Gold demand weakest since 2009 in Q2 as Chinese turned to stocks-GFMS

http://finance.yahoo.com/news/global-q2-gold-demand-weakest-080332024.html

MANILA/LONDON (Reuters) - Demand for gold slid to its lowest in six years in the second quarter of this year as buyers from top consumer China poured funds into its now troubled equities market, an industry report showed on Tuesday.

Retail investment from China fell by a quarter and jewellery demand by 23 percent in the April to June period as stock markets there soared, GFMS said in a quarterly update.

However, a subsequent plunge in Chinese share prices from mid-June has not helped bullion, it said, as some investors were locked in and others nervous about switching to different asset classes while financial markets are so volatile.

After a 12-year bull run peaked in 2011, global prices of the safe haven metal have struggled to gain traction. Last week, gold sank to $1,077 per ounce, its lowest in 5-1/2 years, after a sudden sell-off in New York and Shanghai, as investors worried about Chinese growth and the prospect of U.S. interest rate rises made the dollar more attractive.

"Gold has certainly moved out of favour in China in recent quarters," GFMS analyst Andrew Leyland said.

"I think Chinese demand was a reaction to weak price performance, rather than a cause. Both the equity market, and the U.S. dollar have promised stronger returns than gold, and this put investors off the yellow metal."
GFMS was cautiously optimistic that both demand and prices could start to pick up in the final quarter of the year.

"Chinese purchasers tend to buy into rallies, so when gold gets some upward momentum Chinese purchasing should support this," Leyland said.

China and India are the world's top gold consumers. Physical demand there has not picked up strongly despite a sell-off last week that knocked global prices (XAU=) to 5-1/2 year lows.

That contrasts to the explosion in physical demand seen after gold prices dropped sharply in the second quarter of 2013.

GFMS, a division of Thomson Reuters, said global demand for gold bars and coins fell 12 percent year-on-year in April-June and was around 63 percent below the peak two years ago.

In the largest consuming sector, jewellery, consumption dropped 9 percent and production declined 6 percent, GFMS said. Overall physical demand stood at 858 tonnes in the second quarter, down 14.2 percent from a year before.

Central banks remained net buyers of gold, but their purchases fell 62 percent year on year.
That helped push the physical surplus in the gold market to its highest in five years at 196 tonnes, more than double the total of a year before.
While jewellery consumption in India increased 2.5 percent to 158 tonnes during the period, gross imports fell 10 percent to the lowest in five quarters, the report said.
China and India consumed almost the same amount of gold in January-June, with China a tad higher at 394 tonnes against India's 392 tonnes, it said.

In the full year, GFMS is expecting gold demand to come in at around 4,000 tonnes, Leyland told the Reuters Global Gold Forum on Tuesday.

"That's the weakest since 2010, but still 1,000 tonnes per year higher than the 2004-2007 period," he said.

GFMS forecast gold would average $1,135 an ounce in the third quarter against $1,192 in April-June, before recovering to $1,175 in the last quarter of the year.

"It remains our view that a U.S. rate hike this year is already priced into the market and that an increase could well prompt a review of asset allocations that leads to an increase in gold holdings," the report said.

Any gold rally from here is likely to be a rally within the context of a bear market.’ Mike Armbruster, Altavest

http://www.marketwatch.com/story/gold-retakes-1100-as-dollar-slides-2015-07-27

Gold futures rebounded on Monday from their lowest level in more than five years, finding support from weakness in the U.S. dollar to trade near $1,100 an ounce, but analysts said prices haven’t likely hit bottom just yet.

The yellow metal was benefiting from haven demand as stocks mostly retreated world-wide, led by a major selloff in Chinese equities, but technical analysts attributed Monday’s rebound in gold to technical factors.

August gold GCQ5, +0.88%  climbed $11.10, or 1%, to $1,096.60 an ounce on Comex, after tapping an intraday high of $1,104.40. Prices were staging a comeback from Friday’s settlement price of $1,085.50, which was the lowest level since February 2010.

September silver SIU5, +0.74%  rose 12.7 cents, or 0.9%, to $14.615 an ounce.
Prices got a boost for both technical and fundamental reasons, according to Mike Armbruster, principal and co-founder at Altavest Worldwide Trading.

‘Any gold rally from here is likely to be a rally within the context of a bear market.’

Mike Armbruster, Altavest

“Technically, gold is bouncing off of longer-term trendline support,” which is roughly at $1,085 — close to Friday’s settlement price, he said. “Technical indicators are in deep oversold territory and conditions are ripe for a short-covering rally.”

But “any gold rally from here is likely to be a rally within the context of a bear market,” said Armbruster. “We think the trend toward lower levels is likely to continue in the months ahead.”
Similarly, Ross Norman, chief executive officer at Sharps Pixley Ltd. in London, said momentum in the gold market is “still with the bears.”

Prices haven't hit bottom yet, he said, and he expects them to “attack the $1,080 level, which is “midway between the all-time high at $1,922 and the 36-year low at $246.”
Still, given overall bearishness for gold, “we may indeed be nearing a bottom—as a contrarian, this represents an excellent buying opportunity,” said Norman.

The price climb Monday came as the U.S. dollar DXY, -0.78%  slid against most major currencies, ahead of a closely watched Federal Reserve meeting later in the week that could determine the trading action in currencies and commodities in coming weeks. The U.S. central bank is widely expected to keep interest rates at a record low at the meeting, but expectations are rising that a rate hike could come before New Years. Read MarketWatch’s Fed preview

Those expectations have recently driven the greenback higher, and in turn added pressure on dollar-denominated commodities that get more expensive for other currency holders.

U.S. data released Monday didn’t offer much of an economic hint for the Fed’s next move. They showed that orders for durable goods jumped 3.4% in June, but U.S. business investment rose just modestly.

In other metals price action, platinum for October delivery PLV5, +0.58%  picked up $2.20, or 0.2%, to $982.90 an ounce, while September palladium PAU5, -1.32%  added 15 cents $622.75 an ounce.
September copper HGU5, -1.32%  slipped by 2.2 cents, or 0.9%, to $2.361 a pound.

Gold: Storm on the Horizon?

• 21 Jul 2015
• By Erik Norland
• Topics: Metals, Energy, Interest Rates, Economic Events, FX

While a range of commodities, including crude oil and iron ore, have been on a wild ride over the past twelve months, gold has been comparatively stable. As such, options on gold have spent much of the past several months trading near a record low in terms of implied volatility (Figure 1). Is the market underestimating the risk in holding gold?

The direction of implied volatility on gold options is closely, but not perfectly, linked to the direction of gold prices. In gold, as in equities, implied volatility tends to rise when prices are falling more so than when prices are rising. Measured daily over the period from November 2010 to July 2015, the correlation between changes in implied volatility on three-month constant maturity options on gold futures and gold prices, stood at -0.38. So, while rising implied volatility isn’t exactly the same thing as falling gold prices, the two are related (Figures 2 and 3). If one is worried about an increase in gold option implied volatility, one should probably also be asking what could cause gold prices to fall?

Figure 1.

Figure 2.

Figure 3.

Don’t be lulled into complacency by the low level of realized and implied volatility in gold.Before we delve into reasons why the price of gold might fall, it is worth noting that implied volatility on gold options has risen during gold bull markets in the past. Notably this was the case in August and September 2011, just as gold reached its all-time high (nominal) price in US Dollars. At that time investors appeared to be buying protection in the event that gold prices fell. Fall they did, and as they fell gold implied volatility pushed even higher, peaking at 36.2% annualized on constant maturity 30-day options on gold futures. Since then, however, gold implied volatility has basically only risen when the price of gold has fallen and vice versa. So here are several reasons why implied volatility on options on gold futures could rise.

1) Implied and Realized Volatility are Abnormally Low

Currently, with gold options trading near a record low in terms of implied volatility (12.1% as of July 14, 2015 and up to 18.8% on July 21, 2015), there is little scope for gold implied volatility to decline further. By contrast, there is a great deal of room for it to go higher. A large part of the reason why gold implied volatility is so low currently is that annualized realized volatility has been exceptionally low as well, around 8.7% over the past 30 days. Since 1975 it has averaged around 17%, nearly double its current level (Figure 4). Since November 2010, when the implied volatility series available in Quikstrike begin, realized and implied volatility have both averaged 16%. So, whether you compare it to long run or intermediate term averages, realized gold volatility has been exceptionally low.

Figure 4.

2) Increases in Mining Supply Could Drag the Price of Gold Lower

As we pointed out in our paper, “The Push-Pull Dynamics in Gold & Silver,” mining supply explains as much as 50% of the year-to-year price variation in precious metals.  Moreover, gold supply influences both silver and gold prices, as does silver mining supply. The more supply, typically the lower the price.
Gold mining supplies have grown strongly since 2009.  This growth may have put downward pressure on gold prices, helping them to fall by approximately 40% since September 2011. As a result of this decline, some observers forecast that gold mining supply might begin to contract by as early as the second half of 2015.  

We are skeptical. While the current price of gold, around $1,150 per ounce, is far below its high of around $1,900 from September 2011, the current price still exceeds most estimates of the cost of production. Globally, the all-in sustaining cost of running a gold mine is around $982 per ounce, according to Metals Focus (Figure 5). Thus, at the current price, there is reason to believe that investment in new mines might taper off, as might the expansion of existing mines (at least relative to the torrid pace of expansion in the past decade), but there are not a lot of reasons to think that currently operating mines will slash production.
Moreover, the cash cost of running a gold mine, on average, is just above $700 per ounce. This may be the more relevant indicator when it comes to the level at which gold production might be cut back. In fact, if one looks at gold mining costs country by country, the current price exceeds the all-in costs in almost every case and exceeds the cash costs without exception (Figure 6). Since running a gold mine is a cash flow positive business at $1,150 per ounce, so long as the price remains at or above current levels, there is no particular reason to think that gold mining production is going to decline.
If gold mining production defies expectations and continues to rise, this could put downward pressure on the price of the yellow metal and this, in turn, would likely send the implied volatility of options on gold futures contracts higher. On the other hand, if gold mining production does decline, then it should support gold prices and this, in turn, might keep implied volatility on gold options near historic lows.
It is worth pointing out that after gold prices collapsed in the early 1980s, mining supply continued to rise for another eighteen years (Figure 7). This underscores the point that once capital investment goes into a mine, it becomes a sunk cost and that mine needs to continue to produce until the point at which it goes cash flow negative. Moreover, as McKinsey & Company points out in its recent report, “Productivity in Mining Operations: Reversing the Downward Trend,” there is enormous potential to make metals mines of all sorts more productive. To the extent that this is accomplished in coming years, it will lower the price at which gold can be profitably mined.

Figure 5.

Figure 6.

Figure 7.

3) Gold Prices are Defying Gravity with Respect to other Commodities Such as Crude Oil

Crude oil led gold prices higher during the most recent commodity bull market. Crude oil began to rally in 1999, three years before gold began its long upward trek. Likewise, oil prices peaked in 2008, also three years before gold hit its all-time high in 2011 (Figure 8). Given oil’s massive collapse in 2014 and its inability to sustain a rally amid an inventory build-up in 2015, one must wonder whether or not gold might follow it lower.

The oil-gold ratio is no longer near historic highs (see our paper in February, “Oil-Gold Ratio: Dial Down Deflation Concerns”). At 22.7 barrels of West Texas Intermediate Crude (WTI) /Troy Ounce of Gold, it is still higher than its historical average of 16. If one, hypothetically, held the price of WTI constant and allowed the oil-gold ratio to return to its historical average, this would imply a gold price of around $800/ounce – not too far above its break-even cash flow cost of mining. Of course, there is no particular reason to think that the oil-gold ratio should or will revert to its long running historical average any time soon. That said, if it did, it would likely send the implied volatility on gold options a great deal higher.

Figure 8.

The silver-gold ratio is also trading a bit higher than it has historically as well (figure 10). Given the partial substitutability of the two metals, this also might not be a great sign for gold. Jewelry makers and investors might prefer to use silver rather than gold given the larger-than-normal price disparity.

Figure 9.

Figure 10.

4) Monetary Policy and the U.S. Dollar

Federal Open Market Committee (“FOMC”) Chair Janet Yellen has made clear that she and (most of) her Federal Reserve colleagues would like to raise rates before the end of 2015. For the moment, the markets are skeptical. Fed Funds futures don’t fully price in a rate hike until Q1 2016. Moreover, Yellen has given the FOMC some wiggle room, clearly indicating that the Fed is data dependent. For its part, the data has not always been cooperative. While employment, total labor income and the housing sector are growing solidly, retail sales have been sluggish (1.8% annualized growth ex-autos and gasoline in H1 2015), and inflation has remained abnormally low.
What matters for gold isn’t so much the actual Fed move, when and if it occurs, but rather how the expectations of a Fed move develop over time. Day-to-day changes in gold prices have exhibited an increasingly negative correlation to the day-to-day movements of Fed Funds futures rates (Figure 11).
As such, any economic data or policy pronouncements from the FOMC that bring forward expectations for a rate hike, will more likely than not send gold lower, and by extension, send the implied volatility of gold options higher. Of course, the opposite is true as well. Weak economic data that diminishes expectations of a Fed rate hike will probably support gold. Indeed, the significant decline in expectations for Fed rate hikes in 2015 and 2016 (Figure 12) may be one factor that has supported gold in recent months and prevented it from following the likes of crude oil, silver, and iron ore off the cliff.

Figure 11.

Figure 12.

Additionally, if Fed rate hike expectations are brought forward (meaning more rate hikes sooner than currently priced) it would also likely support the US Dollar. A strong USD is probably bad news for gold and other commodities. As we have pointed out in previous articles on gold, the price of the yellow metal has been relatively stable from the perspective of some of the world’s weaker currencies such as the Indian Rupee, the Japanese Yen, the Russian Ruble, and the Brazilian Real. While that information is interesting, it doesn’t change much the implied volatility of gold options, which is based on the USD price of gold.

Bottom Line

Don’t be lulled into complacency by the low level of realized and implied volatility in gold. While diminishing expectations of a Fed rate hike earlier in 2015 may have prevented gold from following other commodities on a dramatic downward path, given the abnormally low level of volatility, the potential for changes in U.S. monetary policy, and the prospects for increasing mining supply, there remain significant downside (and upside) risks to gold that could drive up volatility. After all, gold is typically bought as a hedge against inflation – of which there is none – or as protection against financial disasters – central banks have the markets’ back for now. While history is not always a good guide, caution is advised since we may be experiencing the calm before the next storm.

GOLD SENTIMENT

“The perfect storm for gold continues to intensify with the metal price falling back under $1,100 on a combination of factors,” said Colin Cieszynski, chief market strategist at CMC Markets

http://www.marketwatch.com/story/gold-slides-for-10th-day-breaks-below-1100-2015-07-22


Those factors include: “capital flowing out of defensive havens, low inflation risk with commodity prices falling and speculation that the U.S. and U.K. could start raising interest rates in coming months — suggesting that outside of commodity countries, the pendulum may be starting to swing away from monetary stimulus,” he said in a note.

Years Left to Go in S&P 500 Bull Market to RBC Strategist Golub

Years Left to Go in S&P 500 Bull Market to RBC Strategist Golubhttp://www.bloomberg.com/news/articles/2015-07-21/years-left-to-go-in-s-p-500-bull-market-to-rbc-strategist-golub

 The U.S. economy’s slow recovery may extend another six years, potentially doubling the duration of the bull market in equities, according to RBC Capital Markets chief U.S. market strategist Jonathan Golub.

Bull markets tend to continue until an economic cycle runs out, usually after about seven years, Golub said in an interview with Bob Moon on Bloomberg Radio. Given the pace of the current economic expansion, he said the cycle could last 12 years or longer, providing investors with reason to continue buying stocks.
“We’re going to see a lot more upside to the stock market,” Golub said. “This is going to go on for long enough that many Americans are going to be able to participate in the run higher.”
The Standard & Poor’s 500 Index has more than tripled during the current bull run, which at 76 months is the second longest in the past 60 years.
The strategist has held to bullish predictions throughout 2015, even as the S&P 500’s advance has slowed to 2.9 percent following three years of double-digit gains. He forecasts the benchmark index will end the year at 2,325, the fourth-most bullish forecast in a Bloomberg survey of 21 strategists.
The Federal Reserve is considering raising interest rates for the first time since 2006 as the economy shows signs of strengthened after years of tepid growth.
Golub said that the prospect for an increase in interest rates won’t deter equities investors, who are more likely to view higher borrowing costs as a sign of the central bank’s confidence in the strength of the economy.
“The market is actually going to rally on that as a sign of confidence,” he said. “As a matter of fact I’d love to see them start earlier solely for the reason that I think it will get this debate behind us and convince the market that we don’t need this additional boost any longer.”

 

Jason Zweig on gold 2011 vs 2015

he two extremes
http://www.wsj.com/articles/SB10001424053111904491704576575051077746110

“We haven’t seen [low] valuations like these since 2008,” says Joe Foster, gold strategist at Van Eck Global. But financially, gold miners have “never been in better shape.” Van Eck’s Market Vectors Gold Miners exchange-traded fund holds 30 mining stocks.

http://blogs.wsj.com/moneybeat/2015/07/17/lets-be-honest-about-gold-its-a-pet-rock/

Since June 2014, investors have yanked $3 billion out of funds investing in precious metals, estimates Morningstar, the financial-research firm; total assets at precious-metal funds have shrunk 20% in 12 months.

You don’t want to be one of these people, spending years telling reality that it is wrong. There is a case to be made for owning gold, but it speaks in a whisper, not in the shouts of doomsday so customary among gold bugs.

Because gold, unlike stocks, bonds, real estate and other financial assets, generates no income, valuing it is all but impossible. “It’s intrinsically worthless or intrinsically priceless,” says Paul Brodsky, a former hedge-fund manager who now is a strategist at Macro Allocation, an investment-research and consulting firm in New York. “You can build a financial model to value it, but every input is going to be your imagination.”

Gold is two things, neither of which is easy to price: a commodity and a currency.

Several big gold-mining companies—among them, Barrick Gold and Newmont Mining —are trading around 14 times their earnings over the past four quarters, virtually matching the Standard & Poor’s 500-stock index at 14.5 times earnings. Even with gold at record highs, the shares of gold miners are trading at an industrywide average of roughly 18 times earnings, at 2.4 times “book” or asset value (versus 2.0 times for the overall stock market) and at one of the lowest ratios on record to the price of the metal itself.

Gold Speculators Least Bullish on Record as Rate Rise Approaches

http://www.bloomberg.com/news/articles/2015-07-19/gold-speculators-least-bullish-on-record-as-rate-rise-approaches
Money managers are holding the smallest net-bullish bet on gold since the U.S. government data begins in 2006. They’re also dumping silver, platinum and palladium, and combined net-long wagers across the metals are the lowest ever. About $2.7 billion was erased from the value of exchange-traded products tracking the commodities last week, the most since March.

Money managers are holding the smallest net-bullish bet on gold since the U.S. government data begins in 2006. They’re also dumping silver, platinum and palladium, and combined net-long wagers across the metals are the lowest ever. About $2.7 billion was erased from the value of exchange-traded products tracking the commodities last week, the most since March.


“The Fed’s decision to restock the rate toolkit has got the gold market very nervous,” George Zivic, a New York-based portfolio manager at OppenheimerFunds Inc., which oversees $235 billion, said by phone. “We have already seen that gold did not perform as a safe-haven investment. There is not a single motivating reason to own gold.”

Can the ageing bull market survive 2015 and beyond?

http://www.irishtimes.com/business/personal-finance/can-the-ageing-bull-market-survive-2015-and-beyond-1.2062898

The bull market in US equities is now almost six years old, with stocks having more than tripled since March 2009. Might 2015 prove to be the year that finally ends the advance, or can the bulls continue to prove the doubters wrong?

Despite stocks’ troubled start to 2015, there’s little to suggest any serious diminution in momentum. The S&P 500 hit all-time highs on 53 occasions in 2014, the most in a single year since 1995. The index got through the year without once suffering three consecutive daily declines. Volatility continues to diminish, with 2014 levels roughly half that recorded in 2009.

Still, sceptics say a serious decline is matter of time. The bull market is getting long in the tooth, they say; this is the fourth-longest rally in history, as well as the fourth-strongest in terms of percentage gains. Valuations, too, look frothy; the S&P 500’s cyclically adjusted price-earnings ratio (Cape), which averages earnings over a 10-year period, is now above 27. That’s almost 70 per cent above its long-term average, and at levels only exceeded on three occasions - at the major market tops in 1929, 2000 and 2007.

That sounds damning, but bulls argue Cape has outlived its usefulness, having signalled a market over-valuation for most of the last 25 years. According to JPMorgan’s latest Guide to the Markets report, Cape has averaged 25.3 over the last quarter-century, barely below current levels. The same report notes stocks trade on a forward price-earnings ratio of 16.4, only slightly above their 25-year average.

Other valuation metrics, such as the index’s price-book ratio, are also in line with the 25-year average.

Duration

As for duration, the current rally may be longer and stronger than average, but that doesn’t mean it must end any time soon. The longest uninterrupted bull market in history, between 1987 and 2000, lasted for 13 years, more than twice as long as the current rally. Stocks advanced by 582 per cent during that time, almost three times more than the current bull market.

Additionally, note that US stocks fell by 19.4 per cent in 2011, just shy of bear market territory (a 20 per cent decline). If one dates the current bull market to 2011, then the rally looks nowhere nearly as aged.

Ultimately, the data gives ammunition to both bulls and bears. For example, research by S&P Capital IQ analyst Sam Stovall indicates the average bull market spends around 7 per cent of its time at new highs. The S&P 500 has hit new highs on 98 occasions since 2009, which accounts for some 7 per cent of trading days.

So is it time to run for the hills? Not so fast. During secular bull markets, such as that seen between 1982 and 2000, it’s estimated markets spend about 9 per cent of the time at all-time highs. If the bull run is merely a cyclical advance during a longer-term secular bear market, new highs are much more rare, occurring on roughly 4 per cent of occasions.

Secular bull or bear?

In other words, the key to assessing the health of the current bull market is to assess whether we are in a secular bull market or a secular bear market.

Stocks were in a secular bear market between 1930 and 1950 and again between 1965 and 1982, enjoying numerous cyclical advances but ultimately going nowhere. By 1982, stocks were cheap and unloved, paving the way for a secular bull market that topped out in 2000, when stocks hit unprecedented valuations.

The question now is whether the secular bear market that began in 2000 ended in 2009, or whether the current bull market is merely a cyclical advance during a period of secular stagnation.

Unsurprisingly, the extremely strong gains of recent years have led to an increasing army of strategists arguing the case for a secular bull market. Money manager Barry Ritholtz, a well-known bear for most of the noughties, turned bullish in 2009 whilst cautioning that any advance was likely to be cyclical rather than secular in nature. Last August, however, he said he had “slowly been inching” towards the secular bull camp over the past year, and that position is an increasingly mainstream one, judging by recent assessments from Morgan Stanley, Charles Schwab, RBC Capital Markets, and others.

Even Ed Easterling of Crestmont Research, a bearish observer who has written much on the concept of secular cycles, admits the current bull market “is longer and has gone farther than any previous cyclical bull inside a secular bear”.

Not settled

Nevertheless, the debate has not yet been settled, and bears argue continued stock market highs do not necessarily mean we are in a secular bull market. In 2007, for example, the Dow Jones Industrial Average traded almost 20 per cent above its 2000 high, resulting in the greatest sucker rally in history, as iconic British investor Jeremy Grantham put it.

Similarly, Easterling has pointed out that strong gains are not uncommon in periods of long-term stagnation, with stocks advancing in nearly half of all the years within secular bear markets.

Others argue that if the secular bear market ended in 2009, it will have been much shorter than previous cycles. For most of the 2000-09 period, they add, stocks appeared relatively expensive, excepting a handful of months in late 2008 and early 2009. Typically, low valuations persist for years during secular bear markets.

Some sceptics also suggest that secular bear markets typically end at valuations even lower than those seen in March 2009, although this may be beside the point. After all, the 2009 lows did result in valuations not seen in decades, while sentiment surveys revealed unprecedented pessimism – exactly what one expects to see at generational market bottoms.

Indeed, only truly hard-core bears, such as Societe Generale’s Albert Edwards, expect the 2009 lows to be revisited. More typically, those in the secular bear camp suggest investors brace for declines in the region of 25 to 30 per cent, which would bring the S&P 500 back to levels first seen in 2000.

They argue that if we are truly in a secular bull market, strong gains are likely over the next decade, despite the fact various valuation metrics suggest US stocks are already “hideously expensive”, as GMO’s James Montier recently warned.

Uncertain

Ultimately, investors may be better off sitting on the secular fence, so to speak. Valuation concerns mean there must be doubts over the case for a long-term secular bull market, but equally, market action over recent years must surely give even the most ardent of bears pause for thought.

That’s a frustrating conclusion, of course. However, the problem about secular bull and bear markets, as Easterling admitted in 2013, is that they are “hard to define in real time” and are “much more obvious in retrospect”. Alas, that remains the case today.

Penn West

http://www.stocknomics.co/site.php?url=http://fool.ca/2015/04/16/penn-west-petroleum-ltd-this-stock-is-poised-for-a-massive-turnaround/

After suffering through the last few months of constant cries from naysayers about the company’s impending bankruptcy, shareholders of Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) can finally look toward the future with a little optimism.
The company got some huge news this week when it announced an agreement to sell $321 million worth of land to Freehold Royalties Ltd, which was more than the market expected for the sale. Shares rallied more than 8% the next day, closing above $3 for the first time since December.
There are a couple of reasons why this sale is so important. Penn West has $650 million in unsecured notes coming due, which aren’t as big of a concern with half the amount in cash. With this sale, the company’s chances of bankruptcy are greatly reduced.
But perhaps more importantly, it shows that Penn West has assets that can still be sold during trying times. In fact, it was reported that there was more than one interested party in the deal, which pushed the price up.
This news, combined with crude recently recovering to its highest level since December, has renewed interest in the beleaguered stock. Here are three more reasons why I think the stock is still a buy at these levels.
Huge potential
One of the cornerstones of value investing is to look at situations of asymmetric risk and reward. Penn West is in such a situation.
The worst case scenario of this stock is that it goes to zero, representing a 100% loss. That’s a bad outcome we want to avoid.
But the best case is an easy 200% gain, perhaps even more. Even after writing off $1.7 billion in assets at the end of 2014, the company still has a book value of $10 per share. Shares currently trade hands at just over $3. Even after a 200% gain, shares still won’t trade at book value. In an environment where oil trades at more normal levels, book value is a pretty obtainable level.
Insider buying
Another thing value investors tend to look at is whether management is loading up on shares. The logic goes that management has a pretty good idea of what’s going on. If they’re buying, it’s obvious there’s value in the name. It’s not a perfect relationship, but it tends to have a correlation.
Over the past six months, insiders have been snapping up shares like crazy. During November and December, insiders bought more than 400,000 shares, with one director spending nearly $1 million of his own money on the struggling stock. Both the CEO and CFO also purchased shares during the past year.
Management confidence
If I had one word to describe Penn West’s former management team, I’d probably go with inept. Not only did they recklessly take on debt to make all sorts of ill-advised acquisitions, but the finance team left the books in shambles, which led to a small accounting scandal when new CFO David Dyck took over.
Penn West’s new management is much better. CEO David Roberts is a veteran of the industry and most recently spent time as Marathon Oil’s COO. Penn West’s Chairman Rick George is also a familiar name in Canada’s energy sector because he spent two decades as the CEO of Suncor Energy. These are exactly the people I want in charge during difficult times.
Roberts has cut costs by laying off employees and focusing drilling on the best areas. Dyck did a nice job both dealing with the accounting scandal and paying down debt left by the previous team. There’s still work left to do, but at least this team is making the right moves.
Penn West will likely suffer more setbacks, but at this point, I’m more confident in the company than I’ve been for months. The stock is cheap, and the threat of bankruptcy is declining. If I didn’t already have a full position, I’d be buying at these levels.