Month: July 2011

NEM. Newmont Mining, Gold the stuff and the Conundrum

Hamilton

Greenspan was flummoxed by the fact that bond yields did not drop after he started up the printing presses. He referred to this phenomenon as a conundrum. Being an ardent advocate of gold, at least in his youth, he must be even more baffled by the disconnect between the major gold miners and the “stuff” . This is true for almost all large producers, ABX, G, AEM, K and a few others but we will use Newmont as an example. Here is the chart, above that of GLD, the gold ETF that represents the stuff;

nem

gld july 29 2011

Both are in US$$ and lined up as best as I can get it. Newmont just reported and like all of them complained about rising operating costs. But how is this possible?  All the big guys still operate at a cost of under $500 an ounce, some a lot lower, so if you look at Newmont in early 2007 it would receive $650 an ounce (the GLD is 1/10th of the spot gold value) for a “profit” of $150 in our example. Today they would receive $1600 for a “profit” of $1100 or 7 times as much, (Even if we assume much lower cost, say $300 an ounce which may be more correct in Newmont’s case, it still works out to more than 3 times as much), yet the stock is now trading  below the level it was at then. Go figure. Production is not down in most cases and the cost of earth moving equipment certainly did not inflate by that much. This is the mystery!

It will, over time, be resolved by the stocks going up or the stuff going down. Unfortunately, looking at the stock there is literally no believable or plausible count that would have this go up. Like AXP years ago,(a sell by the way) this stock has a perfect wedge 5th wave, either the whole thing or just the 5th of the 5th. Does not matter much, it should go down, and not a little either.

The Economist blames the arrival of the ETFs (such as GLD) but also calls the stuff as useless as tulips. And when you think about it, humanity spends fortunes digging the stuff up, and then hides most of it in the underground vaults of Fort Knox and other such places. It is truly a mystery how humanity at large benefits from this. Greenspan ,who argued for the gold-standard , may even agree that that system worked, at the time, mostly because of the conventions and agreements that existed, and not by virtue of the value of the stuff itself, in other words it was also a fiduciary currency. There was a time that cigarettes worked equally well, with so many non-smokers that too may be hard to revive.

TRI, Thomson Reuters.

Hamilton

Once upon a time , everybody in the institutional trading area had a Reuters in front of him (there were few hers), often complimented by a Telerate machine which was orientated more to the bond and money markets. Then came Bloomberg which gave you 2 screens for twice the price. In the mean time there are dozens of “speciality” screens competing in the same space. It is all about the distribution of information and getting that information and charging for it. All that is changing fast with the internet so anything is possible. One of the main variables obviously is the number of traders staring at these things, empty desks have their screens removed very quickly. Thomson saved Reuters from following the Do Do bird but the question now is how well the combo will work over time. Here is the chart.

TRI

TRI did a perfectly symmetric A-B-C, with all legs more or less equal, a near perfect loss of 62% of it’s value, BUT this may not be all there is! EW recognizes 3 different corrective patterns that are essentially a repeat of the same theme. The first low at $35 in 2002 could have been it on its own. However the bull market thereafter is clearly corrective. So we got a second A-B-C down to $25 low. Again this could have been it particularly since the total loss now was at 62%. Here is the rub. The bull market since that low is a fairly clear a-b-c in itself, an initial leg, a pause, and then a wedge. This is corrective action,ergo the next move should be down to below $25 . The most likely, actually the only, pattern that fits is what is known as the triple zig-zag in EW jargon, and as the name indicates it is simple a three-peat of the same theme. More than three does not exist, better yet, has never been found to exist.

The pattern then is an A-B-C X A-B-C Y A-B-C. We are halfway the A of the third A-B-C. The only variation that I can seriously entertain on this one is that the correction is going to be far more complex, like in we are only halfway  and will resume our trek north to ,say, $50. A real possibility if X and Y become symmetric, in magnitude they are already about equal. Even then the stock should make a new low afterwards but at least would provide a nice trading opportunity (this is shown in purple). I would not count on it. By the way, the p/e is at 26, not particularly cheap.

ADM, Archer Daniels Midland, MON, Monsanto

Hamilton

ADM

Another B-wave. Sorry to bother the reader with yet another B-wave, but the sheer numbers are what support the overall bearish outlook and , amazingly, they all more or less peak at around the same time if measured over a month or two.

This one is exceptionally clear as can be seen from the stylized A-B-C in red. Further more it corrected just a little over 62% and found resistance 4 times at the lower trend-line of the past ten years or so. We already have some overlap making if quite unlikely that the pattern will develop in anything more complex.

To stick with the “agricultural complex” another peek at Monsanto supports the bearish outlook. To date this company has not been able to recoup even a minimum of 38% of it’s losses into 2009! Check out  such funds/etf-s as COW or MOO if you own them.

MON july

Short term MON could go a little higher, perhaps to $88 but after that it does not look good, see also a previous blog for a different count.