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Greece Bailout Agreement Adds To GLD Selling Pressure

Summary Greece had finally yielded to Creditor’s demand for austerity against the wishes of its people and this removes the Grexit risk. Fed is now more likely to rise rates as global growth is now more secured to get against financial stability as advocated by the BIS. Gold prices will continue to slump as a result. Greek Bailout Agreement This article is motivated by the breaking news that Greece had reached an agreement with its creditors after a 17 hour marathon negotiation session. It was a make or break moment for Greece and Greece folded to the EU austerity demands despite a clear ‘No’ referendum result on July 5. As the screen shot from European Council President Donald Tusk’s Twitter account shows, there was unanimous approval for the third Greek bailout. Source : Twitter In the end, pensions will be cut and taxes will rise for Greece to stay within the Eurozone and pay its debt on time. Austerity will continue to bite against of the Greek population wishes but at least we can see the light at the end of the tunnel. It is possible that Greek banks will open by the end of the month as the European Central Bank (ECB) is likely to increase its funding support and deposit flight would be reduced greatly. Implication For Gold Prices However the key question for this article would be what does it mean for the price of gold? My previous position for the price of gold is that the premium for USD in the rush for safety will outweigh the premium for gold over Grexit financial stability concerns. This has largely played out which I would highlight in the gold price chart towards the end of the article. Today we have a different situation where the threat of Grexit has largely been taken off the table. This would be even more bearish for the price of gold. The obvious point is that there will be less concern over financial stability. Hence there is now less need for the financial markets to hold gold. The second and less obvious pull factor away from gold would be that it would clear the path for the Fed to rise rates earlier. This could now be done as early as the FOMC meeting on 17 September 2015. We can have more clues from the July 29 FOMC statement and the minutes which will be published on August 19. It is clear that the US economy had been consistent progress especially in the second quarter of 2015. The Fed is approaching its mandate of maximum employment with unemployment at 5.3% and the target unemployment range is from 5.0% to 5.2%. This range has been revised lower consistently and wages have gone up as a result. Quit rates have gone up as well as employees quit jobs to find jobs that fits them better. This is a result of higher confidence in the jobs market which translated to better consumer confidence. The Fed is confident of hitting its 2% inflation target in the medium term over the next 2 years and this period would be the time for them to raise rates and get ahead of the curve. BIS Support For Rate Hike & Growth Implication On the international front, there has been difference in opinion between the Bank of International Settlements (BIS) and the International Monetary Fund (IMF). The BIS advocated that the Fed rise rates as soon as possible so as not to punish savers unnecessarily and to create bubbles in other parts of the financial markets. In addition, the higher rates would also give the Fed the tools it need to deal with the next crisis. This is the quote for the relevant Handelsblatt interview which the BIS expressed its views Do you think that central banks should raise the interest rate earlier and faster in order to preserve financial stability? Would that be your advice for the Fed? Mr. Caruana: We think there are risks and costs if central banks raise interest rates too late. They become apparent only once you fully factor financial stability considerations into monetary policy. But at present the debate is not paying much attention to this. Rather, it focuses on the costs of raising interest rates too early. Mr Jamie Caruana is the General Manager of the BIS. This article was published recently on July 10 and it is in response to the IMF opinion that the Fed should push its rate hike to year 2016. IMF Managing Director Christine Lagarde advocated that the Fed push its rate hike to year 2016 so as not to undermine the fragile recovery. Conclusion The Greek bailout agreement takes the risk away that a rate hike would hurt the European recovery as a whole. This would also mean that higher growth would also necessitate higher interest rates to tame inflation going forward. If institutional savers are constrained by artificial low interest rates, they would be tempted to push up other asset values such as real estate or the equity market. This is the financial stability risk which the BIS was referring to. It is not saying that the Greek bailout would lessen financial stability risk and hence there is lesser need for a rate hike. (click to enlarge) As we can see from the SPDR Gold Trust ETF (NYSEARCA: GLD ) chart above, gold prices have been bearish for the past month as the Grexit crisis intensified as predicted by my previous articles. This is likely to continue in the near future as the chances of a Fed rate hike in September 2015 goes up. Hence we should continue to avoid gold in the short run. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

RWE’s Share Price Bounce Should Be Short-Lived

The German government’s final decision on coal plants is favorable for RWE. Old plants will receive capacity payments. But there will be a very limited power price impact. The shares trade in line with the sector despite weaker profitability prospects and a less attractive dividend. I expect the short-term bounce to reverse. RWE’s ( OTCPK:RWEOY ) share price has risen 7.5% on the back of the German government’s final decision on coal plants . The government had previously proposed legislation for a levy on old coal plants that would have meant a de facto shut down. RWE’s plant would have been the main casualty. As a result of fierce opposition, the Economic Ministry has amended the draft bill and published a revised decision. The final decision is favorable for RWE for several reasons. There will not be any forced shut down of coal plants. And 2.7GW of old coal capacity will be brought into a strategic reserve from 2017. Effectively, they will be mothballed. But they will receive capacity payments. The CO 2 emission reduction of 22mt by 2020 that is targeted by the government should be achieved through new combined heat and power, as well as gas plant builds. I expect RWE to furnish the bulk of the plants that will be brought into the reserve. RWE is the most important coal-based power generator in the country, followed by E.ON ( OTCQX:EONGY ) and Vattenfall. It also has some of the oldest coal reactors in the country. The exact amount of the capacity payments is as yet unclear. But the industry has reportedly demanded eur 300/kW pa. That would correspond to an implied load factor just short of 60%, according to my gauge likely above current achieved load factors. The plant in question was already running at very low load factors and not likely cash flow positive. The remunerated shutdown will therefore be marginally positive. But in the greater context of things, it is worth noting that this makes up no more than 6% of RWE’s overall fleet. I estimate an impact on German power prices in the order of eur 2-3/MWh long term through limited positive merit order effects. But that is, by far, not enough to make RWE’s plant profitable. Furthermore, over time, the impact will get eroded again from more renewables builds. The German power market is severely oversupplied, and any plant other than renewables and a low-cost lignite plant is running on very weak utilization rates. My model suggests that even with the mothballing, the market will remain in firm oversupply. For more detail on the impact on RWE, see my previous article: ” German Government Provides Relief For RWE .” As a whole, the key feature in RWE’s investment case is its struggle with weak power prices and low utilization rates of its generation plant. The reason is its very coal heavy fleet. About 40%-45% of the company’s plant is currently not cash flow positive. The company is looking to shift the company’s profile toward decreasing the weight of conventional power generation and increasing the weight of renewables, supply, and regulated activities. But as I have argued before , even though I see that strategy as positive, it will take a long time still to make a meaningful impact on the company’s earnings profile. With all of the above, I see the rebound on RWE’s share price as short-lived. The shares now trade at a P/E of 12.7x 2016E, which is in line with the sector despite the company’s weak profitability outlook. The same holds true for the 4.5% yield. The impact of the positive news is not large enough on earnings for a major re-rating. RWE has said it may not rule out an E.ON-style split any longer. That might offer a prospect of share price recovery, but investors should keep in mind that E.ON’s generation business is significantly more attractive. I expect E.ON to resume its outperformance over RWE. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Feeling Sensitive? Interest Rate Hikes May Tickle These Sectors

Greek uncertainty aside, the debate around a Federal Reserve interest rate hike is still a matter of when , not if . In this climate, which rate-sensitive stocks stand to benefit, and which could be stung by Fed moves? Indexes – Broadly Thinking Market interest rates – those set by the bond market – are already moving higher, reflecting trader belief that the Federal Reserve will crank up the interest rate dial at least once this year, possibly as soon as September. Ultra-low interest rate policy has goosed a bull market in the S&P 500 (NYSEARCA: SPY ) since March 2009. But now, economic prosperity will necessitate interest rate increases to keep growth from overheating and inflation from bubbling up. That means tighter interest rate policy is bullish for the broad market, even if it’s met by a collective grumble on Wall Street. That’s true at least for a time because it means the economy is on the right track. Watch for volatility, however, as traders speculate on how aggressive the Fed might be. Traders are mindful that the Fed could overshoot. Financials – In Their Best Interest Traditional banks and insurance companies can pull in more funds with higher interest rates, which means Fed hikes tend to be pro-financial stock. Banks that focus on traditional lower-risk community lending – more of a savings-and-loan model – will also potentially benefit from rising rates on the money they lend. Higher rates help insurance “float” portfolios earn more. Float is the gap between premium collection and claim payout. As that portfolio sits around, it needs to collect interest for the insurer. Conversely, the trading risk that can come with higher rates can reveal the risky underbelly of investment banks and their bond exposure. Consumer Spending – Who and What? Think luxury retailers, travel stocks, casinos, automakers – this type of spending tends to ramp up, not because of rate hikes, but because of the economic conditions triggering those rate hikes. It’s important to remember that consumer discretionary tends to do best in the early part of a rate-hike cycle, market history shows. That’s when the euphoria of the economic bounce is strongest and the bite of higher rates is less pronounced. Key for this pick is combing for attractive valuations and hidden gems in a category that could itself get pretty expensive. One might assume then – based on market history – that consumer staples don’t perform as well in a rising-rate environment. Investors might pick specific retailers or think about the growing e-commerce marts that offer all kinds of goods, both frivolous and fundamental. Technology – A Step Ahead Hey, if consumers are spend-happy in this environment, it’s likely that businesses are too. That means they’re retooling their technology needs. And as companies jockey to outrun any inflation risks, those most nimble with pricing power may come out on top. That’s because innovation (being early to market) can carry its own pricing power, which is potentially advantageous in this stage of an economic cycle. Utilities – Put in the Subs These typical dividend-payers are largely considered a bond alternative. During 2014, for example, when Treasury yields tumbled, the utilities sector more than doubled the 14% total return of the S&P 500 Index, according to Standard & Poor’s data. Because newly issued bonds will presumably pay higher issues in line with other rising interest rates, they tend to make the utilities alternatives less attractive. But utilities are a good example that more goes into stock-picking than just interest rate considerations. Utilities, for instance, win favor from some diversification-seeking investors because utilities are one way to limit exposure to U.S.-only consumer markets. That might sound good to investors who are casting a nervous eye toward Europe about now. Drilling Down – Think Companies, Not Sectors As for company-by-company selection, stock-picking criteria might focus on balance sheet health. Companies that need to borrow extensively to operate or innovate may struggle when money becomes more expensive. Investors should feel empowered to think of a Federal Reserve tightening period creatively. For instance, investors might consider a direct play on the improving job market with a look at job search companies; they stand to draw higher traffic as confident workers go for better pay and benefits. Robust payroll counts could also raise demand for payment processing companies or firms that run employee security checks. Bottom line: A big difference for this rate-hike campaign compared to others is the pace at which the Fed is expected to move. The economic recovery, and global turbulence, is still spotty, which could constrain the central bank to gradual hikes – hopefully providing enough time for stock investors to adjust accordingly. Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold. Market volatility, volume, and system availability may delay account access and trade executions. Past performance of a security or strategy does not guarantee future results or success. Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options. 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