Jan

18

Deflation, from Anatoly Veltman

January 18, 2016 |

 My friend's bearish posture toward Stocks stems from deflationary signs. Yes, they are pronounced. Wage growth has been non-existent. There is no pricing power anywhere. Currently you can't give away raw materials world-wide. Copper at $1.95, Brent led WTI to below $30, grains/fertilizer are cheap. Coal must be given away: just look at US's largest coal Peabody (BTU), down from $1100.00 in 2011 to below $4.00! Uranium is shunned: I notice UEC down from $7 in 2011 to .72 cents! World's largest miner FCX is $4.35 from $60+ in 2011. No wonder credit is being pulled from under most of Canada's enterprises, with Canadian currency depreciating 50% during the same time frame. Investors dread holding the bag over the weekend, as increasingly more corporate treasury shenanigans may need to be disclosed/announced.

Yet Chair reminds us that all of that is (eventually) Bullish, as the lower input prices should act to improve margins. But how do you re-ignite demand and revive pricing power? Surely not by interest rate hikes via the lift-off. So what policy actions can we anticipate nowadays, as Bullish weekend surprises?

anonymous replies: 

The usual quibbles:

FCX is not the "'world's largest (copper) miner"; SCCO is. Its price has fallen by half from its peak at the end of 2012 and by a third since its recent high in May of last year. Hardly wonderful performance but nothing extraordinary for the copper business. The decline in FCX is a comment on its woeful balance sheet. The company has a quick ratio of .6 and current ratio of 1.7; SCCO's numbers are 2.5 and 3.5.

Even two years ago, none of the public U.S. coal companies had a balance sheet that was anything but a joke, especially if you included the pension liabilities. Peabody was bankrupt 2 years ago; the stock market just didn't know it.

As Carder has patiently explained for over a year now, in the U.S. coal now suffers from having direct price competition from natural gas. Those of us who lost a third of the money we put into a coal mining equipment stock (JOY) last year bought the company because, unlike all the U.S. public coal companies, it had a decent balance sheet. It still does; and if we were not busy trying to lose more money in the refiners, we would be tempted to try for being a 3-time loser now that the private owners of coal reserves (the Lexington KY gang) have gotten some wonderful news.

For those who are looking for possible speculations, the Stowe Coal Index is the best source.

In carbon-based energy, demand is not the problem, even for coal; supply has been. The dramatic increases in output from new production techniques (fracking, continuous miners to name 2) have created a surplus. The question now is how much of a surplus. The EIA now says it will be a year before supply and demand in oil match each other.


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1 Comment so far

  1. Jason Humbert on January 28, 2016 10:48 pm

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