Friday, December 26, 2008
Thursday, December 25, 2008
Commodities - Hints for 2009
Rise and fall of commodities gives hints for 2009
Tue Dec 23, 2008 3:38pm EST
By Christine Stebbins - Analysis
CHICAGO (Reuters) - Just a year ago the debate about grain prices was simple: how high was high?
Huge global demand for grains, governments hoarding food, climate fears amid droughts, storms and floods -- basically every bullish factor one could imagine hit the markets.
The psychology of short supplies carried over to other commodities as well, especially industrial metals as China and India drew in a rapidly rising share of materials as their economies raced to modernize and transform.
The final element for the "perfect storm" sending commodities to stratospheric heights was the tsunami of Wall Street and other speculative money that, frustrated by stagnant stocks and bonds, finally bought into the commodities story.
The benchmark Reuters-Jefferies-CRB index .CRB of 19 commodity futures was at 358.71 on December 31, 2007, up 17 percent for the year. It jumped another 32 percent to hit record high of 473.97 on July 3, 2008.
Then, as investors blinked, it was over. The index started sliding and by early December fell to a 6-1/2-year low of 208.58 -- down 56 percent from the midsummer highs.
The global economic crisis tied to dried-up bank credit -- the lifeblood of all markets -- rocked Wall Street but also rolled over commodities, bursting bubbles right and left.
"A great start and an unexpected finish," said Rich Feltes, director of MF Global Research in Chicago.
Gold had soared past $1,000 an ounce. U.S. wheat prices had gone past $25 a bushel -- the previous record was $7.50 -- amid a 60-year low in U.S. wheat stocks. Midwest floods and a biofuels boom pushed corn above $7 a bushel, triple the average price for decades. In July, crude oil neared $150 a barrel.
"The main negative for all of these commodities is the demand side of the equation with the economic malaise," said Bill O'Neill, managing partner of Logic Advisors LLC and former head of commodities research at Merrill Lynch.
The question for the coming year? How low is low?
"As we head into 2009 I think an important question to ask is will that fund money come back?" MF Global's Feltes said.
"Commodities are not going to be a lead indicator," he said, pointing to gross domestic product instead. "The economy has to turn around first. There has to be fundamental justification for higher GDPs for improving commodity demand before investors feel comfortable coming back to commodities."
LIMPING ALONG - BUT KEEP AN EYE ON GRAINS?
In U.S. commodity markets, weekly data from the Commodity Futures Trading Commission has told the story of shell-shocked investors fleeing commodities or cashing out to secure funds.
Open interest in the CBOT's largest ag contract, corn, for example, had grown to 1.4 million contracts by spring. Today, the total is 800,000 contracts as commodity funds downsized to meet the global margin call that came as economies collapsed.
The credit contagion shows no signs of being solved any time soon, with the hopes of most investors pinned to the new policies and measures a Barack Obama administration says it will aggressively put in place starting in January.
How quickly that might spur economic growth and investor confidence is an open question. But among commodities, one place to keep an eye on may be grains. Several factors might make food and biofuels a trigger for a commodities recovery.
For one thing, the single biggest demand force in the recent commodities craze -- China -- is not going away. Neither is food or biofuels demand, although the latter may cool down.
"The theme we've had in the last half of this year was all about demand destruction," said Dan Basse, president of Chicago-based consultancy AgResources. "We're concerned about supply destruction starting mid to late winter and having a bull market in agriculture the last half of 2009."
Basse said supply destruction -- referring to lower global grain plantings -- was a key to watch. But so are biofuels.
Obama, from a top corn and soybean state, has promoted biofuels. But using food crops to produce them has been increasingly attacked by food inflation watchers and even environmentalists, saying it does little for global warming.
"Ethanol has been one of the big drivers of the bull market," Basse said.
Another factor that will have a huge influence over whether commodity prices recover is the value of the dollar. A weak dollar makes U.S. grain exports cheaper, for example.
"The U.S. dollar will continue at least early in the year to drive all commodity markets," said Bill Lapp, president of consultancy Advanced Economic Solutions.
Tue Dec 23, 2008 3:38pm EST
By Christine Stebbins - Analysis
CHICAGO (Reuters) - Just a year ago the debate about grain prices was simple: how high was high?
Huge global demand for grains, governments hoarding food, climate fears amid droughts, storms and floods -- basically every bullish factor one could imagine hit the markets.
The psychology of short supplies carried over to other commodities as well, especially industrial metals as China and India drew in a rapidly rising share of materials as their economies raced to modernize and transform.
The final element for the "perfect storm" sending commodities to stratospheric heights was the tsunami of Wall Street and other speculative money that, frustrated by stagnant stocks and bonds, finally bought into the commodities story.
The benchmark Reuters-Jefferies-CRB index .CRB of 19 commodity futures was at 358.71 on December 31, 2007, up 17 percent for the year. It jumped another 32 percent to hit record high of 473.97 on July 3, 2008.
Then, as investors blinked, it was over. The index started sliding and by early December fell to a 6-1/2-year low of 208.58 -- down 56 percent from the midsummer highs.
The global economic crisis tied to dried-up bank credit -- the lifeblood of all markets -- rocked Wall Street but also rolled over commodities, bursting bubbles right and left.
"A great start and an unexpected finish," said Rich Feltes, director of MF Global Research in Chicago.
Gold had soared past $1,000 an ounce. U.S. wheat prices had gone past $25 a bushel -- the previous record was $7.50 -- amid a 60-year low in U.S. wheat stocks. Midwest floods and a biofuels boom pushed corn above $7 a bushel, triple the average price for decades. In July, crude oil neared $150 a barrel.
"The main negative for all of these commodities is the demand side of the equation with the economic malaise," said Bill O'Neill, managing partner of Logic Advisors LLC and former head of commodities research at Merrill Lynch.
The question for the coming year? How low is low?
"As we head into 2009 I think an important question to ask is will that fund money come back?" MF Global's Feltes said.
"Commodities are not going to be a lead indicator," he said, pointing to gross domestic product instead. "The economy has to turn around first. There has to be fundamental justification for higher GDPs for improving commodity demand before investors feel comfortable coming back to commodities."
LIMPING ALONG - BUT KEEP AN EYE ON GRAINS?
In U.S. commodity markets, weekly data from the Commodity Futures Trading Commission has told the story of shell-shocked investors fleeing commodities or cashing out to secure funds.
Open interest in the CBOT's largest ag contract, corn, for example, had grown to 1.4 million contracts by spring. Today, the total is 800,000 contracts as commodity funds downsized to meet the global margin call that came as economies collapsed.
The credit contagion shows no signs of being solved any time soon, with the hopes of most investors pinned to the new policies and measures a Barack Obama administration says it will aggressively put in place starting in January.
How quickly that might spur economic growth and investor confidence is an open question. But among commodities, one place to keep an eye on may be grains. Several factors might make food and biofuels a trigger for a commodities recovery.
For one thing, the single biggest demand force in the recent commodities craze -- China -- is not going away. Neither is food or biofuels demand, although the latter may cool down.
"The theme we've had in the last half of this year was all about demand destruction," said Dan Basse, president of Chicago-based consultancy AgResources. "We're concerned about supply destruction starting mid to late winter and having a bull market in agriculture the last half of 2009."
Basse said supply destruction -- referring to lower global grain plantings -- was a key to watch. But so are biofuels.
Obama, from a top corn and soybean state, has promoted biofuels. But using food crops to produce them has been increasingly attacked by food inflation watchers and even environmentalists, saying it does little for global warming.
"Ethanol has been one of the big drivers of the bull market," Basse said.
Another factor that will have a huge influence over whether commodity prices recover is the value of the dollar. A weak dollar makes U.S. grain exports cheaper, for example.
"The U.S. dollar will continue at least early in the year to drive all commodity markets," said Bill Lapp, president of consultancy Advanced Economic Solutions.
Wednesday, December 24, 2008
Identify market bottom
This piece of advice is probably worth millions to the right person. Giving this away free on my blog is almost altruistic
; ) Sometimes when we have certain "information" or " smart ideas", we tend to sock them away to make it work for our benefit.
There's not much wrong with that, its how rich people think and act.
Well, another way rich and wealthy people act is to ask "questions", questions seeking views and ideas, its free anyway. You'd be surprised how prevalent that is, and nobody would be thinking of "paying back" a fee to the ideas/views generator. I could do the same and not share, anyway a blog does not make me money. So, here's my Christmas gift to all.
How to look for markets' bottom this time around. You look around, there are so many stocks trading at 3 or 4 times PER, there are so many trading at just 0.2-03 book value, how to pick, when to buy? You switch on CNBC, everyday is a time to buy and sell, depending on who you are listening to.
We all know that 5 years out anyone who bought well would do very well. However, you also want to know you are buying into a genuine recovery. Seriously real bottoms are unattainable, but we can keep a lookout for catalysts that signify a genuine recovery.
Cheap valuations are a reflection of risk aversion, the rush to US Treasuries is a sure sign of risk aversion, the rush to USD and yen are a sign of definite risk aversion.
Gem #1: Markets will only start a genuine recovery when risk aversion subsides
Gem#2: Risk aversion reduction will be immediately reflected in weaker USD and yen
The fall in USD over the last two days is more due to the zero interest rate regime enacted by Federal Reserve, so that should not be a sign of risk aversion reduction.
The best guide for locating current markets' bottom: WHEN USD and YEN BOTH STARTS TO FALL IN VALUE in a sustained pattern. When these two currencies fall, it show a willingness to move exposure into other currencies or assets, be it stock or bonds. Before they are reflected in the prices, the signal will be most apparent in the currencies.
However, even then we cannot really ascertain a buying trigger. So, my advice would be to break up you investing funds into 3 portions, get ready your list of stocks to buy.
Catalyst #1: When yen/usd rate moves back to 94, plonk down 1/3 of your funds
Catalyst #2: When the rate moves to 97, move the second portion
Catalyst #3: When the rate breaks 100, move the rest in
A point not missed here is that if yen weakens against the USD, the latter would be gaining in strength. However, I am using the yen/usd rate as a guide, as I believe when the yen starts to weaken, the USD would also weaken, but not by as much - i.e. the USD would gain ground against yen but at the same time lose ground against the euros and other major currencies. I use the yen/usd rate because that is most widely followed. The yen is used as the determinant because it was the most popular currency for carry trades, the unbelievable strength now is due to risk aversion as the Japanese exporters are basically losing money and cannot compete below 90.
Merry Christmas & Happy Holidays!
; ) Sometimes when we have certain "information" or " smart ideas", we tend to sock them away to make it work for our benefit.
There's not much wrong with that, its how rich people think and act.
Well, another way rich and wealthy people act is to ask "questions", questions seeking views and ideas, its free anyway. You'd be surprised how prevalent that is, and nobody would be thinking of "paying back" a fee to the ideas/views generator. I could do the same and not share, anyway a blog does not make me money. So, here's my Christmas gift to all.
How to look for markets' bottom this time around. You look around, there are so many stocks trading at 3 or 4 times PER, there are so many trading at just 0.2-03 book value, how to pick, when to buy? You switch on CNBC, everyday is a time to buy and sell, depending on who you are listening to.
We all know that 5 years out anyone who bought well would do very well. However, you also want to know you are buying into a genuine recovery. Seriously real bottoms are unattainable, but we can keep a lookout for catalysts that signify a genuine recovery.
Cheap valuations are a reflection of risk aversion, the rush to US Treasuries is a sure sign of risk aversion, the rush to USD and yen are a sign of definite risk aversion.
Gem #1: Markets will only start a genuine recovery when risk aversion subsides
Gem#2: Risk aversion reduction will be immediately reflected in weaker USD and yen
The fall in USD over the last two days is more due to the zero interest rate regime enacted by Federal Reserve, so that should not be a sign of risk aversion reduction.
The best guide for locating current markets' bottom: WHEN USD and YEN BOTH STARTS TO FALL IN VALUE in a sustained pattern. When these two currencies fall, it show a willingness to move exposure into other currencies or assets, be it stock or bonds. Before they are reflected in the prices, the signal will be most apparent in the currencies.
However, even then we cannot really ascertain a buying trigger. So, my advice would be to break up you investing funds into 3 portions, get ready your list of stocks to buy.
Catalyst #1: When yen/usd rate moves back to 94, plonk down 1/3 of your funds
Catalyst #2: When the rate moves to 97, move the second portion
Catalyst #3: When the rate breaks 100, move the rest in
A point not missed here is that if yen weakens against the USD, the latter would be gaining in strength. However, I am using the yen/usd rate as a guide, as I believe when the yen starts to weaken, the USD would also weaken, but not by as much - i.e. the USD would gain ground against yen but at the same time lose ground against the euros and other major currencies. I use the yen/usd rate because that is most widely followed. The yen is used as the determinant because it was the most popular currency for carry trades, the unbelievable strength now is due to risk aversion as the Japanese exporters are basically losing money and cannot compete below 90.
Merry Christmas & Happy Holidays!
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