It is well-known fact that there is a causation effect between commodities and US dollar. After all commodities, like gold, oil and grains are all priced in dollars. Moreover, the mainstream media has attributed much of the recent climb in commodities prices to recent weakness in the dollar. So all things being equal, the commodity should move in the directly proportional opposite direction of the dollar.
The only problem with this argument is that all things never remain equal. The stable cause and effect market relationships will only work up to a certain limit. That depends on the time period you look at.
From December 1989 to September 2000, the relationship of oil and the dollar was positive. When one when up, the other went up. On the other hand, since February 2006, the relationship has been negative. When oil was crashing, the dollar was rising sharply. And over the past four months, oil has recovered and the dollar has fallen.
The move in oil and other commodities, along with stocks, bonds and currencies, are tracking one key thing – perception of the health of the global economy. When the economic and financial crisis commented, the CRB Index fell 58% and the Dollar Index rallied 25% and that was because of fear and uncertainty. Capital fled all risky assets, commodities included, and found safety in US Treasuries and US dollar.
Now, oil is moving higher and the dollar has been moving lower. This time, it is a retracement of the flight to safety trade. Money flowing back into commodities and other higher risk assets and out of the safety of US dollars and longer term US Treasuries, coinciding with Fed Chairman Bernanke’s first mention of ‘green shoots’. The US stock markets ip 44%, the CRB Index climbed 33%, crude oil up 120% and copper rose 97% respectively.
But the Dollar Index has lost only 12%, not exactly tick-for-tick linkage that many would suggest. Also, gold, the notable inflation hedge, has risen only 3% and it seemingly to suggest that the entire move has little to do with inflation arguments.
For that reason, I think this run-up in commodities and stocks provides the perfect opportunity to reduce risk – not add it. Today’s winners could soon be tomorrow’s losers.
Wednesday, July 8, 2009
Tuesday, July 7, 2009
Which of Commodities ahead of fundamentals?
My readers know I am a natural bull on commodity, but recent rally in commodity seems to suggest that it is getting ahead of fundamentals again. I think, the strong uptrend in commodity prices since February has been propelled more by technical than fundamentals and it could snap back to reality before resuming a more moderate uptrend in line with a ‘U’ shaped global growth path.
I am more concerned about base metals as it has posted the strongest rebound among the commodity groups, arguably due to China’s copper imports, which driven by strategic reserve buying and the re-stocking of deleted inventories to take advantage of low prices, not to reflect strong growth in global manufacturing or consumption.
No doubt, that China’s infrastructure heavy fiscal stimulus will provide some support to commodities but other private demand may continue to be weak, suggesting that China’s commodity demand may level off at somewhat lower levels than recent trends. Non-precautionary metal demand has been flat globally, leaving the metal prices uptrend without any real economic backing. Base metal demand tends to spike up in the spring as refiners stock up before metal producers primarily in Europe take their summer holidays. Demand for aluminum by beverage makers rise in the spring in anticipation of higher demand for canned beverages in the summer. After restocking ends, base metal demand will likely dip into a summer lull.
And in the case of iron & steel, contract bulks remain in limbo. Negotiations have already passed April 1 start of the 2009 contract year yet benchmark iron ore contracts are still to be settled. Steelmakers are demanding drastic price cuts (40-60%) back to 2007 levels, and sellers have been stalling for time in hopes that the market will improve. Producers have offered iron ore in the sport at temporary prices 20% below the 2008 contract levels, and the recent rebound in prices are on higher freight costs, not higher demand. The Baltic Dry Index was up 228% since the beginning of 2009.
Preliminary forecasts suggest hat oil in 2009 will mark the second back-to-back annual oil demand decline since the 1980s as industrial and residential demand slows and commercial inventories are high around the world. As such, spot and future prices are likely to face further pressure along with a return in risk aversion.
OPEC’s cuts have contributed to tightening supplies somewhat but have yet to lead to much of an erosion of stockpiles, particularly in the US, where crude oil inventories are just off the highest levels since 1990 and well above the 5-year average. In Europe and Japan, the supply overhang is less pronounced but stockpiles remain well above average levels, indicating no supply shortage. The recent data from the Department of Energy suggesting an 8% drop from early May 2008, with the decline in air traffic contributing to double digit declines in jet fuel demand.
In short, I am seeing commodity exporting economies and their currencies are like commodities, vulnerable to a reversal of risk appetite.
I am more concerned about base metals as it has posted the strongest rebound among the commodity groups, arguably due to China’s copper imports, which driven by strategic reserve buying and the re-stocking of deleted inventories to take advantage of low prices, not to reflect strong growth in global manufacturing or consumption.
No doubt, that China’s infrastructure heavy fiscal stimulus will provide some support to commodities but other private demand may continue to be weak, suggesting that China’s commodity demand may level off at somewhat lower levels than recent trends. Non-precautionary metal demand has been flat globally, leaving the metal prices uptrend without any real economic backing. Base metal demand tends to spike up in the spring as refiners stock up before metal producers primarily in Europe take their summer holidays. Demand for aluminum by beverage makers rise in the spring in anticipation of higher demand for canned beverages in the summer. After restocking ends, base metal demand will likely dip into a summer lull.
And in the case of iron & steel, contract bulks remain in limbo. Negotiations have already passed April 1 start of the 2009 contract year yet benchmark iron ore contracts are still to be settled. Steelmakers are demanding drastic price cuts (40-60%) back to 2007 levels, and sellers have been stalling for time in hopes that the market will improve. Producers have offered iron ore in the sport at temporary prices 20% below the 2008 contract levels, and the recent rebound in prices are on higher freight costs, not higher demand. The Baltic Dry Index was up 228% since the beginning of 2009.
Preliminary forecasts suggest hat oil in 2009 will mark the second back-to-back annual oil demand decline since the 1980s as industrial and residential demand slows and commercial inventories are high around the world. As such, spot and future prices are likely to face further pressure along with a return in risk aversion.
OPEC’s cuts have contributed to tightening supplies somewhat but have yet to lead to much of an erosion of stockpiles, particularly in the US, where crude oil inventories are just off the highest levels since 1990 and well above the 5-year average. In Europe and Japan, the supply overhang is less pronounced but stockpiles remain well above average levels, indicating no supply shortage. The recent data from the Department of Energy suggesting an 8% drop from early May 2008, with the decline in air traffic contributing to double digit declines in jet fuel demand.
In short, I am seeing commodity exporting economies and their currencies are like commodities, vulnerable to a reversal of risk appetite.
Monday, July 6, 2009
Europe’s fiscal dilemma
The announcement of a new and contrasting fiscal program in Germany and France is really puzzling and could be a fiscal drift for the zone.
It has indeed raised the eyebrows and markets are concerned if the Germany’s fiscal move could mean too soon to a restrictive stance, that it could be deflationary and potentially derail recovery. The European Commission explicitly asked EU members for a 1.5 percentage points or more discretionary fiscal boost last November.
On the other hand, France’s announcement that it is going to launch a new borrowing program to finance growth-enhancing measures is a concern for the opposite reason – that higher debt ratios may impart an inflationary bias.
The resulting debt dynamics need to be addressed. The implementation of multi-year deficit reduction plans seems unavoidable to prevent adverse market reaction as well as to comply with existing Stability and Growth Pact rules.
France appears to be an outlier at this stage. In addition to the announcement of a likely longer timeframe for reducing its deficit/GDP ratio, France has also announced its intention to launch a new borrowing program to fiancé ‘good’ public expenditure.
It has indeed raised the eyebrows and markets are concerned if the Germany’s fiscal move could mean too soon to a restrictive stance, that it could be deflationary and potentially derail recovery. The European Commission explicitly asked EU members for a 1.5 percentage points or more discretionary fiscal boost last November.
On the other hand, France’s announcement that it is going to launch a new borrowing program to finance growth-enhancing measures is a concern for the opposite reason – that higher debt ratios may impart an inflationary bias.
The resulting debt dynamics need to be addressed. The implementation of multi-year deficit reduction plans seems unavoidable to prevent adverse market reaction as well as to comply with existing Stability and Growth Pact rules.
France appears to be an outlier at this stage. In addition to the announcement of a likely longer timeframe for reducing its deficit/GDP ratio, France has also announced its intention to launch a new borrowing program to fiancé ‘good’ public expenditure.
Sunday, July 5, 2009
Nasdaq’s fortunes?
If the last three months are any indication, the US tech sector has possibly shaken off its recession-heightened late-winter doldrums. The technology-laden Nasdaq was at the forefront of the most recent market rally, having soared more than 45% since hitting its 52-week low on March 10.
Relatively, it outpaced Dow Jones Industrial Average, which up 30% and the Standard and Poor’s 500 Index, which rose 37%.
Some analysts that I talked to argued that technology tends to be a leader in the early stages of an economic turn. If that is right, then this could be a confirmation of a sustainable rally-money rotating into the sector that historically is seen as consumer and business sensitive and requiring more leverage in terms of borrowed money, or perhaps this could be just another blip for the next couple of months.
Microsoft beat analysts’ expectations, helping the company’s stock to surge more than 50% from its mid-March low and earlier this month, Texas Instruments sharply raised its second quarter financial guidance as customers had slowed the rate at which they were reducing chip inventories – a signal that the market for semiconductors may be stabilizing.
The long suffering PC maekt may get a shot in the arms with the October 22 release of Microsoft’s Window 7, which claimed to be better than its predecessor Windows Vista, based on the pre-release versions being publicly tested. Also driving it, the company is offering cheaper upgrades to those who pre-order Windows 7 between June 26 and July 11. History shows that a release of new operating system will usually translate into only a slight increase in PC sales and the main issue now will the release will get drowned by the macro-economic environment.
The tech sector is anticipating a slew of product releases – many of them in the $22 billion video-game sector with activision Blizzard Inc – the largest third-party game publisher in the world to lead the way with the latest in its rock music game series. Activision’s rival, Electronic Arts Inc also has some potential big hit titles coming in the year’s second half and most game publishers are looking to cash in on the holiday shopping season – primetime for consumer spending.
Relatively, it outpaced Dow Jones Industrial Average, which up 30% and the Standard and Poor’s 500 Index, which rose 37%.
Some analysts that I talked to argued that technology tends to be a leader in the early stages of an economic turn. If that is right, then this could be a confirmation of a sustainable rally-money rotating into the sector that historically is seen as consumer and business sensitive and requiring more leverage in terms of borrowed money, or perhaps this could be just another blip for the next couple of months.
Microsoft beat analysts’ expectations, helping the company’s stock to surge more than 50% from its mid-March low and earlier this month, Texas Instruments sharply raised its second quarter financial guidance as customers had slowed the rate at which they were reducing chip inventories – a signal that the market for semiconductors may be stabilizing.
The long suffering PC maekt may get a shot in the arms with the October 22 release of Microsoft’s Window 7, which claimed to be better than its predecessor Windows Vista, based on the pre-release versions being publicly tested. Also driving it, the company is offering cheaper upgrades to those who pre-order Windows 7 between June 26 and July 11. History shows that a release of new operating system will usually translate into only a slight increase in PC sales and the main issue now will the release will get drowned by the macro-economic environment.
The tech sector is anticipating a slew of product releases – many of them in the $22 billion video-game sector with activision Blizzard Inc – the largest third-party game publisher in the world to lead the way with the latest in its rock music game series. Activision’s rival, Electronic Arts Inc also has some potential big hit titles coming in the year’s second half and most game publishers are looking to cash in on the holiday shopping season – primetime for consumer spending.
Wednesday, July 1, 2009
US – swing towards state capitalism?
I am foreseeing that Barack Obama administration is likely to substantially increase the government’s share of GDP, taking the US economic picture closer to that of Europe.
In words of George Soros…`having gone too far in deregulating - which contributed to the current crisis - we must resist the temptation to go too far in the opposite direction. While markets are imperfect, regulators are even more so. Not only are they human, they are also bureaucratic and subject to political influences, therefore regulations should be kept to a minimum’
Obama now wants to make the Fed an ‘uber-regulator’ in order to head off any future systemic risks. Throughout the 1990s and early 2000s, Fed worship was widespread in Washington and the Treasury Secretary Geithner has put a lot of faith in the Federal Reserve’s ability to spot risk and exercise its power to prevent the next crisis.
This could be a potentially dangerous drift toward American state capitalism – a threat to the economy’s free market foundation. Allowing the pendulum to swing too far in the direction of government control subjects the democratic capitalism model to attack by socialist influences. And that assault is already underway.
My view is that by keeping the old guard on duty and only giving them new binocular, we may well see the next set of failures on the horizon – but will be powerless to stop them.
In words of George Soros…`having gone too far in deregulating - which contributed to the current crisis - we must resist the temptation to go too far in the opposite direction. While markets are imperfect, regulators are even more so. Not only are they human, they are also bureaucratic and subject to political influences, therefore regulations should be kept to a minimum’
Obama now wants to make the Fed an ‘uber-regulator’ in order to head off any future systemic risks. Throughout the 1990s and early 2000s, Fed worship was widespread in Washington and the Treasury Secretary Geithner has put a lot of faith in the Federal Reserve’s ability to spot risk and exercise its power to prevent the next crisis.
This could be a potentially dangerous drift toward American state capitalism – a threat to the economy’s free market foundation. Allowing the pendulum to swing too far in the direction of government control subjects the democratic capitalism model to attack by socialist influences. And that assault is already underway.
My view is that by keeping the old guard on duty and only giving them new binocular, we may well see the next set of failures on the horizon – but will be powerless to stop them.
Tuesday, June 30, 2009
Shifting Europe to a Free Market
The long-standing attitude toward Europe is that it is an anti-free-market continent that should be of little interest to investors. That was the right view, but the recent European election results may suggest otherwise – which should be hugely interesting to international investors.
It has been becoming more free-market oriented, coming closer to the US economic system as evidently in the last four European elections – 1994, 1999, 2004 and 2009 over a period of rapid EU expansion with membership from 12 countries in 1994 to 27 now.
Couple of weeks back, someone sent me an interesting article that classify the various EU parties and their alliances and that will be a platform for formation of my point of view.
Broadly, we can classify Europe into three broad groupings – (i) Socialist/Green – believing in strong state control over the economy, (ii) Centre-right, which often nationalist but believing in a free-market economy but more welfare payment than in the United States and finally (iii) Centrist/Other, either small centre parties holding the balance of power in domestic parliaments or the inevitable residue of the unclassified.
Since 1994, EU elections have shown the following trend:
• 1994 – 12 countries with Socialist Group 1 parties 249 seats of 567 (44%), Group II of 40% and Group III of 16%
• 1999 – 15 countries with Socialist Group 1 parties 270 of 626 (43%), Group II of 45% and Group III of 12%
• 2004 – 25 countries with Socialist Group 1 parties 283 of 732 (39%), Group II of 45% and Group III of 16%
• 2009 – 27 countries with Socialist Group 1 parties 243 of 736 (33%), Group Ii of 45% and Group III of 22%.
Can you see the trend now? This is because with more new countries of former members of the communist bloc with an aversion to many aspects of government control. Productivity growth has been generally slower in Eastern Europe than in the United States – but not much slower with good education systems and heavy foreign direct investment of those countries that allowed them to catch up with the rich West.
Look for my next point of view on the US economy under Obama.
It has been becoming more free-market oriented, coming closer to the US economic system as evidently in the last four European elections – 1994, 1999, 2004 and 2009 over a period of rapid EU expansion with membership from 12 countries in 1994 to 27 now.
Couple of weeks back, someone sent me an interesting article that classify the various EU parties and their alliances and that will be a platform for formation of my point of view.
Broadly, we can classify Europe into three broad groupings – (i) Socialist/Green – believing in strong state control over the economy, (ii) Centre-right, which often nationalist but believing in a free-market economy but more welfare payment than in the United States and finally (iii) Centrist/Other, either small centre parties holding the balance of power in domestic parliaments or the inevitable residue of the unclassified.
Since 1994, EU elections have shown the following trend:
• 1994 – 12 countries with Socialist Group 1 parties 249 seats of 567 (44%), Group II of 40% and Group III of 16%
• 1999 – 15 countries with Socialist Group 1 parties 270 of 626 (43%), Group II of 45% and Group III of 12%
• 2004 – 25 countries with Socialist Group 1 parties 283 of 732 (39%), Group II of 45% and Group III of 16%
• 2009 – 27 countries with Socialist Group 1 parties 243 of 736 (33%), Group Ii of 45% and Group III of 22%.
Can you see the trend now? This is because with more new countries of former members of the communist bloc with an aversion to many aspects of government control. Productivity growth has been generally slower in Eastern Europe than in the United States – but not much slower with good education systems and heavy foreign direct investment of those countries that allowed them to catch up with the rich West.
Look for my next point of view on the US economy under Obama.
Monday, June 29, 2009
End of Recession
I have been hearing a lot of ‘green shoots’ lately, but am also filtering tons of misleading data with my 2 computer screens and 16 windows opened almost every-night. Friends, fund managers and commentators alike are singing praises of recovery and markets are ready to rise. To that, I politely say – RUBBISH!
There will be a recovery but not right now. St Graham said, in the short run, the market is a voting machine, and in the long run, it is a weighing machine. It means that the voting is based on current sentiment, but what the market weighs in the long run is earnings. The market tries to forecast future income streams and it gets it wrong as often as it gets it right!
We have the first balance sheet recession in 70 years, yet they want to compared garden-variety recessions to what we have now. Air, trucking and rail shipping is down 20% year-on-year and global trade is down about 30% in the major exporting countries.
The hidden problem is going to be most evident and painful in the unemployment numbers. The research paper by the San Francisco Federal Reserve generally supports projections that labour market weakness will persist and I believe the relatively low level of temporary layoffs and high level of involuntary part-time workers make a jobless recovery similar to the one experienced in 1992 a plausible scenario.
In the 1970’s and 80s, job losses were quick and deep, but the recovery was also quick. In the last two recessions, job recovery was noticeably slower, giving rise to the term ‘jobless’ recovery. It was the lacking of hiring, not firing, that was responsible for the slow employment recovery. The US now has less manufacturing jobs, so the rehiring process has been much slower in recent recessions.
Personal income from wages and salaries was down US$12bn in May, so how did income go up? A large increase in ‘government social benefits’ and a decline in personal taxes accounted for all the gain and then some. The increase was the effect from the recent stimulus package, which in my view, is transitory. The only different of this method from home equity withdrawal is that taxpayers are on the hook this time.
Final thought for today – The Congressional Budget Office released another report saying that the current deficit levels are unsustainable, either taxes must increase by $440 billion or spending must be cut by a like amount, or some combination. If the new health-care and other program are enacted, the number comes closer to $700 billion! Raising taxes by that amount will dip us back into recession.
There will be a recovery but not right now. St Graham said, in the short run, the market is a voting machine, and in the long run, it is a weighing machine. It means that the voting is based on current sentiment, but what the market weighs in the long run is earnings. The market tries to forecast future income streams and it gets it wrong as often as it gets it right!
We have the first balance sheet recession in 70 years, yet they want to compared garden-variety recessions to what we have now. Air, trucking and rail shipping is down 20% year-on-year and global trade is down about 30% in the major exporting countries.
The hidden problem is going to be most evident and painful in the unemployment numbers. The research paper by the San Francisco Federal Reserve generally supports projections that labour market weakness will persist and I believe the relatively low level of temporary layoffs and high level of involuntary part-time workers make a jobless recovery similar to the one experienced in 1992 a plausible scenario.
In the 1970’s and 80s, job losses were quick and deep, but the recovery was also quick. In the last two recessions, job recovery was noticeably slower, giving rise to the term ‘jobless’ recovery. It was the lacking of hiring, not firing, that was responsible for the slow employment recovery. The US now has less manufacturing jobs, so the rehiring process has been much slower in recent recessions.
Personal income from wages and salaries was down US$12bn in May, so how did income go up? A large increase in ‘government social benefits’ and a decline in personal taxes accounted for all the gain and then some. The increase was the effect from the recent stimulus package, which in my view, is transitory. The only different of this method from home equity withdrawal is that taxpayers are on the hook this time.
Final thought for today – The Congressional Budget Office released another report saying that the current deficit levels are unsustainable, either taxes must increase by $440 billion or spending must be cut by a like amount, or some combination. If the new health-care and other program are enacted, the number comes closer to $700 billion! Raising taxes by that amount will dip us back into recession.
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