Dont’t Believe Everything You Hear

by Rob Kirby, Kirby Analytics. November 20, 2006

One of my favorite weekend pastimes is listening to the Financial Sense Newshour, hosted by Jim Puplava each weekend and broadcast on the internet. This past weekend in the show's 3rd hour, in a segment called "other voices" - Jim interviewed well known investment letter writer Dennis Gartman [begins at 21:20], author of the Gartman Letter.

Mr. Gartman opined that in the wake of Democratic mid-term electoral successes that legislative grid-lock would be a likely outcome in the upcoming Congress. Mr. Gartman sees these prospects of "limited government" as the pretext for equity markets to move higher. In responding to Jim's questioning about the current state of inventories of base metals, Mr. Gartman intimated that "inventories as low as they are today" are unsustainable and inventories will in all likelihood build because, in Mr. Gartman's words, referencing current copper prices for example which he describes as,

"egregiously, preposterously, stunningly, shockingly high."

Mr. Gartman presumes that prices for these commodities will fall over the next six to twelve months as inventories build as a result of a supply side response [companies rushing out to bring more of these "expensive goods" to market].

The Numbers Tell The Story:

Take a look at 5 year aluminum data:

5 yr. stocks 5 yr. prices

Now let's take a peek at 5 year copper data:

5 yr. stocks 5 yr. prices

Let's not forget 5 year Nickel data:

5 yr. stocks 5 yr. prices

And here's 5 year Lead data:

5 yr. stocks 5 yr. prices

And good ole 5 year Zinc data:

5 yr. stocks 5 yr. prices

Any supply side response that Mr. Gartman alludes to would necessarily have to come from the miners of base metals.

Now, let's take a look at the Federal Reserve's Capacity Utilization Statistics for selected industry groups including the mining industry:

Capacity utilization	Percent of capacity								Capacity growth Oct. '05 to Oct. '06
	Average 1972-2005	1994-95 High	2001-02 Low	2005 Oct.	2006
					July	Aug.	Sept.	Oct.
Total industry	81.0	85.0	73.9	79.9	82.6	82.7	82.1	82.2	2.0
Previous estimates					82.6	82.5	81.9
Manufacturing (see note below)	79.8	84.5	72.0	79.4	81.2	81.4	81.0	80.7	2.5
Previous estimates					81.2	81.2	80.8
*******Mining*******	87.3	89.0	85.6	79.6	91.2	90.6	91.1	91.8	-1.3
Utilities	86.7	93.7	83.7	86.2	88.9	88.9	84.8	88.2	.6

A Few Notes On Capacity Utilization From Wikipedia:

Capacity utilization is a concept in Economics which refers to the extent to which an enterprise or a nation actually uses its installed productive capacity. Thus, it refers to the relationship between actual output produced and potential output that could be produced with installed equipment, if capacity was fully used.

In general, if market demand grows, capacity utilization will rise, and conversely, if demand weakens, capacity utilization will slacken. Economists and bankers closely watch capacity utilization indicators for signs of inflation pressures.

There is a common belief, that when utilization rises above somewhere between 82% and 85%, price inflation will increase. On the other hand, excess capacity means that insufficient demand exists to warrant expansion of output.

The chart above paints a different picture than the one espoused by Mr. Gartman - doesn't it?

Here, we can clearly, explicitly, succinctly and unequivocally see that the mining industry's ability to DELIVER a supply side response is weaker today than at ANY TIME in the past 35 YEARS!

Not only that folks, the capacity of the mining industry to continue delivering the goods at the current pace is in fact shrinking - unless the Fed is reporting unreliable economic data.

And we all know they wouldn't do that - would they?

Anyone invested in the mining / metals complex owes it to themselves to at least consider the data above BEFORE they pitch any of their resource investments or shares.

Today's Market

Overseas equity markets began the week on a sour note with Japan's Nikkei Index coughing up 365 points to close at 15,725. North American equities were largely mixed with the DOW off 26.02 to 12,316.54, the NASDAQ up 6.80 to 2,452.70 and the S & P losing .70 to 1,400.50. NYMEX crude oil futures fell by .17 to end the day at 58.88 per barrel.

Interest rates were virtually unchanged from Friday's closing levels with the 2-year benchmark government bond ending the day at 4.77%, the 5-year at 4.60% and the 10-year at 4.60%.

On foreign exchange markets the U.S. Dollar Index fell .01 to close at 85.28.

Precious metals had an unusual day of trade. COMEX gold futures fell by .60 to 622.70 per ounce and COMEX silver futures were off by .03 to 12.80 per ounce. But COMEX platinum futures were ahead by 66.00 [5.56%] to 1,258.00 per ounce. The XAU Index fell .53 to 132.20 and the HUI Index dropped .79 - ending the day at 317.85.

There is no economic news of note scheduled for tomorrow - so on that note, I'd wish you all a pleasant evening!

Rob Kirby

© 2006 Rob Kirby

Contact Information

Rob Kirby | Proprietor, Kirby Analytics Newsletter - Proprietary Macroeconomic Research
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