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How Much to Go With Palladium?

Palladium has caught absolutely on fire in recent months. The ETF (PALL) for the hedge fund darling has soared by 34% since the September low, and shows no sign of slowing. The CFTC announced that speculative positions in palladium futures leapt 12% last week to an all time high.

Also known as the ?poor man?s platinum,? demand for palladium for jewelry in China has been soaring with the growth of the middle class. On top of this, you can add huge new investment demand from the palladium ETF, which launched three years ago. As of yesterday, it boasted $500 million in assets, which amounts to a breathtaking 9.3% of 2011?s 7 million ounce global production.

Car manufacturers consume huge amounts of the white metal to make catalytic converters, which are used to scrub the emissions of vehicle air pollution. They could turn out as many as 15.5 million cars this year, up from a paltry 9 million annual rate during the dark days of 2009. Remember cash for clunkers?

Fewer than one million of these will be hybrids or electrics. That means industry demand for catalytic converters is ramping up by 5.5 million units a year from the lows.?That is a lot of palladium, and platinum (PPLT), the substitute metal.

Some 80% of the world?s palladium production comes from Russia and South Africa, dubious sources on the best of days. So a long position in this white metal gives you a free call on political instability in these two less than perfectly run countries. Last year, Russia cut the amount of palladium released from stockpiles from 1 million ounces to only 100,000. Strikes in South Africa have recently crimped supply there.

For traders, it is kind of late to get involved in (PALL) here from the long side. What is of value now is the predictive power palladium has recently achieved. It perfectly called the bottom of all risk assets in August. It ducked the Federal Reserve?s QE3 head fake in September and kept going up. It then ducked a second head fake in November with the tax loss selling that ensued after the presidential election, maintaining its appreciation. It was off to the races once again at the beginning of January.

The message here is that if you are ever in doubt about the short-term direction of the markets, check out palladium. If it is still going ballistic it means buy every dip. If it isn?t, you should sell everything.

PALL 2-6-13

Canadian Coin

 

Taking Ford Out for a Spin

I have been trying to buy this stock for a month. Not because I like their pedestrian cars (except the new, muscular, retro Mustang), but because it is one of the great turnaround stories in business history.

Today?s earnings announcement gives us that window. It delivered over $3 billion in profits during Q4, 2012. But the market decided to focus instead on the expectation of a loss from European operations of $2 billion in 2013, compared to only $27 million in 2011 and $1.7 billion in 2012. That was enough to drop (F) by 15% from its mid-January high.

Europe has definitely been a nightmare for the entire auto industry. When your economy crashes, your bank goes under, and you lose your job, the last thing you do is run out and buy a new car. Tough union rules prevent carmakers from downsizing to a level appropriate with current demand. Everyone is bleeding on their European operations, not just Ford.

Another problem is the collapsing yen, which is making Japanese vehicles much more cost competitive. Get the beleaguered Japanese currency above ?100 to the dollar and keep it there, and that could erode market share for the American makers.

Dig deeper, and you?ll find there?s more to the story. Half of the European losses come from one time only charges. That is far and away offset by a North American market that is absolutely on fire. Indeed, the total size of the US market could soar from 15 million units last year, to 16 million units this year, up from the 9.5 million nadir we saw in 2009. Ford is successfully cutting costs. The rocketing price of palladium (PALL), a key component of the catalytic converters that go into new cars, is telling you as much.

There is no doubt that Ford CEO, Alan Mulally, is a genius. Ford is also a high yield play, with a dividend of 2.90% off of today?s close, which is set to rise. Yet the shares are trading at a 38% discount to the S&P 500. That sounds like a bargain to me for the only US auto manufacturer to avoid a government bailout.

F 1-30-13

PALL 1-30-13

Mustang

Think I?ll Take Ford Out for a Spin