Effectively, the CME is lowering the cost to trade crude oil, gold, silver, copper, and a few other commodities. So far this has had no impact on prices of the SPDR Gold Trust (NYSE: GLD), United States Oil Fund (NYSE: USO), iShares Silver Trust (NYSE: SLV), nor in the iPath DJ-UBS Copper TR Sub-Index ETN (NYSE: JJC).

In the past, margin costs were raised on traders as an effort to curb runaway trading to the upside by making it more expensive for traders and speculators to trade energy and metals.  In short, driving up the cost of poker creates fewer gamblers. So what happens when they make it cheaper to trade?

The full details are here.

JON C. OGG

Demand for coal, both the thermal variety used for generating electricity and the metallurgical coal used in steel making, declined in 2011 as coal-fired plants have been shut down in favor of gas-fired plants and demand for steel has dropped.

In the US, gas-fired plants account for about 39% of total generation capacity, but these plants have traditionally been used to meet demand spikes because natural gas was more expensive than coal. With gas prices so low (about $2.49/thousand cubic feet today), coal miners have to lower prices or reduce production or both.

A quick look at coal mining companies’ valuations is enlightening.

Alpha’s share price at around noon today is $23.19 in a 52-week range of $15.49-$61.66. The consensus target price on the stock is $29.50, for a potential upside of 27%.

Patriot’s share price is $9.19 in a 52-week range of $6.92-$27.56. The consensus price target on the stock is $11.50, for a potential upside of 25%.

Peabody’s share price is $38.38 in a 52-week range of $30.60-$73.95. The consensus price target for the stock is $49, for a potential gain of about 28%.

Consol’s share price today is $37.34 in a 52-week range of $30.56-$56.32. The consensus price target is $50, for a potential upside of 34%.

Arch Coal’s share price is $15.39 in a 52-week range of $13.09-$36.99. The consensus price target is $22, for a potential upside of about 43%.

Market Vectors Coal ETF (NYSE: KOL) is down 0.4% at $37.17 and is 52-week trading range is $27.42 to $51.87.

Share price highs for all the coal miners is down by -24% to -64%, with Consol down the least and Patriot down the most. Our pick from among these would have to be Peabody, primarily for its strength overseas. The others are either closing shafts or soon will be.

The boom in shale gas production not only weighs down natural gas prices, but will continue to weigh on coal prices. About the only thing that can help here, is lower natural gas production, and that may be starting to happen.

Paul Ausick

iShares MSCI Global Agriculture Producers Fund (NYSE: VEGI) targets the front end of the production chain (fertilizers or agricultural materials) while excluding exposure from companies at the end of the production chain (packaging and marketing). This is a bit similar to but nowhere near identical to the Market Vectors Agribusiness ETF (NYSE: MOO).
 
iShares MSCI Global Energy Producers Fund (NYSE: FILL) tracks the MSCI ACWI Select Energy Producers Investable Market Index.  This is similar to the ProShares Ultra Oil & Gas (NYSE: DIG), but without the leverage.

iShares MSCI Global Select Metals & Mining Producers Fund (NYSE: PICK) aims to track the MSCI ACWI Select Metals & Mining Producers Ex Gold & Silver Investable Market Index. This one is not identical to but has overlaps with the SPDR S&P Metals & Mining ETF (NYSE: XME).

iShares MSCI Global Gold Miners Fund (NYSE: RING) aims to track the MSCI ACWI Select Gold Miners Investable Market Index.  We consider this an alternative to the Market Vectors Gold Miners ETF (NYSE: GDX).

iShares MSCI Global Silver Miners Fund (NYSE: SLVP) aims to track the MSCI ACWI Select Silver Miners Investable Market Index.  We would consider its an alternative to the Global X Silver Miners ETF (NYSE: SIL).

As far as why these are different from some other ‘production’ ETFs, iShares explains that these include only companies at, or near, the initial phase of production of the commodity. Investors can target the front end of the production chain instead of including the back-end of the production chain to focus on the aspects more sensitive to fluctuations in the underlying commodity price.  Companies further down the production cycle are impacted by a number of factors in addition to commodity prices.

An ETF for just about anything… now competing ETFs for many more strategies.

JON C. OGG

Charles Biderman noted, “The U.S., Europe, and Japan are printing enormous sums to pay their bills and in turn are devaluing their paper currencies. I doubt that’s going to change because it’s much easier for central bankers to print money than it is for politicians to cut spending.”

Biderman went on to note that gold and silver prices are going to skyrocket from retail money chasing a limited supply of the metals. On silver he noted, ““The gains in silver could be particularly strong because the silver market is much smaller than the gold market. Silver ETFs have only one-ninth the assets of gold ETFs.”

The current unemployment data from today is signaling that the Fed Funds rate hikes could come toward the end of 2013 now rather than the end of 2014, but that is one-month data.

TrimTabs goes on to note that monetary easing by the Federal Reserve and the European Central Bank has helped push up gold and silver prices much more than stock prices.  He even noted that since QE2 was announced, the gold ETF is up 41% versus the 30% gains for the SPDR S&P 500 (NYSE: SPY) gain of 30% after including dividends.

The report even noted that in the past three weeks alone there has been a $1.4 billion inflow into gold ETFs by investors while silver ETFs saw smaller inflows. 

JON C. OGG

Kinross is making a bit of a comeback on speculation that the company may now be a takeover target. Larger Canadian gold miners Newmont Mining Corp. (NYSE: NEM) and Barrick Gold Corp. (NYSE: ABX) are included in the number of possible buyers, as are Goldcorp Inc. (NYSE: GG) and AngloGold Ashanti Ltd. (NYSE: AU). Another potential buyer is London-traded Polyus Gold International Ltd. according to a report at Bloomberg News.

Kinross acquired Canadian miner Red Back in 2010 for $7.8 billion, and the deal included the Tasiast mine in Tanzania. The Tanzanian mine is the cause of the goodwill writedown, but the simple fact is that Kinross paid way too much for Red Back. Kinross has admitted that itself.

Of the potential buyers, Polyus might be the one to take most seriously. The Russian company has said that it wants to become one of the three largest gold miners in the world. Acquiring Kinross would achieve that goal.

Kinross might also be a good acquisition for Newmont, which currently has few growth prospects according to an industry analyst cited by Bloomberg: “Newmont has no growth, whereas Kinross has plenty of growth projects.”

Kinross is now trading at around $10/share though its asset value is about double that. That’s still a $20 billion+ deal at a time when production costs are rising and the price of gold going forward is unclear.

Shares of Kinross are up about 1.5% at noon today at $10.25 in a 52-week range of $9.96-$18.25. Shares of the SPDR Gold Trust (NYSE: GLD) are up 0.27% at $161.65 in a 52-week range of $127.80-$185.85.

Paul Ausick

The firm downgraded price targets of copper, nickel, zinc, and alumina as well as part of the broader macro-market call in metals.  As far as the gold target, Morgan Stanley cut the 2012 target by about 16% to $1,845 per ounce.  On silver, the call was down almost 30% to $35.50 per ounce.

Neither are hurting any market gains, but it was interesting to see that the cut in silver was the highest, followed by gold.  The other cuts in the other metals seen in the call were to the tune of about 3 percentage points to about 13 percentage points. These markets are reacting to currencies and economic data more than economist and price target calls.  Still, these were worth a closer look.

JON C. OGG

Patriot Coal officials said demand for met coal has weakened in the last few weeks, especially export demand. Demand from China, the world’s largest importer of met coal, is expected to remain weak through the first half of the year, although demand is expected to rise in the second half as Chinese and European economies begin to grow again. Total consumption of met coal could fall by 13 million metric tons in 2012.

In the late morning, Patriot Coal shares are down more than -9% at $8.18 in a 52-week range of $6.92-$29.20.

Shares in Alpha are down nearly -8% at $20.76 in a 52-week range of $15.49-$62.65.

James River shares are down more than -8% at $6.77 in a 52-week range of $5.41-$25.59.

Steel maker Arcelor Mittal is down nearly -2%, while US Steel and AK Steel are both down about -3%.

Paul Ausick

The aluminum giant reported earnings of -$0.03 EPS and $5.99 billion in revenues.  Thomson Reuters had a consensus grouping of -$0.02 EPS and $5.74 in revenues.  Keep in mind that it was just a week ago that analysts were looking for $0.03 EPS and less than 3 months ago estimates were up around $0.20 EPS or so.

The loss was $199 million for the fourth quarter and if you include items the loss came in at -$0.18 EPS.  The company blamed “restructuring charges associated with the closure and curtailment of high-cost production capacity, lower aluminum prices, and continued market weakness.”

Alcoa had already been talking down its expectations when it was talking about capacity shutdowns.

As you would expect, The company is forecasting for 2012 global aluminum demand will grow 7% and it expects a global deficit in primary aluminum supply.  That is above the 6.5% projection per year that Alcoa has said is required for the aluminum market doubling in size by 2020. It sees 600,000 metric tonnes as the deficit for the industry in 2012. Global industrial use/growth is projected by Alcoa as follows:

• aerospace (10-11 percent),
• automotive (3-8 percent),
• commercial transportation (2-5 percent),
• packaging (2-3 percent),
• and building and construction (4-5 percent) markets.

Alcoa shares closed up 2.9% at $9.43 on the day and the 52-week trading range is $8.45 to $18.47.  Today’s news could have been worse and the stock was already very week ahead of earnings. Shares were above $11 on October 31, 2011.  Shares may trade lower on this news, but that is proof that the market’s ability to price in the known events is dead.  So much for the efficient market theory you learned about in college.

Read Also: Stocks Priced for 12% Gain to DJIA 13,678

JON C. OGG

What is interesting about the news is that China has been reported as cutting its export quotas for the year ahead. The problem is that the levels are still higher than what many investors were expecting.  Further increased production targets from both Lynas (Australia) and Molycorp are also expected to weigh on prices of rare earths.  It is currently overlooked that Molycorp’s production is mostly booked up for a year (and more from some customers) at this point.

Avalon Rare Earth Metals Inc. (AMEX: AVL) s down “only” 3.1% at $2.50 and Rare Element Resources Ltd. (AMEX: REE) is down 6% at $3.41 on the day with a new 52-week low.  The Market Vectors Rare Earth/Strategic Metals ETF (NYSE: REMX) is down only 1.2% a $15.01 and its 52-week range is $13.82 to $28.91.

Based upon its valuations, we recently provided a full outlook for 2012 in Molycorp because its stock has been sold down so much from highs.  The short version is that the stock is attractive, but there are some serious caveats.  What price Molycorp truly bottoms out at is truly guesswork.

Investors need to understand one key issue about Molycorp.  It is a euphoria or hypochondriac when it comes to its stock.  China has proven to be untrustworthy when it comes to forecasting output versus saber-rattling over what it is willing to export (and at what price).  If China comes back out and says in the first quarter that its rare earth supply quotas are being absorbed too rapidly and that it will not allow exports later in the year, then traders and investors will not bother conducting even a forward P/E analysis in Molycorp shares.  They will just start loading up.

The other side of the coin is that China could cheat on its export quotas.  It would be no surprise, and there is some history to suggest that it could happen.  Does each nation inside OPEC actually stop every barrel of oil exports when they hit the OPEC-mandated quotas?  Sometimes yes, many times no.  When news comes out (if it does) that Chinese companies have sold more rare earths than what was expected, it is only normal to expect investors to sell the shares off without conducting any analysis.

Molycorp is now down over 8% and share hit a 52-week low after breaking under $25.50.  This is the hypochondriac version of the stock… bad headlines kill the stock, regardless of what should have already been priced in.  The market has known for some time that China is not going to be as strict as investors once feared.  Molycorp has also lost literally two-thirds of its value from the peak of $79.00. 

It is our take that the market has proven over and over in 2011 that it is just not capable of pricing in good news or bad news any longer.  That is exponentially the case for a company in rare earths.  Still, today’s news should have been fairly easy to anticipate.

JON C. OGG

The nation has an estimated 29.2 million people and 2010 Gross Domestic Product was listed as $275.7 billion on a purchasing parity calculation.  Moody’s currently has a “Baa3″ rating, the lowest of all investment-grade ratings, but it has a “Positive” outlook.  S&P rates Peru as “BBB” as invest-ment grade but slightly better than the lowest investment-grade by rival ratings agency Moody’s, and it has been that way since August of 2011.

While trade deals and ratings agencies do not immediately impact many investors’ decisions, this is another positive for iShares MSCI All Peru Capped Index (NYSE: EPU) and its ADR members in weighting: Credicorp Ltd. (NYSE: BAP) in financial services; Compania Mina Buenaventura, S.A. (NYSE: BVN) in precious metals; and Southern Copper Corporation (NYSE: SCCO), based in Phoenix, Arizona, with a $24 billion value for its mining, exploring, smelting, and refining copper ores in Peru, Mexico, and Chile.

Read Also: Nations Expected to See Their Ratings Raised in 2012

What is interesting is that Russia was also on the list of companies which may face ratings upgrades in 2012 and that was before the official entrance into the World Trade Organization.  Peru is often overlooked by U.S. investors, but the ETF above and the three stocks there tend to make investing in the mountainous nation much easier than many international investors might think.

Peru’s most recent growth was called up at 5.1% GDP, which was higher than most nations and was actually considered a disappointment due to a weaker manufacturing climate which was boosted by private consumption and public spending.  There is some economic stimulus in place and some investors may consider Peru’s stock market cheap.  The iShares MSCI All Peru Capped Index (NYSE: EPU) was down more than 30% in 2011 as of late-September and early-October but shares have rebounded from about $34 to over $38 since then.

The latest news is that Peru will begin deeper discussions with Russia over a free trade pact in 2012.  A Peruvian trade minister was quoted noting that Russia offers many export possibilities for Peru and the government data showed bilateral Peru-Russia trade being worth some $214 million (in converted dollar terms) in 2010. 

Will this overtake the free trade pacts in place with the United States or with China?  Unlikely.  Still, this is yet one more tailwind that could help steer Peru forward and deeper into investment grade by the ratings agencies along with expected trade pacts coming from Japan and the European Union in 2012.

And as far as the stocks noted, here is the discount that these are trading at to 2011 highs:

• Credicorp Ltd. (NYSE: BAP) in financial services is down around $107 after peaking at about $121 in 2011;
• Compania Mina Buenaventura, S.A. (NYSE: BVN) in precious metals is down at about $39 and its high in the last twelve months was just over $49.50;
• Southern Copper Corporation (NYSE: SCCO) in metals and mining trades around $30.50 versus a high of just over $50.00 in the last twelve months.

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JON C. OGG