PGM Capital – Blog

HighLights of the Week of July 20, 2015

By Eric Panneflek


Dear PGM Capital Blog readers,

In this weekend's blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of July 20, 2015:

  • Bad start of earnings season Q2-2015
  • DOW Jones Down YTD
  • Gold falls below US$ 1,100.00 a Troy Ounce

The stock market’s reaction to a heavy week of earnings reports was not encouraging.

Last week’s stock trading featured a few winners but there were more losers as declining stocks swamped the advancing ones by a 4-1 margin. Some of the losers like Caterpillar (NYSE: CAT) are large multinational companies that have been hurt by the stronger dollar and the resulting weakness in their overseas business.

Below a list of stocks and blue chips that were hit hard last week:

  • Apple Inc. (NASDAQ: AAPL) where shares were down 7% at US$121.63 after it reported earnings on Tuesday, July 21st.
    260715-Apple Week July 20
  • Technologies Inc. (NYSE: UTX) reported a 10% drop in elevator orders from China and it’s stock was down 10% for the week.
    260715-UTX Week July 20
  • IBM Inc (NYSE: IBM) shares fell in the week of July 20, from US$ 172.57 to US$ 159.75 a share, -US$ 12.82 or 7.4%, after the company reported its second-quarter earnings fell 17% as the technology giant posted its 13th straight quarter of year-over-year revenue declines.
    260715-IBM Week July 20

U.S. stocks fell for the fourth straight session on Friday, leaving indexes with the biggest weekly losses in months.

Over the past week, investors sold stocks as disappointing earnings results from companies such as Apple Inc., Caterpillar, United Technology and IBM  as well as a dramatic sell-off in commodities, brought back concerns over a slowing growth in global economy.

  • The S&P 500 closed 22.50 points, or 1.1%, lower at 2,079.65, booking a 2.2% weekly loss. The weekly decline for the benchmark was the steepest since March.

    260715-S&P 500 Week July 20
    Among the S&P 500 sectors, materials stocks were hit the hardest, with the sector falling 5.5% over the week, while the energy sector booked a 4.1% loss.
  • The Nasdaq Composite dropped 57.78 points, or 1.1%, to 5,088.63, ending the week with a 2.3% weekly loss.
    260715-S&P 500 Week July 20
  • The Dow Jones Industrial Average, dropped 163.39 points, or 0.9%, to 17,568.53, recording a 2.9% weekly loss.
    260715-DOW week july 20

Investors also grappled with a housing report that showed sales of new single-family homes in the U.S. dropped to the slowest pace in seven months, suggesting the U.S. housing market may not be firing on all cylinders.

Gold fell more than 1 percent to a five-year low on Wednesday as a bounce in the dollar fueled downside momentum, with investors continuing to pull away from the metal after its dramatic slide earlier this week.

A looming increase in U.S. interest rates, the first in nearly a decade, has diminished gold's appeal to investors, encouraging more sellers in the market after Monday's 3 percent rout, the biggest one-day drop since September 2013.

As can be seen from below chart Spot gold hit the lowest since February 2010 at US$1,078.24 an ounce on Friday, July 24 at noon for it to rebound with 0.5 percent, to close at US$1,096.29.

Screen Shot 2015-07-26 at 2.54.41 PM

The above shows that although it closed below the psychological important level of US$ 1,100.00 per Troy ounce, it was only down with approx. 1.00%  last week.

Corporate earnings in the USA are being hurt by the high US-Dollar, while on the other-side the positive impact of lower oil prices has not materialized.

In the meantime oil prices continued to decline as West Texas Intermediate crude closed 0.72% lower to US$48.88 a barrel and down 5.4% for the week as can be seen from below chart.

260715-WTI week July 20

Prices dropped after the total number of active U.S. rigs drilling for oil climbed 21 to 659 over the week, according to Baker Hughes. Crude took a dive last week after six world powers agreed to a nuclear deal with Iran that would lead to Iranian oil on global markets.

USA Stocks by extended losses in the final hour of trading Friday, pushed the Dow Jones Industrial Average into negative territory for the year as can be seen from below chart.

260715-DOW YTD July 24 2015

The USA-media is blaming the Greece woes in the Euro-zone and the slowdown in China the decline of global demand for commodities and USA produced goods, and subsequent the decline in earnings for USA Companies.

How ever below chats of the German DAX-30 and China CSI-300, shows that both index are in the green YTD.


260715-DAX YTD July 24 2015

Germany's DAX Index performance Year-To-Date

260715-China CSI-300 YTD July 24 2015

China's CSI-300 Index, performance Year-To-Date

Beside this it is also worth mentioning that the Euro, was up in the week of July 20, as can be seen from below chart.

260715-Euro - USD week july 20

Last but not least, when analysing market behaviour, always remember below quote of John Maynard Keynes;
"Markets can stay irrational longer than you can stay solvent."
Secondly before taking any investment advise, always take your investment horizon and risk tolerance into consideration.
Thirdly, remember that we currently are living in the age of turbulence which is very volatile and that sharp corrections may happen at a sudden.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek


China Reports an Increase in Gold Reserves By 57%

By Eric Panneflek

Dear PGM Capital Blog readers,

On Friday, July 17, China ended years of speculation about its official gold holdings by revealing an almost 60 percent jump in its reserves since 2009.

The People’s Bank of China (PBOC), the country's central bank, announced on Friday, that its gold reserves have grown by 57% to about 1,658 metric tonnes (53.31 million fine troy ounces) as of the end of June. This is the first official update to China’s gold reserves since April 2009, when it reported that its gold reserves were 1,054 tonnes.

The purchases show how China is seeking to diversify its reserves away from the US dollar at a time when the price of gold has fallen to near its lowest price since 2010.

China has been reducing its foreign exchange reserves this year, reporting 3.69 Trillion US-Dollars, at the end of June, down from 3.84 Trillion US-Dollars in January.

The People's Bank of China said on its website:

"Gold has special risk-return characteristic, and at specific times is not a bad investment"

The reason why everyone has been so focused on Chinese official gold holdings is that there has been no official update to the gold inventory of the world's biggest nation, which have been fixed at 33.89 million oz since April 2009, a little over 1000 tonnes.

The long awaited moment, finally arrived on Friday, July 17th, in the morning, when after a 6 year delay, China announced that its gold holdings had increased from 38.89 million to 53.31 million troy ounces, a 57% increase "in one month." as can be seen from below table.

The amounts to a new grand total of 1,658 metric tons, an increase of 604 tons from the 1054 reported last in 2009 and which according to the PBOC was also the May 2015 total.

According to the World Gold Council, China’s gold reserves are now the fifth largest of any country in the world and sixth when you include the holdings of the International Monetary Fund (IMF). Only the United States, Germany, Italy, and France hold more gold than China as can be seen from below table.

The latest total is about half what the market thought it was. The market was generally expecting a total of well over 3,000 metric tons, according to Brien Lundin, editor of Gold Newsletter.

In our April 26, blog article we wrote that "The Mystery Of China's Gold Holdings Is Coming To An End" as a result of China willingness to add the Yuan to the IMF's SDR currency basket which would require the disclosure of China's gold holding ahead of an IMF meeting on Special Drawing Rights (SDR) composition which may be held in October.

The increase in China’s gold holdings highlights the precious metal’s role in the global financial system as a bank reserve asset. Central banks, as a group, have continued to buy gold over the past three years even as prices plunged more than a third from their record, set in 2011.

While we welcome some long overdue transparency by China, the numbers they reported on Friday July 17, are well below official expectations. The market was generally expecting a total of well over 3,000 metric tons.

This is what Bloomberg Intelligence said previously:

"Based on trade data, domestic output and China Gold Association figures, the People’s Bank of China may have tripled holdings of bullion since it last updated them in April 2009, to 3,510 metric tonnes,"

Ken Ford, president of Warwick Valley Financial Advisors, said:

"China has been pressing to be included in the International Monetary Fund’s Special Drawing Rights, or SDR, currency basket. So they want to show that the have accumulated enough, but do not want to show their whole hand because it may spook the markets"

China has undertaken economic reforms aimed at persuading the IMF to include the Yuan in the basket, which would accelerate its acceptance as a reserve currency.

We believe that lifting the Yuan’s potential as a global reserve currency is what’s behind China’s move to lift the shroud of mystery surrounding its hoard of gold.

That could mean China will be adding a lot more gold to its reserves in the months to come.

China also has ambitions to create a global reserve currency to challenge the hegemony of the U.S. dollar and the Chinese clearly recognize gold’s role in providing credibility and status to what would be a new currency on the international stage.

The IMF will be considering the inclusion of the Yuan under the special drawing rights in October, to become part of the IMF’s SDR basket, China will almost certainly have to unpeg its currency from the US dollar.

The above means that the coming weeks up the IMF meeting regarding the reshuffling of the SDR, in October, we can expect some more fireworks news from China.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek


After Six months of Eyeball to Eyeball, Greece blinked

By Eric Panneflek


Dear PGM Capital Blog readers,

After six months of chaos, and Eyeball to Eyeball negotiation between Greece and its Creditors, it looks like Greece has blinked in a showdown with European leaders over its financial crash.

Before analyzing the events of last week, after the July 5th, referendum, where 61% of the Greeks voted "NO" or "OXI" to more austerity measures, lets take a look on why Greece has so much debt.

Eurozone leaders held an emergency summit in Brussels on Tuesday, July 7, to discuss the fallout from Greek voters' defiant "No" to further austerity measures, with the country's Prime Minister Alexis Tsipras set to unveil new proposals for talks.

Tsipras, arrived at the meeting buoyed by a triumph in last Sunday's referendum, where an overwhelming majority of Greeks backed his call to reject the belt-tightening reforms that creditors had last proposed.

But that domestic victory did not appear to give him much leverage in talks with foreign creditors, who know Tsipras needs a deal soon to keep his country afloat.

Eurogroup meeting to discus the result of the Greece referendum that rejected of the bailout terms


After  day’s worth of talks aimed at finding a way out of months of bitter deadlock, European leaders were scathing in their assessments of Greece’s proposals, calling them inadequate and demanding the Greek government return with a detailed plan by Thursday, July 9.

Euro zone members have given Greece until Friday, July 10, to come up with a proposal for sweeping reforms in return for loans that will keep the country from crashing out of Europe's currency bloc and into economic ruin.

The situation in Greece worsened with banks closed for a second week, limited cash withdrawals and businesses feeling the crunch of demands from vendors for cash payments.

Mr. Tsipras sounded upbeat as he left the summit, even though many of the reforms demanded by his partners would inflict more pain on Greeks who voted at his behest to reject the austerity measures in return for financial aid.

Greek Prime Minister Alexis Tsipras appealed to his party's lawmakers on Friday to back a tough reform package after abruptly offering last-minute concessions to try to save the country from financial meltdown.

Prime Minister Alexis Tsipras acknowledged that his government had made mistakes

With creditor institutions due to deliver an initial verdict on Athens' loan request and reform proposals within hours, euro zone partners appeared to be preparing for a deal at the weekend to keep Greece in the euro zone, Greece has put forward a plan of reforms, spending cuts and tax rises that is close to what was demanded by its creditors before Alexis Tsipras called last Sunday’s referendum.

The plan includes:

  • Sweeping changes to VAT to raise a full 1 percent of GDP, moving more items to the 23% top rate of tax, including restaurants - a key battleground before.
  • Dropping its opposition to abolishing the lower VAT rate on its islands, starting with the most popular tourist attractions, despite firm opposition from Tsipras’s coalition partner.
  • Significant concessions on pensions, agreeing to phase out solidarity payments for the poorest pensioners by December 2019, a year earlier than planned, and raise the retirement age to 67 by 2022.
  • Raising corporation tax to 28%, as the IMF wanted, not 29% as previously targeted.
  • Cutting military spending by €100m in 2015 and by €200m in 2016.
  • Implementing changes to reform and improve tax collection and fight tax evasion.
  • Privatization of state assets including regional airports and ports.

See below video from The Telegraph for more details:

Not everyone in Greece is overjoyed about the new proposals, of course, especially given that Sunday’s July 5, referendum - was it really less than a week ago - had rejected something very similar.

Below picture shows protesters in front of the Greek parliament as it voted on the PM Tsipras proposal.

Early on Saturday July 11, Greek members of  parliament voted overwhelmingly in favour of the measures proposed by PM Alexis Tsipras - despite the fact that many of the ideas had been rejected by the Greek people in last Sunday's referendum.

Some members of Mr. Tsipras's own Syriza party voted against the proposals in anger at his apparent U-turn.

During a meeting on Saturday Eurogroup finance ministers, Greece’s creditors are drafting a response to Athen’s bailout proposal - outlining what extra measures are needed.

In true dramatic fashion, the Greek government submitted an 11th-hour proposal late on Friday, July 12, that meets most creditor demands, in exchange for a new 53.5 billion euro bailout - Greece’s third since 2011 - .

On Saturday, July 11, Greece's finance minister, Euclid Tsakalotos, was locked in talks in Brussels with skeptical creditors, trying to persuade them that the Greek government can be trusted to deliver on its reform promises in exchange for a financial rescue securing the country's future in the Euro.

Greek Finance Minister - Euclid Tsakalotos -

A Question of Trust:
With Greece running out of money, and facing a July 20 demand for a three billion euro payment to the European Central Bank, a series of meetings the weekend of July 11-12, could hold the key to the country's economic future.

Eurogroup President Jeroen Dijsselbloem

Speaking at a meeting - on Saturday July 11 - to consider Athens' request for a third bailout Eurogroup chief Jeroen Dijsselbloem, who is also Dutch finance minister said:

"A deal was still a long way off."

"There is, of course, a major issue of trust: can the Greek government actually be trusted to do what they are promising to actually implement in the coming weeks, months and years?"

The magnitude of Greece’s private and public sector debts are crushing its economy and without meaningful debt reduction, default seems inevitable.

That’s why it’s likely the Grexit scenario will play out all over again at some point. So what can we expect when that day comes? The events of the past few weeks offer a glimpse into the future.

Based on this, we believe, that pretending Greece will be able to pay them off someday isn’t a viable solution.

On some future Friday, bank deposits will be denominated in euro, and presto, converted to drachma the following

Monday. This has all happened before in Argentina, Mexico and Peru in the 1980s, and as recently as 2002 for Argentina.

In all cases, the currency conversion was accompanied by massive capital flight from these countries, as citizens correctly anticipated a forced currency conversion and loss of purchasing power.

Conclusion of Eurotop on Greece of July 12, 2015:
Euro zone leaders told near-bankrupt Greece at an emergency summit on Sunday that it must enact key reforms this week to restore trust before they will open talks on any new financial rescue to keep it in the European currency area.

Prime Minister Alexis Tsipras will be required to push legislation through parliament to convince his 18 partners in the euro zone to release immediate funds to avert a state bankruptcy and start negotiations on a third bailout program.

Six sweeping measures including tax and pension reforms will have to be enacted by Wednesday night, July 15, and the entire package endorsed by parliament before talks can start, a draft decision sent by Eurogroup finance ministers to the leaders showed.

Greece Prime Minister, Alexis Tsipras was told that Greece will either become an effective “ward” of the eurozone, by agreeing to immediately implement swift reforms this week. Or, it leaves the euro area and watches its banks collapse.

Last but not least we want to end this blog article with the word from Germany's finance minister, Wolfgang Schaeuble, as a comment on the results of Greece referendum of last Sunday, July 5th:

"Elections change nothing. There are rules."

And looking at the reform package, proposed by Greece Prime Minister Alexis Tsipras, to its creditors on Friday July 10, which the Greece parliament approved Saturday morning, Mr.Wolfgang Schaeuble wasn't wrong.

When the Going Gets Tough, the Tough Get Going.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek