Also stirring the bulls has been a healthy start to second-quarter earnings season. Of the 118 companies in the S&P 500 that have reported to date, nearly three-quarters have posted better-than-expected profits.
We continue to look for another leg lower in stocks over the next two months. In particular, we expect the S&P 500 to at least retest its June lows of around 1,266 and more likely undercut those lows and retest technical support closer to 1,200 to 1,225.
On Friday, July 20, stocks fell sharply after Spain announced that its economy would remain in recession throughout 2013 and the region of Valencia would seek a rescue package from the national government. The yields on 10-year Spanish government debt spiked to 7.25 percent, the highest level since the nation joined the euro zone.
Italian yields also rose, although the country’s 10-year bond yields over 1 percentage point less than Spain’s. While investors have largely ignored the euro zone crisis over the past two weeks, these developments in southern Europe are yet another sign that the EU is far from finding a solution and more negative headlines are likely to emerge from the troubled Continent in coming months.
One week from today, the US government is set to release its first estimate of second-quarter gross domestic product (GDP) growth. The consensus expectation is for growth of around 1.5 percent; recent negative data suggests even that modest pace of growth may prove too optimistic.
Earlier this year, most economists were looking for the US economy to accelerate in the final half of the year and grow close to 3 percent. Instead, it’s likely that growth will continue to decelerate into the second half of the year.
While conditions have worsened, the data is still not bad enough to suggest a coming recession. A more likely scenario is that the US continues to limp along with growth of around 2 percent, as it has since early 2010.
Opportunities Still Exist
Even amid these lackluster market conditions, some promising trends are underway for investors. One such trend is in agriculture. With a severe drought and heat wave hitting much of America’s Corn Belt, the quality of crops has deteriorated. The US Department of Agriculture (USDA) now estimates that only 31 percent of the US corn crop is rated in “good” or “excellent” condition, down from 40 percent last week and 70 percent in a normal year. To make matters worse, almost three-quarters of the corn crop has silked — i.e., reached a pollination stage — whereby it is most vulnerable to bad growing conditions.
As a result, corn prices have soared, as the USDA continually cuts its estimates of the ultimate size of the crop. Spot corn prices have jumped from lows of $5.51 per bushel in late May to recent highs just under $8/bu. Soaring prices are boosting the fortunes of a myriad companies that sell into the agriculture industry.
Another trend worth watching is energy—in particular, uranium and nuclear power.
The 9.0 magnitude Tohoku earthquake that rocked Japan on March 11, 2011 was one of the most powerful and devastating in history. The quake centered off the coast of the island nation created a massive tsunami that measured over 100 feet high as it struck parts of Japan’s east coast. The human toll is hard to imagine: 15,856 dead, 3,306 missing, 6,025 seriously injured and more than 700,000 rendered homeless.
In the days following the quake, the media’s attention shifted from the devastation caused by the earthquake and tsunami to a fast-evolving emergency at the Fukushima Daiichi nuclear facility. There were three fatalities at Fukushima, all from drowning as the tsunami hit.
Since the accident, six TEPCO workers at the plant have died. However, according to a UN report released in late May, none of these deaths were linked to radiation exposure. Not a single person has died as a result of the explosion at the Fukushima reactors or from radiation-related illness.
Early estimates also suggest that radiation exposure from the crippled plant wasn’t high enough to cause a noticeable increase in cancer rates in Japan. This was partly because of the timely evacuation of residents from the region and also because the plant did not spew as much radiation over land as occurred during the Chernobyl incident in 1986.
However, the negative headlines surrounding Fukushima convinced many investors that nuclear is a dead technology. Nothing could be further from the truth. With the exception of Germany, a country that has long had plans to phase out its nuclear power, no major country that uses the technology has decided to abandon nuclear. In fact, China recently approved a new safety plan for its nuclear program and will restart approvals for new plants.
The International Atomic Energy Agency (IAEA) forecasts that global nuclear capacity will grow from 375 gigawatts (GW) in 2010 to 429 GW in 2020 and 501 GW in 2030. Most estimates still show global demand for uranium, the key fuel for all these plants, to rise from around 68,000 metric tonnes this year to over 100,000 tonnes per year by 2020.
Total mined uranium supply was about 58,000 metric tonnes last year, well under global uranium demand. That supply/demand gap has historically been met through so-called secondary sources such as government uranium stockpiles and reprocessed Russian nuclear warheads. The Megatons to Megawatts program for recycling Russian warheads produces the equivalent of over 10,000 metric tons of uranium. However, Megatons to Megawatts will terminate at the end of 2013, meaning that mined supply will have to rise to meet both growing demand from new nuclear plants and to offset the decline in secondary sources such as Megatons to Megawatts.
To incentivize producers to mine enough uranium to meet growing demand, prices must rise far above their current level of $50/pound. It’s time to take another look at uranium mining companies.
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