Highlights of the Week of July 28 2014

Dear PGM Capital Blog readers,

In this weekend’s blog edition, we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of July 28, 2014.

• Argentina’s Credit rating downgraded to SD on July 30.
• The USA Economic reports of last week.
• Rhodium at 16-month high.

ARGENTINA CREDIT RATING DOWNGRADED TO SD:
A federal judge in New York has ruled that Argentina must pay a small group of creditors in full — about US$1.5 billion — even though it got 93 percent of its other bondholders to accept partial payment in a debt restructuring after its 2001 default.

With no deal by late Wednesday, July 30, ratings agency Standard & Poor’s announced that it had downgraded the country’s foreign currency credit rating to SD “selective default” because of the missed interest payments.

Below video gives more details on Argentina’s current “Selective Default” status.

After defaulting in 2002, Argentina restructured its debt in 2005 and 2010. More than 90 percent of the bondholders agreed to accept new bonds with reduced payments. The holdouts refused the terms, and were awarded US$1.33 billion, plus interest, by a U.S. judge.

THE USA ECONOMIC REPORT:

The USA Q2-GDP report of July 30, 2014:
Wednesday, July 30, US GDP came in with a nice surprise with a growth of 4% in the second quarter of this year, while the previous quarter has been revised to a decline of -2.1% instead of -2.9%. Q2 figures came in far better than the analysts’ 3% forecast. However, looking deeper into the numbers, we can find what drove the sharp expansion and deduce why it might be a temporary growth.

• Business Inventories Represents 1.66% of the 4% GDP Growth:
  Rising inventories does not mean that they are selling more goods because products can end up on store shelves or in warehouses.Therefore, this reading cannot be seen as a sign of recovery, but looking at final sales will be the key.
• Cars & Light Trucks:
  Looking further into the numbers, it’s clear that car and light truck purchases played a major role in the GDP release. Motor vehicle and parts spending grew an annual percentage of 17.5%. The purchase of motor vehicles and light trucks can be considered as an investment with an economic life-cycle of 5 years. Due to this we believe that a great portion of new cars purchased in June, can be seen as delayed purchases by owners off written-off vehicles, using their vacation bonus.
• Exports Added 1.23% to GDP:
  However, this increase is also based on estimated trade data. Therefore, the second estimate for the second quarter, which is based on complete data, will be released at the end of August. That number will be more accurate and representative.

The USA jobs report of August 1, 2014:
The US Economy added 209K  versus an estimated. 230K and the Unemployment Rate ticked higher to 6.2%.

The USA Core PCE: 
The US personal consumption expenditures price index excluding food and energy – the so-called core PCE – increased 0.1% in June,  to 1.5%, while it was anticipated
to remain stable at 1.4%.

RHODIUM AT 16-MONTH HIGH:
Rhodium advanced to the highest price in 16 months and is set for the biggest monthly gain since 2009 as demand from car makers increased amid restricted supply.

Rhodium climbed to US$1,250 an ounce on July 25, the highest since March 26, 2013.

As can be seen from below chart, the metal, used in catalytic converters to curb harmful emissions, has rallied 40% since reaching a nine-year low of US$890 an oz in December of 2013.

Rhodium has gained 28% this year. It’s set for the first annual increase since 2009, when prices doubled.

PGM CAPITAL COMMENTS:

Argentine Selective Default:
Argentina is not the only country that has struggled, or even failed, to pay its debt in recent years. It is hardly the only country with a severely impaired credit rating either. Alongside Argentina, Moody’s currently lists 10 other countries with a rating of Caa1 or worse.

Based on ratings from Moody’s Investors Service, these are the 10 other countries at risk of default:

•  Ecuador:
  • Moody’s credit rating: Caa1
  • Gov’t debt (pct. of GDP): 24.8%
•  Venezuela:
  • Moody’s credit rating: Caa1
  • Gov’t debt (pct. of GDP): 51.6%
•  Belize:
  • Moody’s credit rating: Caa2
  • Gov’t debt (pct. of GDP): 80.4%
•  Cuba:
  • Moody’s credit rating: Caa2
  • 2014 Gov’t debt (pct. of GDP): N/A
•  Jamaica:
  • Moody’s credit rating: Caa3
  • 2014 Gov’t debt (pct. of GDP): 133.7%
•  Egypt:
  • Moody’s credit rating: Caa1
  • Gov’t debt (pct. of GDP): 91.3%
•  Ukraine:
  • Moody’s credit rating: Caa3
  • 2014 Gov’t debt (pct. of GDP): N/A
•  Greece:
  • Moody’s credit rating: Caa3
  • 2014 Gov’t debt (pct. of GDP): 174.7%
•  Cyprus:
  • Moody’s credit rating: Caa3
  • 2014 Gov’t debt (pct. of GDP): 121.5%
•  Pakistan:
  • Moody’s credit rating: Caa1
  • Gov’t debt (pct. of GDP): 63.7%

Source:

USA Economic data:
Based on the Country’s economic data and geopolitical tensions, U.S. stocks tumbled during the last days of July 2014.

As can be seen from below chart, the DOW Industrial tumbled 467 points or 2.75%.

Former Federal Reserve Chairman Alan Greenspan said that USA-equity markets will see a decline at some point after surging for the past several years.

While Greenspan said he didn’t think equities were “grossly overpriced,” his comments come amid growing concern that interest rates near record lows are creating asset-price bubbles. Fed Chair Janet Yellen said in a July 16 congressional testimony that while she saw signs of high valuations in some markets, prices overall — including for U.S. stocks — weren’t out of line with historical norms.

Rhodium:
Rhodium is the second scarcest element in the earth’s crust.

Demand for the metal will beat supply by 60,000oz this year while on the other hand output will drop 3.8% and car companies, accounting for about 80% of demand, will boost usage 4.1%.

European car sales rose in June for the longest stretch of gains in four years, Brussels-based European Automobile Manufacturers’ Association said on July 17. 

Rhodium’s surge to a record $10,100 in 2008 forced manufacturers to use more platinum and palladium, which have similar properties needed to clean car emissions.

We are very bullish on Rhodium and the other Platinum Group of Metals (PGM) Palladium and Platinum and have BUY rating on them.

Last but not least, before following any investing advice, always consider your investment horizon and risk tolerance and financial situation and be aware that stock prices don’t move in a straight line and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Eric Panneflek