Today’s topics

  • Monetary policy (FOMC)
  • Gold
  • Stock story (IPL, Incitec Pivot)


The Fed’s 2 day FOMC finished up, with the key takeaway that the Fed is now “talking about talking about” tapering, and that markets should regard this meeting as that meeting.

The Fed is going out of its way to reduce sticker shock for the market, by signalling as gently and clearly as possible, that the mindset is shifting towards an eventual exit of ultra-accommodative policy.

The very short end of the curve moved up, and the long end of the curve down, with the US dollar up and commodities down. That is a very clear market signal for “tightening”. The fact that the 10 year initially rose substantially (4th highest move since 2013) and then fell by more than it rose strongly signals that the market views the removal as a) de facto tightening and b) a potential mistake, which will lead, over time, to lower growth and lower inflation.

We don’t agree, and see a higher 10 year yield as simply reflective of the economy operating sustainably “pre-COVID” and “pre 2019 manufacturing recession” levels. However, we do agree that both tightening and/or perceived weaker growth is a negative for commodity prices, which are both macroeconomically and idiosyncratically overvalued.

The decline in the term spread should also remove some of the market enthusiasm for banking and financial stocks, which tend to do well when the return to maturity transformation is higher.


The sector hardest hit was commodities, and gold stocks within commodities. Not only is gold not a particularly good inflation hedge, it also suffers when a) the US dollar goes up and b) when real yields rise.

The decline in breakeven inflation drove the majority of the movement in the real yield, and the result was a modest form of carnage across the gold miners.

The gold price itself remains very elevated, at closer to $1800/oz. However the all-in-sustaining-cost for most gold miners has drifted higher over recent years, and even the AISC often understates the true cost of production, reserve depletion and eventual remediation.

A 20% fall in the gold price will seriously imperil many of the juniors. At the margin, this is an argument for a more robust/favourably positioned producer like NCM, over other names within the space.

We also believe that most gold stocks have overcapitalised the rally in the gold price over the past half decade, and are now poised to give much of that back.


Incitec is a stock that we’ve been interested in, on Valuation grounds. Diammonium phosphate pricing is near multi-decade highs, likewise urea, and mining activity is strong. That means demand for fertilisers, and explosives, is robust, and that’s what IPL do.

However, size does not seem to ever result in meaningful scale benefits to unit economics..

..if anything it seems the opposite. The bigger they get the less profits there are.

This shows up clearly in the margins.

The group are also frequently beset by unplanned outages, to the point at which they show up in the below waterfall chart, where the “manufacturing” impact on EBIT is its own separate field.

And the hangover of these outages and issues means Waggaman will likely continue affecting production over the next year or two. At a time of record high commodity prices, these technical issues are occurring at the maximally worst moment.

Still, the stock is very cheap, and we have, on occasion, been willing to buy companies that we regard as lower in Quality if a) the value is sufficiently compelling and b) we keep the trade size small.

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