Tag Archives: peter-arendas

Prime Minister Tsipras Resigned, The Greek Parody Is Set To Continue

Summary Prime minister Tsipras resigned, new elections are expected in September. A new anti-austerity Popular Unity party to be created. GREK investors should expect increased share price volatility and potentially new lows. The Greek parody seemed to come to an end finally. But the recent developments show that another act has only begun. Although opponents of the austerity measures were victorious in the referendum that took place in early July, the Greek government agreed to adopt reforms and austerity measures demanded by the creditors, in order to avoid the looming state bankruptcy. On July 15, the Greek parliament approved bailout measures with 229 out of the total of 300 votes. The measures included increase of value added tax, limits on public spending and reform of the pension system. As a result, €86 billion should be provided to Greece over the next three years. The reaction of the Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) was positive at first, but the share price decline resumed very quickly due to the uncertainty as to whether the new financial package for Greece will be approved by the creditors. There are 19 countries in the eurozone and in 8 of them (Austria, Germany, Greece, Estonia, Finland, France, Latvia, Slovakia) the parliament had to decide whether the country will vote for or against the bailout package. Things started to look brighter in August, as it began to be clear that the bailout package will be approved. On August 18, Fitch upgraded the Greek credit rating to CCC, on August 19, the German parliament approved the bailout package. Germany was the last country to approve the package. It seemed like the Greek problem has been resolved (swept under the carpet) for now. But another of the countless surprises was prepared by the Greek government on August 20, when prime minister Tsipras resigned . According to Reuters, the new elections should take place on September 20. Tsipras wants to support his position and get rid of the opposition inside his own party. According to BBC , 25 members of Syriza plan to create a new Popular Unity party, led by the former energy minister Panagiotis Lafazanis. The situation may get really complicated, as the July referendum showed that a majority of Greeks opposes the austerity measures. If the new anti-austerity party gains too much power, all the bailout process may be endangered. After Tsipras won elections in January 2015, he said that his government doesn’t feel obliged to fulfill commitments of former Greek governments. If the new government behaves the same way, the Greek parody may start over again. Source: own calculations, using data of YahooFinance It is highly probable that the relatively calm couple of weeks have ended for GREK. Volatility measured by the 10-day moving coefficient of variation (chart above) was relatively low over the last couple of weeks, as it ranged from 1% to 4%. But GREK investors should prepare for another turbulent period ahead. GREK’s share price development will be driven mainly by the pre-election polls. The most vulnerable part of GREK’s portfolio continues to be shares of Greek banks, however their cumulative weight declined to approximately 12%. The banks are in a complicated situation, as the eurozone finance ministers declared that bail-in of depositors will be explicitly excluded. It means that the Cypriot scenario shouldn’t repeat in Greece. But the bondholders are endangered. This decision should prevent bank runs and increase the trust of depositors in Greek banks. On the other hand, Greek banks will have even bigger problems to raise money via bond markets. Conclusion The situation in Greece is getting more complicated once again. If the anti-austerity parties win the coming elections, it is hard to predict what may happen. GREK investors should be prepared for another weeks of increased share price volatility and it is quite possible that new lows will be created. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Could A Strike Of The South African Gold Miners Push GLD Higher?

Summary All the three major labor unions in the South African gold mining industry rejected the proposed 13% pay hike. The labor unions demand 70%-100% increase of wages. The South African gold producers can’t afford to increase wages too much as labor costs are said to represent approximately 50% of gold mining costs in South Africa. A probable strike may help to support gold and GLD prices; however, it won’t push too them much higher, as the South African gold production isn’t important enough. As the gold price stabilizes in the tight range between $1,080 and $1,100 per troy ounce (toz), the SPDR Gold Trust ETF (NYSEARCA: GLD ) found its short term support at the $104 level. Although the long-term fundamentals are positive, the short-term development of the GLD share price is questionable. But the current developments in South Africa indicate that GLD may bounce off the recent lows. On August 2 , The Association of Mineworkers and Construction Union that represents approximately one third of South African gold miners, rejected a 13% pay hike proposal. On August 7 , the National Union of Mineworkers did the same. Although the offer has been increased to a 17% pay hike, the unions demand an increase by 70-100%. Basic monthly wage is approximately $460 right now which really isn’t too much, given the harsh working conditions in South African gold mines. On the other hand wage costs are said to represent approximately 50% of gold mining costs in South Africa. This claim is supported by a 2011 estimate that labour costs account for 38% of total operating expenditures. It means that increasing wages by the rejected 13% or 17% would be extremely painful for gold producers given the current gold price. Increasing wages by 100% would ruin them. The South African gold producers can’t afford to increase wages too much. The discussions should continue on Wednesday but the difference between the demands of the miners and offers of the mining companies is still very large. The general secretary of the National Union of Mineworkers claimed that they will go on strike if their demands are not met. The situation will most probably escalate in the coming weeks, however impacts of the possible strike on gold and GLD prices is questionable. South Africa And Gold Mining Although South Africa was the world’s biggest gold producer for the better part of the 20th century, its position has deteriorated significantly lately. According to the USGS data, South Africa produced approximately 150 tonnes gold in 2014. It equals to approximately 4.823 million toz. On the other hand China, the world’s biggest gold producer, mined 450 tonnes (14.468 million toz) gold and the total global gold production amounted 2,860 tonnes (91.951 million toz). It means that South Africa was the 5th biggest gold producer in 2014 (the 5th position is shared with Peru) and only 5.24% of the 2014 global gold production was attributable to this country. (click to enlarge) Source: own processing, using data of USGS Only 20 years ago, South Africa was the world’s biggest gold producer by far. It produced 580 tonnes (18.647 million toz) gold in 1994, which represented more than 25% of the global production. But poor infrastructure, labor problems and the fact that the miners must dig for gold deeper and deeper, resulted in a continuous decline of South African gold production. The South African gold production declined by 74% between 1994 and 2014, while the global gold production increased by 24% during the same time period. (click to enlarge) Source: own processing, using data of USGS The problems of the South African gold industry are well illustrated by the fact that 8 out of the 10 deepest mines are located in South Africa (chart below) and all of them produce gold. The world’s deepest mine, Mponeng , is owned by AngloGold Ashanti, which produces 405,000 toz gold per year and the operating depth ranged from 2,400 to 3,900 meters below surface in 2012. The mine life should be expanded to 2040 which means that the miners will probably dig much deeper. Source: own processing, using data of mining-technology.com Can the strike alone push GLD price higher? The strike alone probably won’t be enough to push gold and GLD price too much higher. South Africa is responsible for only slightly more than 5% of global gold production. In the case that all of the South African gold production would stop (which is not probable), global gold market would lost only slightly more than 0.4% of annual mine supply every month. And there is another problem. There was a major strike of the platinum miners last year in South Africa. The strike took place from January to June and some of the world’s biggest platinum producers (Lonmin ( OTCPK:LNMIY ), AngloAmerican Platinum ( OTCPK:AGPPY ), Impala Platinum ( OTCQX:IMPUY )) were affected. But the platinum price was relatively stable. The chart below shows price development of ETFS Physical Platinum Shares ETF (NYSEARCA: PPLT ), ETFS Physical Palladium SHares ETF (NYSEARCA: PALL ), GLD and iShares Silver Trust ETF (NYSEARCA: SLV ). Share prices of all of the funds increased by 5-9% during the first half of 2014. Only palladium price increased more significantly, mainly due to the problems between Ukraine and Russia that is the world’s biggest palladium producer. Platinum and PPLT prices increased by less than 10% although South Africa is world’s biggest platinum producer and it was responsible for 72% of global platinum production in 2013, the year before the strike. The reason is that platinum producers were processing the stockpiled material. If the South African gold miners have stockpiles large enough, a similar scenario may repeat itself this time again. It means that the strike alone doesn’t have the potential to push gold price notably higher, however it may have a positive psychological effect and it may help gold and GLD prices to hold above the current support levels. Conclusion All in all, the possible strike of the South African gold miners doesn’t have the potential to move gold and GLD prices significantly. South Africa is not that important gold producer anymore. Moreover the miners have probably some stockpiled material that may help to offset the impacts of the strike for some time. On the other if there is a strike, it may have a positive psychological impact on markets and given that GLD price is consolidating above the $104 level and most of the gold producers are unable to generate any profit at current gold prices, it may help to avoid further price declines in the short term. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

EWZ: June Review

Summary The iShares MSCI Brazil Capped ETF grew by 1.55% in June. Out of the 15 biggest EWZ holdings, Cielo was the biggest gainer and Vale was the biggest looser. The Petrobras corruption scandal still impacts Brazilian share markets significantly. The iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ) grew by 1.55% in June. Although the first half of the month was very good and EWZ’s share price was up by 7% at one point, it started to decline in the second half of June, as the Petrobras (NYSE: PBR ) corruption scandal started to weigh on Brazilian share markets again. On June 19, Reuters reported that police arrested top executives of the two biggest Brazilian construction companies. And on June 25, a wave of panic flooded the markets, as a rumor claimed that the former Brazilian president da Silva should be investigated. Although the rumor was denied quickly, the panic reactions have demonstrated that investors are still extremely sensitive to any news related to the corruption scandal that is still far from over. The portfolio of EWZ consists of 68 share titles. The 15 largest holdings represent more than 60% of assets of the fund. The biggest holdings are prefferred shares of Itau Unibanco (NYSE: ITUB ), the biggest Brazilian bank, followed by shares of Ambev (NYSE: ABEV ), a major South American beer and soft drinks producer. Ordinary shares of the second biggest Brazilian bank, Banco Bradesco (NYSE: BBD ), create 7.19% of the portfolio. And the weight of preferred shares of Petrobras is 5.06%. Source: Own processing, using data of iShares.com The chart below shows the June performance of the 15 biggest holdings. The biggest price increase experienced shares of electronic payment solutions company Cielo ( OTCQX:CIOXY ) (9.55%), shares of Banco do Brasil ( OTCPK:BDORY ) (6.77%) and shares of the stock exchange BMF Bovespa (4.36%). On the other hand, June wasn’t good for shares of the energy sector holding company Ultrapar (NYSE: UGP ) (-4.28%) and for diversified mining company Vale (NYSE: VALE ) (-7.04% and -8.78%). (click to enlarge) Source: Own processing, using data of Bloomberg The share price of Cielo grew by 9.55% in June. The growth was fueled by the announcement that Cielo will acquire 30% of Stelo S.A. The transaction should help Cielo, the biggest Brazilian electronic payment solution company, to expand to the electronic wallet segment. Shares of Vale were crushed by weak metals prices. The iron ore price started to grow after it bottomed in early April near the $46/tonne level and it reached $62/tonne in the first decade of June. But it started to decline again and it was at $55/tonne in late June. Copper price declined by 4% and Vale’s investors started to be nervous again. Not only the share price of Petrobras is negatively affected by the corruption scandal. Also the future growth prospects of the company are negatively affected. The company intends to cut its investments by 37% over the next five years. Petrobras plans to invest $130 billion over the 2015-2019 time period, although the original plan was to spend $207 billion. The company needs to reduce its huge debt, but this decision will reduce its growth significantly. (click to enlarge) Source: Own processing, using data of YahooFinance As shown by the chart above, the EWZ share price is strongly correlated with S&P 500 as well as with oil prices represented by The United States Oil ETF (NYSEARCA: USO ). But the strongest and most stable correlation is between EWZ and Petrobras. Although Petrobras represents only 9.03% of EWZ’s portfolio, it is one of the most important Brazilian companies and it has a strong impact on the whole Brazilian economy. Moreover the current corruption scandal leads to an increased political risk and any negative news about Petrobras tends to affect the whole Brazilian share market. The chart shows that EWZ had the highest correlation with Petrobras share price and S&P 500 in June. (click to enlarge) Source: Own processing, using data of YahooFinance The chart above shows volatility of EWZ measured by 10-day moving coefficient of variation. Although the volatility was high in late May and early June, it was relatively low and stable during the second part of the month. Conclusion The EWZ share price increased by 1.55% in June, when most of the early gains evaporated during the last decade, as the corruption scandal started to unnerve investors again. The moving correlation between EWZ and Petrobras was high and stable in late June. On the other hand the correlation between EWZ and S&P 500 was high and declining and correlation between EWZ and USO was high and growing. The development on global share markets, development of oil prices and any news related to the Petrobras corruption scandal will impact the direction of EWZ in July. Moreover the state of the Brazilian economy isn’t good, the GDP is expected to decline by 1-1.2% in 2015. Although EWZ may be an ineresting long term buy, it is quite probable that its share price will decline in the short term. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long PBR. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.