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Commodities Growling Like a Bear

Posted by Larry Doyle on June 1, 2010 2:48 PM |

Does anybody have any doubt that the equity markets are heavily manipulated by the banks and Uncle Sam? I didn’t think so.

The same clearly holds true for our credit markets, primarily the Treasury market. That said, the commodities market, in my opinion, is much more closely aligned with the real economy. What have commodities done over the last few years? The DJ-UBS Commodity Index was up a mere 16% in 2009 and is down 10% so far in 2010. Over the last two years, the index is down approximately 50%, significantly more than most major equity averages.

What are commodities telling us currently? Let’s navigate.

Bloomberg provides a sobering review of the commodities market today in writing, Commodities’ Biggest Drop Since Lehman Bear Signal:

The biggest slump in commodities since Lehman Brothers Holdings Inc. collapsed is undermining Wall Street forecasts for accelerating economic growth and higher prices for everything from copper to crude oil.

The Journal of Commerce Industrial Price Commodity Smoothed Price Index that tracks the growth rate of steel, cattle hides, tallow and burlap plunged 57 percent in May, two years after a decline that foreshadowed the worst recession in half a century. The index of 18 industrial materials declined the most since October 2008 as Europe’s debt crisis widened and China took steps to curb growth.

While the Organization for Economic Cooperation and Development raised its growth forecasts for this year and next on May 26, investors are dumping holdings at the fastest pace since February. Separate reports today showed manufacturing slowdowns last month in China, Europe and the U.S.

“As risk-taking falls, expected growth is reduced,” said Colin P. Fenton, the chief executive officer of Curium Capital Advisors LLC in Boston, who was a commodity analyst at Goldman Sachs Group Inc. and Stanley Druckenmiller’s Duquesne Capital Management LLC hedge fund. “Demand for commodities is going to be softer than it might otherwise have been.”

The Journal of Commerce Industrial Price Commodity Smoothed Price Index reflects clearer signs of supply and demand than futures markets because half the items it tracks don’t trade on exchanges used by speculators, said Lakshman Achuthan, the managing director at the New York-based Economic Cycle Research Institute. The gauge dropped to 25.97 on May 28 from 60.56 on April 30.

Now, “the collapse in the commodity index is telling us that the peak in global industrial growth is imminent, it’s here right now,” Achuthan said. “Markets are going to have to deal with the reality of a slowdown.”

If only Tim Geithner and Ben Bernanke could figure out how to manipulate the commodities markets maybe, just maybe, we could keep the shell game going a while longer.

For those who shepherd their capital a little more wisely and carefully, you may want to factor these moves in the commodities markets into your analysis and navigate accordingly.

LD

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  • fred

    LD,

    “GREAT STUFF”! Questions, please explain what Mr. Fenton meant by risk taking. From the context of the article I took it to mean long speculation in the commodity markets? Or is it open interest? Are commodity holdings the first to be reduced on a margin call, if so why, higher margin requirements and/or higher volitility of prices as a function of less credit?

    • LD

      Fred,

      I read ‘risk taking’ in the context of entrepreneurs and industrialists looking to grow their business enterprises. That ‘risk taking’ would require the use and implementation of a variety of commodities, both metals and non-metals. This increase or decline is a strong indicator as to the real health of the economy.

      I am not a commodity expert per se so am not in a position to properly address the margin question.

      Thanks for the plug!!






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