Posted on 10/13/2010 7:07:22 PM PDT by blam
Commodities Are Sizzling, Risks Are Building
by: Daniel Moser
October 13, 2010
Practically all risk assets, and even many “risk-off” assets, have enjoyed extraordinary performance in the past month–maybe even too much. Jim Cramer, like him or not, coined the saying, “bulls make money; bears make money; pigs get slaughtered”. It would appear prudent to print out those words of wisdom and tape it to your computer screens for at least the next few weeks.
A substantial portion of the gains in the last month seem most attributable to the prospects for additional quantitative easing. There has been some degree of improvement in some macro data, but at best, this is secondary in nature.
David Tepper has been widely quoted for articulating two outcomes for asset prices in the near future: (1) macroeconomic fundamentals improve, at which point the Federal Reserve will not resort to quantitative easing, and asset prices generally go up albeit modestly or (2) macroeconomic fundamentals do not improve at which point the Federal Reserve will begin some sort of quantitative easing which can be characterized by “everything going up”.
The whole point of quantitative easing is to stimulate economic activity via lowering market interest rates in an effort to induce risk-seeking behavior by consumers, entrepreneurs, and lenders. The benchmark results for a successful quantitative ease can probably be characterized by increasing demand pull inflation (e.g. inflation prompted by short-term demand outpacing supply).
This is where critics of quantitative easing will argue that quantitative easing, or at least this time around, is resulting in little more than debasing the currency.
In part, this argument is compelling because interest rates are so incredibly low that it is rather difficult to foresee any additional economic investment or risk-seeking behavior prompted from even lower interest rates.
Moreover, with the recent outbreak of the foreclosure fraud issues; decreasing mortgage rates even further seems somewhat analogous to shooting an elephant in the ass with a bb gun–it isn’t likely to make much of a difference given all the other issues playing out.
Nonetheless, a tremendous amount of risky assets have performed well on the prospects for an additional round or some systematic quantitative easing. Is the market in a reflexive process right now?
Since the purpose of quantitative easing is to lower interest rates and push up asset prices, and the market has done just that, what’s the point for the Federal Reserve to actually deliver quantitative easing? It would seem to me there isn’t a point to it.
Furthermore, the market front running actually alleviates the need for the Federal Reserve to purchase assets–they have a significant portion of the outcome that was desired (in terms of asset price shifts) and they haven’t had to spend a dime to get it.
This sounds pretty reflexive to me. But now we are in a scenario where if the Federal Reserve doesn’t deliver or doesn’t deliver to the extent market participants expect, asset prices could fall in the near term, which is to say the market might just be priced for a perfection that won’t be delivered.
One specific example of a possible market distortion is oil prices.
Neil Beveridge, PhD, of Bernstein has recently argued that, “with oil having increased to $82/bbl over the past two weeks, it would seem that momentum rather than fundamentals is driving price.” He goes on to argue that, “despite the increase in oil prices, US petroleum stocks are at record levels relative to historic norms.
Demand growth in developed markets remains weak with high unemployment doing little to stimulate new demand. Global supply has held up relatively well this year despite the reduction in global upstream capex investment in 2009.
Latest estimates suggest that global non-OPEC production is likely to grow by over 2% or (0.9mbls/d) this year. There is no fundamental problem with oil supply, and current markets remained well-supplied with crude in our view.
On this basis there would seem little justification for oil prices trading significantly above the marginal cost of oil which we estimate to be around $75/bbl.”
On Wednesday the International Energy Agency [IEA] revised their demand forecast for 2011. Did oil prices react negatively? Nope.
Although they did revise their 2010 demand forecast upward. According to the story posted on CNBC’s website, which can be seen here: http://www.cnbc.com/id/39645739, "The market should remain pretty well-supplied at least until the middle of next year," said David Fyfe, head of the IEA's oil industry and markets division. "If the lower case GDP scenario materializes, that would trim demand quite dramatically and the market would look very well-supplied through 2011."
“The agency, which advises major industrial countries on energy policy, said temporary factors such as heating oil restocking ahead of the northern hemisphere winter are behind the upwards demand growth revision for 2010.” In addition to the demand revision, “The IEA raised its estimate for non-OPEC supplies by 150,000 bpd to 53.1 million bpd next year.”
Overall this is a bearish change to oil fundamentals i.e. less demand, more supply. Perhaps the IEA forecasts are meaningless, I am not really sure. But the point is that many risky assets are starting to drift away from fundamental drivers, and that always results an inherent increase of risk for a significant correction back to fundamental drivers.
The following graph, created by Bernstein, provides a roadmap for the companies most leveraged to oil prices. Perhaps it might be a good idea to reduce implicit exposure to oil prices by shifting to more integrated oil names which exhibit less price elasticity (i.e. beta) to oil prices.
Concluding remarks: risky assets have been performing far too well to get caught up in a sudden correction back to fundamentals resulting from anything less than perfection with the evolution of macro fundamentals, monetary policy, or fiscal policy…hell even the mid-term elections pose new levels of risk.
As a result, it can only be advisable to take gains where they appear frivolous or exceptionally good and/or shift into more protective (defensive) positions (i.e. lower beta, dividend paying, put options, stop losses, etc).
Maintaining optionality/flexibility is tantamount to navigating this particularly risky environment. Godspeed.
Check out copper ETF-—COPX-— http://www.google.com/finance?hl=en&q=%22COPX%22&rlz=1B3GGLL_enUS393US393&um=1&ie=UTF-8&sa=N&tab=we
SLW is good on silver http://www.google.com/finance?q=NYSE%3ASLW
GDX and GDXJ are gold miner ETFs
“Since the purpose of quantitative easing [by the Fed] is to lower interest rates and push up asset prices, and the market has done just that, what’s the point for the Federal Reserve to actually deliver quantitative easing? It would seem to me there isn’t a point to it.”
They are whistling past the graveyard, IMHO. Made another tidy little sum today. Mama Like!
Keep up the good work, 0bama, et al! You’re makin’ me a wealthy woman as I drag myself (kicking and screaming!) into my Golden Years. :)
It can be more risky to accept low interest rate returns on your money. Might be better to get into commodity ETFs which will rise with inflation since the USD will be declining relative to commodities. Commodities are traded world wide. Oil silver copper and gold have a worldwide price and the USD is declining relative to them
Blam, the fat lady sings on Nov.2nd, and after that,no more surreptitious qantitative easing.Make hay while the field is dry, we won’t be seeing this again for year or more.
he Dow really should be at about 7900, or even less.Its interesting watching money chasing its own tail.I have grabbed off a few tail hairs , a few thousand dollars worth.
And the smart money will be defensive come the 31st of October. All Hallows Eve will break the spell.
And the Fat Lady will indeed sing like an elephant.
Much of the rise in commodities is simply the dollar getting weaker. And there is little sign that that trend will be coming to an end.
copper-— COPX (copper ETF)
and FCX (Freeport MacMoran old line copper gold & molybdenum producer)
Much of the rise in commodities is simply the dollar getting weaker. And there is little sign that that trend will be coming to an end.>>>>>>>>
Weaker USD will soon translate into high gasoline and heating oil prices. Then America will really love Obama. Food prices are higher already
Gold, silver, platinum, and palladium are all hitting new highs in Asia right now. And the dollar tanked this evening.
I believe the rising commodities are going to cause the next big leg down. I think high gasoline prices were the catalyst for everything falling to pieces in 2007/08. The house of cards were stacked high, and $4.50 per gallon gas was like someone trying to sit a baseball on top of it. It did the only thing it could. It just fell apart....
What is so scary about it this time around(unlike 07/08) is the fact that so many people don’t have all of the credit cards to simply charge their higher fuel and food costs to. The higher prices will come straight out of the consumer’s cash flow. This will cause a ripple effect throughout the economy as if you just raised taxes on EVERYTHING that people HAVE to buy.
Another difference between 07/08 and now is unemployment is easily double what it was then. When the higher prices hit those unemployed people, they will be just flat out SCREWED!
You would think the Fed would learn from their mistakes. They flood the economy with currency, and much of it flows into commodities(again), and combined with a weakened dollar, the cost of virtually everything we need for day-to-day living rises! You couldn’t screw the low income/middle class any more if you tried!
Our policy makers truly have painted themselves into a corner I think. I’m by no means at all an expert about such things. I don’t even claim to know much about it, but when someone like me can even see this unfolding, it should be OBVIOUS to those who are supposed to be managing this mess!
God help us....
For those living outside of the U.S., on 2 November the most important U.S. election since 1932 will take place. On that day, U.S. voters may repudiate the Keynesian liberal model of government.
For nearly 80 years Keynesian liberals have been on a path of wealth confiscation and destruction not seen since the Mongol hordes unleashed their terror across Asia and Europe. On 2 November we may, hopefully, witness the beginning of the death of Keynesianism. If not, we still have Gold.
With $Gold in a clear parabolic movement, perfection is now required. Markets are fully anticipating that QE II will explode onto the scene on 3 November. Federal Reserve is expected, by near all market participants, to begin a massive second round of liquidity injections into the U.S. financial system. This action is universally expected to crush the U.S. dollar, and send $Gold into the stratosphere. Nonsensical forecasts for $Gold are the primary byproduct of these expectations, with the latest being a ridiculous one of $8,000.
[snip]
(Ahem, I posted an article earlier that said gold would probably go to $10k an ounce)
That's been my strategy for quite a while. Commodity ETFs like DBA (wheat, corn, soybeans, sugar), DBC, the CanRoy oil sands trusts (that are now converting due to Canadian tax law changes), SLV, etc. Gold bars for the lower commissions.
Also, anything to get out of USD. Loonie denominated mostly.
The whole point of quantitative easing is to stimulate economic activity via lowering market interest rates in an effort to induce risk-seeking behavior by consumers, entrepreneurs, and lenders.
To stimulate the economy, Obama must become ‘pro business’ and that ain’t gonna happen. Any effort by Team Obama to appear positive will be seen as purely an act. The damage has been done and there will be little activity until undone.
Some are calling for a ‘Cold War’.
The whole point of quantitative easing is to stimulate economic activity via lowering market interest rates in an effort to induce risk-seeking behavior by consumers, entrepreneurs, and lenders.
To stimulate the economy, Obama must become ‘pro business’ and that ain’t gonna happen. Any effort by Team Obama to appear positive will be seen as purely an act. The damage has been done and there will be little activity until undone.
Some are calling this a ‘Cold War’.
You’re preaching to the choir.
In summer 2008, when fuel prices went sky high, I remember the Dems (Nancy & Harry) looking unconcerned.
If I were a conspiracy theorist, I’d believe that it was just part of the greater plan.
Like you said, if someone like I (we) can see this...
By Bill Bonner
10/13/10 Buenos Aires, Argentina – “This country is in a boom,” said the editor of a financial magazine in Buenos Aires. “Everything is going up. Everything is selling. And inflation is roaring at 25% per annum.”
To hear him tell it, Argentina is everything America wishes to be. Its people shop. Its restaurants are full. Its economy is growing at more than 8% a year.
Why?
“Inflation. Everyone wants to get rid of cash. You hold onto it and it’s worth less and less. So you buy an apartment.”
Amazingly less than 10% of property transactions in Argentina include mortgages. People pay with cash. Still, prices are not as low as you would expect. The lot next to our office is on the market for $250,000.
“It should be about $100,000,” said a friend who keeps an eye on real estate. “But everything is high.”
The cab ride from the airport was 70 pesos when we came 4 years ago. This time it was 128 euros. Two glasses of wine at a local bar were 40 pesos. They would have been half that a few years ago.
“There’s a boom going on,” continued the financial editor. “But it can’t go on forever. You can’t have 25% inflation and have a healthy economy. People don’t make wise investments. They just try to avoid getting ripped off by inflation. They don’t make long-term investments. They just try to park their money where it won’t disappear.
That’s why real estate is so expensive. People will save their money and buy an apartment whether they need it or not. They figure it will still be there in five or ten years. The peso won’t be. At least not today’s peso.”
Nor will the dollar.
Very nice and “diverse”
Anyone have any experience in Canadian denominated securities? There are a few online firms where you can buy in the local markets denominated in the country’s currency.
I am wondering how the CA $ and Aussie $ will hold up when America implodes? Gains in US dollars may be somewhat useless. I have one holding based in Euros and it has done well on currency gains.
Even any average Joes and Janes reading may want to hold international or global funds versus US index funds.
I feel sorry for seniors and baby boomers. I think America is finished. Any people who elect a muslim, allow a victory mosque and watch 6 Saudi owned/controlled/influenced TV networks who own all the channels is doomed.
The US is just too corrupt - the whole judicary is corrupt and military is now too.
He is our own Muslim Mugabe.
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