Tuesday, July 28, 2009

Commodity Bull Market Will Continue

Commodity Prices, Bull Market

A number of factors will contribute to the ongoing commodity bull market, including population growth (although that isn't the primary factor) and other changes that will ensure probably at least a decade or not more of commodity price surges.

Now along with population growth, the more significant reason commodity prices will increase are the emerging middle classes in China and India, and other smaller Asian countries.

After all, population growth won't significantly change things if people aren't able to afford food. Sure, you get the subsidized food, but that always is the basics to survive, never the higher margin food middle classes enjoy and can afford.

But, either way, population growth for general food stuffs, along with available funds from emerging market consumers will drive commodity prices for years to come.

"World population growth trends suggest massive numbers of new global citizens on the way -- citizens that are going to require essentials such as food, clothing and shelter," commodity ETF expert Doug Fabian said.

"For investors who want to ride this population wave, I offer you the PowerShares DB Commodity Index, an exchange-traded fund that seeks to track the performance of the Deutsche Bank Liquid Commodity index," he added.

Of course I've been writing about this for a long time trying to show you the reasons many commodities will be highly profitable. Jim Rogers has also contributed to that conversation, saying that commodities should be the top performing investment for years into the future.

Commodity prices in many cases have dipped because of the temporary economic slowdown, and no matter how long it takes to be dug out of it, eventually commodities will begin to rise again, and when they do, they could explode in price. Of course you can make money whether commodity prices rise or fall, but this makes pricing of them easier than when there's a lot of uncertainty, which over the long term there isn't: commodity prices overall will rise, and that's a surety over the long term.

If Commodity prices continue to lag, that could be a great buying opportunity as well, and could even add to the profits of investors going forward.

Commodity Prices, Bull Market

Wednesday, July 15, 2009

Brazil Commodities Pushing Economy

Brazil Commodities

Stocks in Brazil, which are primarily fueled by the commodity sector, enjoyed a strong push, as oil and metals helped drive up the prices of producers and investors hope this is the beginning of a rebound in the Brazilian economy.

Vale SA, the world’s largest iron ore miner, climbed more than 7 percent after Bank of America Corp. upgraded the stock on valuations and higher ore prices. Tam SA and Gol Linhas Aereas Inteligentes SA, Brazil’s two biggest airlines, increased the most in the Bovespa index on hopes demand will increase. Rossi Residencial SA led gains for homebuilders after competitor MRV Engenharia & Participacoes SA recorded record contracted sales.

Industrial production in the U.S., the world’s biggest economy, had the smallest fall in eight months, the Federal Reserve said today. A New York regional factory gauge showed the smallest contraction in more than a year.

Vale Upgrade

Vale increased by the highest in two months, adding 7.2 percent to 29.84 reais, after it was raised to “buy” from “neutral” at Bank of America.

“Since March, the stock has been a big underperformer and we now believe investors are overly pessimistic on the name,” analysts led by Felipe Hirai wrote. “Vale’s current share price is not reflecting a stronger iron ore market scenario.”

The Bloomberg Base Metals 3-Month Price Commodity Index gained 3.5 percent to 156.86. Crude oil rose as much as 4.1 percent, the most in six weeks, after a government report showed a bigger-than-forecast drop in U.S. crude inventories as refineries increased operating rates.

The Bovespa has gained 36 percent in 2009 on speculation a rebound in commodity prices and falling interest rates will bolster economic growth. The measure had tumbled 10 percent from this year’s high on June 1 through yesterday on speculation the global recession will be prolonged, reducing commodity demand.

Grupo Elektra SA, the Mexican electronics retailer controlled by billionaire Ricardo Salinas, led the gains in the Bolsa index after Intel Corp. forecast sales that beat analysts’ estimates.

Grupo Financiero Banorte, Mexico’s largest publicly traded lender, rose. Mexico’s central bank is expected to cut interest rates by 25 basis points.

The Bolsa is tracking the rise of U.S. stocks, which had fallen “too much too quickly,” Guilherme Paiva, Deutsche Bank’s Latin American equity strategist, said in an e-mail. “Plus it looks like Intel figures were driven by top-line growth rather than cost cutting,” he said.

The Bolsa has gained 49 percent since its March 2 low on signs that the worst of the recession is over.

Commodities continue to help lead the way for Brazil, but I would be very cautious on making decisons based on wishful thinking that the recession is over.

Brazil Commodities

Commodities Still Hot - Jim Rogers

The commodities rally seems to have paused. The Rogers International Commodity Index has come off 13% since June 12. This pullback, essentially as I can see, is because of tin, energy and silver even as some of those agri commodities like orange juice, sugar and cotton have done well. What are your expectations going forward for commodities?

That's the way I know you know about commodities. You read The Economic Times and your ET TV. So, you know that the markets always have corrections whether they are going up or down. Nothing goes straight up or down forever. So, it's having a normal correction. In my view, the best place to be is in real assetscommodities, because if the world is going to recover, they (commodities) will recover first because of the shortages and if the world economy is not going to recover, they are still the best place to be, because governments around the world are printing huge amounts of money. So, if you got to own something, I don't much to own besides commodities.

In India, we are getting worried about the monsoon. We are looking out of our windows and not finding any clouds, and there is also talk about El Nino weather formation. Is this something you would advise investors to keep an eye on?
Of course, I would. The world's inventories of food are at the lowest they have been in decades. We haven't have had any serious weather problems around the world for several decades as a matter of fact. So, with fairly good weather, we have been having bad harvest or we have been consuming more than we have been producing. Can you imagine what's going to happen to the price of agriculture if we have bad weather around the world?

The last time we met here in Mumbai you had a sachet of sugar in your pocket and you pulled it out to underscore your point of impending shortage about agri commodities. You have been right about sugar as far as we can see from the price charts. What are you hiding today in your pockets? A silver coin, a hip flask full of crude oil, may be?

I do actually have a silver coin in my pocket. I don't know how you knew. I also have a gold coin, but the silver one is probably my better play. If I were a bright young man, I would be buying sugar now and silver, given the state of the world. That's not a recommendation, but I am just saying I do own some silver. Silver is cheaper than many things on a historic basis and I do own some silver. The dollar has fallen almost 10% since the beginning of the stocks rally in March. Commodities have risen 94% of the time that the dollar has fallen. A very strong correlation. Do we expect the dollar decline and the commodity run-up, therefore, to continue? It's not always a strong correlation. You are right; there has been (a correlation) in recent months, recent years even. But no, there are many times when the dollar and commodities go entirely separate ways. So, don't get it into your head, and I know many times that the press do have it in their head that commodities and dollars go opposite ways. I am not terribly bullish on the dollar in long term. US dollars are a terribly flawed currency and down the road I hope I don't own any US dollars. I still own some of them at the moment, but it's not getting better for the US. The dollar any way is getting worse. The fundamental for commodities continue to improve. The fundamentals for the US dollar do not continue to improve. They are deteriorating.

Are you still sticking to your prediction of a currency crisis sometime in a year or two?

Yes. The world is full of currency imbalances and economic trade imbalances would have to be resolved or corrected, one way or the other. Unfortunately, given the state of politicians and it's not just the current state of politicians, but politicians throughout history have usually got things wrong. So, we are going to have some problems in the currency market. I don't know when. May be not. I may be wrong. But having seen that sort of thing before in history somebody would have to pay the price whether it's the pound sterling or the US dollar or the rupee, I have no clue. No idea where it’s going to stop, but we are going to have problems in the currency markets.

What’s your view on global equities now? Do you think emerging markets’ premium over developed country markets has gone a way too high?

I don't pay any attention to things like emerging markets premium. You talk about it on TV, but every market is different. Why can't I just go out and buy emerging markets when it is likely to go broke. Every market is different, every country is different, every economy is different and every sector of the economies is different. Just because you are in an emerging country does not mean you are going to make money if you get the wrong sector. I have not bought any stocks anywhere in the world in the last couple of years except China. I did buy some Chinese shares back in October-November. I have not been buying anything other than that for some time. I have been worried about the world economy, about the world stock markets. If you got to be somewhere and if there is going to be a recovery, it will show up in commodities best of all, and if there is not going to be any recovery, commodities are still a better place to be.

So what are you buying nowadays?

If you want to put in your money somewhere, put it in commodities. That's the only thing I bought recently. I have bought some yen and swiss francs. If you know enough about currencies to figure out who is going to benefit, if I am right about the currency turmoil coming, then you can buy some of the currencies and if you think that the rupee is the place to be, then you can buy some rupees.

Long-term inflation expectations in the US as reflected by the five-year forward breaking rates on treasury inflation protected securities. Those have hardened considerably since the beginning of the year. That's also your view, right? Too much money in the financial systems and monetary authorities the world over don't have a credible plan to withdraw liquidity?
I cannot conceive of lending money to the US government for 30 years in US dollars for 3, 4, 5 or 6% interest. It's just inconceivable to me that I would let them have my money for 30 years and they would pay me back someday in US dollars at such a low rate of interest. I expect problems in the bond market. I don't know when. I am not sure about the bond market. I was short in the bond market, but I got out. I expect to see serious problems in the bond market down the road.

In the near term, markets seem to be more concerned about growth than they are about inflation. The difference between the 10-year and the two-year bond yield in the US has narrowed some 40 basis points since early June. Unlike you Jim, people are actually going out and buying long maturity treasuries because they don't see growth, don't see inflation. So, what do say to these bond buyers? Good luck?

When you see anomalies like this in the market, you are supposed to take advantage . The spread is very low. So, why would anybody buy a 10-year when he can buy a two-year ? Not worth the extra risk to go out 10 years. I would urge people to keep their wits. Now, granted Mr Bernanke and the US are buying a lot of government paper and driving the price up. That's why I am not sure. He has got more buying power than I do, at least for the foreseeable future. So, you are seeing longer bonds going up. That gives you an opportunity to get out if you own them or think about selling them short if you don't own them and know how to sell short.

Interview with Jim Rogers from India Times

Wednesday, July 8, 2009

CFTC Trading Limits Regulation

U.S. Commodity Futures Trading Commission trading limits?

IntercontinentalExchange Inc. and CME Group Inc. shares plunged on Wednesday following news that the U.S. Commodity Futures Trading Commission is planning to propose huge trading limits on oil, natural gas and maybe other commodities.

CFTC Chairman Gary Gensler said Tuesday the CFTC will hold hearings this summer to consider imposing position limits for "all commodities of finite supply." The agency will also review whether swap dealers, index traders and exchange-traded fund managers should be allowed to get around those limits through special hedge exemptions.

Raymond James analyst Patrick O'Shaughnessy said that the news has been dragging down shares as investors are scared about how far the government could go with regulation.

"ICE is being hit by a double whammy," O'Shaughnessy said. "There are concerns about earnings, and you have multiple compression taking place because people are concerned about what the government could do next.

"It's changing the rules in the middle of the game."

Investors are similarly concerned about CME, he said.

While O'Shaughnessy said the initial market selloff seems to be an overreaction, J.P. Morgan analyst Kenneth B. Worthington said he views the reaction as "logical," given the recent runup in ICE shares, its valuation and the beginning of the seasonally slow summer.

"While concerns with regard to Gensler's actions will likely cap valuation for both ICE and CME near term, we believe regulatory fears are overblown," Worthington said in a note. "We expect ICE stock could head lower but suggest investors buy on the dip this summer."

He added that he doesn't think ICE trading will be hurt by regulations and said Gensler's investigation into position limits, hedge exemptions and transparency could be good for "market "integrity." However, Worthington said if "regulation gets restrictive, the new CFTC chairman risks lower liquidity and higher volatility in commodities markets."

O'Shaughnessy said the CFTC has jurisdiction over ICE's West Texas crude and natural gas products, which is about a quarter of its revenue. If the trading limits go through, he said, they could lower ICE's revenue by about 3% to 4%.

But O'Shaughnessy said the larger concern is whether London could take similar actions -- which could lower revenue by an additional 4% to 5% -- and whether the U.S. government could take further steps.

In a worst case scenario, CME -- which is completely regulated by the CFTC -- would lose about 3% to 4% of its revenue from the changes, he said.

U.S. Commodity Futures Trading Commission