Barron's : Palladium Is Now More Valuable Than Gold

Palladium Is Now More Valuable Than Gold

Palladium started the year on a positive note, with futures prices already up by more than 10% after hefty gains in the last three years. Better yet, analysts are upbeat about the long-term prospects for the metal.

“The biggest driver for palladium’s recent success comes from the ongoing supply deficit, creating a very tight physical market,” says Maxwell Gold, director of investment strategy at Aberdeen Standard Investments.

The metal had record automotive demand of 8.5 million ounces last year, up from 5.8 million in 2010, and “coupled with constrained mine production growth, this has resulted in palladium demand outpacing global supply over much of this decade,” according to a recent report from precious metals consulting firm Metals Focus. Palladium is mostly used in pollution-controlling catalytic converters on gasoline-powered vehicles.

The March futures contract for palladium settled at a record $1,318.50 an ounce on Wednesday, its eighth record settlement in nine sessions. In 2018, futures prices climbed nearly 13%. The impressive rise has made the metal more valuable than gold for the first time in over 16 years. On Wednesday, palladium futures settled with a nearly $25 premium over gold futures at $1,293.80 an ounce. Palladium spot prices topped spot prices for gold on Dec. 4 for the first time since Oct. 23, 2002, according to Dow Jones Market Data.

“Palladium and gold are both rare and therefore valuable,” says R. Michael Jones, chief executive of Platinum Group Metals (ticker: PLG). But “palladium is more valuable than gold as it is rarer,” he notes.

“There are dozens of gold mines around the world,” Jones says, while “there are only two primary palladium mines in the world and two new mines in South Africa in development.”

But as palladium trades a few dollars above gold, it now costs more than $500 an ounce above platinum, whose futures prices settled at $807.90 on Wednesday. Investors can access palladium via futures contracts, as well as the physical metal and exchange-traded funds such as the Aberdeen Standard Physical Palladium Shares exchange-traded fund (PALL) and stocks of miners, including its biggest producer Norilsk Nickel (NILSY).

Platinum’s much cheaper price has raised the possibility that auto makers will start looking to replace palladium in catalytic converters with platinum. The opposite happened when palladium was the cheaper metal. Palladium prices were consistently lower than platinum’s from about 2001 to 2017.

“We are told by the makers and buyers of [automotive catalytic converters] that it would take a $500 spread in platinum and palladium for at least two years to have the beginnings of switching,” Jones says.

And in a recent report, John Ciampaglia, chief executive of Sprott Asset Management, said that while auto makers may return to using platinum if palladium’s price continues to outpace platinum’s, analysts have said it would take auto makers at least 18 to 24 months to make the change.

Switching isn’t quite as easy as it sounds. “There are manufacturing, engineering, and supply-chain costs involved in changing the chemistry of automotive catalytic converters from palladium back to platinum,” says Shree Kargutkar, portfolio manager at Sprott.

“As palladium’s momentum continues higher, it runs the risk of profit-taking and speculative activity weighing on prices,” Gold says. Given that the metal is “very volatile, I wouldn’t be surprised to see a significant pullback of 10% or more, but this would be an attractive entry point more than a reason to abandon ship.”

Barron's : Battered British Defense Stock Will Mount New Charge

Battered British Defense Stock Will Mount New Charge

The United Kingdom-based defense company BAE Systems has been taking flak of late. The stock has dropped because of the company’s Saudi Arabian ties and now presents an opportunity for investors to buy cheap shares with good prospects for capital gains and dividend growth.

“BAE has an attractive valuation relative to the sector and market,” according to a recent report from European bank Berenberg. “Underlying cash generation is set to steadily improve from 2019 estimates, driven by growth in profits,” the firm noted.

BAE (tickers: BA.UK and BAESY) builds warplanes (including participating in Lockheed Martin’s F-35 fighter program) and warships, and has a growing business in cybersecurity as well as other businesses.

The stock is down 26% over the past six months versus a 10% drop in the FTSE 100 index, which tracks the 100 largest U.K.-listed companies. The losses are directly related to the killing of a dissident journalist inside Saudi Arabia’s Istanbul consulate. “The death of Jamal Khashoggi put BAE’s deals with Saudi Arabia under the spotlight,” George Salmon, an equity analyst at U.K.-based Hargreaves Lansdown, told Barron’s. That’s particularly bad news for BAE because Saudi business accounted for 16% of its sales in 2017.

Investors worry that BAE might eventually be forbidden by the British government to sell arms to Saudi Arabia.

Given the kingdom’s enormous wealth and pivotal role in the Middle East, it’s more realistic to believe that the Saudi monarchy weathers world-wide condemnation for the murder and continues to bolster its military. “The cyber business should grow to take some of the strain in the coming years, by which time it’s hoped the political risks around the U.K. and Saudi Arabia reduce,” says Salmon.

Meanwhile, the shares are cheap relative to the stock’s history and versus U.S.-based competitors. The stock trades at a forward price/earnings ratio of 10.8, which is lower than the 12.7 average for the past five years, according to Morningstar. At the same time, U.S. competitors are far pricier. Boeing (BA) trades at 18.4 times next year’s consensus earnings while Lockheed Martin (LMT) and Raytheon (RTN) both fetch forward P/Es of around 14.

“Traditionally U.K. defense stock valuations are cheaper than U.S. ones, but that gap is too high, and that’s why U.K. companies are good value now,” Helal Miah, an analyst at U.K. stockbroker The Share Centre, says.

He sees the dividend going as high as 4.25% over the next couple of years, while Goldman Sachs sees the yield above 5% over the same period. In 2017, the dividend was 3.9%. Goldman has a target price of 6.35 British pounds ($8.19), which is more than 25% above its recent price of £4.98. Earnings are expected to rise to £0.46 per share in 2019 versus a forecast £0.43 in fiscal 2018.

Increases in U.S. and U.K. military spending should drive profits higher.

“Outlays in the U.S. are running at record pace (8% year-to-date) and the budget outlook is improving,” Goldman forecast in a report late last year. “In the U.K., the government has committed to at least 1% real annual growth in defense-equipment spending.”

There are political risks for BAE. Current Brexit-related political wrangling increases the chances that U.K. opposition leader Jeremy Corbyn takes power. The Labour Party head is unlikely to advocate for more foreign arms sales. In the end, arms sales are one of the U.K.’s top three exports, which equates to jobs and votes, which should help sway any future U.K. government.

WWD : LVMH Said Eyeing Stake in New Guards Group

LVMH Said Eyeing Stake in New Guards Group
The fashion group includes Virgil Abloh's Off-White label.

A NEW GUARDS DEAL FOR LVMH?: LVMH Moët Hennessy Louis Vuitton might be getting even closer to one of its star designers, Virgil Abloh.

According to market sources, the French luxury group is in talks with New Guards Group, the Milan-based parent company of the Off-White brand created by Abloh, who is also creative director of men’s wear at Louis Vuitton.

New Guards Group Holding SpA includes the Marcelo Burlon County of Milan label, Palm Angels, Heron Preston, Unravel Project, Alanui and A Plan Application.

The fashion group was founded by Davide de Giglio, Claudio Antonioli and Burlon in 2015.

Off-White was launched online in late 2013, holding its first showroom presentation in Paris the following January with designs that merged influences ranging from Bauhaus to sports apparel and Caravaggio. It established the visual signature of the brand: thick diagonal stripes that have become a byword for insider cool.

“Cool” is a word that also applies to the other brands in the New Guards Group. Francesco Ragazzi, who is also art director of Moncler, established Palm Angels in 2015, inspired by the vision of Eighties’ American fashion entrepreneurs such as Ralph Lauren and Tommy Hilfiger. The brand was launched with the blessing of Pharrell Williams, who wrote the introduction of the “Palm Angels” photo book that Ragazzi published with Rizzoli in September 2014.

Marcelo Burlon County of Milan was established in 2012 as a brand selling printed T-shirts, but his founder has been building the elevated streetwear label’s credibility with solid collections.

Preston this week staged his inaugural runway show in Paris, titled “Night Shift,” held at the Palais de Tokyo. A former art director for Kanye West, Preston, who grew up with the skate culture in San Francisco, worked at Nike Inc. and was also a part of the Been Trill art and DJ collective with Abloh, Justin Saunders and Matthew Williams.

Alanui is known for its luxury knitwear and was founded in 2015 by siblings Carlotta and Nicolò Oddi.

A Plan Application is the brainchild of the U.K.-based sculptor Anna Blessmann and is the most recent addition to New Guards Group.

LVMH could not be reached for comment as of press time.

FT : Chinese drone maker DJI finds $150m in employee fraud

Chinese drone maker DJI finds $150m in employee fraud
Company fires 29 workers after finding widespread embezzlement

DJI, the world’s biggest maker of consumer drones, has uncovered multiple cases of embezzlement and fraud among workers in China that could involve more than Rmb1bn ($148m).

The private Chinese company on Friday said that the corruption had been uncovered by an internal investigation, which “found some employees inflated the cost of parts and materials for certain products for personal financial gain.” The frauds were spread across production, sales and marketing and R&D operations in China.

The Chinese company has fired 29 workers and referred another 16 to lawmakers, though the investigation could ultimately draw in dozens more.

The large number of cases seemed to point to widespread control failures at DJI, which has emerged as one of China’s most successful consumer electronics start-ups and has quickly dominated the new drone industry. The company, founded in 2006, has seen breakneck growth and has seen its workforce swell to 14,000 employees.

DJI said it was “taking steps to strengthen internal controls” and has “established new channels for employees to submit confidential and anonymous reports relating to any violations of the company’s ethical and workplace conduct policies.”

News of the fraud spread after the company sent an internal email to employees in China with an update of its investigation.

“We hold our employees to the highest ethical standards and take any violation of our code of ethics very seriously,” DJI said in a statement. It said that after uncovering the issue it had “fired bad actors and contacted law enforcement officials. We continue to investigate the situation and are co-operating fully with law enforcement’s investigation.”

FT : Donald Trump’s cold war tactics will not work with China

Donald Trump’s cold war tactics will not work with China
The Chinese will not crumble as the Soviets did in the 1980s

Generals fight the last war, and Washington’s economic war on China is straight from America’s tactics against the Soviet Union and its skirmishes with Japan in the 1980s. Yet China is neither the Soviet Union nor Japan. The US’s aggressive trade actions towards Beijing, unless suspended in the near future, will damage the world economy and America itself.

The overriding aim of US policymakers is American economic and military primacy. Though China remains far poorer than the US (roughly one-third the gross domestic product per capita at international prices), it has pulled ahead of the US in total GDP when measured at international prices and is converging or ahead on technologies such as 5G. A notable upcoming test will be China’s ability to compete with Boeing and Airbus in the market for civilian aircraft during the 2020s. My own bet is it will be able to compete.

In the future, no country will have economic primacy, neither the US nor China. China’s economy will be bigger than America’s by dint of a larger population, yet China will be no hegemon. According to the UN’s medium forecast, China’s population will decline by around 400m between now and 2100. Its population is currently 18 per cent of the world’s and 4.3 times that of America. In the UN forecast, China’s share of the world population in 2100 will be 9 per cent, and just 2.3 times that of America. By 2050, China’s median age will soar to 48 years, more senior citizen than world conqueror.

In short, the US policymakers’ China neurosis is vastly overblown. Moreover, the instruments of America’s economic warfare vis-à-vis China are old-fashioned and unlikely to succeed, though they are potent enough to cause damage to both countries and collateral damage as well.

The US’s core tactic is cold war-style “containment”, pushing its security alliance (Nato plus Japan, Australia, and others) to stop buying China’s high-tech products or selling it advanced technologies. The word has gone forth to stop buying Chinese telecoms equipment — not because of proven backdoors to China but because such backdoors might exist (or perhaps because the US government would have a harder time spying on its own citizens with Chinese equipment). Across the US security alliance, governments are now blocking China’s acquisition of technology firms. Recently, Washington even floated the notion that China might somehow spy on Americans with Chinese-built subway cars.

In the 1980s, as part of its attempt to halt Japan’s manufacturing ascendancy, the US sought to close its markets to exports through quotas and tariffs, while threatening a charge of “currency manipulation” if the yen were to depreciate. From the mid-1980s through the 1990s, the US succeeded in pushing the yen into a sustained overvaluation with threats of the dire trade consequences were Japan to let its currency weaken.

The US is playing the same cards with China: close the markets and mutter about currency manipulation. Since US president Donald Trump took office, the renminbi has appreciated slightly against the dollar despite the trade measures, an indication of Beijing’s reluctance to allow the currency to weaken.

There are, of course, hawks and doves in the US’s trade war. Hawks want to bring China to its knees, to make it a Soviet Union redux. Moderates, meanwhile, are after specific concessions, for example on intellectual property. China will probably grant these, but they will neither stop Chinese growth nor greatly benefit the US. Mr Trump himself is likely to settle for spectacle, a “great deal” (perhaps “the greatest ever”) with little content, in the hope for adulation from his base.

Some apparently believe that a successful deal will return millions of industrial jobs to the US. American manufacturing employment today stands at 12.8m (in a workforce of some 163m), far below the peak of 19.6m in November 1979. Automation, not China, accounts for most of the job losses. Future American jobs will be overwhelmingly in services, not on the assembly line, where robots will do the work.

China will not crumble as the Soviet Union did. Its technology and industrial bases are far too strong and its economic and diplomatic links around the world far too deep. Nor will it bow to US threats. Unlike Japan, China is not part of the American security umbrella, and not dependent on US goodwill. China’s products around the world sell because they are high quality, less costly, and often cutting edge.

Today’s trade brinkmanship has rising global costs. The world economy is gradually being dislocated by Mr Trump’s impetuousness. Business investments are increasingly stymied by uncertainty. The US president may do the remarkable disservice of turning synchronised global growth in 2018 into a synchronised slowdown this year and next. The renminbi will depreciate significantly if China is pushed too hard, causing further dislocations.

If ever there were a time for China to make some clear commitments on intellectual property and market access, and for Mr Trump to declare a great success and move on, it is now.

>>> US Gapping down

Gapping down
In reaction to disappointing earnings/guidance:

  • NLS -41%, CASA -31.8%, PRGS -11.1%, NFLX -3.1%, RF -2.6%, AXP -2.3%, FHN -1.6%, TIF -0.6%

Other news:

  • LXRX -24.7% (FDA AdCom votes 8-8 over whether to support sotagliflozin as an adjunct to insulin to improve glycemic control in adults with type 1 diabetes mellitus)
  • TSLA -6.9% (company to cut 7% of workforce, warns that the road ahead is 'very difficult', says preliminary figures suggest Q4 generated GAAP profit, but was less than that from Q3)
  • KIN -5.7% (proposed public offering of common stock)
  • CVRR -4.8% (CVR Energy reports exercise of right to purchase common units of CVR Refining)
  • LLY -2.4% (reports results of Phase 3 soft tissue sarcoma study of LARTRUVO -- study did not meet primary endpoints)
  • SNY -0.7% (FDA AdCom votes 8-8 over whether to support sotagliflozin as an adjunct to insulin to improve glycemic control in adults with type 1 diabetes mellitus)

Analyst comments:

  • SIG -1.5% (downgraded to Sell from Neutral at Citigroup)
  • PPG -0.4% (downgraded to Neutral from Overweight at JP Morgan)

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance:

  • OZK +14.3%, TEAM +8.4%, STI +4.9%, SLB +3%, VFC +2.4%, KSU +1.8%, GME +1.6%, STT +1.5%

Other news:

  • GPOR +8.8% (announces 2019 capital budget and new $400 mln stock repurchase program)
  • FANH +3.3% (responds to unusual trading in stock, says volatility was caused by a report which made groundless accusations and deliberate out-of-context misinterpretations) CGC +2.9% (ongoing volatility)
  • ACB +2.6% (modestly rebounding; prices previously announced offering of convertible senior notes due 2024)
  • CVS +2.5% (CVS Health and Walmart (WMT) reach new multi-year agreement for Walmart to continue participating in the CVS Caremark pharmacy benefit management commercial and Managed Medicaid retail pharmacy networks)
  • PCG +1.6% (modestly rebounding)
  • CVI +1.4% (CVR Energy reports exercise of right to purchase common units of CVR Refining)
  • AZN +1.1% (Linzess approved in China for the treatment of irritable bowel syndrome with constipation) . 

Analyst comments:

  • SPWH +9% (upgraded to Overweight from Neutral at Piper Jaffray)
  • SPB +0.9% (upgraded to Buy from Neutral at BofA/Merrill)
  • CVX +0.8% (upgraded to Buy from Neutral at UBS )