selling call options at an average strike price of $3.00 per pound for 21,600 tonnes (approximately 47.6 million pounds) of copper production during 2019. The Company entered into these contracts at no premium and therefore incurred no investment costs upon initiation.

The call options sold and put options purchased are treated as derivative financial instruments and marked-to- market at each reporting period on the consolidated statement of financial position with changes in fair value recognized in other gains and losses. Realized gains and losses as a result of the exercise of the Company’s call and put options up to an amount not exceeding the Company’s production of copper pounds for the reporting period are recorded as an adjustment to revenue. The exercise of options on copper pounds in excess of the Company’s copper production for the reporting period are recorded as other gains and losses.

COPPER PRICE OPTION CONTRACTS OUTSTANDING

Copper call contracts - sold 10,800 tonnes July – December 2019 3.00 (0.5) Copper put contracts - purchased 10,800 tonnes July – December 2019 2.50 0.6

(c) Gold price option contracts

In December 2018, the Company entered into gold price option contracts by purchasing put options at an average strike price of $1,230 per ounce and selling call options at an average strike price of $1,300 per ounce for 192,000 ounces of gold production between January 2019 and December 2019. In the second quarter of 2019, the Company further entered into gold price option contracts by purchasing put options at an average strike price of $1,300 per ounce and selling call options at an average strike price of $1,355 per ounce for 72,000 ounces of gold production between January 2020 and June 2020 and by purchasing put options at an average strike price of $1,300 per ounce and selling call options at an average strike price of $1,415 per ounce for 96,000 ounces of gold production between July 2020 and December 2020. The Company entered into these contracts at no premium and therefore incurred no investment costs upon initiation.

Consistent with the accounting treatment of the copper price option contracts described above, the call options sold and put options purchased are treated as derivative financial instruments and marked to market at each reporting period on the consolidated statement of financial position with changes in fair value recognized in other gains and losses. Realized gains and losses as a result of the exercise of the Company’s call and put options up to an amount not exceeding the Company’s production of gold ounces for the reporting period are recorded as an adjustment to revenue. The exercise of options on gold ounces in excess of the Company’s gold production for the reporting period are recorded as other gains and losses.

GOLD PRICE OPTION CONTRACTS OUTSTANDING

Gold call contracts - sold 264,000 oz July 2019 – December 2020 1,300 – 1,415 (30.8) Gold put contracts - purchased 264,000 oz July 2019 – December 2020 1,230 – 1,300 3.4

 

 

[ashestoashes]

46 minutes ago, Harley said:

BTW, I'm a big oil brat.  Quite an adventure.  Even lived on a refinery once so guess oils's in me blood, literally!

cracking story Harley

[DurhamBorn]

Harmony have used zero cost collars and caps for years,if you read their results youl see the tables.They will likely have to take a hit on them in the next results if they mark to market but still served them very well over the years.These companies operate where currencies swing hard as does inflation and hedging around 30% ensures they arent put out of business during a downswing.Frank Abbot the CFO of Harmony has ran theirs,and i consider him one of the best mining CFOs out there.I sold a lot of Harmony simply as i had made over 50% on them and i had a very large holding,to be honest too large and i shouldnt of gone as large,but it was my no1 rubber band stock and i couldnt resist.

Good results from BAT today.I tagged the bottom on them around £24 so i have offloaded some today.Together with getting back into Imperial i had too large a holding in the sector so sold 40% of my BAT and will sell 30% of my Imperial if they hit £24.Hold the rest for the long term and hope they snag the cannabis market going forward.

 

[reformed nice guy]

Does anyone have a view on Evraz? They look like they could be a good play for a reinflation cycle.

Low + decreasing debt, PE of 4.74 and a 14.2% div yield.

https://www.evraz.com/en/investors/reports-and-results/highlights/#financial-results

[CVG]

^ EVRAZ

 

I can't speak about their prospects but I like them. They form 4.1% of my holdings and have made me 60%p.a in capital growth and dividends since I have held them. They currently show up as having a fwd PE of 7.6 and fwd Yield of 9.3%.

Of note includes Current Ratio of 1.5 (good), Piotroski F-Score of 8 (good) and Price to Free Cashflow of 5.44 (good). 

Moody's upgraded their outlook to positive a few weeks ago: http://www.moodys.com/page/viewresearchdoc.aspx?docid=PR_404411&WT.mc_id=AM~UmV1dGVyc05ld3NfQU1QU19TQl9OUl9DVl9SYXRpbmdfTmV3c19BbGw=~20190705_PR_404411

DYOR, but buy them. Buy them today while they're down 2.4% (every bit helps (me)!). Half-year earnings release next week.

[sancho panza]

1 hour ago, reformed nice guy said:

Does anyone have a view on Evraz? They look like they could be a good play for a reinflation cycle.

Low + decreasing debt, PE of 4.74 and a 14.2% div yield.

https://www.evraz.com/en/investors/reports-and-results/highlights/#financial-results

Balance sheet loaded with debt.assets include 864mn in goodwill.Debt to equity might be even worse if they tried to sell the plant for what it's sat at the balance sheet at.-Dyor natch

Chart has it up 500% since 2016

https://www.investing.com/equities/evraz-balance-sheet

[sancho panza]

3 hours ago, MvR said:

Some more details from New Gold's financial statements about their hedging strategy.. a "collar" whereby they sell call options and buy put options with the proceeds.

http://s1.q4cdn.com/240714812/files/doc_financials/2019/Q2/Financial-Statements-Q2-2019-FINAL.pdf

 

 

Looks like someone's done their maths on what they need to survive..Thanks for digging that out MvR.

[leonardratso]

cna's on a mission to zero by the look of it.

[leonardratso]

heres a nice bitcoin chart to break the monotony;

[Craig]

5 minutes ago, leonardratso said:

cna's on a mission to zero by the look of it.

Ha! Just ploughed into another batch of CNA.

Falling knife catching, by the looks...

[Don Coglione]

Hargreaves Lansdown's FTSE100 heat map is looking particularly colourful today:

https://www.hl.co.uk/shares/stock-market-summary/ftse-100/heat-map