Thursday, March 3, 2011

Week Ending March 4/2011 - High Ho Silver!

Looks like every cloud does indeed have a silver lining!
New high 31 year prices have been registered this week in the $35 range. $40-45 is the next significant level of resistance and looks to be challenged before Spring Training ends.  Silver trades currently around 400 m ozs per day on the Comex. Lately it has been bullishly trading approx. the same dollar value as gold. In February silver gained 19% and gold rose 6%. Front month prices are significantly higher than future months levels (backwardization) which indicate serious demand and potential upcoming delivery issues. The cost of borrowing silver is at 2 year highs and a half a dozen major producers have totally hedged future sales at current levels. Silver stocks in Comex warehouses are at the very low levels of 6 years ago when the price was in the $5 bill level. Tight global silver supply-demand levels are locked in the 900m oz level. The gold-silver ratio looks to break 40x and is gaining momentum. Mid tier silver producers and junior exploration companies are performing the best. There are not very many names in the sector as silver has been more of a 'by-product' than a 'go to' metal for many years - very much like copper. The silver & copper industry remains far behind in the production supply cycle should demand continue at current or potentially higher rates.

Less than 3 months before the expiration of the QE2 hyper adrenaline stimulus program - inflation is already beginning to find it's way from domestic gas pumps to the besieged back pedalling autocratic regimes of the world. Bernake announced this week that inflation is indeed reaching 'expected' and 'desired' target levels - but in a very controlled manner? He may regret making that statement public. To make matters worse he used a warped analogy of a family with credit card debt to explain how the ceiling differs from congressional spending decisions. I'd rather not explain.
The bulk of the economy will be facing severe input price increases and potential shortages not long after summer ends. Apparel companies are facing at least a 20% increase in cotton prices. Cocacola and McDonald's are considering rising prices before long because of all increasing input costs. Wheat inventory is down to 2 weeks of consumption levels. Soya Beans less than that!  All this before any 'revised' negotiation on raising debt ceiling levels or heated discussions of a modified QE3 - the final installment in Bernake's dramatic 'Financial Viagra Trilogy.'

I remained glued to the Internet awaiting fast breaking middle east developments. The Financial Post did a fabulous spread (Feb 26) titled 'Ripe For Revolt - Who Might Fall' which covered everything from cell phone users to corruption scores. I was pleasantly surprised to discover that there are countries in the middle east which are very well run and quite happy with their lot in life. Issues in Libya continue to heat up significantly. Southern Europe will be most affected in the short run should the Libyan gas pipeline close and shut down the 25 m cubic meters per day that it exports. GazProm from Russia is capable of supplying the difference but they have been know to be an even  more 'dodgy' and unreliable source of natural gas.

The S&P and DJIA continue to 'March' ahead relentlessly toward new all time record high territory. Inter day 'teflon & resilient' action has been stimulated by a accelerated flow of funds into mutual/managed funds and from many of the treasury bonds refugees who took shelter from the painful deleveraging fiasco of 2 years ago. Internal economic news continues to 'over deliever' with very encouraging news from the stellar service sector, reduced unemployment claims, muted corporate layoff activity, strong car sales, and a very positive ISM Manufacturing Employment Index numbers. All we need is for housing to play ball and we might just have a pre-season 'perfect game' on our hands. The 'silver lined' clouds are starting to part and the birds are starting to sing!

In Canada the roll out of the 'almost obscene' bank earnings and very long awaited dividend increases lead the cavalry charge.The Cdn$ briefly poked it's head above $1.03US and looks to tack on at least another 5% before the Blue Jays take the field for the home opener. Hostile (25% increase) overtures for Lundin from the fine Austrailian Equinox folks set off what looks to be the best PDA Conference ever. Bombardier basks in the glow of a $7b+ order from W.Buffet and his NetJets operation. RIM is on the verge of unveiling it's much vaunted Playbook and is very close to recent high levels in anticipation of greatness. I hope it has all the bells and whistles needed to take a healthy bite out of Apples 90% market share. With crude oil in excess of $100/bb there ain't a drilling rig that is idle or a rough necker who is unemployed. Even our national current account situation seems to be a lot better than expected. The BofC continues to hold interests levels at a paltry 1% until further notice. The country is firing on all 'super charged' 16 cylinders. It is truly amazing what a 5 game Leaf winning streak and a run to the much covetted 8th playoff spot can do!

Bottom Line: Most significant markets appear to be on a single minded march higher to the June 30th QE2 program official end  irrespective of the cost of oil, interest rate levels, or political turmoil. The tidal wave of liquidity is in 'risk on' mode. Crude oil may challenge $110 but is more likely to settle in the more affordable and reasonable mid $90 level until the driving season takes hold. March 11th is the official 'Internet Day of Protest' in Saudi Arabian. Look for the plug to be pulled on March 10th.

The spring season heralds significantly improving economic conditions both sides of the border. A bidding war appears imminent for the consumer financial unit of CitiFinancial. Conditions have changed very quickly indeed. Corporations hold over $1.2 T in cash on their balance sheets and looks to grow significantly based on this stellar earnings season. Joy returns to Mudville after all!
It will be nice to see the Americans regain their strut and swagger. It's the confidence and attitude that I miss the most. They sure are just ain't the same on bended knee and with cap in hand!

 

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