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What’s Real Behind Commodities

Inflation is sustained monetary debasement – money printing, if you prefer – that wrecks consumer prices. It is the other of the evil monetary diseases,…

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This article was originally published by Alhambra Investment Market Research

Inflation is sustained monetary debasement – money printing, if you prefer – that wrecks consumer prices. It is the other of the evil monetary diseases, the one which is far more visible therefore visceral to the consumers pounded by spiraling costs of bare living. Yet, it is the lesser evil by comparison to deflation which insidiously destroys the labor market from the inside out.

You see inflation around you; anyone can only tell deflation by hopefully noticing and appreciating what must instead be absent (a poignant reminder for US Labor Day).

People with the means don’t sit idly by for either affliction. As to the former, inflation, as noted here investments and activity will flow from the financial to the real. Commodities do particularly well and in that sense they can tell us something about the underlying aggregate opinion of those doing the investing.

Inflation, or something else?

There are, however, real components mixed up in commodity prices. Yes, supply factors balanced against real economy demand before then being spliced into any perceptions money-wise.

Given the real-ness of these prices, would it really surprise anyone that commodity costs seem to correlate very highly with the marginal pass-through economy in China? The Chinese system has for decades acted as the central nexus between the developed world buying manufactured goods made there and the developing, more-resource oriented systems sending raw material to China in order to do the manufacturing.

The latter is and was augmented by how much building inside China the Chinese needed or might still need in order to remain stable in this middle real economic ground.

Build China so China could build all the things. This had meant a huge, sustained influx of those raw materials. The more and faster the Chinese built, the more likely commodity prices in their real sense would be bid upward, too. US QE not much difference (because, in the end, it is not money printing).

Therefore, a relatively stable – even visible – correlation between global commodity prices (in US$’s, of course) and the rate of additional Chinese imports. The more that China demanded from the rest of the world, the more demand for commodities against relatively less elastic supply.

See for yourself:



Setting aside notions of “money printing” here, what we see is slowing in both – though the extent of potential deceleration in China imports is more difficult to parse given base effects in the numbers.

Commodity prices have come off their sizzling boil, of course, but the question is whether or not this is some temporary pause in what many have called the beginning of a supercycle. For something like that to happen, “money printing” on the one hand and a resurgent China on the other. This is why, for inflation narrative purposes, China is always classified as the strongest economy (whether it is or not).

How might we know in terms of Chinese imports? That country’s General Administration of Customs (GAC) doesn’t provide any seasonally-adjusted monthly figures. Instead, we’re left to calculate something similar of our own.

First, though, the raw data. For the month of August 2021, estimates released today, GAC puts record highs for both exports out of China as well as inbound trade coming in. That’s neither a big deal nor is it a useful description; how fast and how far from one record high to the next.

According to Customs, the year-over-year rate of change for exports was 25.6%, while for imports 33.1%. Yet, those include large base effects from low comparisons with last year’s recessionary hole.



For imports, therefore commodity and inflation potential, the 2-year change a paltry 14.5%. Why is nearly 15% “paltry”? It is less than the rate from 2018’s not-nearly-enough imported trade, and nowhere near the initial “recovery” period during the immediate aftermath of the Great “Recession.” The former never did provide enough growth and momentum to keep 2017’s globally synchronized growth dream from collapsing hard by late 2018.

And it was the opposite of “money printing” which doomed the whole period (Euro$ #4). What we find currently are not the growth rates anyone should associate with a recovery let alone a real inflationary boom extending well beyond one.

In addition to those wider-spaced comparative paces, there’s also the growing question about more recent slowing; second derivatives. If Chinese imports (or exports) aren’t really robust in the longer-run sense, what about a possible turnaround in the more immediate calendar?

Again, while there aren’t seasonally-adjusted monthly data values, we can look back through recent years and compare the changes between specific months, say, after April and through the end of August each year. The same seasons.



What we find in doing so is that, yes, there does appear to be some significant slowdown in the more recent pace of Chinese import activity (undoubtedly some will blame COVID and port bottlenecks). The difference from May through August (inclusive) 2021 compared to the same months in 2020 is just more than 6%. Last year it was almost 14% (May-Aug 2020 vs. May-Aug 2019).

During the two years of “globally synchronized growth” (2017 & 2018) as well as the one preceding them (2016) when China was last hopped-up on heavy doses fiscal and monetary “stimulus”, these same short run rates were each in the double digits. Instead, mid-year 2021 has turned out more like mid-years 2011 and 2012, which back then had emptied out the last commodity “supercycle” of anything real behind that same rhetorical promise.

And it had been emptied out by, previously, the opposite of “money printing” (Euro$ #2).

Up to August 2021, then, Chinese imports have not really been all that robust to begin with and there is growing evidence even so the best days might be behind. Nothing here proves this to be the case, of course, and four-month comps can be equally as noisy as any month-to-month (and there’s always questions about data from China).

Still, when it comes to the “real” piece of commodities insofar as real demand goes, there’s much which does vigorously correlate prices to real economy.



And if China’s economy really is cooling off despite never really heating up all that much (instead, supply issues in prices), there goes the supercycle leaving mere “inflation” to depend more comprehensively on the “money printing” aspect alone.

Which is to say, pretty likely transitory.

Economics

US stocks retreat after mixed economic data

Benchmark US indices drifted lower on Thursday September 16 after mixed economic data showed that retails sales rose in August but unemployment benefits…

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Benchmark US indices drifted lower on Thursday, September 16, after mixed economic data showed that retails sales rose in August, but unemployment benefits claims also increased last week.

The S&P 500 fell 0.16% to 4,473.75. The Dow Jones shed 0.18% to 34,751.32. The NASDAQ Composite rose 0.13% to 15,181.92, and the small-cap Russell 2000 was down 0.07% to 2,232.91.

Retail sales rose by 0.7% to US$618.7 billion in August after declining 1.8% to US$613.3 billion in the previous month, the Census Bureau reported. Retail sales increased by 15.1% YoY in the month. The data indicated the economic recovery is on track despite Delta virus concerns.

The unemployment benefits claims rose by 20,000 to 332,000 in the week ended Sep 11 after rising 2,000 to 312,000 in the previous week, the Labor Department data revealed. The spike in benefits claims suggested the labor market could still be under stress. Investors also took cues from the Chinese markets, where stocks sharply retreated amid fears of economic slowdown.

Real estate and consumer discretionary stocks were the biggest gainers on the S&P 500 on Thursday. Nine of the 11 index segments stayed in the red. Materials and energy stocks were the bottom movers.

Stocks of DoorDash, Inc. (DASH) rose 5.84% after analysts upgraded the stock to a buy rating. Beyond Meat, Inc. (BYND) stock fell 4.21% in intraday trading after investment banking company Piper Sandler downgraded the stock to an underweight rating.

Also, shares of mobile application developer Asana Inc rose by 8.84% after analysts gave a buy rating to the stock. The company bagged the 9th spot in the Best Workplaces for Women list issued by Great Place to Work and Fortune. It is among the top 10 companies for the second consecutive year.

Lucid Group, Inc. (LCID) stock gained 6.60% after analysts provided a bullish outlook for the stock. In addition, the company said it received the longest-range rating from the US Environmental Protection Agency (EPA) for its Air Dream Edition luxury sedan's 520-mile coverage.

In the consumer discretionary sector, Target Corporation (TGT) rose 1.16%, Dollar General Corporation (DG) gained 2.11%, and The Kraft Heinz Company (KHC) rose 1.26%. Sysco Corporation (SYY) and Archer-Daniels-Midland Company (ADM) advanced 1.00% and 1.01%, respectively.

In material stocks, BHP Group (BHP) declined by 3.86%, Rio Tinto Group (RIO) fell by 4.57%, and Vale S.A. (VALE) fell by 4.91%. Freeport-McMoRan Inc. (FCX) and Southern Copper Corp (SCCO) ticked down 6.38% and 4.67%, respectively.

In energy stocks, Royal Dutch Shell plc (RDS-A) declined 1.21%, PetroChina Company Limited (PTR) declined by 1.37%, and BP plc (BP) fell 1.34%. China Petroleum & Chemical Corporation and Equinor ASA (EQNR) declined 1.34% and 2.19%, respectively.

Also Read: IronNet (IRNT), Sphere 3D (ANY) stocks draw huge attention Thursday

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Also Read: SBUX, BYND & APRN: Three trending food, restaurant stocks Thursday

Top Gainers

Top performers on S&P 500 included ETSY Inc (3.10%), American Airlines Group Inc (2.63%), Align Technology Inc (2.53%), Dexcom Inc (2.44%). On NASDAQ, top performers were Aeye Inc (36.53%), Elite Education Group International Ltd (33.33%), Leap Therapeutics Inc (31.09%), Tuesday Morning Corp (28.32%). On Dow Jones, Salesforce.Com Inc (1.64%), Mcdonald's Corp (0.93%), Home Depot Inc (0.91%), American Express Co (0.80%) were the leaders.

Top Losers

Top laggards on S&P 500 included Freeport-McMoRan Inc (-6.64%), Newmont Corporation (-3.95%), L3harris Technologies Inc (-3.35%), Aptiv PLC (-3.30%). On NASDAQ, Vera Therapeutics Inc (-26.54%), MacroGenics Inc (-23.76%), Silverback Therapeutics Inc (-23.08%), Aerie Pharmaceuticals Inc (-21.40%). On Dow Jones, Goldman Sachs Group Inc (-1.31%), Dow Inc (-1.21%), Merck & Co Inc (-1.15%), Caterpillar Inc (-1.04%) were the laggards.

Volume Movers

Top volume movers were Apple Inc (15.32M), Bank of America Corp (13.83M), Ford Motor Co (12.29M), AT&T Inc (8.41M), Lucid Group Inc (13.42M), Leap Therapeutics Inc (13.39M), Vinco Ventures Inc (12.36M), SoFi Technologies Inc (10.40M), Farmmi Inc (9.55M), ContextLogic Inc (8.79M).

Also Read: Top betting stocks to watch amid NFL craze, Macau casino review

Futures & Commodities

Gold futures were down 2.35% to US$1,752.55 per ounce. Silver decreased by 3.86% to US$22.883 per ounce, while copper fell 2.90% to US$4.2787.

Brent oil futures increased by 0.24% to US$75.64 per barrel and WTI crude was down 0.04% to US$72.58.

Bond Market

The 30-year Treasury bond yields was up 0.66% to 1.881, while the 10-year bond yields rose 2.46% to 1.336.

US Dollar Futures Index increased by 0.34% to US$92.847.

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Economics

Top Shipper Warns Commodity Freight Rates About “To Go Parabolic”

Top Shipper Warns Commodity Freight Rates About "To Go Parabolic"

Similar to container rates, dry bulk shipping rates are poised to move…

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Top Shipper Warns Commodity Freight Rates About "To Go Parabolic"

Similar to container rates, dry bulk shipping rates are poised to move higher on limited vessel capacity and robust demand, according to Genco Shipping President and CEO John Wobensmith, who spoke with Bloomberg

"I think rates can go higher from here," Wobensmith said. "You do get to a point, and you've seen this in containers, where you hit a certain utilization rate, and you start to go parabolic on rates. I think we're getting close to that period."

He said, "fundamentally, you've got demand outstripping supply growth," adding that freight agreements are above $20,000 for 1Q, a level not seen seasonally in a decade. 

More than 5 billion tons of commodities, such as coal, steel, and grain, are shipped worldwide in bulk carriers in a given year. A move higher in the Baltic Dry Index (BDI) indicates increasing commodity demand on top shipping lanes. 

Lending credit to Wobensmith's argument is BDI on a seasonal basis that shows demand is currently outpacing vessel supply and pressuring rates higher. 

He doesn't expect bulk carrier rates to experience a significant reversal until early next year as demand troughs seasonally. "You need very little demand growth to just continue to build off what we've seen this year," he said. "It's more about higher highs and higher lows than anything else."

China's credit impulse needs to turn higher for the commodity boom and bulk carrier rates to stay elevated. 

Besides China, passage of a US infrastructure bill could be the fiscal injection that could also spark higher commodity prices, thus continue driving bulk carrier rates higher. 

All of this is feeding into inflation that the Federal Reserve convinces everyone it's only "transitory." 

 

 

Tyler Durden Thu, 09/16/2021 - 16:50
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Economics

It May Take Time for General Electric to Surge Again

General Electric (NYSE:GE) stock is up about 90% in the past year, but it has been treading water around a split-adjusted $100 per share since the spring….

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General Electric (NYSE:GE) stock is up about 90% in the past year, but it has been treading water around a split-adjusted $100 per share since the spring. After fully pricing in expected earnings growth in 2022, investors have been hesitant to bid up the industrial giant’s shares much higher.

Source: Sundry Photography / Shutterstock.com

Last month, I said investors should wait for lower prices before buying due to the risk of earnings falling short of expectations. But after giving the situation another look, two other catalysts could help prevent GE stock from falling below $100 per share.

The first is GE’s pending sale of its aircraft leasing unit, a move that could help unlock shareholder value. Second, a possible ramp-up in spending by the federal government could give GE stock an indirect boost as well.

Now, don’t take this to mean I think shares will pop in the coming months. Instead, it’s a situation where strengths and weaknesses cancel each other out. There’s enough to keep GE stock steady around $100 to $105 per share. Just not enough to send it higher in the near term.

GE Stock Already Trades on Next Year’s Results

The key issue with General Electric today is that upcoming earnings growth is already accounted for in its valuation. The consensus estimate projects the company will generate around $4.33 per share in earnings in 2022.

At today’s prices, that gives GE stock a forward price-to-earnings (P/E) ratio of around 24.5. That’s in line with the valuation of a similar name, Honeywell (NASDAQ:HON), which trades at 23.9 forward earnings. But other diversified industrial companies trade at even lower valuations, such as 3M (NYSE:MMM), which has a forward P/E ratio of 16.9.

It goes without saying that General Electric needs its earnings to meet or beat these estimates. If the company disappoints, GE stock could take a big hit.

In the past, I have questioned whether General Electric’s earnings will come in above $4 per share next year, mostly due to the risk of inflationary pressures. Inflation that ends up being more than just “transitory” could affect performance across all its business units.

A repeat of last year’s Covid-19 lockdowns, due to the Delta variant, is a big risk as well. This would be a major setback for the recovery of the company’s flagship aviation unit.

That said, there are a few positives to counter these negatives. They may not be enough to send shares higher soon, but they could help prevent GE stock from falling below $100 per share.

Plenty in Play to Keep GE Stock Steady

As I mentioned above, there are two positive catalysts on the horizon for General Electric.

The first catalyst is the pending sale of its aircraft leasing unit. As Barron’s reported on Aug. 27, Barclays analyst Julian Mitchell sees this as something that could result in “valuation upside.”  According to Mitchell, once GE sells this unit, investors may be more willing to value the company at a higher multiple in line with its peers in the aviation, healthcare and renewable energy sectors.

Admittedly, it’s questionable whether this happens. Given Wall Street’s preference for pure plays, a diversified company like General Electric will likely have a hard time getting to a price on par with its sum-of-the-parts valuation.

Fortunately, the second catalyst seems more likely to play out.

As fellow InvestorPlace contributor Larry Ramer wrote on Sept. 3, both the infrastructure bill and the proposed federal budget could provide an indirect boost to GE’s power and renewable energy segments. Additionally, the desire of the Biden administration and Congressional Democrats to expand government healthcare spending may benefit the company’s healthcare unit.

Strength in these areas could counter any further headwinds with the company’s aviation unit. This, in turn, may ensure that General Electric’s turnaround carries on, its earnings soar above $4 per share next year, and the company’s current valuation stays intact.

The Bottom Line on GE Stock

Despite my prior pessimism, there may be enough in play to ensure GE stock stays at its current price levels. But with regards to its next move higher, that may take time.

Shares are fully priced based on 2022 projections. Earnings will need to come in at or above the high end of analyst estimates, currently at $4.88 a share, in order for the stock to see another immediate boost.

In the long run, GE stock could continue to rise. But in the short term, expect shares to hold steady at or around today’s prices.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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