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Tuesday, March 11, 2008

Parabolic Commodities: The End is in Sight

Risky assets will continue to lose value. Not necessarily because they all deserve to, but because they must. The entire financial system is de-leveraging. Yes, that means that even commodities will face the wrath of the margin clerks... Eventually. They’ve all gone parabolic. That NEVER ends well. EVER… and it ALWAYS signals the beginning of the end.

Equities in general (I'm using the S&P 500 here to represent) peak BEFORE commodities do. Commodities in general (I'm using the CRB Commodities Index to represent) then follow through to new highs before correcting just as aggressively.

I posted on the subject a while back.

This is all you need to know: PARABILIC = END IS NEAR.

First: When The Momos Go Parabolic…
Second: When The Momos Lead The Way Down
Thirdly: Life After Things Go Parabolic, This Bounce Too Will End.
Most importantly: All Bubbles Are The Same

Oil is at $109+ this morning… U.S. crude-oil inventories rose 1.75 million barrels last week, according to the median of responses in a Bloomberg News survey. Stockpiles increased in seven of the previous eight weeks, Energy Department figures showed.

Crude Oil Rises Above $108 to Record as Returns Outpace Stocks:

“The grab for hard assets is on due to the lack of confidence in the rest of the markets at the moment.” –John Kilduff

“The perception in the financial community is that the oil market is the one safe harbor. The speculation that's moving oil higher will eventually undercut some of the safety they seek. As prices rise, the economy will weaken and eventually hit demand.” –Rick Mueller

“We're witnessing an ongoing flow of fund buying, which isn't particularly motivated by the particulars of the petroleum market. Prices have rallied to such an extent where sellers have backed off. Any time prices go lower the buyers come right back into the market.” –Tim Evans

“Clearly the fundamentals don't matter at this point. We've seen bubbles in other markets over the years and eventually they end. It's impossible to see when that will be the case here.” –Chip Hodge

“The golden days of oil moving between $15 and $25 a barrel are clearly in the past, but it's hard to justify oil over $100, given the fundamentals. There are longer-term concerns about supply, which would justify a price in the $70s.” –Rick Mueller

Persian Gulf Oil-Tanker Rates May End Declines on Cargo Backlog: “The cost of shipping Middle East crude to Asia may be steady, after falling the most in three months yesterday, because a backlog of cargoes is building up.”

Unrelated, but just as important:

BOE Offers Further Three-Month Loans to Ease Tension (Update1): “The Bank of England said it will hold two more auctions of emergency funds, joining the Federal Reserve in stepping up efforts to ease renewed tensions in money markets.

The U.K. central bank will offer 10 billion pounds ($20 billion) of three-month loans on March 18 and will hold a further auction on April 15, according to a statement. The size of the second auction will depend on the outcome for the first.

The Bank of England and other central banks are struggling to restrain an increase in money market interest rates after about $190 billion of losses from the U.S. subprime mortgage slump made financial institutions reluctant to lend to each other.

While central banks damped market rates in December when they announced joint measures to counter the credit shortage, conditions have tightened since then. The cost of borrowing pounds and euros for three months rose to a two-month high today.”

I’ve been mentioning the spikes in LIBOR and EURIBOR since last week. This does not bode well for risky assets.

Bear Stearns Shares Fall on Liquidity Speculation (Update6): “Bear Stearns Cos. denied that the firm lacked sufficient access to capital, after speculation about a liquidity crisis pushed the stock down 11 percent in New York trading, the most since the 1987 stock market crash.”

Of course Bear Stearns says it ain’t so… but if it is, look out below.


Anonymous said...

Hi, are you going to be buying the pullbacks in the commodities or the commodity-related equities?

Anonymous said...

Can the FED be increasing its liquidity injections in order to cancel out the need for inter-meeting rate cuts? I also believe these injections work to give the FED some room to stop cutting.

I believe they have reached a point where they view further rate cuts as not beneficial and are using these liquidity injections as temporary intermeeting cuts.

Or am I nuts?

Anonymous said...

the fed is giving away money to the IB's so that they can invest in commodities.............just in time so that the commodities market collapses and the IB's lose another trillion dollars.

this time may be different....the trend could just go straight up for years..........

Anonymous said...

A Federal Judge ruled last week that a reasonable person would not find that Fannie Mae had violated SEC regulations if and when it recorded false information to its general ledger.

See Department of Labor CASE NO: 2007-SOX-00047


Commodities may or may not be in a bubble but I know this, history tells us they will continue to outperform equities for a minimum of 10 more years. Lots of pundits are calling this a commodity bubble while they didn't even know what a commodity was 8 years ago. Now everyone is an expert. I've said it before and I'll say it again, the bull will be over when gold and the dow cross each other-about 10-12 years from now. Things always go much, much further than you ever thought possible in secular bull markets. BTW, I'm not some blowhard commodity bull that thinks these things will continue to go straight up. I am expecting a nasty pullback in most commodities, perhaps as much as 50%, sometime over the next couple of years.

Anonymous said...

Ninja, thanks for all your work in posting to this blog; I enjoy reading it. Your charts do show that commodities peaked a quarter or so after stocks during the last bubble. However, they do not show that this normally happens or has repeatedly happened. Could you please dig up more historical data. Did a similar thing happen during the last three bubbles? If so, I would agree the same drop seems likely this time around.

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