Thursday 11th March 2010

Browning Newsletter on Climate, Behavior and Commodities: Triad - My thanks to Alex Seagle for the latest issue of this fascinating report published by Fraser Management Associates. It is posted in the Subscriber's Area but here is the opening:

Anyone who is familiar with the "triple witching hour" will understand what is happening with the weather. The expiration of three financial instruments results in extra stock volatility. Similarly, the peak of three climate oscillations, hitting at the same time, results in very volatile stormy weather. Just ask Washington D. C. The volatile "Snowmageddon" closed down the federal government for four days.

Of course there are a number of factors shaping this winter's weather, not just the three climate cycles. The sun is currently at the bottom of a solar cycle, radiating less energy. Volcanoes are exploding immediately north and south of the US, sending chemicals high in the atmosphere. The tropical Atlantic is shifting its warmth northward. El Niño is slamming warm water along the West Coast. The Indian Ocean Dipole is heating the Indian Ocean and bringing rain to southeastern Australia.

All of these factors have combined to create a complex and abnormal global weather pattern, especially in North America. In the Northwest, the Vancouver Winter Olympics have been fighting to keep Mt. Cypress from melting into a giant mound of slush during the warmest winter weather on record. In the South, storms have been taking a cross-country road trip on Route 66, and Interstate 40. At one point every state except Hawaii had snow on the ground. Storm after storm slammed the Midwest while Nor'easters ripped up the East Coast. Meanwhile Northern Canada roasted as cold air and winter storms glided south.

The cold weather was not confined to North America. According to Rutgers University Global Snow Lab, the amount of snow in the Northern Hemisphere, covering 20.141,730 sq. mi. or 52,166,840 km2, was the second greatest amount on record. Rutgers has been keeping track of snow using satellite observations since 1967 and the only time it has recorded more snow was in 1978. (Ironically, back in those days scientists fretted about global cooling and used the record snow to confirm their fears. Now we are hearing that the snowfall is confirming global warming!) The snow has smothered Europe down to the balmy Mediterranean, portions of the Middle East, China and Japan. China, in particular, has suffered an abnormally harsh winter with the worst blizzards in over six decades lashing the western provinces and freezing northern ports.

While a variety of complex climate patterns have combined to create this misery, three main patterns, the Arctic Oscillation, the El Niño/Southern Oscillation and the Atlantic Multidecadal Oscillation are the major culprits. All three of these have united to make this winter memorable. The big question is whether they will continue to make 2010 a year of misery.

My view - If the extreme weather conditions experienced by North America and Europe this winter similarly affect the spring and summer crop cycle we can expect some turbulence in prices for staple foods.

This item continues in the Subscriber's Area.

Email of the day (1) - More on gold as an inflation hedge:

"DAVID, REGARDING THE QUERY YESTERDAY REGARDING GOLD'S PERFORMANCE VS INFLATION, I HAVE 2 POINTS:

1) IN THE DAYS OF THE GOLD STANDARD BY DEFINITION GOLD KEPT UP WITH INFLATION SINCE GOLD WAS MONEY.

2) IN THE FIAT ERA, GOLD OVER THE LONG TERM WAS BEATEN INFLATION. FOR EXAMPLE OVER THE 40 YEAR PERIOD FROM 12/1969 TO 12/2009, THE PRICE OF GOLD DIVIDED BY THE US CPI INDEX INCREASED 5.41 TIMES, A REAL RATE OF RETURN OF 4.31% PER YEAR.

"OF COURSE, OVER SHORTER PERIODS YOU CAN GET ANY RESULT YOU PREFER. ALSO GOLD HAD BEEN HELD AT $35 FOR 35 YEARS IN 1969, SO THE PRICE HAD SOME CATCHING UP TO DO WITH INFLATION. BUT RETURNS WERE STILL POSITIVE IF YOU GO BACK TO 1942.

"KEEP UP THE GOOD WORK."

My comment - Thanks, and I agree with your first point, although few of us can remember when currencies were last on true gold standards. The history of gold standards is interesting, not least that countries could not endure it indefinitely because their bullion reserves were eventually drained by creditors at the first hint of fiscal problems. This paragraph from Wikipedia is informative:

The gold specie standard ended in the United Kingdom and the rest of the British Empire at the outbreak of the World War I. Treasury notes replaced the circulation of the gold sovereigns and gold half sovereigns. However, legally the gold specie standard was not repealed. The end of the gold standard was successfully effected by appeals to patriotism when somebody would request the Bank of England to redeem their paper money for gold specie. It was only in the year 1925 when Britain returned to the gold standard in conjunction with Australia and South Africa, that the gold specie standard was officially ended. The British act of parliament that introduced the gold bullion standard in 1925 simultaneously repealed the gold specie standard. The new gold bullion standard did not envisage any return to the circulation of gold specie coins. Instead, the law compelled the authorities to sell gold bullion on demand at a fixed price. This gold bullion standard lasted until 1931. In 1931, the United Kingdom was forced to suspend the gold bullion standard due to large outflows of gold across the Atlantic Ocean. Australia and New Zealand had already been forced off the gold standard by the same pressures connected with the Great Depression, and Canada quickly followed suit with the United Kingdom.

The Bretton Wood's Agreement of 1944 has been referred to as 'Gold Standard lite' and President Nixon scrapped it in 1971 because the USA would have otherwise run out of gold bullion.

My reservation about your second point is that I do not regard US CPI as an accurate measure of inflation in the USA (See Email 2 on Monday.) However I cannot think of a better very long-term hedge against inflation than gold.

Email of the day (2) - More on shale gas:

"Don't know if I've mentioned it but I'm sitting on top of the Marcellus Shale formation here in Pittsburgh, PA. Estimates are as high as 500 TRILLION cu. ft!! Perhaps more than 10% is recoverable. There are problems w/ quicker than expected declines in the Barnett formation (Texas), but as the technology is so new, no one is sure why. I have been looking for land w/ mineral rights the past year but as you might expect, it hasn't been easy. This year, given the real estate crunch here, and still weak natgas prices should be the time to pull the trigger. (if I can find a gun!)

"Shale gas IS the game changer in the energy world. There is a bill in congress that would encourage natgas transportation research and development."

My comment - Good luck with the prospecting. As one who has presumably studied sites which may contain hidden reserves of shale gas, do you think I should try to obtain the mineral rights beneath our home in London SW7?

Why Japan is edging closer to China - My thanks to a subscriber for this interesting column by Gideon Rachman for the Financial Times. It is posted without further comment.

Additional commentary by Eoin Treacy

Buy Asian Stocks Before 'Lights Turn Green,' Goldman Sachs Says - Thanks to a subscriber for this interesting article by Shiyin Chen for Bloomberg. Here it is in full:

Investors should buy Asian stocks after valuations dropped and before sentiment strengthens further, Goldman Sachs Group Inc. said.

"By the time all the lights turn green, the race will already be well under way," Goldman Sachs analysts led by Timothy Moe wrote today.

"Sentiment and valuation will improve as the year progresses, and we would prefer to be early."

The MSCI Asia-Pacific excluding Japan Index slipped 0.1 percent to 416.23 as of 8:35 a.m. in Singapore and is little changed for the year. The gauge yesterday erased year-to-date losses of as much as 9.7 percent on Feb. 8 that had been fuelled by concern that China will tighten lending to combat faster inflation and that Greece's debt crisis will spread.

Analysts' earnings growth estimates for this year have climbed to 26 percent on average, near Goldman Sachs's 30 percent forecast, according to the report. The brokerage is predicting a 21 percent increase in profits in 2011.

The MSCI index's valuation has dropped to 14.5 times estimated earnings from as high as 29.3 times in November, after profit estimates were upgraded, according to weekly data compiled by Bloomberg.

"We view the risk/reward balance very positively from a strategic perspective," the Goldman Sachs analysts wrote.

Still, the brokerage trimmed its December 2010 forecast for the MSCI Asia-Pacific excluding Japan Index to 530 from a November forecast of 540, and lowered its estimate for the MSCI Asia excluding Japan Index to 640 from 650.

Goldman Sachs said it remains most optimistic on the outlook for stock markets in China, South Korea and Taiwan. Indexes tracking Chinese shares traded in Shanghai and Hong Kong and Taiwan's Taiex index have retreated at least 4 percent this year, among the 10 worst performers globally. South Korea's Kospi index has fallen 0.8 percent.

My view - Thanks to the same subscriber for the report mentioned in this article which is well worth a read and is posted in the Subscriber's Area. Today's higher Chinese inflation and industrial production figures increases the likelihood of a resumption to the appreciation of the Yuan. If the last move is any guide, then further gains in the Yuan's value should be relatively gradual. Such a move should have a net positive impact on the Asian region generally, particularly for neighbouring manufacturing centres which would be under less pressure to hold down the value of their own currencies relative to the Yuan.

This section continues in the Subscriber's Area.

China Southwest Region Suffering Severe Drought, Ministry Says - This article from Bloomberg may be of interest to subscribers. Here it is in full:

China's southwest region is suffering from a severe drought, with water levels in major rivers at record lows, the Ministry of Water Resources said.

About 79 million mu (5.3 million hectares) of crops are under stress in the region, about half of them in Yunnan province alone, a statement said yesterday. More than 18 million people and more than 11 million head of livestock nationwide are short of drinking water, it said.

The drought in most of Yunnan and parts of Guangxi and Guizhou provinces has lasted for almost five months, the ministry said. Rainfall dropped by more than half in those provinces, water levels in major rivers have plunged and volumes in most reservoirs have dropped by more than 20 percent, it said.

My view - Yunnan is primarily known for its industrial metal deposits but is also a relatively high rainfall area which feeds the Yangtze, Pearl and Mekong rivers. If this area is experiencing drought, it is reasonable to assume that water levels further down river, where major agricultural activities take place, are somewhat lower than normal. At the very least, if there is drought in one area, there will need to be excess rain somewhere else to make up the shortfall. This is having no effect on commodity prices right now but the situation is worth monitoring due to the potential for bullish impact on rice prices later on this year.

Email of the day - on Japan REITs:

"Re J REIT discussion, I suggest people also look at Astro Japan (AJA) an Australian listed REIT which concentrates on Japan and has an enticing yield of 20% (disclosure, I own it). It has high leverage (70%), but it is non-recourse beyond the individual security properties. See also recent announcement for background."

My comment - Thank you for highlighting this Australian listed fund investing in Japanese property and the associated announcement. The 20% yield, as you mention, does not come without risk and is unlikely to be sustained at such high levels. Nevertheless, the REIT remains a recovery candidate.

This section continues in the Subscriber's Area.

Email of the day - on questions relating to the Chart Library's capabilities:

"1. Can you set up say 4 charts per screen and by sinking 2 screens, you have 8 chart types in total, with all different time periods and you use that as a master format. And then you can tab up/down with your keyboard from code to code and they all update together for the selected code.
2. What are all the time frames can you provide.
3. Can you scan as well, or just view.
4. Is this all included in the 'family pack' as well as commentary."

My comment - Thank you for these questions which may also be of interest to other pre-subscribers. Let me address your fourth question first: The Fullermoney Global Strategy Service includes the Comment of the Day, Subscriber's Audio and unlimited access to the Chart Library's more than 18,000 stocks, bonds, funds, indices, commodities, currency cross rates, ratios, spreads and overlays.

An annual subscription, permitting access to all of the above costs £500 and either a monthly subscription or trial costs $50. The current strength of the Australian Dollar against the Pound suggests that now would be an opportune time to consider taking out a subscription if so inclined.

Returning to your questions, I'll take them in order: It is possible to have seven charts, tiled one above another on one screen using the Chart Library's "View All Charts" function, but they would all have to show the same timeframe. This feature was designed to facilitate looking through multiple instruments in a relatively short period of time.

You can save customized formats for individual charts as Preset templates and apply these to whatever instrument you wish. Here is a link to Comment of the Day on June 17th 2009 where a detailed explanation of this functionality is outlined.

The Chart Library can produce Daily, Weekly, Monthly and Quarterly charts over 3-months, 6-months, 1-year, 2-years, 3-years, 5-years, 10-years, 20-years or 50-years.

The Chart Library Filter system can scan through the Chart Library menus or your customized lists using Performance parameters such as ranking by best or worst performers over timeframes ranging from 1-day to 1-year. The High/Low filter scans for 3-month to All Time highs and lows within the previous 5 days. Here is a link to Comment of the Day on August 7th where a much more detailed explanation as well as a number of examples are provided.

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