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Saturday, March 22, 2008

Commodities Unravel, Confidence Collapses

Commodities continue to plunge as MASSIVE speculative excess is forced out.

Platinum Futures in Tokyo Drop Amid Concern U.S. Growth Waning: “Platinum futures in Tokyo fell by the exchange-imposed limit after the Federal Reserve lent money to non-banks for the first time since the Great Depression, adding to evidence a recession looms in the U.S.

The Fed lent $28.8 billion as of March 19 to the biggest securities firms to try to stabilize capital markets stymied by losses on investment in notes based on subprime mortgages.

Platinum for February 2009 delivery dropped the daily maximum 300 yen, or 5 percent, to close at 5,745 yen a gram ($1,794 an ounce) on the Tokyo Commodity Exchange. The most- active contract has plunged 23 percent from the record 7,427 yen a gram set March 6.”

Investors should be worried about demand. Everybody and his momma is long. With nobody on the bid, getting out is going to be a real BITCH.

Oil Falls in N.Y. on Concern U.S. Slowdown May Limit Demand: “Crude oil fell for a second day in New York on growing concern a U.S. economic slowdown will curb demand for commodities.

Oil has dropped 8.9 percent from a record this week, tracking declines in gold, wheat and metals, as the dollar strengthened, reducing the need for hedges against inflation. U.S. fuel demand in the past four weeks averaged 3.2 percent less than last year, the Energy Department said yesterday.”

Fuel demand is just beginning to weaken. As the recession really starts to bite deep expect some fairly dramatic drops in demand… along with a serious plunge in the entire energy complex, from crude to gasoline.

“Commodities such as oil and gold, which reached records as equities and currencies tumbled, are no longer attracting demand as investors now need to free up money to cover losses in other assets, said Robert Laughlin, senior broker at MF Global Ltd. in London.”

What did you think would happen? That is EXACTLY how de-leveraging works. This is the correlation contagion. When forced liquidations hit some critical point, correlations across asset classes all approach one as everybody is forced out. Fundamentals become irrelevant. Capital preservation and return OF capital becomes the only thing that matters.

“Commodities are undergoing “cyclical weakness” and fundamentals will reach their “weakest point” in April as economic conditions and high prices weigh on demand, Goldman Sachs Group Inc. analysts wrote in a report today.”

You see, there never was supply shortage and if those feared geopolitical nightmares don’t actually occur, well then the entire energy complex will be re-valued. Quickly.

Dollar Gains Versus Euro, Yen as Fed Acts to Restore Confidence: “The U.S. dollar posted its first weekly advances against the euro and the yen in a month on speculation Federal Reserve moves to revive lending among banks will restore confidence in financial markets and the economy.

The greenback also strengthened to at least one-month highs versus currencies of commodity producing nations from Norway to Australia after raw materials including gold and oil tumbled the most in five decades. The Fed cut interest rates, agreed to accept a wider range on collateral on loans and extended credit to securities firms for the first time.”

I first wrote about the dollar strength on January 28th, 2008 in the post The Dollar Smile Theory and then again on February 11th, 2008 in the post Global Decoupling Theory, Correlation Contagion. That critical inflection point fast approaching now. Economic reality is slowly sinking in. In Euroland the economic numbers are coming dangerously weak. That will put the massively overvalued Euro into a swan dive as the ECB is finally forced to cut rates as well. Commodity producing economies will get whacked as their main engine of growth, Chindia, finally stalls out. These are export economies and the US and Euroland were their final destinations. It’s a closed system and the feedback loop is very real. Those economies will all be as badly off or worse. The US dollar will gain significantly as huge quantities of capital are repatriated, especially from emerging economies.

“The euro has some room to adjust lower. We're getting confirmation that subprime is shifting to the European financial sector. The euro-zone economy will start to slow from here on.” –Kengo Suzuki, Currency Strategist, Shinko Securities

“Commodities -- one of the few remaining long trades -- have turned south. The currency market is next in line, forcing investors out of yielding positions. We underline our bearish commodity currency call. The dollar will rebound.” –Hans-Guenter Redeker, Stragesit, BNP Paribas

Canada's Dollar Falls Most Since 1985 on Plunge in Commodities: “Canada's dollar plummeted the most in more than two decades this week as investors shunned commodities on concern that a slowing U.S. economy will curb global demand for energy, metals and grains.

The currency dropped 3.3 percent, the steepest since 1985, as commodities slumped. Gold declined 11 percent from a record earlier in the week, and copper posted its biggest weekly decline in 10 months. Crude oil fell more than $13, going below $100 a barrel for the first time since March 5. Commodities account for about half of Canada's exports. The oil sands in Alberta contain the largest crude deposits outside the Middle East.”

Duh. What did you think would happen to global demand? China isn’t building factories for internal consumption. Not yet. They’re building them for us. To make shiny, fancy stuff for us. We buy less and they buy and build less. That means demand for commodities drops PRECIPITOUSLY. Nuff said. Trade accordingly.

(In five or ten years China WILL build for internal consumption. But not yet. That is another rung up on the economic development ladder. THEN we will see real, sustained demand for commodities. But not yet.)

Don’t forget about them there ‘monolines’ either. Ambac, MBIA and others are still in the same stinking mess. NOTHING has been resolved yet although they haven’t been in the news for a couple of weeks now.

FGIC, Bond Insurer Unit Ratings May Be Cut by S&P (Update2): “FGIC Corp. and its bond insurance unit may have their ratings cut again by Standard & Poor's because of doubt about their ability to raise capital and take on new business.

Financial Guaranty Insurance Co.'s A rating and holding company FGIC's BBB ranking were put on CreditWatch with “negative implications,” S&P said today in a report.

FGIC, owned by Blackstone Group LP and PMI Group Inc., has proposed splitting in two to protect the ratings on municipal bonds it guarantees after the insurance unit lost its top AAA credit ratings. Bond insurers including FGIC and MBIA Inc. use their AAA ratings to back about $2.4 trillion of debt. Losing that imprimatur jeopardizes the debt rankings of thousands of schools, hospitals and local governments around the country.”

In fact that financial stresses are spreading. CIT Group Inc. (CIT), the biggest independent U.S. commercial finance company, said it expects to raise $5 billion to $7 billion in the first quarter from asset sales, which won't include the New York-based company's four “marquee” commercial finance units. CIT also tapped an emergency line of credit for $7 billion.

CIT Plans Asset Sales to Quell Concerns About Cash Shortages: “CIT Group Inc., trying to quell concerns about a cash shortage at the biggest independent U.S. commercial lender, may raise as much as $7 billion from asset sales and said it has enough money to last through 2008.

CIT Taps $7.3 Billion of Bank Lines Amid `Disruption' (Update3): “CIT Group Inc. shares and bonds plunged after the largest independent U.S. commercial finance company fell victim to the freeze in short-term debt markets.

The company drew on its entire $7.3 billion of emergency credit lines today after ratings downgrades left it unable to finance itself with commercial paper, or debt due in nine months or less. Chief Executive Officer Jeffrey Peek said the “protracted disruption” in capital markets may also force the New York-based company to sell assets. CIT has started seeking a “strategic funding partner” he said on a conference call.”

Considering the company WASN’T actually profitable going into this mess, I’m going to say ‘good luck’ to Mr. Peek and CIT shareholders because they are really going to need it.

Related Headlines:
Hungarian Retail Sales Fell for 12th Month in January (Update1)
Crude Oil May Fall as Dollar Rises, Demand Wanes, Survey Shows
Fed Denies Report It's Involved in Talks on Buying Mortgages


Unknown said...

Do you think there will be a stink on Monday over the 'credit watch w/negative implications' for GS and LEH? It seems like just the thing to set off a fresh spiral.

Unknown said...

Ben- Do you think there will be another episode in the markets Monday beacause of the credit changes for LEH and GS. It seems like it would be like fresh blood in the water.

Anonymous said...

I don't think the ECB will cut rates because of a softening economy. It will cut rates only because inflation is no longer a problem. That will mean that it will keep rates up longer than the Anglo-Saxons expect.

Ben Bittrolff said...

Goldman, Lehman Rating Outlook Cut to Negative by S&P (Update3)

I think Thursday's action was dominated by short covering into a four day weekend. Therefore, I don't expect Monday to be pretty. The Goldman, Lehman Negative watch won't help.

Just you wait until more people begin to seriously question the valuations used for all the street's Level 3 Assets.

Ben Bittrolff said...


Agreed. The ECB will most certainly hold out the longest on the rate cutting front.

You'll be surprised by how quickly 'inflation' pressures vaporize. You have to understand that commodities were bid up in a SPECULATIVE frenzy beyond any fundamentals. On top of that the record pace of credit destruction will absolutely suck the oxygen out of the entire global demand side of the equation.

Anonymous said...

"The US dollar will gain significantly as huge quantities of capital are repatriated, especially from emerging economies."

Please clarify your jujitsu here, especially with regard to the nature of emerging economy repatriations...

Trading arbitrage w.r.t. interest rates & carry trades, yes I can see some of that in the flows of non-emerging market trading partners, but the emerging economy repatriations?

They have sold us stuff, we have paid with FRN's, they have reinvested the FRN's in physical plants and resource properties expansion and development. What is to repatriate?

Ben Bittrolff said...


I'm referring to investment fund flows reversing course. Everybody and his momma went long any and every emerging market in a big way. Most of that capital came from North America. It will come back, voluntarily (as investment opportunities dim) or involuntarily (general de-leveraging especially as the margin clerks start working the phones in a big way).

Think about it. How many individual investors bought into the Chindia, the BRICK countries and the commodity stories via mutual funds and ETFs... especially if you subscribed to the Global De-coupling Myth. I know the hedgies did in a big way...

What do you think will happen when they start scrambling to get out (more than they are already I mean)?

Anonymous said...

Ben - I think a lot depends on whether the myth of debt as sound money and a store of wealth unravels first or second.

Do you really want your investments and wealth in the currency of the largest global debtor ever, or not?

Anonymous said...

Some further clarification -

Consumers are cutting back from excessive levels of past years and banks are slashing HELOC available credit lines and limits on cards.

Given consumer pullbacks, businesses are slowing investment as capacity is not constrained domestically nor globally, and hence an attendant reduction in project finance, if there was available capital given the credit crisis.

The US economy is sliding first and fastest into recession, corporate earnings are decelerating at an increasing pace, especially on Wall St and the financial sector, making forward earnings or cashflow valuation extremely difficult.

Home prices are in free fall and the debt extended to finance them are increasingly of lower values, yet there is a huge supply of available housing and more coming as the home builders haven't stopped and foreclosures rates are increasing (the evicted will rent from another struggling real estate investor or in an apartment).

Real yields on short term treasuries have reached negative levels, given taxes and official inflation. You've seen the treasury yield curve, yes?

The Fed is entering a liquidity trap and new debt to expand the money supply is minimal, except for what the Fed is injecting into the banking and shadow banking system to keep their inherent leverage levels from imploding them.

So the repatriated cash is going to go where? Equities? Treasuries paying negative yields? Munis with increasing unbalanced local budgets, albeit these are safer than mortgage backed securities, except maybe GNMA's...

If the capital slosh comes back into equities, it will be sold into by currently trapped longs IMO.

The credit markets are in total disarray and even the Repo market is experiencing fails.

Actual commodities or other hard assets with supply demand imbalances (food, fuel, essentials) appear to me to be some of the few remaining stores of wealth...

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ben, i thought you might be interested in this blog. maybe

then again i try not to think too hard. peace

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