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Debt Ceiling – Opportunity?

Posted by nexvucapital on January 16, 2013

We have been watching the out-performance of the growth sectors over the last couple of weeks and thought it opportune to make comment as the Debt Ceiling (more like a debt skylight) battle begins to knock the good news down the page. Firstly, the Debt Ceiling will be resolved (not to be confused with solved) and the reasoning is the same as with the Fiscal Cliff. Washington is in crisis management mode and nothing gets done until it becomes a crisis. At some point in the future, leadership may return to Washington as the United States government needs to shrink and get out of the way to allow the economy to grow and increase revenues. Every person and every company in the United States has been on this path since the actual crisis – a balloon in private debt. We get the Keynesian solution (well done Mr. Bernanke) but along with stepping in to offset the deflation in the private sector the government needs to become more efficient. The current leadership in Washington will not get there and hence crisis to crisis management prevails. Enough about politics.

The seeds of growth (borrowed that) have been appearing across the globe and we feel this will continue against the backdrop of ongoing political crisis management. Each episode in the crisis management saga creates a pull-back (entry point?) in the rotation of capital towards growth from safety. We have chosen the copper sector, to show what this looks like.

Copper Weekly - January 16 2013

The last three entry points into copper were created by fear of a coordinated Global Economic Melt in the US/Europe/China (Sept-Oct 2011) the Greek Tragedy (May-June 2012) and the recent Elections in China/US plus the Fiscal Bluff (Oct – Dec 2012). We suspect the Debt Skylight will create another entry point by delaying the upward movement caused by the continuing rotation into growth from safety. What is very important to recognize is the process of returning global growth which has been orchestrated by the Central Bankers of the world and is reflected in the sequence of higher lows that we see in the above weekly copper chart. Post a Private Debt implosion the Government/Central Banks must step in to offset the deflationary vacuum effect of cleansing the Private Sector Balance Sheet to avoid an economic catastrophe (unless you like eating spam and living in a cave with your gold). Well – “News Wire” – the Private Sector Balance Sheet is looking better through debt reduction/increased savings and is starting to reflate through rising asset prices (housing and equities). Consumption is returning and that is the fuel of the Modern Global Economy. The Copper Price has reached an inflection point where volatility has decreased and the 20 Day Moving Average has now crossed above the 50 Day Moving Average for the first time since 2011. This gives rise to the million dollar question – which way do we go from here?

To shed some light on what we might expect going forward lets take a look at one of our favourite Junior Copper Producers – Capstone Mining.

CS.TO Weekly - January 16 2013The most leveraged entry into the copper market is via the junior sector as any movement in the price of the commodity should be met with a leveraged move in producers of that commodity that trade on a fundamental basis at some multiple to cash flow. Simply put, if one is betting on a move higher in the copper price the purchase of a producer should provide a leveraged return on the move. As can been seen in the above chart – Capstone has recently experienced a breakout from a +20 month down trend.

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