Research Watch

Despite strong equity rallies here and abroad, Australian miners have been left behind. But this week, Goldman Sachs sees value in the beaten-down resources sector. The bank also advises clients to sell gold, as George Soros says the precious metal has been “destroyed” as a safe haven — although prices may already have bottomed. Elsewhere, the Bank of Japan takes QE to a whole new level, amid warnings the government bond market there may finally collapse. You’ll also find Bank of America’s top trades for the quarter ahead; stocks priced in eggs and milk; and the world’s new biggest yacht.

Miners are selling cheap...

“Over the past two years, the mining sector has underperformed the ASX 200 by 40%, its worst run since 1999, when the sector lagged by 55% over a two-year period. The drivers of that period seem similar to today: Resources suffered significant share price falls driven by weak revenues and high fixed costs, while the broader market was relatively strong. Miners now trade at 11.3x forward EPS, a 30% discount to Industrials. On a relatively low 3.3% yield they have missed the markets re-rating of higher income generating stocks, but this remains a possible upside case given recent pay-out ratios of c.40% are well below the 60% pay-out that was delivered during the low growth phase pre-2003. 50% of the ASX Metals sector now trades below 10x P/E and 5x forecast EV/EBITDA: DML, MGX,SFR, FMG, PNA, AGO and RIO.” (Goldman Sachs, April 9)

And Goldman’s shorting gold...

“Turn in gold prices accelerating; closing our long gold position. Given gold’s recent lacklustre price action and our economists’ expectation that the acceleration in US growth later this year to above-trend pace will support US real rates, we are lowering our USD-denominated gold price forecast once again. Our new forecast is further below the forward curve with year-end targets of $1,450/toz in 2013 and $1,270/toz in 2014. As a result, we recommend closing the long COMEX gold position that we first initiated on October 11, 2010 for a potential gain of $219/toz, with the risk reversal overlay expired on March 25. Our long-term gold price forecast (2017 ) remains at $1,200/toz: while higher inflation may be the catalyst for the next gold cycle, this is likely several years away. … While there are risks for modest near-term upside to gold prices should US growth continue to slow down, we see risks to current prices as skewed to the downside as we move through 2013. In fact, should our expectation for lower gold prices continue to prove correct, the fall in prices could end up being faster and larger than our forecast, as aggregate speculative net long positions across COMEX futures and gold ETFs remain near record highs.” (Goldman Sachs, April 10)

Which is no longer a safe haven...

“[Gold] has disappointed the public, because it is meant to be the ultimate safe haven. But when the euro was close to collapsing in the last year, actually gold went down, because if people needed to sell something, they could sell gold. Therefore they sold gold. So gold went down together with everything else. Gold was destroyed as a safe haven, proved to be unsafe. Because of the disappointment, most people are reducing their holdings of gold. But the central banks will continue to buy them, so I don’t expect gold to go down. If you have the prospect of a crisis, you will have occasional flurries or jumps. So gold is very volatile on a day-to-day basis, no trend on a longer-term basis.” (George Soros via South China Morning Post, April 8)

But prices may already be bottoming...

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“One of the only asset classes I tend to prefer today is the precious metals sector. I recent weeks I have hinted at the extremely depressed sentiment including the following important indicators:

1. In early March COT reported gold short positions reached the highest level in over a decade.
2. In early March gold’s public opinion reached one of the lowest levels in at least a decade.
3. Last week COT reported silver short positions reached the highest level in almost two decades.
4. Last week silver’s public opinion reached one of the lowest levels in at least a decade.

The latest development worthy of ‘decade extreme’ or ‘record extreme’ within the precious metals sector, comes to us thanks to Mark Hulbert Financial Digest. According to Mark … there has been a huge plunge in exposure of various Gold newsletter advisors. Currently, the Hulbert Gold Newsletter Sentiment index (HGNSI) is at -31% net short, a historical record low since the inception of the survey in 1997. Essentially, this means that the average gold newsletter advisor is telling subscribers and various other clients to be short gold with 31% of their portfolio.” (Pragmatic Capitalism, April 10)

Top trades for the coming quarter...

1. Own volatility in Q2. There is a close relationship between ISM and stocks, and the recent ISM reading suggests that global stocks are about 8% too high. Buying into volatility is a good contrarian trade in the second quarter.
2. Sell treasuries into Q2 strength. The sequester (automatic defence spending cuts) is expected to impact US economic data and this should see US rates decrease.
3. Long the US dollar versus commodities. The strength in the US dollar won’t be as visible as it was in the first quarter, but as America develops its shale resources and becomes more energy independent, the dollar will continue to strengthen.
4. Favour stocks over bonds. High yield over high grade in 2013. Lower volatility means higher debt issuance and greater corporate ‘animal spirits’. This means equities outperform credit.
5. Own Japanese financials. One word: ABE, as in ‘Asset Bubble Economics’. Inflation is a positive for Japanese stocks, especially financials.
6. Buy German equities on Q2 weakness. … The DAX has global cyclical exposure.
7. Long US financials, short Canadian financials in 2013. US banks and the dollar are expected to benefit from the housing recovery.
8. Long US industrials, short European industrials. … The US benefits from stronger domestic demand and its energy revolution.
9. Long BRIC resources versus Emerging Markets in Q2. BRIC resource stocks have their cheapest valuation in 13 years. Meanwhile, a stronger dollar, weaker commodity prices don’t bode well for emerging market equities.

(Bank of America Merrill Lynch via Business Insider, April 5)

It’s time for investors to count their eggs...

“In a new report, David Rosenberg quotes Kyle Bass as saying that [US] stockmarket gains in real terms are weaker than those in nominal terms. In fact, Bass is quoted saying, ‘one of the best performing equity markets in the last decades has been Zimbabwe. But now your entire equity portfolio (in Zimbabwe) only buys you three eggs.’  Rosenberg says that this made him think about the S&P 500 in egg terms: ‘While there has been a market recovery, it is far more subdued on this basis ... in egg-adjusted terms, the S&P 500 is more than 20% below its pre-recession highs and about half what it was at the all-time highs 16 years ago. In milk terms, the S&P 500 is actually 15% below its pre-recession highs, and in bread terms, the index is 10% lower. Just in case you thought I was cherry picking what’s on the breakfast table." (David Rosenberg of Gluskin Sheff via Money Game, April 9)

Step aside Roman Abramovich...

“You’re no longer the owner of the world’s largest yacht. Boat maker Lürssen announced late last week that it had officially launched Azzam, a 590-foot (180-metre) ship, placing it in the water near its Bremen, Germany facility. Billionaire Abramovich’s yacht Eclipse, which previously held the title of world’s largest yacht, measures 538 feet long. While Lürssen has not confirmed the ship’s owner, it’s been reported that it was built for Sheikh Khalifa Bin Zayed Al Nahyan, President of the United Arab Emirates, who supposedly paid a whopping $627.4 million for it.” (Getting There, April 8)

Japan is taking QE to a whole new level...

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(Credit Suisse via Sober Look, April 9)

Video of the Week: The ‘beginning of the end’ for Japanese bonds…

Hedge fund manager Kyle Bass thinks the so-called widow maker trade – shorting Japanese government bonds – is finally set to pay off.

Bloomberg, April 9)