Based on the derisking POV expressed in my post on The Daily Capitalist yesterday, I have taken further profits in the accounts I manage in PSLV and PPLT, tho I think platinum heads higher based on newflow.
Overall, earnings estimates continue to climb for CF, more or less on a daily basis. Short-term volatility notwithstanding, I think it can trade a lot higher given EPS projections to be over $20/share for the next several years. AGU is cheap and so is DE.
However, I basically think the markets have it wrong right here. They are busting silver up to 10+% above its 50 day sma, but assuming the global recession moves thru the U.S. (per ECRI), industrial uses of silver will decline and my long-held target price of $21 would then have a good shot at being met. There remains a good deal of speculation in silver (and gold).
The reason I write the above, even tho I think the physical metals are going much higher over time, is the unwarranted sell-off in the "safe" high-quality utilities. One can now receive over 4% in WGL, with a low-ish dividend payout, and about 4% in ED. Both companies serve the two most vital cities in the U.S. and in this inflationary age, appear to be better buy-and-holds for anything other than the most hair-shirt part of a portfolio (high-quality bonds)-- and that is so even if their tax rate rises. Even as Japan was (financially speaking) "going Japanese", their 10-year bond did not go below the rate of current CPI inflation, as the U.S. 10-year did recently.
Last year I concentrated thru August on gold, and starting in the spring added Treasurys. This year the theme is to lock up an interest stream that has a good chance of being valued much more highly in future years in a ZIRP-forever (ZIRP4EVA per ZH) world. And if "NIRP" (negative interest rate policy) comes to America, one could see extraordinarily low dividend yields on these equities.
Finally, though they are riskier, both T and VZ are "growthier" than the above utes and offer higher dividend payouts.
All the above have RSI's near or below 20 tho the fundos have not changed. So I'm finishing the move into these guys.
Of course, in a new Lehman moment, the prices of all these things will collapse; but I'm betting that their dividend streams won't.
Showing posts with label commodities. Show all posts
Showing posts with label commodities. Show all posts
Thursday, August 23, 2012
Thursday, May 31, 2012
ISM Comment Leads to an 'Aha' Moment
Sometimes little things make the difference. For example, early in 2009, I saw a comment on a blog that was arguing with the blogger and most of the commenters. This comment went as follows: forget about the injustices you perceive about the bailouts of the banks and bankers. They have won. It shows in Jamie Dimon's swagger. Get over it.
This commenter was right, and thinking about the real-world wisdom it embodied it helped me switch from the bearish posture I had had ever since the summer of 2007-- and uber-bearish after a recession (mild, at the time) was confirmed by the spring of 2008.
In any case, a similar comment from the Chicago PMI report released this morning struck me as also bringing me to a clearer understanding of the markets, this time in a negative way. Here is part of the intro to this report:
This was an 'aha' read for me (note emphasis was added above).
Inexplicably, the purchasing managers' companies were bullish.
A problem that has vexed me a great deal has now been answered. That problem is that the futures markets show that commercial hedgers have gotten much less bearish as prices have declined. This is seen in general summary data available on the Web, and please note I'm an amateur at this and don't look at detailed COT reports and the like. But publicly available data indicate that the commercials in important markets such as copper and less important ones such as palladium are acting as they have during routine price corrections. However, in 2008, we saw similar activity from the commercials, and it merely presaged a much deeper depression. In other words, so far as they knew in 2008, the U.S. was undergoing a mild recession, the world was reacting in sympathy to temporarily decreased demand, and normal inventory policies were appropriate. And indeed, eventually, prices were higher than where they went bullish, but it took a major downtrend and many, many months for them to rise enough off of a much lower bottom for that to occur.
So we have it: if the fringe views of the ECRI and a few economists such as John Hussman and Gary Shilling (and Econophile Jeff Harding at The Daily Capitalist) are correct, then the U.S. is in or is soon to be in a recession. In that situation, China will lose even more demand for its exports, and we can expect more economic turmoil globally.
This fits together an additional way. A few weeks ago, Dr. Achuthan of ECRI went on TV and said his own 'aha'- he said that what had been going against his forecast of recession (which he had held to steadily since he first made that call around Sept. 20 of last year) was employment. He pointed to the nascent uptrend in new unemployment claims as evidence that finally, all the diagnostic evidence was in his favor.
So what did we see today? Another set of bad numbers on the employment front, both in new claims and in the ADP flash employment number. The ECRI case for recession not only remains on track, but just this week it put out a report for paying subscribers with the ominous title "More Signs of Global Economic Stress".
So, while the consensus on the Street has to be treating the current stock sell-off as a response to European turmoil, ECRI is doubling down- and it does have a strong track record.
A mild U.S. recession can be expected to have disproportionate effects on business behavior, and if so, currently "cheap" stocks may get a lot cheaper.
I am not an economist or a professional forecaster, but I do have a knowledge of advanced statistics. Thus I understand the message of simple statistics well. In this case, it is that for many years, there has been a strong correlation between recessions in the U.K. and other important European countries and recessions in the U.S. While correlation is not causation, I do respect it. Thus, putting all the above points together, my "central tendency" is for greater caution on risk assets than I think the markets are pricing in. So, again, in murky times when legitimately major events are occurring in the world's largest economic zone, the EU, I like a lot of cash. Buying into an established uptrend at higher prices only has an opportunity cost, not a real economic cost.
We are, indeed, skating on thin investment ice.
Knowing and saying all this, I now feel I should add that none of this is of any value for short-term market action. This is intermediate-term stuff.
(P.S. Due to the above, I took advantage of the late-day surge in AAPL to reverse most of my purchases yesterday. Still long, still love the fundos there, and look for it to get to its now-declining 50 day sma, but I like to prepare for intermediate-term stuff in advance.)
This commenter was right, and thinking about the real-world wisdom it embodied it helped me switch from the bearish posture I had had ever since the summer of 2007-- and uber-bearish after a recession (mild, at the time) was confirmed by the spring of 2008.
In any case, a similar comment from the Chicago PMI report released this morning struck me as also bringing me to a clearer understanding of the markets, this time in a negative way. Here is part of the intro to this report:
The short term trend of the Chicago Business Barometer, and all seven Business Activity indexes, declined in May. The Production index fell to neutral while, inexplicably, measures of Business Policy advanced.
This was an 'aha' read for me (note emphasis was added above).
Inexplicably, the purchasing managers' companies were bullish.
A problem that has vexed me a great deal has now been answered. That problem is that the futures markets show that commercial hedgers have gotten much less bearish as prices have declined. This is seen in general summary data available on the Web, and please note I'm an amateur at this and don't look at detailed COT reports and the like. But publicly available data indicate that the commercials in important markets such as copper and less important ones such as palladium are acting as they have during routine price corrections. However, in 2008, we saw similar activity from the commercials, and it merely presaged a much deeper depression. In other words, so far as they knew in 2008, the U.S. was undergoing a mild recession, the world was reacting in sympathy to temporarily decreased demand, and normal inventory policies were appropriate. And indeed, eventually, prices were higher than where they went bullish, but it took a major downtrend and many, many months for them to rise enough off of a much lower bottom for that to occur.
So we have it: if the fringe views of the ECRI and a few economists such as John Hussman and Gary Shilling (and Econophile Jeff Harding at The Daily Capitalist) are correct, then the U.S. is in or is soon to be in a recession. In that situation, China will lose even more demand for its exports, and we can expect more economic turmoil globally.
This fits together an additional way. A few weeks ago, Dr. Achuthan of ECRI went on TV and said his own 'aha'- he said that what had been going against his forecast of recession (which he had held to steadily since he first made that call around Sept. 20 of last year) was employment. He pointed to the nascent uptrend in new unemployment claims as evidence that finally, all the diagnostic evidence was in his favor.
So what did we see today? Another set of bad numbers on the employment front, both in new claims and in the ADP flash employment number. The ECRI case for recession not only remains on track, but just this week it put out a report for paying subscribers with the ominous title "More Signs of Global Economic Stress".
So, while the consensus on the Street has to be treating the current stock sell-off as a response to European turmoil, ECRI is doubling down- and it does have a strong track record.
A mild U.S. recession can be expected to have disproportionate effects on business behavior, and if so, currently "cheap" stocks may get a lot cheaper.
I am not an economist or a professional forecaster, but I do have a knowledge of advanced statistics. Thus I understand the message of simple statistics well. In this case, it is that for many years, there has been a strong correlation between recessions in the U.K. and other important European countries and recessions in the U.S. While correlation is not causation, I do respect it. Thus, putting all the above points together, my "central tendency" is for greater caution on risk assets than I think the markets are pricing in. So, again, in murky times when legitimately major events are occurring in the world's largest economic zone, the EU, I like a lot of cash. Buying into an established uptrend at higher prices only has an opportunity cost, not a real economic cost.
We are, indeed, skating on thin investment ice.
Knowing and saying all this, I now feel I should add that none of this is of any value for short-term market action. This is intermediate-term stuff.
(P.S. Due to the above, I took advantage of the late-day surge in AAPL to reverse most of my purchases yesterday. Still long, still love the fundos there, and look for it to get to its now-declining 50 day sma, but I like to prepare for intermediate-term stuff in advance.)
Sunday, May 20, 2012
China Said to Be: "Hand to Mouth"; No, That's Not an Old Chinese Saying, It Means the Commodities Bears Are Feeling Their Oats (If Bears Eat Oats)
Sometimes it just seems as though Groundhog Day got it right. Almost exactly one year ago, I wrote the following blog post, which soon enough proved highly accurate: Goldman Wrong on Rates, Zero Hedge Wrong on Oil As Deflationary Side of Biflation Begins Its Ascendancy (June 8). Well, Zero Hedge might be correct that 2011 is being repeated this year... but it's possible that presidential election years could be starting a new pattern. Heavens forfend, it could be more like 2008.
Here's a new reason why:
Today (May 21) we see this breaking article from the Financial Times. Its focus is on raw materials but it also contains bearish commentary about China’s overall economy. Here are excerpts:
Singapore/London: Chinese consumers of thermal coal and iron ore are asking traders to defer cargos and – in some cases – defaulting on their contracts, in the clearest sign yet of the impact of the country’s economic slowdown on the global raw materials markets.
The deferrals and defaults have only emerged in the last few days, traders said…
“China is hand to mouth at the moment.”...
Other key economic indicators followed by Chinese policy makers, including electricity consumption, rail cargo volumes and disbursement of bank loans, point to a sharper slowdown, suggesting the risk of a hard landing.
Soft commodities such as soyabeans and cotton have also seen Chinese customers default in the past two weeks, a trader at a third global trading house said…
Highlighting a “worrying” weakness in consumer spending inside China, Kim Youngha, the head of Samsung’s China operations, said he expected the domestic market for technology goods to grow 7 per cent this year in China, down from 10 per cent last year.
Yu Song, analyst at Goldman Sachs, told clients last week that Chinese economic activity was “exceedingly weak”.
A number of the individual commodities that I follow on the futures boards look technically poised for a relief rally. The biggie, oil, does not look as promising-similar to last spring. And, gold is trading at a massive premium to platinum- that should be bearish for gold. It is indeed possible that since gold trades as a currency and platinum is an industrial metal with important jewelry and investment uses, the traditional discount that gold has carried to platinum ever since catalytic converters came into use may be fading away. Nonetheless, I'm not brave enough to be favorable to gold prices unless I were even more bullish on platinum. And all I'm willing to say about platinum is that it's had a huge price drop recently, so short-term it probably a good trade, but given the above news out of China (which echoes the thrust of a NYT article published within the past week), I'm wary that we're going to face a 2008-style commodities liquidation event. So I'm basically waiting until I see the whites of the oil market's eyes before arguing with the FT per the above report.
It's the nature of markets to condition investors/traders to one pattern, then do something different. The resilience of the markets the past three years may simply be failing as real European economic activity continues to surprise to the downside.
Not to overdo the bearishness, but I've been in the markets well over three decades, handled my portfolio well in the 1987 crash and got completely out of stocks in 2000 and again in summer 2007. So for the many mistakes I've made, I've been lucky re crashes and want to post this from this week's Hussman Market Comment which I just noticed before posting the above:
As John Kenneth Galbraith wrote in 1955, "Of all the mysteries of the stock exchange there is none so impenetrable as why there should be a buyer for everyone who seeks to sell. October 24, 1929 showed that what is mysterious is not inevitable. Often there were no buyers, and only after wide vertical declines could anyone be induced to bid ... Repeatedly and in many issues there was a plethora of selling orders and no buyers at all. The stock of White Sewing Machine Company, which had reached a high of 48 in the months preceding, had closed at 11 on the night before. During the day someone had the happy idea of entering a bid for a block of stock at a dollar a share. In the absence of any other bid he got it."
When the Financial Times publishes the above article on a Sunday, it's my opinion that this news has not made its way into speculative commodities prices. "Deflation" might be afoot. Keeping dry investment powder, and being patient with it, is my major current strategy. To paraphrase Louise Yamada reminds investors (she said it before Jim Cramer): there's always a bull market somewhere during a decent tape and decent economy. In other words, prices can rise, and it's OK to be in cash at that time. I just don't like to lose the most precious financial asset of all: capital.
Here's a new reason why:
Today (May 21) we see this breaking article from the Financial Times. Its focus is on raw materials but it also contains bearish commentary about China’s overall economy. Here are excerpts:
Singapore/London: Chinese consumers of thermal coal and iron ore are asking traders to defer cargos and – in some cases – defaulting on their contracts, in the clearest sign yet of the impact of the country’s economic slowdown on the global raw materials markets.
The deferrals and defaults have only emerged in the last few days, traders said…
“China is hand to mouth at the moment.”...
Other key economic indicators followed by Chinese policy makers, including electricity consumption, rail cargo volumes and disbursement of bank loans, point to a sharper slowdown, suggesting the risk of a hard landing.
Soft commodities such as soyabeans and cotton have also seen Chinese customers default in the past two weeks, a trader at a third global trading house said…
Highlighting a “worrying” weakness in consumer spending inside China, Kim Youngha, the head of Samsung’s China operations, said he expected the domestic market for technology goods to grow 7 per cent this year in China, down from 10 per cent last year.
Yu Song, analyst at Goldman Sachs, told clients last week that Chinese economic activity was “exceedingly weak”.
A number of the individual commodities that I follow on the futures boards look technically poised for a relief rally. The biggie, oil, does not look as promising-similar to last spring. And, gold is trading at a massive premium to platinum- that should be bearish for gold. It is indeed possible that since gold trades as a currency and platinum is an industrial metal with important jewelry and investment uses, the traditional discount that gold has carried to platinum ever since catalytic converters came into use may be fading away. Nonetheless, I'm not brave enough to be favorable to gold prices unless I were even more bullish on platinum. And all I'm willing to say about platinum is that it's had a huge price drop recently, so short-term it probably a good trade, but given the above news out of China (which echoes the thrust of a NYT article published within the past week), I'm wary that we're going to face a 2008-style commodities liquidation event. So I'm basically waiting until I see the whites of the oil market's eyes before arguing with the FT per the above report.
It's the nature of markets to condition investors/traders to one pattern, then do something different. The resilience of the markets the past three years may simply be failing as real European economic activity continues to surprise to the downside.
Not to overdo the bearishness, but I've been in the markets well over three decades, handled my portfolio well in the 1987 crash and got completely out of stocks in 2000 and again in summer 2007. So for the many mistakes I've made, I've been lucky re crashes and want to post this from this week's Hussman Market Comment which I just noticed before posting the above:
As John Kenneth Galbraith wrote in 1955, "Of all the mysteries of the stock exchange there is none so impenetrable as why there should be a buyer for everyone who seeks to sell. October 24, 1929 showed that what is mysterious is not inevitable. Often there were no buyers, and only after wide vertical declines could anyone be induced to bid ... Repeatedly and in many issues there was a plethora of selling orders and no buyers at all. The stock of White Sewing Machine Company, which had reached a high of 48 in the months preceding, had closed at 11 on the night before. During the day someone had the happy idea of entering a bid for a block of stock at a dollar a share. In the absence of any other bid he got it."
When the Financial Times publishes the above article on a Sunday, it's my opinion that this news has not made its way into speculative commodities prices. "Deflation" might be afoot. Keeping dry investment powder, and being patient with it, is my major current strategy. To paraphrase Louise Yamada reminds investors (she said it before Jim Cramer): there's always a bull market somewhere during a decent tape and decent economy. In other words, prices can rise, and it's OK to be in cash at that time. I just don't like to lose the most precious financial asset of all: capital.
Saturday, April 30, 2011
Metals in Motion
The question facing all investors is how to play the inflation and negative real interest rates that the Fed continues to engineer. In that vein, I have spent a good deal of time reviewing long-term price charts for gold, silver, platinum, palladium, copper and oil. Links are here (precious metals, click on historical charts), here and here (copper) and here for more detailed price charts on silver. I also included oil from memory.
The bottom line as I see it is that these varied commodities have tracked each other pretty well over time. Copper is triple its 1980-era peak, gold about double its peak, silver about equal to its peak but is about double its late-1980 peak which was unaffected by the "corner" that sent it to around $50 months earlier (Hunt brothers). Copper is up about 15 times in 50 years; it has lost a good deal of its market due to fiber-optics. Silver is up about 40-50X in that time frame, as is gold.
Oil was in the $2-3/bbl range in 1970 and is up 40-60X from then. Oil is also about 2-2.5X its 1980 peak.
Where are the metals and commodities going?
So long as the Fed is engineering ultra-low interest rates and averting its gaze from the obvious price inflation that we see all around us, especially in that most "core" of human activities called eating, I feel that the underlying trend remains higher. The "cost of carry" is negligible when money on deposit in a bank yields a whole lot of nothing. Will there be sharp declines? Sure.
But when stocks and bonds were 10 years into their bull markets by the early 1990s, the best was yet to come. Dips were buying opportunities.
Watch the Fed's actions. When and if they actually withdraw liquidity, we will see what prices are real and what are pumped up. Given the unwillingness of Congress and the President to seriously bring revenues in line with expenses, I continue to believe that the game plan of the authorities is to inflate the debt away as well as to inflate housing prices upwards so that the banks and homeowners are made whole again in nominal terms. Doing so, or attempting to do so, has "collateral damage" on the dollar. This in turn reflects in elevated trends of prices of real goods that continue to be demanded by people and businesses. I am sticking to essentials or near-essentials. In these difficult economic times, I am leery of fripperies. The metals mentioned above are "core" products to our economy and financial system. Other core commodities include sugar and cotton, which in healthy bull market-type action, have had significant declines recently following huge runs. (I don't know the first thing about trading commodities on futures exchanges, but if I did, I'd probably be looking into buying the dip in those two commodities.)
I am not spending a lot of energy trying to decide which inflation play is "better" than another. So long as the central authorities have all the power they do, I'm just riding the weak dollar policy as carefully and as long as I can in a diversified manner. Metals, energy stocks, strong foreign currencies . . . it's all one trade. It's also getting crowded, but one could have said that about techs in, say, 1997. Don't fight the Fed is a motto I have adopted years ago. It continues to be a good trader's and investor's credo. The Fed wants more inflation; my money says there's more to come.
Copyright (C) Long Lake LLC 2011
The bottom line as I see it is that these varied commodities have tracked each other pretty well over time. Copper is triple its 1980-era peak, gold about double its peak, silver about equal to its peak but is about double its late-1980 peak which was unaffected by the "corner" that sent it to around $50 months earlier (Hunt brothers). Copper is up about 15 times in 50 years; it has lost a good deal of its market due to fiber-optics. Silver is up about 40-50X in that time frame, as is gold.
Oil was in the $2-3/bbl range in 1970 and is up 40-60X from then. Oil is also about 2-2.5X its 1980 peak.
Where are the metals and commodities going?
So long as the Fed is engineering ultra-low interest rates and averting its gaze from the obvious price inflation that we see all around us, especially in that most "core" of human activities called eating, I feel that the underlying trend remains higher. The "cost of carry" is negligible when money on deposit in a bank yields a whole lot of nothing. Will there be sharp declines? Sure.
But when stocks and bonds were 10 years into their bull markets by the early 1990s, the best was yet to come. Dips were buying opportunities.
Watch the Fed's actions. When and if they actually withdraw liquidity, we will see what prices are real and what are pumped up. Given the unwillingness of Congress and the President to seriously bring revenues in line with expenses, I continue to believe that the game plan of the authorities is to inflate the debt away as well as to inflate housing prices upwards so that the banks and homeowners are made whole again in nominal terms. Doing so, or attempting to do so, has "collateral damage" on the dollar. This in turn reflects in elevated trends of prices of real goods that continue to be demanded by people and businesses. I am sticking to essentials or near-essentials. In these difficult economic times, I am leery of fripperies. The metals mentioned above are "core" products to our economy and financial system. Other core commodities include sugar and cotton, which in healthy bull market-type action, have had significant declines recently following huge runs. (I don't know the first thing about trading commodities on futures exchanges, but if I did, I'd probably be looking into buying the dip in those two commodities.)
I am not spending a lot of energy trying to decide which inflation play is "better" than another. So long as the central authorities have all the power they do, I'm just riding the weak dollar policy as carefully and as long as I can in a diversified manner. Metals, energy stocks, strong foreign currencies . . . it's all one trade. It's also getting crowded, but one could have said that about techs in, say, 1997. Don't fight the Fed is a motto I have adopted years ago. It continues to be a good trader's and investor's credo. The Fed wants more inflation; my money says there's more to come.
Copyright (C) Long Lake LLC 2011
Friday, February 5, 2010
Today's Commodity Markets: Stocks vs. Commodities Ownership Per Se
Based on current prices, palladium-- the "junkier" platinum group metal (vs. platinum itself) is off 11% since Wednesday's close (less than 2 full trading days; it being Friday AM now). Gold is off 5%, platinum off 6%, and silver off 7 1/2%.
On a 2-year basis, the GDX index of gold miners' stocks is off about 17%, whereas GLD (passive ownership of the metal) is up about 19%. On a short-term basis, gold mining stocks are off their peaks much more than gold itself.
On a 5-year basis, GDX is up about 5% (1% a year, underperforming money in the bank), whereas GLD is up about 140%.
In other words, the focus at EBR on owning the metal rather than the stocks of the producers has worked. So long as mining stocks are priced insanely, with no requirement by investors that they actually return large dividends to shareholders as Homestake Mines did in the 1930s, then the basic economic argument for gold ownership continues. This argument is simple. It is that gold is becoming scarcer and thus more expensive in real terms to produce. Environmental concerns enhance that expense. Thus, one of the reasons for projecting increasing gold prices is the difficulty of creating refined gold. However, that point is an argument against owning a mining company.
GLD, GTU, physical ownership of gold, etc. They are all variations on a theme. Most investors have been trained to own gold in the ground (stock market gold) rather than the thing itself.
This concept is also true for silver, platinum, and the like. Should stock prices fall relative to the price of the commodity, the investment case could shift to favor ownership of the stock rather than the commodity itself. For now, ownership of a durable commodity such as a metal of course does not protect one from booms that turn into busts or simple changes in "sentiment", but it is the anti-AIG, anti-Fannie Mae mode of investing. So long as the fund or other caretaker holds the metal it says it holds, or your bank vault is not cleaned out or the like, you own a thing that simply is what it is when you own the commodity rather than a minority share of a corporation that may never make a dime even if it churns out the metal as promised.
Commodities bears are growling loudly and scarily. Are these bears nothing but paper tigers?
I have no idea, but . . .
During sharp market moves, investors who own commodities outright, without margin debt, can sleep well so long as they can live their lives if the commodities drop sharply in price. A severe drop in price, which tends to reverse if the commodity is an essential one, may however bankrupt individual companies, but the commodity itself cannot suffer that fate. It survives to "fight" another day. Ownership of a common stock of a metals miner is mostly for suckers.
Copyright (C) Long Lake LLC 2010
On a 2-year basis, the GDX index of gold miners' stocks is off about 17%, whereas GLD (passive ownership of the metal) is up about 19%. On a short-term basis, gold mining stocks are off their peaks much more than gold itself.
On a 5-year basis, GDX is up about 5% (1% a year, underperforming money in the bank), whereas GLD is up about 140%.
In other words, the focus at EBR on owning the metal rather than the stocks of the producers has worked. So long as mining stocks are priced insanely, with no requirement by investors that they actually return large dividends to shareholders as Homestake Mines did in the 1930s, then the basic economic argument for gold ownership continues. This argument is simple. It is that gold is becoming scarcer and thus more expensive in real terms to produce. Environmental concerns enhance that expense. Thus, one of the reasons for projecting increasing gold prices is the difficulty of creating refined gold. However, that point is an argument against owning a mining company.
GLD, GTU, physical ownership of gold, etc. They are all variations on a theme. Most investors have been trained to own gold in the ground (stock market gold) rather than the thing itself.
This concept is also true for silver, platinum, and the like. Should stock prices fall relative to the price of the commodity, the investment case could shift to favor ownership of the stock rather than the commodity itself. For now, ownership of a durable commodity such as a metal of course does not protect one from booms that turn into busts or simple changes in "sentiment", but it is the anti-AIG, anti-Fannie Mae mode of investing. So long as the fund or other caretaker holds the metal it says it holds, or your bank vault is not cleaned out or the like, you own a thing that simply is what it is when you own the commodity rather than a minority share of a corporation that may never make a dime even if it churns out the metal as promised.
Commodities bears are growling loudly and scarily. Are these bears nothing but paper tigers?
I have no idea, but . . .
During sharp market moves, investors who own commodities outright, without margin debt, can sleep well so long as they can live their lives if the commodities drop sharply in price. A severe drop in price, which tends to reverse if the commodity is an essential one, may however bankrupt individual companies, but the commodity itself cannot suffer that fate. It survives to "fight" another day. Ownership of a common stock of a metals miner is mostly for suckers.
Copyright (C) Long Lake LLC 2010
Commodities: Too Popular? Sometimes One Can Take Contrarian Thinking too Far
Mish raises a familiar objection to commodities and by extension, contrarian investments, and raises a question of high importance at EBR is his post, Commodities Kiss of Death? Is the Reflation Trade Over?
He points to the interest of the California State Teachers' Retirement System in putting a very small part of its funds into commodities and points to that as contrarian evidence that a further fall is underway:
Pension plans are looking to hop on the commodity bandwagon now after copper prices have quadrupled in the past eight years, and crude oil has more than doubled. . .
China is on the verge of imploding (or blowing up attempting to prevent a implosion) yet pension plans and other misguided souls are plowing into China and commodities. These are contrarian indicators.
Another take is that IF there were a cost-effective way to own commodities (not so easy to achieve), the cost of creating refined metals and raw foods (etc.) is actually a reasonable way to tie into the real world. In contrast, the true bubble is in the stock market. The idea that ownership of the industrial company Deere & Co. is in any way a good way to obtain a correlation to the inflation/deflation possibilities of raw materials pricing is just plain silly.
In the same column, Mish admits to being a bull, after all, on commodities:
Yet, I am a also believer in peak oil and commodities for the long haul. However, for the short-to-intermediate term I am sticking with my target for the price of crude to fall back to $55.
Since pension funds are only for the long haul, it makes little sense to, on the one hand, criticize their interest in diversifying their exposure to add commodities and on the other hand express bullishness about the investment class on the time frame which pension funds are required to consider.
Over the past century and perhaps through the centuries, the regions of the world that have had advancing prosperity have done so by using physical raw materials to create wealth by adding human ingenuity. Thus, commodities' returns have not kept pace with theoretical stock market returns in the U. S. or most of Western Europe. Whether that relationship continues is, of course, unknown. What is nearly certain, however, is that the concept of exposure to an underlying necessity of life is a reasonable thing for an investor to do, especially a conservative organization such as a pension fund. The real challenge is to find an appropriate investment vehicle, given the ETFs such as USO (oil) and DBA (ag) that have such high operating costs that they are guaranteed to underperform their benchmarks.
Copyright (C) Long Lake LLC 2010
He points to the interest of the California State Teachers' Retirement System in putting a very small part of its funds into commodities and points to that as contrarian evidence that a further fall is underway:
Pension plans are looking to hop on the commodity bandwagon now after copper prices have quadrupled in the past eight years, and crude oil has more than doubled. . .
China is on the verge of imploding (or blowing up attempting to prevent a implosion) yet pension plans and other misguided souls are plowing into China and commodities. These are contrarian indicators.
Another take is that IF there were a cost-effective way to own commodities (not so easy to achieve), the cost of creating refined metals and raw foods (etc.) is actually a reasonable way to tie into the real world. In contrast, the true bubble is in the stock market. The idea that ownership of the industrial company Deere & Co. is in any way a good way to obtain a correlation to the inflation/deflation possibilities of raw materials pricing is just plain silly.
In the same column, Mish admits to being a bull, after all, on commodities:
Yet, I am a also believer in peak oil and commodities for the long haul. However, for the short-to-intermediate term I am sticking with my target for the price of crude to fall back to $55.
Since pension funds are only for the long haul, it makes little sense to, on the one hand, criticize their interest in diversifying their exposure to add commodities and on the other hand express bullishness about the investment class on the time frame which pension funds are required to consider.
Over the past century and perhaps through the centuries, the regions of the world that have had advancing prosperity have done so by using physical raw materials to create wealth by adding human ingenuity. Thus, commodities' returns have not kept pace with theoretical stock market returns in the U. S. or most of Western Europe. Whether that relationship continues is, of course, unknown. What is nearly certain, however, is that the concept of exposure to an underlying necessity of life is a reasonable thing for an investor to do, especially a conservative organization such as a pension fund. The real challenge is to find an appropriate investment vehicle, given the ETFs such as USO (oil) and DBA (ag) that have such high operating costs that they are guaranteed to underperform their benchmarks.
Copyright (C) Long Lake LLC 2010
Wednesday, June 10, 2009
Of Green Shoots and Red Ink
Fed Chairman Bernanke espied economic green shoots of economic revival in the U. S. three months ago, in a phrase made famous in part because he said it on Sixty Minutes. Well, here it is almost the ides of June, and the most populous, richest state in the country - California- not only is going to need drastic action to avoid insolvency, but its revenues in May fell well below projections. Thanks to CR, here is an excerpt from a letter from California State Controller John Chiang today to the Governor:
In the letter I sent you on May 29, I indicated we would have a negative cash balance of $1.02 billion at the end of July, and a low point for 2009-10 of $22 billion. The additional deterioration is a result of two factors: (a) May revenues coming in $827 million less than projected by the Governor’s May Revision, and (b) adjustments made by the Department of Finance to its revenue and expenditure projections. Attached is a chart detailing the projected cash low point for each month for the fiscal year starting July 1.
I cannot find the projected revenues for May, but based on information available on the Web, it was expected as of one month ago to equal $7 billion. A fall-off from the estimate of just several weeks earlier of $827 million is- how can we say it- amazing- and distressing.
You don't see an error in revenues to the downside of at least 10% when green shoots are flourishing.
Something is wrong here. It's probably the green shoots story.
Also, the New York Times is reporting that the China commodity story is looking weak, in China's Commodity Buying Spree:
Strong buying by China has helped lift commodity prices around the world this spring, but growing evidence suggests that a sizable portion of this buying has been to build stockpiles in China, and may not be sustainable.
At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing, chief executives of shipping companies said in interviews this week. Yet actual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak . . .
There has been enormous stockpiling of all commodities” by China, and this cannot continue indefinitely, said Tim Huxley, the chief executive of Wah Kwong Maritime Transport Holdings, a big shipping line based here.
Those extra purchases beyond China’s daily needs have helped reverse the price collapse in commodities that followed the economic downturn last fall, but could also limit the scale of the rebound.
Moody’s Investors Service announced on Wednesday that it was putting a negative outlook on the base metals, mining and steel industries in Asia and the Pacific, having previously done so for these sectors elsewhere.
Everywhere I look, the forecasters are getting more optimistic and the data looks more and more sluggish.
With so many manipulated markets, having confidence in any special point of view is difficult, but the situation is most consistent with a gradual shift of economic growth to the creditor (underconsuming, export-driven) countries such as Asia from the indebted countries of North America and Europe.
Since the data out of China continues to be questionable, and that out of the "country" of California looks horrible and is "real-time" more or less, it is hard to question Dr. Roubini's view that the economy remains quite weak in the United States of America.
Copyright (C) Long Lake LLC 2009
In the letter I sent you on May 29, I indicated we would have a negative cash balance of $1.02 billion at the end of July, and a low point for 2009-10 of $22 billion. The additional deterioration is a result of two factors: (a) May revenues coming in $827 million less than projected by the Governor’s May Revision, and (b) adjustments made by the Department of Finance to its revenue and expenditure projections. Attached is a chart detailing the projected cash low point for each month for the fiscal year starting July 1.
I cannot find the projected revenues for May, but based on information available on the Web, it was expected as of one month ago to equal $7 billion. A fall-off from the estimate of just several weeks earlier of $827 million is- how can we say it- amazing- and distressing.
You don't see an error in revenues to the downside of at least 10% when green shoots are flourishing.
Something is wrong here. It's probably the green shoots story.
Also, the New York Times is reporting that the China commodity story is looking weak, in China's Commodity Buying Spree:
Strong buying by China has helped lift commodity prices around the world this spring, but growing evidence suggests that a sizable portion of this buying has been to build stockpiles in China, and may not be sustainable.
At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing, chief executives of shipping companies said in interviews this week. Yet actual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak . . .
There has been enormous stockpiling of all commodities” by China, and this cannot continue indefinitely, said Tim Huxley, the chief executive of Wah Kwong Maritime Transport Holdings, a big shipping line based here.
Those extra purchases beyond China’s daily needs have helped reverse the price collapse in commodities that followed the economic downturn last fall, but could also limit the scale of the rebound.
Moody’s Investors Service announced on Wednesday that it was putting a negative outlook on the base metals, mining and steel industries in Asia and the Pacific, having previously done so for these sectors elsewhere.
Everywhere I look, the forecasters are getting more optimistic and the data looks more and more sluggish.
With so many manipulated markets, having confidence in any special point of view is difficult, but the situation is most consistent with a gradual shift of economic growth to the creditor (underconsuming, export-driven) countries such as Asia from the indebted countries of North America and Europe.
Since the data out of China continues to be questionable, and that out of the "country" of California looks horrible and is "real-time" more or less, it is hard to question Dr. Roubini's view that the economy remains quite weak in the United States of America.
Copyright (C) Long Lake LLC 2009
Wednesday, June 3, 2009
China: Forget the Hype
Econblog Review has criticized the easy and optimistic story that China is doing great and will be the next engine of growth in an important way for the global economy. Today, Bloomberg.com supports this view in one of the first mainstream articles to take this viewpoint, in China Sees ‘Grim’ Job Market, Deeper Impact From Global Crisis. The article begins:
June 3 (Bloomberg) -- China’s government said unemployment is worsening, a quick rebound in trade is becoming less likely, and the nation is yet to feel the full effects of a global slump.
The foundations for an economic recovery aren’t solid, the State Council said in a statement on a government Web site today. Trade faces “unprecedented difficulties,” Vice Commerce Minister Zhong Shan said separately.
Commodities are selling off, as are stock markets.
More later.
Copyright (C) Long Lake LLC 2009
June 3 (Bloomberg) -- China’s government said unemployment is worsening, a quick rebound in trade is becoming less likely, and the nation is yet to feel the full effects of a global slump.
The foundations for an economic recovery aren’t solid, the State Council said in a statement on a government Web site today. Trade faces “unprecedented difficulties,” Vice Commerce Minister Zhong Shan said separately.
Commodities are selling off, as are stock markets.
More later.
Copyright (C) Long Lake LLC 2009
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