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05 January 2021
Video commentary for January 4th 2021
Eoin Treacy’s view
A link to today’s video commentary is posted in the Subscriber’s Area.
Some of the topics discussed include: yield curve steepens, financial repression fuels the precious metal and crypto rally, China firm, Wall Street weak
December Research Letter
Thanks to a subscriber for this report from Crescat Capital which contains a number of interesting charts. Here is a section:
Contributing to the supply shortage, the number of major new gold discoveries by year, i.e., greater than 2 million Troy ounces, has been in a declining secular trend for 30 years including the cyclical boost between 2000 and 2007. At Crescat, we have been building an activist portfolio of gold and silver mining exploration companies that we believe will kick off a new cyclical surge in discoveries over the next several years from today’s depressed levels.
Gold mining exploration expense industrywide, down sharply since 2012, has been one of the issues adding to the supply problems today. Crescat is providing capital to the industry to help reverse this trend.
Since 2012, there has also been a declining trend of capital expenditures toward developing new mines. From a macro standpoint, gold prices are likely to be supported by this lack of past investment until these trends are dramatically reversed over the next several years. Credit availability for gold and silver mining companies completely dried up over the last decade. Companies were forced to buckle up and apply strict capital controls to financially survive during that period. Investors demanded significant reductions in debt and equity issuances while miners had to effectively tighten up operational costs, cut back investment, and prioritize the quality of their balance sheet assets.
Eoin Treacy’s view
Supply Inelasticity Meets Rising Demand was the catch call of the commodity-led bull market between the early 2000s and 2011. Once identified it represents the beginning of a new bull market.
It takes time to convince investors there is a new bull market. By the time that happens prices have been trending higher for years already. Then it takes time to find and build new mines. That can take anything up to five years. Over that time, the firmness of prices convinces more and more people that the trend of demand dominance is irreversible so miners come under a great deal of pressure to expand capital expenditure or to buy out other operations. That generally occurs around the same time that new mines come online and contributes to a triple waterfall decline. Supply increases, debt is unmanageable and prices declines destroy valuations. Such is the cyclicality of the mining sector.
Bitcoin Holds Near Record, Ether Surges Amid Crypto Rally
This article by Joanna Ossinger for Bloomberg may be of interest to subscribers. Here it is in full:
Bitcoin held near a record a day after breaching $34,000 for the first time while Ether, another digital currency, also surged as the crypto rally continues.
Ether climbed as much as 22% to about $1,163 following a 30% advance on Sunday. Bitcoin held onto most of its weekend gains, dipping about 1.6% to $33,060 as of 6:53 a.m. on Monday in London, according to a composite of prices compiled by Bloomberg.
“What we’re seeing is the standard moving of the crypto markets from Bitcoin to the Altcoin market led by Ether,” said Vijay Ayyar, head of business development with crypto exchange Luno in Singapore. “This rotation happens usually when Bitcoin has a large rally and investors rotate profits” into other digital coins, he said.
Bitcoin eclipsed its 2017 high late last year and only hit $20,000 for the first time in the middle of December. Proponents of the world’s largest cryptocurrency argue that it’s muscling in on gold as a hedge against U.S. dollar weakness and inflation risk, citing evidence of growing interest among institutional investors.
Skeptics view the digital asset’s more than 300% surge over the past year as a risky bubble fueled by investors chasing the momentum in crypto prices.
Eoin Treacy’s view
Bitcoin and Ethereum has experienced one of the more impressive Santa Claus rallies ever with a major surge between Christmas Eve and this weekend. The big question that will be occupying the minds of anyone monitoring the market is whether the move is now over or are we seeing the first consolidation following a breakout?
Byron Wien and Joe Zidle Announce the Ten Surprises of 2021
This press release may be of interest to subscribers. Here is a section:
5. The economy develops momentum on its own because of pent-up demand, and depressed hospitality and airline stocks become strong performers. Fiscal and monetary policy remain historically accommodative. Nominal economic growth for the full year exceeds 6% and the unemployment rate falls to 5%. We begin the longest economic cycle in history, surpassing the cycle that lasted from 2010 to 2020.
6. The Federal Reserve and the Treasury openly embrace Modern Monetary Theory as their accommodative policies continue. As long as growth exceeds the rate of inflation, deficits don’t seem to matter. Because inflation increases modestly, gold rallies and cryptocurrencies gain more respect during the year.
7. Even as energy company executives cut estimates for long-term growth, near-term opportunities are increasing. The return to “normal” increases both industrial activity and mobility, and the price of West Texas Intermediate oil rises to $65/bbl. Rig counts increase and energy high yield bonds rally soundly. Energy stocks are among the best performers in 2021.
8. The equity market broadens out. Stocks beyond health care and technology participate in the rise in prices. “Risk on” is not without risk and the market corrects almost 20% in the first half, but the S&P 500 trades at 4,500 later in the year. Cyclicals lead defensives, small caps beat large caps and the “K” shaped equity market recovery unwinds. Big cap tech is the source of liquidity, and the stocks are laggards for the year.
9. The surge in economic growth causes the 10-year Treasury yield to rise to 2%. The yield curve steepens, but a concomitant increase in inflation keeps real rates near zero. The Fed wants the strength in housing and autos to continue. As a result, it extends the duration of bond purchases in order to prevent higher rates at the long end of the curve from choking off credit to consumers and businesses.
Eoin Treacy’s view
If we contrast this list of potential surprises, I get the feeling they are less ambitious than in years past. I have heard the rumour from many quarters that President Trump is planning to set up his own TV station and there is plenty of speculation that the entire effort to overturn the election is to create a sound footing for a re-run at the title in 2024.
Rolls-Royce to Shelf Next-Generation Propulsion Engine After Testing Ends in 2022
This note from the Financial Times may be of interest to subscribers. Here it is in full:
Rolls-Royce Holdings PLC will shelf its next-generation UltraFan engine program and halt investment until a new aircraft is launched as the industry grapples with low demand for new airplanes, the Financial Times reports.
–The British engineering giant will finish testing the new engine in 2022 but will then put the program “on ice,” including postponing the search for an industrial partner for the new propulsion system, according to the FT.
–Rolls-Royce Chief Executive Warren East said he expects a significant delay until the new aircraft appear as the industry reels from the acute shock of the coronavirus pandemic, the FT reports.
Eoin Treacy’s view
The challenge for many industrial companies is that their growth prospects are dependent on economic growth and the ability of their customers to boost capital expenditure. At present the enthusiasm which greeted vaccine approvals is being tested by the evolution of new strains of the COVID-19 virus. That suggests capex decisions will likely be delayed until customers have visibility on what their post pandemic businesses will look like.
Eoin’s personal portfolio: stock market trading position opened December 18th
Eoin Treacy’s view
One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change.
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