PGM Capital – Blog
2May/160

Highlights of the Week of April 25, 2016

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 April 25, 2016:

  • China's central bank guided the yuan higher at the sharpest pace since 2005.
  • Venezuela Economic situation worsening.

CHINA'S CENTRAL BANK GUIDED THE YUAN HIGHER:
China's Central Bank, (The People’s Bank of China or PBoC) on Friday, April 29, set its currency 0.52% stronger against the U.S. dollar, in the yuan’s steepest one-day fixing increase since November, reflecting the broad weakness in the dollar after the U.S. Federal Reserve moved to a more dovish tone.

The People’s Bank of China fixed the yuan’s daily mid-point at CNY6.4628, reaching the currency’s strongest level against the U.S. dollar since December 16.

As can be seen from below 5-day chart, the yuan closed on Friday April 29 in New York at CNY 6.4737.

The cause of the jump in the yuan's level may be driven by forces outside China. As can be seen from below chart, the dollar index, which measures the dollar against a basket of currencies, has fallen 1.7 percent in the week of April 25.

US Dollar Currency Index 5-day Chart

US Dollar Currency Index 5-day Chart

The sharp decline of the USD-Index last week is based  in particular on the Japanese yen, which composes nearly 15 of Index, which has risen sharply against the greenback last week as can be seen from below chart.

JPYUSD

The Euro, which makes up more than 20 percent of the basket, has also climbed this week, tacking on as much as 1.56 percent against the dollar.

VENEZUELA ECONOMIC SITUATION WORSENING:
Venezuela's economic disintegration hit a sad new milestone on Tuesday April 26, when President Nicolás Maduro announced that government employees would work only on Mondays and Tuesdays for at least the next two weeks to save scarce electricity.

The government in Caracas has also started scheduling rolling, four-hour blackouts around the country.

Venezuela’s epic shortages are nothing new at this point. No diapers or car parts or aspirin, it’s all been well documented. But now the country is at risk of running out of money itself.

The story began last year when the government of President Nicolas Maduro tried to tamp down a growing currency shortfall. Multi-million-dollar orders were placed with a slew of currency makers ahead of December elections and holidays, when Venezuelans throng banks to cash their bonuses.

As can be seen from below chart, this money creation by the central bank of Venezuela, the amount of money in circulation in the country has tripled last year.

In a tale that highlights the chaos of unbridled inflation, Venezuela is scrambling to print new bills fast enough to keep up with the torrid pace of price increases.

Most of the cash, like nearly everything else in the oil-exporting country, is imported. And with hard currency reserves sinking to critically low levels, the central bank is doling out payments so slowly to foreign providers that they are foregoing further business.

PGM CAPITAL ANALYSIS AND COMMENTS:
China Strengthening its Yuan:
With Japan's markets closed on Friday April 25, and unable for now to do more damage (or damage control), China stepped in with some modest turmoil of its own by strengthening the Yuan fix by the most since 2005, pressuring the USD weaker for the 5th day in a row.

Commodities, which are trading in US-Dollars, have to push higher on the back of this with Crude Oil above $46.50 but Gold and Silver have surged to fresh 15 month highs (over US$1292 and US$17.81 per troy ounce respectively) as can be seen from below 2-year charts.

Goldprice 2-year chart

Silverprice 2-year chart

The Venezuelan Crisis:
As can be seen from below chart, the money printing spree of the Venezuelan's Central Bank has lead to an unprecedented hyperinflation of 275 percent in 2015 and is forecasted to reach 720 percent this year, as can be seen from below table.

This high rate of inflation in Venezuela is a consequence of the more than doubling the monetary liquidity in 2015, including bank deposit, this even if  the country has has fewer dollars to support the new Bolivars, which has lead to a constant depreciation of the nation currency the VEF against the USD as can be seen from below chart.

The problem is that it is "very difficult money" for Venezuela which needs to pay in hard dollars to print its rapidly devaluing domestic currency. In fact, among the sources of funds to purchase its own money was the liquidation of its gold reserve.

All of this brings us to Wednesday April 27 news from Bloomberg in which De La Rue, the world’s largest currency maker said, that they have sent last month a letter to the central bank of Venezuela, complaining that it was owed $71 million and would inform its shareholders if the money were not forthcoming.

In other words, Venezuela is now so broke that it may not have enough money to pay for its money.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek

23Apr/160

Oil Rigs count to 6-year low is time to invest in Oil?

By Eric Panneflek

 

OILRIGCOUNT downzTXozdkLc

Dear PGM Capital Blog readers,

On Friday, April 22, in its weekly release, Houston-based oilfield services company Baker Hughe (NYSE: BHI) reported another record fall in the U.S. rig count (number of rigs searching for oil and gas in the country) from the previous week.

As can be seen from below chart, the USA oil rig count fell by 8 to 343, to a new 6-year low.

As can be seen from above chart, U.S. energy firms cut oil rigs for a fifth week in a row to the lowest level since November 2009, oil services company Baker Hughes Inc said Friday, as energy firms continue to slash spending despite a bigger than 60 percent spike in futures since hitting a near 13-year low in February.

The number of 343 U.S.A. oil rigs currently operating compares with the 703 rigs operating in the same week a year ago.

PGM CAPITAL ANALYSIS AND COMMENTS:
In 2015, drillers cut on average 18 oil rigs per week for a total of 963 for the year, the biggest annual decline since at least 1988 amid the biggest rout in crude prices in a generation. Before this week, drillers cut on average 12 oil rigs per week for a total of 185 so far this year.

Energy firms have sharply reduced oil and gas drilling since the collapse in crude markets began in mid-2014.

Brent crude futures fell from over US$107 a barrel in June 2014 to a near 13-year low around US$ 28.50 in February as can be seen from below 5-year chart.

Peak Production in the USA:
According with a brief from the USA Energy Information Agency (EIA), of July 7, 2015,  it acknowledged that U.S. oil production peaked in April, hitting 9.7 million barrels per day (mb/d), the highest level since 1971 as can be seen from below chart.

Why Peaking of the USA Oil production is so important:
The slowing US production due to the higher break-even and production costs will reduce supplies in the global oil market. As a result, we could see the supply and demand gap to narrow down in 2016. US production averaged 9.3 MMbpd in 2015 and is expected to slow down to 8.8 MMbpd in 2016.

As can be seen from below chart, the crude oil production in the USA, continued to decrease in 2016, and was a 8,953 million barrels per day in the week ending on Friday, April 15, 2016.

Decreasing U.S.A. oil production combined with a rig count decrease is like music in the ears of Crude Oil Bulls, because it means that when shortage hits the market it will be difficult to bring those rigs back in operation in order to fill the demand supply gap.

With the cooling and driving season 2016, to start in approx. one month, we believe that most probably, we have seen the lowest for the oil prices by now.

Our research team has a report of some great Oil producers, -services and drillers company, which benefit the most from the coming oil price recovery.

Like Warren Buffett said:

"BE GREEDY, WHEN OTHERS ARE FEAR FULL and FEAR FULL WHEN OTHERS ARE GREEDY"

The following quote from John Maynard Keynes, might also be applicable for crude oil its producers:

"MARKETS CAN REMAIN LONGER IRRATIONAL, THAN YOU CAN REMAIN SOLVENT"

Last but not least, before following any investing advice, always consider your investment horizon, risk tolerance and financial situation and be aware that commodities prices and the stock of their producers might be very volatile and that sharp corrections may happen in the short term.

Yours sincerely,

Suriname Times foto

Eric Panneflek

17Apr/160

Have we reached the End Of the Coal Era?

By Eric Panneflek

Dear PGM Capital Blog readers,

On Wednesday, April 13th, Peabody Energy (NYSE: BTU), the largest U.S. coal miner, filed for bankruptcy, marking the end of an era for big publicly traded companies that have fueled American industry for more than a century.

Peabody was the last major U.S. coal miner still standing. Arch Coal, Alpha Natural Resources, Patriot Coal, and Walter Energy all filed bankruptcy within the past year.

Those companies have lost a combined US$30 billion in stock-market value since 2010, and the coal sector has shed 31,000 jobs since 2009, according to the Mine Safety and Health Administration.

INTRODUCTION:
Coal; meaning "mineral of fossilized carbon" is composed primarily of carbon along with variable quantities of other elements, chiefly hydrogen, sulfur, oxygen, and nitrogen and is the largest and most widespread fossil fuel resource providing 23 percent of the world’s energy.

Metallurgical versus Thermal Coal:
While metallurgical coal and thermal coal have similar geologic origins, their commercial markets and industrial uses are vastly different.

Thermal coal or steaming coal  is burned for steam to run turbines to generate electricity either to public electricity grids or directly by industry consuming electrical power (such as chemical industries, paper manufacturers, cement industry and brickworks). During power generation the coal is ground to a powder and fired into a boiler to produce steam to drive turbines to produce electricity.

Metallurgical coal or coking coal is used in the process of creating coke necessary for iron and steel-making. Coke is a porous, hard black rock of concentrated carbon that is created by heating bituminous coal without air to extremely high temperatures.

Plunging Coal Price:
As can be seen from below chart, the price of coal has plunged 75% since 2011.

The U.S. simply has too much coal, for which its coal production has hit a record high in 2008 as can be seen from below chart.

That year, America entered its worst financial crisis since the Great Depression.

Coal demand fell and never recovered.

On top of that, the U.S. government is trying to regulate the coal industry to death. Strict laws have made it almost impossible for coal to compete with natural gas, a cleaner fuel source. Natural gas is set to overtake coal as America’s main source of power this year, according to the Energy Information Association.

PGM CAPITAL ANALYSIS AND COMMENTS:
America may never again see a coal company as big as Peabody. Founded in 1883 by Francis Peabody with US$100, a wagon and two mules, according to the company’s corporate history, Peabody grew into a juggernaut, producing coal for customers in 25 countries and employing 7,600 people.

As can be seen from below chart, Peabody's shares have crashed from their record high of more than US$ 1,300 in 2008 to US$2.07 on Wednesday, April 13, 2016.

Its market capitalization was U$74 million Wednesday, down from over U$20 billion in 2008, according to Thomson Reuters data.

Peabody has lost money nine quarters in a row and  although many of its mines are still profitable, but not profitable enough to take care of the debt it has run up.

The company over-expanded when times were good. In 2011, Peabody bought Macarthur Coal, an Australian coal miner, for US$4 billion.

Peabody was the largest U.S. corporate bankruptcy this year and it certainly won’t be the last.

It is also worth mentioning that so far, 2016 has been the year of nervous investors, volatile markets and fragile sentiment. Now it turns out that it’s also been the year of defaults.

According to a report published by rating agency Standard & Poor’s on Friday April 8th, 40 companies have defaulted globally so far this year, for which 14 of the 40 defaults have come from the oil and gas sector, with eight from the metals, mining, and steel sector.

In other words, those sectors account for more than half of all global defaults. than during the start to any year since 2009.

At this rate, 138 companies could default this year. That would be 30% more than last year and nearly triple the number of defaults in 2014.

The above also proves, that countries cannot build sustainable economic growth by counting on revenues obtained from commodities, but has to use commodities bonanza cycles to diversify their economy and to invest education.

Until next time.

Yours sincerely,

Suriname Times foto

Eric Panneflek