Marc Faber's June Outlook: Deflationary Collapse or Inflationary Bust

Marc Faber is out with the latest issue of his famous Gloom, Boom, and Doom Report which is always a must read for serious investors. Unlike most of the other talking heads, Faber has an excellent track record. He predicted the top in the equity markets in Nov 2007 and caught the bottom in March 2009, making his subscribers a lot of money. Let's see what he is up to in June 2011:

1. Stocks--Faber is still cautious on equities, believing that a more significant market correction is around the corner. However, shorts should beware because they are fighting the Federal Reserve. If you have to be in the market, stick to consumer staples like MO, JNJ, KO, PG, etc. For the ultimate contrarian investor, take a look at some select housing stocks (TOL,LEN, KBH), but only if you have a high risk tolerance.

2. Bonds--Likes Treasuries for a trade. Says 10 year yields could fall to 2.5% during a stock market correction. Longer-term Faber hates Treasuries and dismisses Albert Edwards call for sub 2% yields for the 10 year.

3. Commodities--Stay away from industrial commodities. Global growth is slowing, which means weaker demand and lower prices.

4. Gold--Still likes gold and recommends a gradual accumulation despite market fluctuations. Says that longer-term gold can only go higher because of negative real interest rates. Even a deflationary collapse is unlikely to hurt gold because the Fed will simply debase the dollar to get nominal prices higher. If the Fed gets it right and successfully re-inflates asset prices, then inflation will be in the double-digits, which would be bullish for gold.

5. Dollar--Any temporary bounce in the dollar (say 10-20%) would be met with more money printing by Bernanke and Co. This factor limits any sustainable gains for the dollar. In fact, the only scenario where you could see a much higher dollar would be nothing short of a worldwide financial collapse.

5. Macro--Faber says it is very hard in this environment to predict what will happen in the markets. The Fed's manipulation of asset prices has caused large distortions. However, one thing is clear: the Fed will not let the markets fall too much. This is why Faber thinks the stock market will trend higher (in nominal terms) or at least trade sideways for the forseeable future. 

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Marc Faber's June Outlook: Deflationary Collapse or Inflationary Bust

Anthony Ward's Cocoa Speculation May Be In Trouble

   As we speculated earlier, trying to publicly corner a market is a sure way to financial ruin (just ask the Hunt brothers). So far Anthony Ward's seems to be learning this the hard way. Since news of Ward's large purchase leaked out, the price of cocoa has plummeted by approx 10.5%, as an improved crop outlook from the Ivory coast has eased supply concerns. This is contrary to Ward's bet that a poor crop from the Ivory Coast would lead to a supply shortage and higher cocoa prices. It is surprising that Ward could be so wrong when it comes to the supply/demand situation. He has an extensive information gathering operation ,which gives him an inside track to the worldwide cocoa market. In particular, he has people on the ground in the Ivory Coast monitoring the weather, cocoa volume at major ports, and general crop conditions. His firm also acts as a distributor of cocoa and coffee in the region, which gives him an information advantage when it comes to where cocoa is being shipped. But so far, all of this has not helped him with his cocoa operations.    

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Anthony Ward's Cocoa Speculation May Be In Trouble

Thoughts From Marc Faber--- Aug 1

Legendary investor Marc Faber is out with his monthly report which discusses the US economy, QE 2, equity markets, China's property sector, and the EU debt crisis. Here are a few highlights:

1. Stock market outlook is uncertain. Faber is less confident that markets will fall to 850-900 because of the inevitable money printing (aka QE 2), which will boost asset prices. Possible trading range developing with 1040 as the bottom and 1170 as the top for the S&P 500. Even so he would be reducing equity exposure on any stock market strength.

2. Euro is likely to bounce around erratically between 1.25 and 1.35. Faber hates the dollar and euro but likes undervalued Asian currencies.

3. If you have to buy stocks make it Asian equities and REIT's in Thailand, Singapore, and Malaysia. They have high yields and are attractive compared to 3% 10 year treasuries. Asian economies will continue to grow at a healthy clip even with weakness in the US and Europe, which makes them good investments.

4. China's economy will continue to do grow even if the property market declines sharply. The growing Chinese middle class will support increased domestic consumption. Wages in China have gone up giving hundreds of millions of people increased purchasing power.

5. US municipal debt will likely become a major problem in the future. As of the 1st quarter of 2010 there is an estimated $2.8 trillion in outstanding municipal debt, which can never be repaid and will require a federal bailout. Another issue is state and local government pension plans, which are severely underfunded.

6. Gold is a buy after its seasonal bottom usually in September. Long term trend is up and as long as Bernanke is Fed Chairman, gold will do well.

7. Likes agricultural commodities and related stocks (but says avoid commodity ETF's because of the roll). In particular Faber likes wheat, rice, and soybeans. He also likes the fertilizer and seed stocks.

8. Faber expects rising agricultural prices will lead to civil unrest and violence in some countries.


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Thoughts From Marc Faber--- Aug 1

China Reduces rare earth export quotas for second half 2010

   China announced that it will reduce export quotas for rare earth's by 72% for the second half of 2010, indicating that Beijing wants to keep its production for domestic consumption. According to the Department of Commerce, shipments will be capped at 7,976 tons, down from 28,417 tons for the same period a year ago. 

    The only reason I bring this up is because it bodes well for one of my investments Stans Energy, which is bringing back a previously operated soviet era mine in Kyrgyzstan. If China were to completely restrict supply (which it is expected to do in the next few years) this would cause the price of rare earths to increase quite dramatically. This is because China accounts for 90% of rare earth production globally. The outlook for rare earths is looking up.

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China Reduces rare earth export quotas for second half 2010

A Bleak Outlook for Potash Market

    During the commodity bubble of 2003-2008, potash was one of the hottest commodities surging from $200 a ton to a staggering $1000 a ton  in June of 2008. The market was in love with stocks like Potash Corp, Mosaic, and Agrium. Analysts were constantly raising their price targets and boosting earnings projections due to strong fundamentals. The general market wisdom at the time was that investing in potash companies was a no-brainer because "people have to eat" and "farmers have to buy potash." They were thought of as recession proof stocks and considered safe investments. This market enthusiasm did not last long as investors dumped potash stocks during the market crash of 2008 and have largely stayed away from the sector through 2010.

     The potash market has suffered from low agricultural prices, obstinate farmers, and a deflationary environment thanks to large excess capacity within the industry. These factors have lowered the price of potash on world markets all the way down to around $350 a ton. In response to lower prices, the official potash cartel known as Canpotex has dramatically reduced potash production to keep prices artifically high. While the cartel itself has done an excellent job manipulating the market, its brethren in Belarus, known as the Belarusian Potash Company, have been very keen on selling potash at the market's prevailing price (they need the money).

       The question is: Will the market will turn around any time soon? I believe the answer is no because the supply/demand fundamentals just don't merit any sharp increase in potash prices. Demand remains weak (estimated at between 45-50 million tons) and their is ample excess capacity (60-68 million tons). Another factor is that farmers have shown themselves quite willing to reduce or completely halt potash applications for their crops if prices spike too high. In fact, potash prices at $350-400 are historically high when you consider that for a long time during the 80's and 90's the price of potash was below $200 a ton. A further nuance in the world market for potash is the increasing power of China and India which have become two of the largest buyers. Recently both countries have taken hard lines against Canpotex and have won major price concessions. These annual price negotiations have become the benchmark for world prices, and as long as China and India hold the line, they can help keep prices low. I also wonder how long the Canpotex cartel will be able to keep members fully compliant with production quotas. So far, the members have cut production by approx. 6 million tons since 2008, but prices have continued to fall nevertheless. At a certain point it may make more sense for some Canpotex members to quit the group and increase production. After all, they are leaving a lot of money on the table as potash at $350-400 a ton is still very profitable.

   Another negative factor for potash supply/demand is the entry of BHP Billiton into the market with their Jansen Mine. According to BHP, Jansen will have an estimated output of approx. 8 million tons of potash and will begin production in 2015. More importantly, BHP had indicated that it will not likely join the Canpotex cartel because it has little need and does not want to have its production restricted. BHP will be more interested in selling as much potash as it can to recoup its significant investment, which is estimated at over $8 billion. If BHP refuses to join the potash cartel, it could put Canpotex out of business as it becomes less relevant in world markets.

   In conclusion, I see little reason for potash prices to pick up from here, which means that potash companies will continue to lag the market. Investors need to look past simple cliches such as "people have to eat" and so on to better understand the fundamentals of the potash industry. We have learned over the last two years that people do indeed need to eat, but that does not mean farmers have to pay $1000 a ton for potash. Those lofty price levels show no signs of returning in the future. If anything, prices could revert to their normal level of around $200 a ton, which would make potash stocks poor investments.

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A Bleak Outlook for Potash Market

The Curious Case of Natural Gas

Natural Gas had another miserable day on Friday to conclude a miserable week. The interesting aspect of natural gas is that it has not participated in the huge commodity rally in 2009. Market commentators postulate that poor demand due to a weak economy is the culprit. Its funny that the same could be said for copper, oil, zinc, etc. But that did not stop these commodities from rising 100-150% in 2009. However natural gas is the only commodity held back by fundamentals and large supplies.

Furthermore, I am told that natural gas supplies are high and that this will keep prices low for a long time. Lets take a look at the charts.

Source: http://www.nowandfutures.com/energy.html

You will clearly see that natural gas supplies are within the 5yr average. So why has the Federal Reserve's free money not found its way to natural gas? Why has natural gas fallen from $6 to below $4?



The only answer I can up with is that natural gas is a local commodity and cant be easily stored by traders and speculators. Oil for example can be stored anywhere--even in my garage. These easily stored commodities have been gobbled up by market participants and financed by the Fed's monopoly money. Natural gas on the other hand has to be held in specially designed storage tanks. Another problem for natural gas is that transporting natural gas is difficult and requires a pipeline.

So whats the future for Natural Gas

Because I am long natural gas I naturally expect natural gas to fall to below zero (only 4 dollars away) in the immediate future. On a serious note I would prefer to be a buyer of natural gas and a seller of crude oil. Natural gas is historically cheap and will eventually rise (no one knows when). It may take some time though.

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The Curious Case of Natural Gas

You can now purchase rhodium directly

Forget gold, silver, platinum, or even palladium. The new investment to be had is rhodium. Rhodium is one of the rarest elements in the world with only 25 tons produced annually. It is used in catalytic converters which help reduce car emissions. Kitco has introduced a product that can be purchased by the general public. It comes in a little bottle that has been certified by Kitco. Buying 1 oz will not be cheap as rhodium is currently trading at $2,580. Rhodium is a volatile commodity judging by its chart, but it could do well in the future thanks to Federal Reserve money printing. Anything is better than holding fiat money.



You can check out the page on kitco at
https://online.kitco.com/bullion/completelist.html

Black Swan Insights

Disclaimer: I am not an investment advisor and nothing on this site should be interpreted as investment advice. Please consult with your own financial advisor before investing in the stock market or any financial asset.

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You can now purchase rhodium directly