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US stocks drift on skyrocketing oil prices, inflation worries

Benchmark US indices closed lower on Monday October 11 dragged down by losses in utility healthcare and technology stocks amid rising global oil prices…

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This article was originally published by Kalkine Media - Canada

Benchmark US indices closed lower on Monday, October 11, dragged down by losses in utility, healthcare, and technology stocks amid rising global oil prices that renewed inflation concerns.

The S&P 500 was down 0.69% to 4,361.19. The Dow Jones fell 0.72% to 34,496.06. The NASDAQ Composite fell 0.64% to 14,486.20, and the small-cap Russell 2000 was down 0.56% to 2,220.64.

Brent oil futures jumped to a nearly three-year high at US$83.62 a barrel, while US crude saw a closing high of US$80.50 per barrel for the first time since 2014, sparking fresh inflation concerns.

US markets have been volatile in recent days. Last week's mixed jobs data and the Fed's tapering fears dissuaded traders from betting on risky instruments. Besides, inflation and labor and raw material shortages painted a gloomy picture of the pace of the economic recovery.


Can the US market bounce back?


Meanwhile, several big companies like Delta Airlines, JPMorgan & Chase, Bank of America Corporation, etc., are expected to report their quarterly earnings this week. In the third quarter, some analysts expect around 29% YoY growth in profit for the S&P 500 companies, while others predicted weak earnings due to factors like labor and raw material shortage dogging the economy.

On Monday, basic materials and consumer staple stocks led gains on the S&P 500 index, but utilities and communication stocks trailed. Seven of the 11 index segments stayed in the red.

SoFi Technologies, Inc. (SOFI) stock surged 14% in intraday trading after Morgan Stanley analysts gave it an "overweight" rating over its "powerful revenue growth story".

Shares of Southwest Airlines Co. (LUV) fell 3.08% after the company canceled thousands of flights since Saturday due to staff shortages and bad weather.

The Protagonist Therapeutics, Inc. (PTGX) stock jumped 97.72% after the US Food and Drug Administration (FDA) lifted a clinical hold on its clinical studies.

In the material sector, Air Products and Chemicals, Inc. (APD) rose 1.38%, Freeport-McMoran, Inc. (FCX) gained 3.91%, and PPG Industries, Inc. (PPG) rose 1.00%. Nucor Corporation (NUE) and International Paper Company (IP) gained 1.53% and 2.74%, respectively.

In financial stocks, Berkshire Hathaway Inc. (BRK-B) fell 1.04%, JP Morgan Chase & Co. (JPM) declined 1.84%, and Wells Fargo & Company (WFC) fell 1.31%. Morgan Stanley (MS) and Goldman Sachs Group, Inc. (GS) declined 2.20% and 1.44%, respectively.

In the communication sector, The Walt Disney Company (DIS) plunged 1.35%, Comcast Corporation (CMCSA) plummeted 3.66%, and Verizon Communications Inc. (VZ) sank 1.92%. AT&T Inc. (T) and T-Mobile US, Inc. (TMUS) fell 2.56% and 2.78%, respectively.

Also Read: Top stocks, quarterly earnings to watch this week

Also Read: IPOs to watch in October as race for stock listings continues

Seven of the 11 S&P 500 index segments stayed in the red.

Also Read: CLOV, ADMS stocks up on rating upgrade, purchase deal

Futures & Commodities

Gold futures were down 0.18% to US$1,754.15 per ounce. Silver decreased by 0.52% to US$22.587 per ounce, while copper rose 1.48% to US$4.3388.

Brent oil futures increased by 1.49% to US$83.62 per barrel and WTI crude was up 1.45% to US$80.50.

Bond Market

The US bond market was closed today for a federal holiday.

US Dollar Futures Index increased by 0.32% to US$94.377.


Producer vs. Consumer Price Potential

More inflation numbers around the world, more of the same. Producer prices, this time. Beginning in the US, the annual rates remain high and reached a…

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More inflation numbers around the world, more of the same. Producer prices, this time. Beginning in the US, the annual rates remain high and reached a little higher in September 2021.

Commodities have been the highest of all, up 20.47% year-over-year for another greatest increase since the mid-seventies. The PPI for final demand goods was up 11.68%, that the most since the early eighties. Core producer prices gained 6.80%. Each was faster in September than in August.

Even still, producer prices are slowing down. Not just showing signs, actively decelerating once you get past base effects as well as the increasingly isolated recent effects from earlier this year.

Take commodities; the PPI index for them, on a rolling 3-month basis, dropped to +3.2% (not annualized) July to September from 3.79% June to August and 7.83% January to March. This most recent three month slice the slowest since last December.

The core PPI, in month-over-month terms, gained just 0.24% September from August; the lowest monthly increase since February.

While not nearly as well-defined as recent CPI’s, the single 2021 camel hump in producer prices is becoming more visible anyway. Producer prices are – at times – harder to turn around, less responsive or sensitive to short-run inflections in macro conditions than consumer prices generally perform. It takes some time before businesses squeezed by faster rising producer inputs undertake the negative macro backlash represented by less lasting CPI gains.

Over in China, the same but to an ever greater extreme. Producer prices accelerated in September, too, though consumer prices just stagnated – both in monthly as well as yearly terms.

Try running a business or economy with that disparity. Again.

The CPI first gained nothing from August, plain flat, leaving it only 0.7% higher than last September. This was, yet again, among the lowest consumer price increases in Chinese history. While base effects in food particularly pork were the primary reason for the lack of inflation, even without food the CPI gained just 2.0% year-over-year (and +0.2% month-over-month), not significantly different.

But like their American business counterparts, Chinese manufacturers and industry while having a harder time passing along input costs to consumers, broadly speaking, those input costs are still going up.

China’s PPI was rose 10.7% year-over-year, the highest annual increase on record. Factory gate prices, specifically, surged 14.3%.

Yet, even those are somewhat misleading, annual jumps that are more base effects than not. The 2-year change for each far less headline-grabbing: PPI +4.1% 2-year compounded; factory gate prices +5.7% 2-year compounded. Neither is any higher than the peak rates from 2018.

Producer prices, as they do, are less restrained, while even so though those in the US are already showing the same signs as consumer prices here have with regard to slowing down. Transitory. Given history and Chinese imbalances, it would be a real surprise if producer prices in China didn’t follow along.

Not just a surprise, it would be the first time.

It’s so often said, and just taken as an article of faith, that given the difference in rates and speeds between producer and consumer prices the latter must eventually be driven upward by the former. It sounds plausible, that businesses whether American or Chinese will have to pass along far higher input costs to consumers, thereby converging CPI’s upward where the PPI’s are. As if there is no other way to resolve this imbalance. 

But that’s not how it has worked, especially the post-2008 era (post-2013 China). Time and again, businesses find they can’t pass along consumer prices (apart from, in the US, short run transitory periods) because actual demand/recovery is never really there. Economists, central bankers, media, they all claim it is there, or will be just around the corner, but they continually get it all wrong (starting with the global monetary situation, then their interpretation errors getting larger from there).

Eventually, like the macro economy, all prices revert and converge instead downward (slowing) to the natural state of no recovery; no demand strength.

Again, signs of this already in PPI’s while Chinese consumer prices never really budged at all. It took more than a year and a half between later 2017 and the start of 2019 for the globally synchronized downturn and recession to accomplish a meeting of prices in China. With the discrepancy far greater now, and with the global “recovery” never having gotten even that little as “globally synchronized growth”, would it really be surprising if reversion this time comes about even faster?

Right in time for taper. No wonder such stubbornly low real rates in Treasuries (which price these global conditions) with no regard for the Fed’s sudden “hawkishness.”

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Albert Edwards: We Should Start Worrying About The Coming Recession

Albert Edwards: We Should Start Worrying About The Coming Recession

One week ago, when looking at the surge in commodity prices, SocGen’s…

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Albert Edwards: We Should Start Worrying About The Coming Recession

One week ago, when looking at the surge in commodity prices, SocGen's Albert Edwards pointed out the eerie similarities between what was taking place in the energy sector today and crude prices in the summer of 2008 - right before Lehman collapsed - and said that "it's starting to fell a bit like July 2008." That prompted him to tell readers to "think hard about the likelihood that higher energy prices and bond yields will trigger a ‘wholly unexpected’ recession. For that is where the biggest risk might lie for investors."

It will hardly come as a surprise that, one week later, with more banks slashing their GDP forecasts (like Goldman) even as they hike their inflation forecasts (also like Goldman), the odds of a stagflationary recession keep rising, and sure enough in his latest note published today, Edwards finds another indicator suggesting that a recession may now be inevitable, and imminent. Pointing to the latest NFIB small business survey, the SocGen strategist first notes what even the Fed now knows, namely that wage pressures are stepping up to a new record high, making what may one have been transitory inflation fully permanent. But it is the chart on the right which is more troubling: it shows companies’ net % balance of those expecting a stronger or weaker economy. As Edwards notes, "this series has now fallen to levels where we should be worrying about recession. Last week we mused that near term recession risk was being underestimated. Maybe that’s what we should be really vigilant about?"

It's not just small business sentiment that is going haywire: pretty much everything in China is as well. According to Edwards, in addition to the impact on foreign investors resulting from the new policy of "common prosperity" and whether Chinese equities and bonds have become "uninvestable", but the tremendous macro uncertainty regarding China’s own energy crisis and collapse in property transactions - which we discussed extensively last Friday - that is a major concern.

The SocGen permabear also refers to two charts from the latest IMF Financial Stability Report, both of which address a point we have frequently made, namely that in the past it was always China's massive credit expansion that pulled the world out of the economic dumps. This time, however, no such thing is happening. To wit, the chart on the left shows how much more restrictive Chinese financial conditions are now relative to the west "in stark contrast to the post-2008 GFC when China was the engine of global recovery" which is shown on the right.

As for what China's current "financial conditions" tightness means for the future, we refer readers that what we discussed at the end of 2020 when we first warned that China's credit impulse was sliding. Edwards, who also is a firm believer in China's credit impulse as the key driver of reflationary (or deflationary) global flows points out that that IMF has also jumped onboard the "credit impulse thesis" and after "highlighting China’s crunch in financial conditions for some months now, it is nice to get confirmation from the IMF!" As for what it means in practical terms, one look at the charts below should concern everyone.

To be sure, in a world where energy prices are hyperinflating, no Edwards note would be complete without some discussion of inflation and sure enough, this time he touches on the latest commodity to see prices surge, fertilizer...

... and even though foodstuffs like soyabeans are well off their recent highs, overall agricultural and industrial commodity indices remain at or close to all-time highs.

Unfortunately, fertilizer prices surging to record highs will only put further upward pressure on already high food prices.

Edwards concludes not with some dire fire and brimstone forecast, as he does on occasion, but by giving the microphone to the IMF. As Edwards notes, “in its twice yearly financial stability report, the IMF called on central banks to be “very, very vigilant” and take early action to tighten monetary policy should price pressures prove persistent … The IMF also highlighted the “challenging trade-off” facing central banks. They want to support the economic recovery from the coronavirus pandemic by keeping interest rates low, but they also need to keep financial risk-taking in check amid “overly stretched” asset valuations."

We wish them the best of luck as they seek to navigate the impossible journey between a world struggling with permanent inflation on one hand (made far worse due to the Fed's chronic inability to observe what was obvious to most a year ago), and a market  - and global economy - that is completely reliant on massive Fed liquidity injections, and where the smallest hiccup to record easy financial conditions could lead to an immediate market crash.

Tyler Durden Thu, 10/14/2021 - 16:40
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Trade Ideas: Inca One Gold

We recently interviewed Rick Rule on our live stream and Rick said something very profound. “The most important thing though,
The post Trade Ideas: Inca…

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We recently interviewed Rick Rule on our live stream and Rick said something very profound.

“The most important thing though, that I think your listeners need to contend themselves with, is market share. Right now in the US market [..] precious metals and precious metals investments comprise about 0.5% of total savings and investments assets in the US. The three decade mean is between 1.5% and 2%.”

And then Rick went on to say “Early in terms of moves that could be parabolic, is really not too early.

While in the former quote he was referencing the precious metals market, and in the latter he was referencing his experience in the uranium market, both facts hold true. As it currently stands, the gold market, by all accounts, is the last place retail investors want to be. Despite near record high gold prices, retail has found itself chasing other sectors, rather than taking the “too early is not too early approach.”

Okay, so we’ve established it’s early for gold, and we want to be early. But why do we think gold might start moving in the near future?

Firstly, it’s simple. Thanks to COVID, we saw unprecedented monetary easing. With US M2 Money Supply expanding nearly 40% over 18 months and stimmy cheques being handed over to the people in a helicopter drop that delivered freshly printed money into the hands of main street.

Secondly, as the economy comes back online, out of COVID, we are looking at an energy crisis’ going on around the world. Natural Gas prices are up nearly 400% in Europe. India is running out of coal. China has flooding in their major coal producing province. Oil is over $80. I can go on.

Thirdly, these energy crisis’ will lead to various supply chain break downs. Whether we are talking about fertilizer production which heavily relies natural gas prices, which could lead to food shortages or various suppliers of electronics being shut down thanks to extreme energy costs.

The point is this. Inflation is here. And the fed has finally coming to terms with how it isn’t transitory.

Okay, so we like toque when we play gold.

But we also like companies with real balance sheets and cheap comparable valuations.

Which brings us to Inca One Gold (TSXV: INCA), a Peruvian gold producer with two fully permitted mineral processing facilities.

Why do we like it? It’s simple. First, the company is trading at a valuation lower than its annual topline revenue, with a recent quarter of $8.4M US dollars, and a current market cap of around $13M Canadian. At the time we filmed this, it trades at a trailing price to sales ratio of less than 0.5 times.

Second, Inca One has a direct comparable in the Peruvian market, that trades at a much higher multiple than they do.

Thirdly, while focused on the gold space, their operation is rather agnostic to the price of gold, so this recent weakness in the spot market doesn’t really impact them. But given the companies operational structure, they have the ability to scale their model to much larger numbers, which we’ll get into shortly.

So Inca One has two metals processing plants in Peru. They work with both artisanal miners and small gold mining operations whom they purchase raw or from, extract the metal, and form into bars to be sold in to the larger precious metals markets.

Breaking it down into simpler terms, they support small operators by providing a service that they otherwise would not have access to, which give the little guy access to the larger global markets.

Heck, you even go on their website right now and order a gold coin! But demand for the physical metal is so hot, that you can only buy it with proof of being a shareholder.

Inca One remains undervalued when compared to its direct comparable, Dynacor Gold Mines

The challenge the company has had, is working capital to purchase raw ore. And this where management got creative. They introduced a debt structure where they borrow fiat (money) in exchange for an agreement to pay back the loan in gold bars.

It started in March. Inca announced their first $2.5M facility and then in August announced a new facility for $9M, that will be paid back with payments of 261.3 ounces of gold per month.

Lets look at it from a math perspective. At an average grade of around 14 g/t, at 200 tonnes per day of production, it works out to roughly 3,000 ounces per month of gold production. In dollar terms, thats roughly $5.3 million in monthly revenue. If the firm is paying, say, 70% of spot pricing for the raw ore, thats roughly $3.7 million in variable costs, plus any fixed costs the company has – i.e. facility overhead, taxes, management wages, etcetera..

But we digress. In simple terms, if production were to double from here, while those variable costs may increase at the same pace of topline revenue, fixed costs stay effectively the same. Suddenly bam, you have your increased bottom line margins.

And why do we trust management to scale this puppy? Just this year alone the company has grown from around 2300 tonnes of ore processing in March, to over 6,800 in August. And again, despite these improving economics, the improvements evidently have not been reflected in the markets, where the company is currently trading below topline revenue. Well below.

The company has indicated that it intends to open a third and fourth processing plant, each with an initial processing capacity of 350 tonnes per day, before expanding the operating lines at each facility, to achieve a target of 4,000 tonnes per day processing capacity by 2028 – which would significantly change the revenue profile of the company as a whole.

In summary, we have a company showing massive topline growth, with a creative debt structure allowing them to scale rapidly, and a balance sheet where the current market cap is less than the assets on the balance sheet. And most importantly, a unique structure we think retail investors will dig when gold starts to catch it’s tailwinds.

FULL DISCLOSURE: Inca One Gold Corp is a client of Canacom Group, the parent company of The Deep Dive. The author has been compensated to cover Inca One Gold Corp on The Deep Dive, with The Deep Dive having full editorial control. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security.

The post Trade Ideas: Inca One Gold appeared first on the deep dive.

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