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Newmont Mining, “Newmont”, is one of the world’s largest gold mining company by Market Capitalization with operations in the United States, Australia, Peru, Ghana and Suriname. On average, over the past 7 years, the company has contributed to 3.58% of the world’s supply of gold (based on World Gold Council figures). Compared to its strongest competition, Barrick Gold, its operational mines are located in politically stable geographical zones. In an industry where government intervention and scrutinity is part and parcel of normal business, an investor would most certaintly benefit from companies that has less exposure to such erratic regulations. Newmont’s share price is highly correlated to gold price, which should be of no surprise as its bulk of profit is derived from gold mining.

Gold, for a good part of modern history, has served as a hedge against inflation and would probably continue to do so. It has also become an asset investors flock to in times of uncertainty. While it is great that we are getting news almost every day about indices making new highs, investors should not be complacent and assume this would continue forever.

Firstly, the Chinese financial industry is undergoing a deleveraging process. In an article by CNBC, according to the Institute of International Finance in June 2016, China’s debt-to-GDP ratio stands at 327 percent. If we recall, just about a decade ago, overleveraging was the cause of the great recession, causing the economy to plunge into freefall. Gold prices rallied from the low of US$781 per ounce at the start of the crisis in September 2007 to an all-time high of US$1878 in August 2011. To put it simply, no one had a clue about where we would move on from there, and their best bet in times of uncertainty would always trace back to Gold. As you are reading, China is still in the midst of their deleveraging process. Money supply growth has slowed tremendously while aggregate financing was RMB 70 billion lower than estimated, at RMB 1.04 trillion, according to a report by Bloomberg. With lesser money going around the economy, interest rates are set to rise. The Chinese 10-Year Bond Yield stands at 3.96% as of this writing, up from 2.66% about a year ago. As the interest rates rise, companies would find it increasingly difficult to meet their debt obligations as refinancing becomes more expensive while they are still drowned in excess capacity. Due to the significant amount of bureaucratic red tape around Chinese statistics, investors’ sentiment is should be best reflected in the market. The Shanghai Stock Exchange Composite Index (SHCOMP) is at 3,276, down about 5% from this year’s high of 3,447. While we have yet to see any event that could trigger a market-wide correction, it would not be right to assume a black swan event is not brewing somewhere.

Secondly, US unemployment rate is at 4.1%. The lowest unemployment rate the US economy has achieved prior to the Financial Crisis but after the dotcom bubble was 4.4%. If history was a guideline, the stock market tends to top when unemployment rate hits about 4%, when it starts to stagnate before heading higher. It isn’t a definite pre-emptive signal, but it would certainly serve as a warning. As things are relatively rosy for now, it may take a year or two before we see a full correction in the markets. Remember, the market is often a reflection of investors’ sentiment. What we are seeing right now would probably be investors’ exuberance due to Trump’s tax policy, though I personally think that the deficit would ultimately bring down the dollar as the world’s reserve currency, especially when Petro-Yuan formally takes over the market, but that story shall be saved for another time.

Now that we are done with the macroeconomic factors, let’s move into the specific company we are looking at. As mentioned earlier, Newmont’s operations are located in geopolitically safe areas, hence reducing risks investors have to undertake in the sector where operating cash flows can be pretty uncertain. Recently, during an investor’s conference hosted by Newmont, the management has decided to shift away from the old dividend structure of being intertwined with gold prices, towards a policy of sustainability of production pipeline and stability. It should also be noted that while gold has been trading in a tight range of US$1200 to $1350, Newmont has managed to maintain a positive Free Cash Flow for the past 7 quarters, while projection of average FCF for the next 5 years is $1.4b.

It should also be noted in a capital-intensive industry, companies are usually debt-laden in order to fuel operations. This was not the case for Newmont as the company’s debt profile consists of 100% fixed interest rate, with Debt-to-Equity ratio at a healthy 0.39. Newmont’s management has pledged to reduce debt further, hence relieving the company (and its shareholders) of additional debt obligations. With existing projects in place, the company is set to increase production by at least 380,000 oz of gold per annum earliest by 2019.

Based on my personal valuation using Price/Revenue Ratio, the projected price for Newmont is $43. Currently, the industrial average (Newmont, Barrick Gold, Goldcorp, Newcrest, Kinross) Price/Revenue ratio is 3.46. With the model taking into account for growth in production into revenue from $6.7b in 2016 to $8b in 2022, the target price for Newmont in that year would be $51.96. Based on the current capital structure, the WACC is 3.92% as equity takes up a significant part of financing, while the stock’s beta is only 0.22. Discounting back to date, that would give us a price of $43.

Another valuation method employed was based on Discounted Cash Flow (DCF). As mentioned earlier, annual FCF generated by the company would be $1.4b. Discounting that figure back to date would give us a terminal value of $141.70. While that number appears to be unrealistic, I choose to infer that the company is still undervalued purely due to the fact that its stock is highly correlated to gold prices, which in turn, is negatively correlated to the broad market.

Moving on to risks, if the economy trumps higher, we could probably see stagnant or even lower gold prices. That would probably sink the stock further as it currently trades at $34.90, about 12% of this year’s high. The other risk that could affect the company negatively would be a surge in All-In Sustainable Costs (AISC), an industry benchmark to gauge the profitability of its mines. Higher AISC represents higher costs to extract gold due to lower ore grade and reduced output as mining gets harder. In Q3 2017, Newmont’s AISC is $909/oz, about 3.6% higher than industrial average of $877/oz. That figure remains well within the projections of the management of $900-$950/oz.

To conclude, the gold mining sector isn’t the most attractive sector right now, but that is the point. Too much interest, and upside would be very limited. While we may be slightly early to the game, I think it would be a great time to hedge your portfolio (since the stock can be considered as counter-cyclical) before market turmoil starts. Newmont, relative to its peers, fares better in my opinion due to the low debt/equity ratio, management’s commitment to increase production as well as a change to the dividend policy which investors could all benefit from.

NOTE: THIS THESIS WAS WRITTEN IN MY PERSONAL BEHALF AND DOES NOT REPRESENT ANY EXISTING FIRMS WHICH I AM WORKING WITH. INFORMATION CONTAINED HEREIN IS SOLELY FOR EDUCATIONAL PURPOSES ONLY.

The post Bad Stock, Poor Market Conditions, but otherwise a great company. (NEM:US) appeared first on THE FOREX TRADER.

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Following up on the previous post on the cable where I recommended a short with a final target of 1.2700, I have closed my position early, just before the pair retraced up. The week ended with the cable at 1.3190, bouncing off the 61.8 retracement level of the dip.

Let’s take a look at fundamentals. From UK’s perspective, the EU has given Britain a 2-week deadline to clarify key commitments that it is willing to honour. While both parties claimed that talks were to accelerate after October, there has been no significant development till date. The current situation has certainly left most market participants in limbo, undecided on the consequences of Brexit. As mentioned previously, with EU being Britain’s largest trading partner (accounting for 43%), it is not difficult to comprehend the complications of Brexit. As a matter of fact, it is not a matter of good or bad, but rather how bad would it be?

US wise, equities ended lower amid concerns of Republican’s tax plan and possible delay of cut in company’s taxes. The DXY has also ended the week lower. Currently, while I hold a neutral stance towards USD, I remain fundamentally pessimistic on the cable. The existing price action proved itself to be a good entry, and hopefully a profitable trade.

The post GBPUSD SHORT TARGET 1.3060 (Continued) appeared first on THE FOREX TRADER.

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Okay so I haven’t update anything related to trading for quite a period of time, but since I found a great opportunity for my readers to make some money, I’d thought it would be great for me to provide some market insights.

Let’s take a look at the fundamentals from USD perspective. This December, the markets will be expecting the Federal Reserve to increase the interest rates to 125-150 basis points. We can see that the traders has already priced this into the market using the Fed Watch Tool.

If interest rates are expected to rise, theoretically speaking demand for USD will rise due to the demand for USD-based assets. This would strengthen USD against other currencies.

On the GBP side, with no deal in sight, this creates much uncertainty for the British economy as well as its currency. David Davis has said that he wishes to wrap up the arrangements with EU on the departure terms by October 2018. He’s also expecting the deal to favour the union more than Britain itself.

My view on this is, whatever the outcome of the deal is, Britain does not stand to benefit from leaving the EU. One should note that 44% of UK’s export goes to the EU. Leaving the bloc would mean trade tariff that would be detrimental to domestic producers who rely on the EU for business. In other words, a fall in exports would mean a reduction in GDP. Should you be bullish or bearish in this situation? I guess that’s a rhetorical question.

Looking at things on the technical side of things, we can see that the pair is currently range-bound between 1.3022 and 1.3340.

I would expect the pair to exit consolidation and head down towards 1.2700 eventually. The first stop to take profit from this short would be 1.295 before the ultimate goal.


On the bigger picture of things, fundamentally and technically, I think the GBPUSD is doomed. I would short on any rallies.

The post GBPUSD Short Target 1.2700 appeared first on THE FOREX TRADER.

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PUT the word Bitcoin into Google and you get (in Britain, at least) four adverts at the top of the list: “Trade Bitcoin with no fees”, “Fastest Way to Buy Bitcoin”, “Where to Buy Bitcoins” and “Looking to Invest in Bitcoins”. Travelling to work on the tube this week, your blogger saw an ad offering readers the chance to “Trade Cryptos with Confidence”. A lunchtime BBC news report visited a conference where the excitement about Bitcoins (and blockchain) was palpable.

All this indicates that Bitcoin has reached a new phase. The stockmarket has been trading at high valuations, based on the long-term average of profits, for some time. But there is nothing like the same excitement about shares as there was in the dotcom bubble of 1999-2000. That excitement has shifted to the world of cryptocurrencies like Bitcoin and Ethereum. A recent column focused on the rise of initial coin offerings, a way for companies to raise cash without the need for a formal stockmarket listing—investors get tokens (electronic coins) in businesses that have not issued a full prospectus. These tokens do not normally give equity rights. Remarkably, as many as 600 ICOs are planned or have been launched.

This enthusiasm is both the result, and the cause, of the sharp rise in the Bitcoin chart in recent months. The latest spike was driven by the news that the Chicago Mercantile Exchange will trade futures in Bitcoin; a derivatives contract based on a notional currency. More people will trade in Bitcoin and that means more demand, and thus the price should go up. But what is the appeal of Bitcoin? There are really three strands; the limited nature of supply (new coins can only be created through complex calculations, and the total is limited to 21m); fears about the long-term value of fiat currencies in an era of quantitative easing; and the appeal of anonymity. The last factor makes Bitcoin appealing to criminals (although this is even more true of cash) creating this ingenious valuation method for the currency of around $570.

These three factors explain why there is some demand for Bitcoin but not the recent surge. The supply details have if anything deteriorated (rival cryptocurrencies are emerging); the criminal community hasn’t suddenly risen in size; and there is no sign of general inflation. A possible explanation is the belief that blockchain, the technology  that underlines Bitcoin, will be used across the finance industry. But you can create blockchains without having anything to do with Bitcoin; the success of the two aren’t inextricably linked.

A much more plausible reason for the demand for Bitcoin is that the price is going up rapidly (see chart). As Charles Kindleberger, a historian of bubbles, wrote

“There is nothing so disturbing to one’s wellbeing and judgment as to see a friend get rich”

People are not buying Bitcoin because they intend to use it in their daily lives. Currencies need to have a steady price if they are to be a medium of exchange. Buyers do not want to exchange a token that might jump sharply in price the next day; sellers do not want to receive a token that might plunge in price. As Bluford Putnam and Erik Norland of CME wrote

“Wouldn’t you have regretted paying 20 Bitcoins for a $40,000 car in June 2017 only to see the same 20 Bitcoins valued at nearly $100,000 by October of the same year?”

Indeed, the chart is on a log scale to show some of the huge falls, as well as increases, that have occurred in Bitcoin’s history. As the old saying goes “Up like a rocket, down like a stick.”

People are buying Bitcoin because they expect other people to buy it from them at a higher price; the definition of the greater fool theory. Someone responded to me on Twitter by implying the fools were those who were not buying; everyone who did so had become a millionaire. But it is one thing to become a millionaire (the word was coined during the Mississippi bubble of the early 18th century) on paper, or in “bits”; it is another to be able to get into a bubble and out again with your wealth intact.

If everyone tried to realise their Bitcoin wealth for millions, the market would dry up and the price would crash; that is what happened with the Mississippi and the contemporaneous South Sea bubbles. And because investors know that could happen, there is every incentive to sell first. When the crash comes, and it cannot be too far away, it will be dramatic.

The post The Bitcoin Bubble appeared first on THE FOREX TRADER.

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President Donald Trump plans to nominate Federal Reserve Governor Jerome Powell to the top job at the U.S. central bank, according to three people familiar with the decision.

Trump, who has said he’ll announce his pick Thursday, would be choosing a former private-equity executive who favors continuing gradual interest-rate increases and sympathizes with White House calls to ease financial regulations. Powell declined to comment when approached by a reporter outside his Washington-area home. The Wall Street Journal earlier reported Trump has selected Powell.

Market reaction to that report was muted. The dollar briefly pared its gains, but still ended the day close to the level it was before the news and Treasuries maintained their advance. S&P 500 futures were little changed in Asian trading Thursday.

If approved by the Senate, the 64-year-old former Carlyle Group LP managing director and ex-Treasury undersecretary would succeed Fed Chair Janet Yellen, who has raised borrowing costs four times starting in late 2015 and just begun scaling back the central bank’s $4.5 trillion balance sheet.

“He represents a bit of the continuation of the status quo without being named Yellen,” said Gennadiy Goldberg, interest-rate strategist at TD Securities. “He’s relatively dovish-leaning on policy, but also willing to undertake some deregulation at the margin. He’s basically a perfect candidate for Trump.”

The decision would cap a months-long White House search that included consideration of re-nominating Yellen, or installing outsiders such as National Economic Council Director Gary Cohn, Stanford University economist John Taylor or former Fed Governor Kevin Warsh.

A Republican appointed to the Fed in 2012 by Democratic President Barack Obama, Powell has earned a reputation as a non-ideological and pragmatic policy maker. While he hasn’t played a prominent public role in formulating and explaining monetary policy, he has generally backed Yellen’s cautious approach to withdrawing stimulus.

Economic Expansion

Under Yellen, whose four-year term as chair expires Feb. 3, the Fed has overseen an economic expansion now in its ninth year and a fall in unemployment to a 16-year low. It would be up to Powell to keep that growth on track, under a president who has stated a preference for much faster gains in gross domestic product and continued low interest rates.

Powell was already the overwhelming favorite on betting websites after reports from a week ago said he would succeed Yellen. Traders have been increasingly pricing in his selection since then, bidding up Treasuries after yields reached the highest since March.

The ninth postwar leadership change at the Fed comes at a critical juncture — the transition to more normal monetary policy after a decade of unprecedented stimulus to minimize the damage from the financial crisis. It’s at this stage that policy mistakes will be made or avoided.

Delicate Balance

Raise rates too quickly and Powell risks stalling the third-longest U.S. expansion and hurting a stock market rally for which Trump often takes credit. Tighten too slowly and a hot economy might boost the cost of living, inflate asset bubbles and fuel investor doubts about the Fed’s inflation-fighting credibility.

Getting that balance right will require flexibility, independence from political pressure, and a deep understanding of how the economy and the American labor force are changing.

Legal Background

A law-school graduate, Powell will be the first Fed chair since Paul Volcker in the 1980s without a Ph.D. in economics. He’ll now have to work with the more than 300 Ph.D. economists at the Fed Board of Governors to decide how to respond to inflation that policy makers consider too low, and stock and other asset prices they view as lofty.

Since joining the central bank, Powell spearheaded the Fed’s response to the 2014 flash crash in Treasury debt and the overhaul of the flawed London Interbank Offered Rate benchmark. He’s also been the point person at the Fed’s Board for handling such unglamorous-yet-essential duties as oversight of the financial payments system.

Powell, who goes by Jay, served at the Treasury Department under President George H. W. Bush, eventually ending up as undersecretary for domestic finance. It was during his time at the Treasury in the early 1990s that he was among the policy makers who successfully headed off a market meltdown after Salomon Brothers tried to corner a Treasury debt auction using phony bids.

Powell spent much of his career outside of government working in the financial industry, first at investment bank Dillon Read & Co. and later at Carlyle, where he set up the private-equity firm’s industrial group. His 2016 financial disclosure listed assets of as much as $55 million.

“Jay was somebody who had experience in both business and in government and also had a legal background,” Carlyle co-founder David Rubenstein said in an interview earlier this year. “That’s a rare combination.”

In 2011, Powell played a key behind-the-scenes role in helping to avert a debt default by the U.S. government while he was working at the Bipartisan Policy Center think tank.

His work came to the attention of Obama, who later nominated him — along with Harvard University professor and Democrat Jeremy Stein — to the Fed board in a successful strategy to win the approval of the Republican-controlled Senate.

Republican Critics

Considered a team player, Powell has generally kept any reservations he had about the Fed’s regulatory and monetary actions private. That led to criticism from some Republican
congressional staffers and banking industry executives that he was not forceful enough in resisting the raft of post-crisis financial rules.

When he was re-nominated by Obama in 2014 for a 14-year term as a Fed governor, 23 Republicans — including current Senate Banking Committee Chairman Michael Crapo — voted against Powell but came up short against Democrats’ then-majority. Although Republicans have since won control of the Senate, they are highly unlikely to turn down the pick of their own party’s president.

Former Fed officials said Powell did question the efficacy of some regulations, though his influence as a single member of the Fed’s board was limited. During a Senate hearing in June, Powell signaled that he’d support some changes to post-crisis financial rules but not a dismantling of them.

“First, we should protect the core elements of the reforms for our largest banking firms in capital regulation, stress testing, liquidity regulation, and resolvability,” he said. “Second, we should continue to tailor our requirements to the size, risk, and complexity of the firms subject to those requirements.”

Regulators “should assess whether we can adjust regulation in common-sense ways that will simplify rules and reduce unnecessary regulatory burden without compromising safety and soundness,” he continued.

On monetary policy, Powell has been similarly measured in his prescriptions for an economy that has struggled to hit full stride after the Great Recession. He privately voiced skepticism of the third round of quantitative easing launched in 2012, but ended up voting for the initiative championed by then-Chairman Ben S. Bernanke, according to Bernanke’s memoir published in 2015.

Since then, Powell has been supportive of Yellen’s initial go-slow approach to raising interest rates and her subsequent move to pick up the pace a bit.

In an Aug. 25 interview with CNBC television, Powell presaged subsequent comments by Yellen that the softness in inflation this year was a “mystery” and said the low price readings allowed the Fed to be patient in raising rates.

— With assistance by Jeanna Smialek, Agnel Philip, and Benjamin Purvis

Article by Rich Miller, Saleha Mohsin, and Elizabeth Dexheimer on Bloomberg

Source: Bloomberg

The post Trump Selects Powell for Fed Chairman, Replacing Yellen appeared first on THE FOREX TRADER.

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