Interview: Axel
>> welcome back, everybody. metals are falling this morning because there’s worries that this year’s rally may be exaggerated. axel merk is joining us in our new york studios spep is joining us for more. axel, why are these markets so weak this monday morning?
>> hi. good to be here. we have seen the market go up in a straight line over the last couple of months. indeed, it’s not just the commodity markets , but if you look at any market , equity market , bond markets , commodity ace cross the board have been going up. it’s about time we have had a correction or increased volatility. we have seen the added volatility a little bit at the end of the last week. people forget we have more of the normal times. people new to investing in commodities don’t know something like the silver market can move a lot in ten minutes. we have had it happen, and it’s good to have it happen to shake out the new money and insure the commodity boom can be more sustainable at a reasonable level.
>> where is that reasonable level? how much further down do you anticipate it’s going to go before sustainability comes in?
>> well, it’s difficult to talk about the absolute level. what we can say is that the entire world is trying to keep growth going, and the resources are limited, and it’s very difficult to ramp up production, so commodity booms last for many many year, some say ten years or longer than that, and as such, long term, the forces remain in place, but nothing goes up in a straight line, and when you have more tools available such as exchange rated funds to buy the commodities directly, that’s adding to the spike in these prices, and as such, it’s very good to have a pullback here.
>> was the gold e.t.f. the top of the market , if you will?
>> that’s what people said, but since then, gold has risen sharply. the gold e.t.f. has the advantage and not the risk of the producers. we have had the silver e.t.f. come on the market and the same voices are calming it down. there are slight differences in the two. notably, the silver market , there is just not enough silver out there, should there be a storm on silver. in gold e.t.f., gold is traditionally horded as a value for money. silver is used much more in the industry for value for money. the industry will cry we need the silver, you can’t just store it, and there might be additional regulations in the market . that definitely contributes to the push higher as retail investors have the opportunity to participate at that market .
>> just a couple of questions, axel. we have seen volatility in the stock market , the options on these commodities certainfully the fixed income markets and financial markets don’t seem to be rising at all. i wonder why that is the case.
>> well, we have seen―it’s been a trend in the making for many, many years, actually. there are fewer and fewer opinions in the market . the markets are getting larger and larger, but the decision-makers are getting few heer. we have a few hedge funds that follow the same strategy. they have the same training and once they reach a certain size, they have the same ideas. it’s high time we have diversity and opinion out there. most folks nowadays have only experienced the last ten or 20 years in the market . that’s a similar markets . we need different markets and different volatility and maybe a crisis to get new opinions and new quality of investor into the market .
>> were you one of the sellers this morning?
>> no, we were not any of the sellers this morning in our hot currency fund. we don’t try to trade in and out of the market . we provide investors to gain exposure, in our case, to hard currencies. it’s difficult to trade this market . traders, if they enjoy doing it, so be it, but a retail investor who gets into the commodities of precious metals have to be aware of the volatility. most folks who invest in gold do so as a store of long term value. they have the difference―the difference to what used to be 20 years ago is you have the e.t.f. available. it used to be that you had to go to the coin dealer. when you go to the coin dealer, you put the coin aside and don’t look at the price every five minutes and now you have the opportunity to trade.
>> axel, in 12 to 18 months, where will gold prices be?
>> i suppose you ask that of everybody and as every analyst revises the prediction upwards as the gold price moves up. it’s difficult to say, it would not hurt if we had a stable market for a couple months. having said, that the forces that have been driving gold higher remain firmly in place. we had gold drive up to this level and leading kind of this market before now. the dollar is weakened in the last couple of weeks. we suspect in the coming months, it will be more on the dollar and gold may pick up again in the next couple of months pochlts that note, we thank axel merk of the merk hard currency fund. stay with us.
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Listen Open Exchange--Suzy (fast)
everybody, from world headquarters in new york. this is “open exchange.” i’m suzy assaad. it’s 11:00 a.m. let’s start you off on the top stories. what was a rally in commodity prices has turn into quite a selloff today. they are tumbling as higher interest rates around the world are threatening to curb the demand which caused the run-up in prices of the metals. oil as other commodities also down. copper is down the most in a year-and-a-half. zinc has dropped the most in 17 years. in other economic news, foreign investors slowed down their purchases of u.s. securities in march. net holdings of stocks and government bonds as well as other assets went up about 20% less than in february. the treasury department said that foreign central banks were net sellers of u.s. treasury notes. it’s the first time in six months that has happened. the report has got the dollar gaining against the euro this morning where strategists say our currency is more appealing because foreign investors bought enough u.s. assets to cover the trade deficit. china’s currency strength and past the 8 to the dollar. it prompts speculation that china is letting the yuan trade more freely to satisfy the united states. let’s get a quick comment on the markets from our featured guest. rob, what do you make of this round of selloff we’re seeing?
>> i think there are two reasons for it. one, the extremely easy money phase of monetary policies at other major countries is gradually ending. in some sense, ben bernanke had had suggested that that process may have already been finished in the united states and the european central bank and the bank of japan have been making noises about raising interest rates. i think the more important factor is the enormous rally we have seen in all commodities in the month of april. copper prices have doubled in just one month. it’s not surprising there’s a wake-up call that goes out and you see adjustments.
>> i guess the question is this a reversal of a trend or correction and a continuing upward channel?
>> my bias says this is the beginning of a reversal. it’s not going to happen smoothly. you will get the alternate up and down in the commodity prices. i wouldn’t be surprised if we saw the run-up in commodity prices before they fall. think back to 2000 when stock markets here came down quite a bit there were two peaks. there was a peak in march and another in august. then they were down for good. similar thing could happen in commodity prices in the current. >> we’ll talk about commodities late he on in the hour. let’s check the overall markets . we’re seeing a little bit of a bounce-back for the dow and s&p. the dow is up 14 points. the nasdaq is lower, after 6 points. the treasury markets , the ten-year note has a yield of 5.717%. the two-year note is trading just a little bit higher as well. a little bit of buying coming into the two-year note, but certainly not as much as the long end. here’s the trade on the foreign exchange markets where the dollar right now is stronger across the board. keep in mind that the yuan has strength and to above 8 versus the dollar in the overnight session. crude oil futures are down 3% lower. we are below $70 a barrel at this point. in the meantirjs other stories we’re thinking of, that is shares of target, because it is among the biggest losers today in the equity markets . let’s send you to ellen braitman to give us more on target.
>> suzy, interesting numbers out from target. first quarter results at 63 cents per share, essentially matching the average analyst estimate but it is short of what some analysts had been looking for and the key is the profit margins for the company in the quarter were lower. in fact, profit margins narrowing for the first time in at least two years. the company may be relying more on less profitable products in order to lift sales. as for the sales, they were up 12%, stronger than analyst had been looking for. the company does have its first quarter conference call going on with analysts right now, and it does say that gross margin decline is not from an underlying problem, saying it will match or exceed gross margin rate for the year. that’s according to the chief financial officer. also, the company saying that costs are likely to remain under some pressure. take a look what’s happening to the shares. down 9% so far this year, and they have been underperforming wal-mart and that’s very interesting to note because for several years running now, target shares have outperformed wal-mart, but year to date, you have wal-mart doing better. wal-mart is out with earnings before the bell tomorrow. they may report the biggest sales gains in more than five years. wal-mart shares are rising up .7% in trading this morning. let’s also talk about bausch & lomb right now. it’s the biggest percentage gainer in the s&p 500. the company is removing its moisture lock contact lens cleaner from worldwide markets effective immediately. the company says that the solutions formula may increase the risk of a potentially binding infection. the decision to halt production stems reports by health authorities in hong kong, singapore and the u.s. that moisture lock was used by many contact lens wearers that had been infected with this infection. so, why are the shares surging?
>> if you look at what’s happening year to date, the shares have been slumping on those reports that i was talking about that led to today’s decision. also, in the past few minutes, you had comments come out from the food and drug administration saying that manufacturing problems are not tied to these eye infections. again, the f.d.a. saying that manufacturing problems from the company are not tied. keep in mind, 30 million americans wear contacts. industry officials say one in four use the products that are made by bausch & lombe in order to clean their lenses. suzy. back to you.
>> thank you very much.
>> ron, what is your biggest bet right now in the hedge fund that you are running? >> well, we think given what is happening to the dollar, it makes sense to be long european interest rates against u.s. interest rates. when you look at the u.s. economy, there are two issues facing us in the next two months and the more important one is inflation. it looks like, just looking at commodity prices and pass-throughs that one hears about in the newspapers from energy prices and other costs, that inflation numbers in the next few months will be on the high side. so --
>> but that’s a global thing, not necessarily just a u.s. problem, or even a european problem for that matter?
>> except if you compare across the major countries, let’s say for the sake of argument, u.s. against europe and against japan european inflation rates are just barely 2%. our headline is well over 3%, comparing headline inflation to headline inflation. japanese headline inflation is close to zero. our inflation has risen more over the last year, than inflation rates in these other countries.
>> but we have also had 16 consecutive interest rate hikes, and they have had maybe one or none.
>> that’s true.
>> that granted, the markets are confused whether the 16 interest rate hike hes are enough. whether we need more. my bias is we will see two or four more interest rate hikes by the time this year is out, because the underlying economy is healthy and inflation numbers are picking up. that gives the risk/reward facing the federal reserve to be tighter than easier on monetary policy. all of the uncertainties are going to hurt the long end of the curve, i think. the long bond yields, whereas in europe, interesting things are happening with the shorp fall of the dollar. the euro is rising. the euro is benefiting almost disproportionately, it’s rising not only against the dollar but a bunch of currencies. that may have put the pace of the e.c.b.’s central bank interest rate hikes. they committed to raising rates in june. after that, who knows. they may have to slow the pace down and let part of the tightening happen through the exchange rate.
>> so, you’re long the euro on interest rates now. the expense of the u.s. interest rates.
>> u.s. interest rates, right.
>> what specifically, if constituented to play that, how can they do that?
>> in the futures markets , we have bought bund futures contracts which is a ten-year german bond. so, and sold ten-year u.s. treasury note contracts. the front end of the curve, short term interest rates, we bought december contracts because they have factored into it almost three further interest rate increases by the european central bank. they’re not sure with the dollar doing what it is, that they have the flexibility to raise interest rates three times for the rest of this year.
>> in terms of what happens from here on, and at what point do you re-evaluate that position?
>> if the u.s. economic numbers were much weaker going forward, then we have to ask the question okay, is the fed actually right, which is, they can afford to pause and not have any further interest rate increases. i don’t think we are there yet, but the data will tell us that?
>> you think pretty much two to four more moves by the fed?
>> that’s what we’re expecting. in our forecasts.
>> all right. we’re going to have more with ram after this please stay with us. when we come back we’ll keep the focus on the plunge we’re seeing in the metals markets . axle merk manages the currency fund. he will tell fuss he was among the sellers this morning. we’ll talk about the dollar and more about inflation and the impact there as well as of course, the commodities frenzy that we have seen as of late. we will be right back after this break. please stay with us.
