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Tuesday, August 5, 2008

From Commodity Bubble to Commodity Bear

Oil Falls to $118 as Storm Danger Abates, Demand Concern Grows: “Crude oil fell to $118 a barrel on speculation Tropical Storm Edouard will leave U.S. oil rigs and refineries undamaged and as commodities prices tumble because of the slowing U.S. economy.

Oil dropped to its lowest since May 5 as Edouard's wind speeds remained below hurricane strength. Gold, platinum and wheat dropped on speculation slower growth will curb demand and as a stronger dollar dulled the appeal of commodities as an inflation hedge.”

Oil lost the critical $120 area, and is now in danger of cascading straight down to $100 as the margin clerks furiously man the phones demanding more bling…

Commodity Shares in Bear Market as Oil, Copper Slide (Update2): “Global energy and raw-materials stocks fell into bear markets after plunging oil, gold, copper and wheat prices spurred declines in last year's best-performing industries.

A gauge of energy producers in the MSCI World Index slipped 1.2 percent as of 9:49 a.m. in London, bringing its drop from a May record to 21 percent. The measure of mining, farm and chemical companies lost 1.6 percent, extending the retreat from an all-time high to 22 percent. Bear markets are commonly defined as a slump of 20 percent or more.

Exxon Mobil Corp., OAO Gazprom, and StatoilHydro ASA all sank more than 19 percent from records as crude prices tumbled. Slumping sales of houses, cars and airplanes sent copper and aluminum producers BHP Billiton Ltd. and Alcoa Inc. lower. The Reuters/Jefferies CRB Commodity Index last month posted its biggest slide since March 1980 as a global economic slowdown threatens to cut demand.”

The commodity bubble has ever so rapidly morphed into the commodity Bear. Like I keep saying, the Global Decoupling Theory is Garbage. Get short everything commodity related on strength. In Global Decoupling, Correlation Contagion I argued:

“Understand this: The last few years have been nothing but a liquidity (read DEBT) driven party. Financial innovation, such as mass securitizations and the mass embrace of derivatives resulted in the development of what is now termed ‘the shadow banking system’. This resulted in flood of liquidity, which is characterized by easy access to cheap debt. This pushed up ALL risky assets over the ENTIRE globe. Now with liquidity circling the drain as financial institutions try desperately to digest their suddenly swollen and impaired balance sheets, the correlations of ALL risky assets are approaching ONE.

There is now no such thing as diversification within the risky asset class.”

Oil was done when the heavily subsidized emerging economies had to start moving closer to paying real market rates. I say ‘closer’, because they are still ridiculously subsidized, and still have a long way to go. I present the consequences in Oil Drops on Subsidy Cuts in China, India, Malaysia, Taiwan.

While everybody is worried about the U.S., don’t forget: The Other Bigger Shoe: The Rest of The World

In Commodities Seeing Demand Destruction, Canada Rolls Over I went over some short commodity ETFs. In Time to be Short Commodities I went over those trades in detail. These trades were profitable even BEFORE the various commodities themselves broke down as can be seen in Oil and Gas: Will They Break Down?

Commodities really were THE FINAL BUBBLE.

DUG has broken OUT and UP. (Again)

Original profit target hit. A pullback to $32 is healthy. Any pullback needs to stay above $30 before another test of the declining 200 day EMA (green line).

SMN has broken OUT and UP. (Again)

Any pullback to $32 is healthy. Any pullback needs to stay above $30. Prices are likely to consolidate around the 200 day EMA (green line) before moving higher.

Some interesting Canadian commodity plays include: HXD.TO, HED.TO, HOD.TO.


Anonymous said...

Ben I have a question. With the massive deflationary spiral about to take serious hold will the backstopping of the USGOV for fannie,freddie and the banks kill the dollar or do you think it will survive? If the FED backstops most of the 800 billion in chinese bonds and tries to bail most companies will the US credit rating hit the fan? Just trying to wrap my mind around this one. Fantastic calls by the way! U should be hooked up with meridtih whitney!

Anonymous said...

Ben...if the Fed raises rates today will that excelerate the commodity fall?

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