Posted on 10/15/2006 12:23:20 AM PDT by conservative in nyc
Commodities had a miserable third quarter and many on Wall Street say they have further to fall. That theory was bolstered last week as oil prices sunk to their lowest level for the year.
If commodities prices do sink further, it will be bad news for emerging markets and the investors who have poured billions of dollars into them over the past three years.
Commodities prices tend to have a domino effect - lower oil prices often drag down gold prices, for instance. And lower commodities prices tend to push down stocks in emerging markets such as Russia and Brazil, countries with a rich supply of oil and metals, respectively.
While many emerging markets continue to be on a tear, if the commodity bears are right, there may be plenty of pain to spread around.
While investors pulled $263 million out of gold and natural resources funds for week that ended Oct. 4, they still have $26.9 billion in the funds, according to Bank of America Corp. Fund flows into emerging markets slowed during the same period, but investors still have $96.6 billion riding on emerging market funds, according to Bank of America.
Stephen S. Roach, Morgan Stanley's chief economist, wrote in September that the tidal wave of money that has flowed into commodities over the last three years has transformed commodities markets "from one of the best real-time gauges of economic activity" to a financial asset like any other - that is, one that's susceptible to hysteria and bubbles.
"Just as return-hungry investors chased these markets on the upside, they could well run like lemmings to get out on the downside," Roach wrote.
Merrill Lynch & Co.'s chief investment strategist, Richard Bernstein, agrees, saying that cheap money and heavy borrowing inflated prices in commodities. Those prices are now 60 percent above what could be explained by fundamental supply and demand, he wrote earlier this month.
"These data suggest that September's downfall in commodities might only be the beginning of a protracted bear market," he wrote.
Other factors that pushed commodity prices higher, such as the U.S. housing boom and powerful growth in the Chinese economy, could also drive prices lower. A slowdown in the housing market is well under way and economists expect slower growth from China as well.
The decline in home construction has already hit the lumber market, where prices recently dropped to 5-year lows. Metals used in homebuilding, such as copper, are also facing price pressure.
Roach argues that a downturn for U.S. consumers could slow business for Chinese producers. U.S. consumers continue to gobble goods made in China, which is why the U.S. trade deficit with China was a record $22 billion in August. But if American consumers were to start cutting up their charge cards, the effects would be felt in Chinese factories almost immediately.
Less use in the U.S. auto industry should affect steel, aluminum, glass and rubber demand, wrote Tobias Levkovich, Citigroup Inc.'s chief U.S. strategist.
While the argument for continued high prices for commodities is that demand will continue to grow, Levkovich points out that there's some room for supply to grow, too, with a possible increase in Saudi oil production and a recent Chevron Corp. find in the Gulf of Mexico.
If the strategists are right, investors who have seen impressive run-ups in markets such as South Africa, where stocks are up more than 25 percent for the year to date, might consider taking some money off the table - and away from all the other dominos.
Got a sudden urge to go check on your sugar I bet. Till next time--GGG
No. Roach has been wrong for several years. What happened to his bear market? Dollar crash?
He must not track the wheat, sugar and OJ production which is really bad this year.
Is that a cartoon of what goes on in your mind?
Looks like a chart of a blowoff top to me.
Agreed.
These expert prognosticators take no responsibility for past predictions that miss wildly.
At any time, the 'current trend' is known with certainty by every financial genius.
Yet time and again, they are caught with their pants down with everyone else by the real world events that impact our economy, from oil shocks to terrorist acts to corporate corruption scandals to election suprises and every act of God imaginable.
In a world where America is:
Still dependent on foreign oil;
Fighting two major wars in the den of the Middle East;
Fighting domestic terrorist plots supported by the Middle East;
Fighting proxy wars supported by Iran, Pakistan, China and Russia in Iraq and Afghanistan;
Fighting the nuclear ambitions of rogue regimes of North Korea and Iran;
Fighting against a South American communist resurgence;
Fighting against an old Europe too soft to counter Islamofascism;
And most importantly, fighting a domestic traitorous Democratic party and their propaganda mouthpieces in Liberal Media.
How can anyone in this environment predict the direction of oil and gold six months out? Good luck.
I'm speaking as someone who has made his living either trading commodities for the last 9 years. I don't think the bull run in commodities is over. The world wide forces that have caused commodities to go up are still in place. Prices can fall in the short term, but until there is a significant increase in supply or a decrease in demand prices will continue to rise. Most commodities bull markets last 15-20 years--not 5.
Wheat and corn are are way up recently. Up over 20% in the last few days. This was due to a very poor Australian harvest. But I believe soft commodities will continue to rise as they are 60-90% below their inflation adjusted all time highs. Inventories for many agricultural products are the lowest in 20-30 years. The corn crop is going to have to grow by 40% in order to supply all the ethanol plants being built.
As far as gold, I think its too early to tell if the bull market is over. A 20% correction after nearly trippiling doesn't mean the bull market is over. If I ran the the Chinese or Japanese or Russian central banks and I saw that the United States trade deficit is nearly $1 trillion per year, I might think of putting some money into something other than the US dollar.
Dow 36,000 is looming, just ahead of Dow 100,000.
"Actually, conditions don't have to get a lot better to justify Dow 36,000," say James K. Glassman and Kevin A. Hassett in "Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market."
Charles W. Kadlec, author of "Dow 100,000: Fact or Fiction," puts the Dow at 100K in 2020.
Sell everything, boys and girls. We're about to get filthy rich.
"A gold bubble"!? Is he insane? 250 to 460 from 2001-2005 is roughly 15% a year. 460-588 this past year is arguably 25% but that ain't bubble territory either.
That said, yeah it was over 700 for like a week but a "bubble" doesn't go down 20% from the peak and then stay in that area for like six months. There's nothing in the definition or the price history of the past couple of years that says gold is or was a bubble.
Ah the old crowd-pleaser. Glassman needs a laugh track behind him when he speaks.
Yep. Gold is going to $1659 plus. When we finally get there, I'll drop you a line.
I invest in precious metals, and mining stocks and I read Jim Sinclair's website regularly, but I find Jim's "language" difficult to fully understand at times. Are there any other prec metals people you recommend following? Thanx ...
Then real estate isn't a bubble either.
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