This week we’re reviewing the impact global events are having on commoditiesand how this bodes very well for the resource heavy TSX, but first a quick note for readers who may be holding NWT Uranium (TSX: V.NWT, Stock Forum; 19.5 cents), which I introduced on Stockhouse near 20 cents a share a few months ago.
NWT was trading near its cash value with significant ownership of London-listed Niger Uranium and exploration projects in Vietnam. I had high hopes for the company but after issuing themselves 7.5 million options at 22.5 cents on January 4, it became clear large shareholders were not happy with this decision or direction. A week later large blocks of stock began to appear on the board for sale from 23 cents to 25 cents and this was our sign to throw in the towel and avoid sitting on dead money.
My paid subscribers were notified early last week that we were dropping coverage and the same holds true here. Someone is content to accumulate stock near 19 cents but short term it will be a major challenge to move beyond the low 20-cent range.
Commodities/Middle East turmoil/increased risk aversion
Typically the TSX and TSX Venture Exchange are joined at the hip to New York. If they’re down, we’re down, and visa versa. But not last week while Egypt was in turmoil. Friday the Dow was down 166 but the TSX was up 27. This isn’t the first time and judging by what’s happening with commodities, it definitely won’t be the last. We are very fortunate in Canada in that we are home to many of the best resource exploration and development companies in the world.
Oil, gold, silver, copper, coal, uranium and agriculture stocks will not be immune to market volatility, but if the aversion to risk continues to build, they should hold up better than most.
We’re only one month into 2011 and yet we’re seeing dramatic changes around the world that are having positive impacts on the price of (already high) commodities. Weather has been the primary driver and we have to ask ourselves why subsequent years are going to be any different as we continue to see dramatic shifts in weather patterns around the world.
Everyone has their theories why and if it is in fact related to C02 emissions, but nothing is going to change. The environmentalists can grandstand all they like, but all you have to do is visit China to see that this country is likely producing more pollution than all others combined. And we’re all content to buy their products so long as they’re cheap and the factories remain “out of sight, and out of mind.”
These weather patterns are pushing agricultural products and food prices to record highs (part of the problem in Egypt). Even coffee is hitting a 13-year high as supplies shrink and demand grows. Floods in Australia are having a major impact on coal prices and now that same flooding is affecting uranium. Uranium mining giant ERA of Australia (owned 68% by Rio Tinto) just announced that rain would wipe out a full quarter of 2011 production.
Weather is the primary culprit but next we can throw in some disease. An outbreak of foot-and-mouth disease is forcing South Korea to kill (cull) almost three million hogs. Korea is the sixth largest buyer of U.S. pork.
We’re barely into the New Year and facing floods, disease and riots. All we’re missing is locusts, a river of blood, and an Exorcist!
Middle East turmoil
Heading into February, global markets are facing significant risk aversion and investors may use this as a (very valid) excuse to take some profit off the table. Continuing violence in Egypt is motivating investors to seek safe havens in gold, treasuries and the U.S. dollar. The good part, unlike European debt problems, these issues in Egypt may be relatively short lived.
There is concern that the violence could spread to other countries in the Middle East or shut down the Suez Canal – which would have a huge impact on oil prices. So far there has been no disruption to oil shipping traffic.
For Israel and the United States, the problems in this region (Tunisia, Lebanon, and Egypt) are very disturbing. Egypt is one of only two Arab states to sign a peace with Israel. Now Israel finds itself with three hostile borders – Lebanon (strong ties to Iran), Egypt (the Muslim Brotherhood), and the Gaza Strip (Hamas).
President Hosni Mubarak has made it clear he has no intention of stepping down. The military (for now) is backing him but they too realize, the tanks and aircraft are nothing more than muscle flexing. It is very difficult for the military to suppress an uprising with force when they are referred to as “The People’s Army.” Military generals have the clout to force Mubarak out (as we saw in Tunisia) but this is unlikely to happen short term.
Closing on a positive note
The economic outlook for 2011 remains positive and large U.S. corporations are sitting on almost $1 trillion in cash. While volatility is always to be expected, these strong balance sheets combined with a leaner and more productive workforce should bode well for corporate North America. Throw in high commodity prices and the TSX and TSX Venture should do well (again) this year.
Disclosure: Danny Deadlock owns 25,000 shares of NWT Uranium (V.NWT), which are for sale at 20 cents per share.