2014 Commodities Halftime Report

Updated on

spurned the financials, industrials and energy sectors.

S&P Economic Sectors
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Strengths

  • The utilities sector closed up .79 percent. This can be attributed to this week’s drop in interest rates and the actions of investors looking to buy dips in the utility sector since it was down about .4 percent last week. The electricity and natural gas distributor PG& E was a top performer for the week, appreciating approximately .8 percent.
  • The telecommunications sector finished up .6 percent.  The integrated communication company CenturyLink was the strongest performer in the group finishing up 1.91 percent.   Not only was the company the proud recipient of a 10-year colocation contract worth about $63 million, but it was also named company of the year by the Indiana Telecommunications Association.
  • The consumer staples sector closed up a mere .3 percent.  Archer Daniels Midland was the biggest gainer up 4.54 percent for the week.  ADM announced its intention to purchase Wild Flavors for $3.1 billion.  Wild Flavors is the maker of the popular Capri Sun flavored drinks.

Weaknesses

  • Energy was the worst performing sector, declining 1.8 percent due to the 5.9 percent drop in natural gas prices.  Range Resources was the biggest laggard of the group declining 5.2 percent.
  • Financials was the second worst performing sector in the S&P 500.  Investors are still somewhat concerned about the fines and investigations levied against some of the big banks.  Genworth Financial was down the most in the group, declining 5.6 percent. Apparently the company may be required to raise approximately $400 million in additional capital to comply with new proposed rules from the government sponsored enterprises.
  • Industrials finished down 1.2 percent for the week.  Fastenal, the construction and supply wholesaler missed earnings estimates and announced additional store closings. Fastenal closed down 8 percent for the week.

Opportunities

  • The markets trend is still up and this week’s decline offers investors the opportunity to put additional capital to work.
  • Job openings continued to rise, topping expectations.  Openings are at a new high since the economic recovery began and layoffs have been declining.
  • Mortgage applications rebounded, breaking a three week decline.

Threats

  • Investors have remained complacent for an uncharacteristically long time.
  • Earnings season started this week and the bulk of the companies will be reporting in the next few weeks.  Wall Street analysts expect the margin of upside surprises to be more limited this quarter.
  • Stock buybacks declined to $23 billion in June. This is the lowest point in a year and a half.

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U.S. Government Securities Ultra-Short Bond Fund – UGSDX  •  Near-Term Tax Free Fund – NEARX

The Economy and Bond Market

Treasury yields declined this week, as the short end of the yield curve retreated from its highest level since late summer 2013. U.S. economic data were relatively scanty following the long Fourth of July weekend, with no major surprises. Earnings season kicked off this week, and will ramp up in earnest next week.  The Federal Reserve’s June minutes were released Wednesday, and confirmed that the eventual concluding “taper” will be in the form of a $15 billion increment, placing the Fed on pace to fully exit the tapering process at its October meeting.

Two-Year Tresurey Yield
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Strengths

  • The U.S. market escaped resurgent European peripheral concerns this week largely unscathed, shaking off a Portuguese scare in healthy fashion.
  • The Fed’s June minutes were released on Wednesday, confirming that the expected pace of “tapering” will include a final $15 billion increment, in turn confirming an expected October conclusion to tapering.
  • U.S. bonds rallied as yields retreated in the face of European concerns.

Weaknesses

  • Small business optimism retreated from its recent cycle highs, coming in at 95.0 and missing expectations of 97.0.
  • When an affiliate of Banco Espirito Santo failed to make good on a payment this week, it sent the Portuguese markets into a tailspin and led to some profit taking across Europe. While the issue does now appear to be largely company specific and peripherals have been major outperformers year-to-date, concerns linger.
  • German industrial production weakened, down 1.8 percent month-over-month, and added to recent European growth and deflation concerns.

Opportunities

  • With key global central banks back into easy policy mode and inflation trending lower in many parts of the world, the path of least resistance for bond yields continues to be down.
  • Mortgage Banker Association mortgage applications ticked higher this week, up 1.9 percent.
  • The bond market has gone through fits and starts over the past year and the recent run up in yields may be an opportunity if recent history is any guide.

Threats

  • The Portuguese debt scare this week caused a lot of volatility in European markets, sending peripheral yields higher and many indices lower.  While Portugal’s second-largest bank did quantify some of its risk today, the drama highlights the possibility of continued, and perhaps unseen, fragility in the European periphery.
  • Confirmation this week of the pace of tapering continues to highlight strength in the U.S. economy.  With the European Central Bank and Bank of Japan taking the global lead in easy monetary policy, the Fed could possibly transition to a tighter policy sooner than many expect.
  • Wage growth continues to remain sluggish despite the recovery and rising rents nationwide.

World Precious Minerals Fund – UNWPX • Gold and Precious Metals Fund – USERX

Gold Market

For the week, spot gold closed at $1,338.62, up $18.07 per ounce, or 1.37 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, rose 3.1 percent. The U.S. Trade-Weighted Dollar Index fell 0.1 percent for the week.

Date Event Survey Actual Prior
July 8 U.S. June NFIB Small Business Optimism 97.0 95.0 96.6
July 9 China June Imports 6.0% 5.5% -1.6%
July 9 U.S. June Fed FOMC Meeting Minutes
July 11 Germany June CPI 1.0% 1.0% 1.0%
July 15 Germany July ZEW Survey Expectations 28.2 29.8
July 15 China June Retail Sales YoY 12.5% 12.5%
July 17 Eurozone June CPI YoY 0.8% 0.8%
July 17 U.S. June Housing Starts 1025K 1001K

Strengths

  • Gold posted its sixth consecutive week of gains after rising $18.07 per ounce for the week. Assets in the largest physical gold ETF erased this year’s decline as investors begin to realize the need for inflation protection as prices rise and the Fed vows to keep rates low for a considerable time. Not surprisingly money managers increased their net long positions in gold for a fourth consecutive week, leading all known ETF gold holdings to rise at the fastest pace since at least 2012.
  • Christian Noyer, head of the French central bank and ECB governing board member, believes the global expansion of U.S. regulations will encourage diversification away from the U.S. dollar, threatening its reserve currency status. Noyer’s comments come as a result of the hefty fines the U.S. government is levying on French bank BNP Paribas after it was accused of dealings with Iran. Mr. Noyer added that trade between Europe and China does not need to use the U.S. dollar, especially now that China has agreed to the creation of an offshore renminbi clearing in Paris. Mr. Noyer concluded by stating the French central bank will now actively avoid U.S. dollar transactions in order to escape the application of U.S. regulations to its dealings.
  • Northern Star shares rose as much as 15 percent in Australian trading as the miner announced it had surpassed its quarterly production guidance and had earned substantial margins at all its operations. Similarly, Coeur Mining reported a 48 percent increase in silver and a 13 percent increase in second quarter production at its Rochester Mine in Nevada. Lastly, Premier Gold confirmed a 69 percent increase to its open pit indicated resources at its Hardrock property in Ontario.

Northern Star Resources Jumps to 52-Week High
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Weaknesses

  • British Columbia’s Fraser Institute’s Centre for Aboriginal Policy Studies warned that a recent Canadian Supreme Court ruling granting a group of 6 B.C. First Nations title to a large piece of land outside their reserves “will likely stunt economic development across Canada.” There are an estimated 200 First Nations bands in British Columbia, which raises concern among the mining community, that’s already been subject to numerous lengthy negotiations with these groups. In a related note, Australia’s Federal Court ruled in favor of the Ngadju people and against Gold Fields with regards to the St. Ives mining tenements. The Court sided with the Ngadju people after determining Gold Fields operations violate the native-title rights, to which Gold Fields objected, arguing it complied with its obligations at all times.
  • Polyus Gold entered into a hedging contract to sell 310,000 ounces of gold over the next two years, which led to numerous headlines stating the gold sector would return to the era of gold hedging. However, data shows the hedge book volume stood at 87 tonnes as of the end of the first quarter, slightly up from the previous quarter, but miles away from the 3000 tonnes reached in the 1999 peak.
  • Banro Corp. tumbled after announcing the throughput capacity at its Twangiza mine may not reach the expected 1.7 million tons design capacity. In addition, the miner said a plant at its Namoya operation will run below capacity as a result of technical setbacks. Banro’s troubles open the possibility of default and bankruptcy as the miner will struggle to repay a heavy debt load with a significant reduction in revenues.

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