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Commodity Bulls in Retreat


Under the Macro-Scope


NOAA had expected a gradual, one-degree Celsius above normal warming of the Pacific Ocean through the coming winter and thus a barely mild El Niño effect on the US, and global weather patterns.

According to someone 'in-the-know,' the warming of the Pacific Ocean has already exceeded one-degree above normal and the season has yet hardly begun. Subsequently the 'trade winds' at lower latitudes have weakened, and drought conditions have already been 'confirmed' on the 'ground' in South Eastern Asia.

VOILA! Wheat is up 30 cents, and again, is up 30 cents as thoughts of a 25 million metric ton Australian Wheat crop has been slashed to as little as 10 million metric tons. My firm remains bullish, as per our special focus piece last month, spotlighting all the coarse grains.

Moreover, according to our trusted, all-knowing source on things to do with 'physics,' a fully developed El Niño is already at work, a la the 'splitting' of the jet stream above North America, into northerly and southerly 'branches.'

My firm's physics sage pronounces that the southerly branch tends to bring heavy rains to the southern states, with a heightened probability of excessive severe tornado-producing patterns, which is matched off against a lower probability of a horrific hurricane season.

Indeed, the recent increase in volcanic activity and earthquakes is directly linked to the 'physics' involved with a strengthening El Niño.

And, this pattern would tend to skew the odds towards experiencing a warmer-than-normal 'winter' season in the Northeastern US.

Potentially, the impact is bullish for the grain complex, maybe even producing a bullish gig for soybean meal, if El Niño becomes severe enough (the bean complex has lagged, thanks to huge supplies held by both producers and consumers).

Potentially, the impact is bearish for the energy complex, as pertains to thoughts of diminished winter demand for heating oil and natural gas, and as pertains to the lessened risk of another horrific hurricane season. My firm remains bearish on the energy complex.

So then, what does El Niño have to do with air conditioners in China?

Nothing, actually.

And everything, surreally.

Evidence a recent story carried in the China Daily, detailing data offered by the State Information Center, a decline in domestic Chinese sales of air conditioners on a year-over-year basis, the first such decline in over 15 years, or, since records began in 1991

Note the details:

  • Chinese Air Conditioners, Sales Volume, down (-) 7.2% yr-yr in August, the first decline since 1991.
  • Chinese Air Conditioners, Sales Revenue, down (-) 2.0% yr-yr

First, my firm notes that volume dropped more than value implying price increases and focusing 'blame' for the decline, on such.

Indeed, according to the China Daily, several air conditioning manufacturers raised prices in response to the explosion in Copper prices!!

Indeed, copper tube is a KEY 'ingredient' in air conditioners.

Note the text from the China Daily:

"Apart from the decline of the domestic and international markets, the rise in energy and raw materials prices increased the cost of manufacturing, and further narrowed the profit margin."

Then, note comments from the State Information Agency Chief Market Information Officer Cai Ying:

"The (domestic) market has almost reached saturation, with sales falling by sixty-four percent (down –64% yr-yr) in first tier cities."

Indeed, these comments only flirt with the fact that more than one dozen local Chinese air conditioning manufacturing firms have gone bankrupt in the last year, amid fierce competition that has been enhanced by the implementation of anti-dumping regulations, which has squelched export growth.

Can anyone say diminished demand growth, for Copper?

How about saying the same for Platinum?

Evidence the latest trade report from Japan, a la the data dissection detailed below, as pertains to Japanese demand for Platinum:

  • Japan, Platinum Imports, 4.68 tonnes in August, down (-) 8.8% from 5.13 tonnes imported during July, and down (-) 22.35% on a yr-yr basis, relative to the August '05 import total of 6.03 tons, worsening from an already negative (-) 14.2% yr-yr rate of decline posted in July relative to July-05.

In other words, one full ton less, or, nearly one-quarter less Platinum imported by Japan, on a year-over-year comparison and an acceleration into a deepening contraction in imports.

Hence we come to the longer-term weekly chart of Platinum, on display below, revealing an intensifying risk, technically, to the macro-multi-year uptrend during which time Platinum prices have risen by exactly $1000.

We spotlight the downside penetration of the longer-term 52-Week MA, which itself is threatening to reverse to the downside, and, the deepening slide into negative territory by the 52-Week Rate-of-Change.

Of specific interest is the teetering noted in the chart below, in which I plot the price of Platinum versus the price of Gold, calculated as a straight dollar-for-dollar price spread. Again, a multi-year uptrendline is under assault, as is the macro-long-term 2-Year Moving Average. An extension to the decline in PL-GC would be a disinflationary signal from the global macro-supply-demand perspective.

Need I mention Platinum's usage by the 'struggling' automobile industry?

We already see a macro-caution-flag waving in the commodities sector. Note the tumble in Crude Oil below $60 --- the push in gold below $600 --- the collapse in sugar, the plunge in cotton below 50c --- the spiral in lumber to less than $250 --- the dump in Natural Gas below $7 --- and the violent downside reversal in RBOB Gasoline and Ethanol.

Right now, not even the spike in the grain complex is enough to keep the CRB Index from depreciating relative to the US equity market (as defined by the S&P 500 Index). As exhibited within the chart below, the CRB Index has already violated the uptrend line in place since 2004, as pertains to its ratio spread against the S&P 500 Index. Note also the violation of the long-term 2-Year EXP-MA.

Observe the upside-leadership turned downside-leadership shown by the Goldman Sachs Commodity Index relative to the S&P 500 Index, as evidenced within the weekly chart below. Note the MA violation, trendline penetration, and the reversal into negative territory by the ROC.

The long-term weekly overlay chart seen below provides a unique perspective, as it plots the path of the CRB against US long yields (10-Year), mid-yields (5-Year), and the short-end yields (2-Year). For sure, the flattening of the US Yield Curve is largely responsible for this divergent action, but the macro-implication is that the flattening curve points to a lower CRB Index, eventually, as these divergences are reconciled.

The alternative scenario, re-convergence wise is for a spike higher in US long-end yields, with, or without a renewed bullish rally in commodities.

Taking the CRB Index --S&P 500 Index Ratio Spread my firm applies a 12-Month and 24-Month Rate-of-Change indicator, to achieve the chart on display below. The 12-Month ROC is nearly below zero, and, is FAR, FAR, FAR from its secular peak while the 24-Month ROC clearly exhibits a significant degree of bearish divergence at the most recent high and has receded back below a double-digit rate of increase.

If, if, if, if we were to use the above chart as a proxy for choosing either stocks, or commodities, as the investment that will outperform the other, it would not bode too well in terms of the maintenance of superior 'returns' in commodity investments versus the broader stock market.

Moreover, on the back of a potential breakdown in commodities markets relative to the US stock market, I refocus on this morning's data-deluge, specifically as pertains to a broad range of European inflation rates:

  • Spanish CPI hit a 2 ½ YEAR LOW, as per the deep disinflation in the yr-yr rate posted over the last two months, with the September figure posted at +2.9%, having deflated by (-) 0.2% during the month. Thus, the yr-yr rate plunged from August's rate of +3.7%, and July's rate of +4.1%.

In other words, Spanish CPI has disinflated by (-) 120 basis points since July.

In other words, Spanish 'real' short-rates have soared since July, and have flipped from 'negative,' to 'positive.'

Also on this morning's data-slate:

  • German WPI deflated by (-) 0.5% during the month of September, driving the yr-yr rate sharply lower, to +3.0%, a deep disinflation from August's rate of +5.3% yr-yr.

In other words, the yr-yr rate of German WPI plummeted by (-) 230 basis points, in September alone and, in the process, went from +200 bp 'over' the ECB repo-rate, to a (-) 25 bp discount.

And, not to be ignored:

  • Slovak Core CPI dumped (-) 0.3% during the month of September, driving the yr-yr rate down to +2.4%, from the +2.8% rate seen in August.
  • Romanian CPI unchanged for the month of September, driving the yr-yr rate down to +5.5%, from the +5.8% rate posted in August and marking a new post-Communist regime low.

New lows in Romanian CPI and a +2.4% yr-yr core rate of CPI in Slovakia. Folks, global price pressure continues to recede, perhaps more rapidly than many want to admit, in line with the weakness that is intensifying, a la commodities markets.

Next I rewind and refocus on the European inflation data released on Tuesday:

  • Austrian WPI deflated by (-) 0.9% in September, taking the year-year rate down by a whopping (-) 150 basis points, to just +2.4% in September, disinflating from +3.9% yr-yr in August.
  • Greek CPI slowed to just +2.9% yr-yr in September, sliding from the August rate of +3.5% yr-yr.
  • Lithuania CPI deflated by (-) 0.1% during the month of September marking a second consecutive month of declining prices, and, driving the year-year rate down by (-) 100 bp, to +3.2%, from +4.2% yr-yr in August.
  • Czech CPI deflated by a sizable (-) 0.7% during the month of September, driving the yr-yr rate down to +2.7%, a forty basis point disinflation relative to the August rate of +3.1%.
  • UK PPI deflated by (-) 0.3% in September, which caused a significant dose of disinflation as per the yr-yr rate, which plummeted to +1.8%, down (-) 90 bp relative to +2.7% in Aug.

Indeed, the lowly +1.8% yr-yr rate of Producer Price inflation posted by the UK this morning for the month of September marks the lowest rate since December 2004, when prices were rising and more 'tellingly,' the (-) 90 bp single-month disinflation in the year-over-year rate represents the deepest deceleration in 15 years.

Ironically, against the backdrop of historic disinflation in UK Producer Prices, and a multi-year low in Spanish CPI, my firm observes the latest commentary on the offer this morning from the Spanish Central Bank Governor Miguel Angel Fernandez Ordonez:

"If current growth expectations are confirmed, monetary policy should continue gradually removing its current accommodative stance. There are signs that oil prices are feeding through into second round inflation in Spain."

Oil prices are feeding through to second round inflation in Spain?


And what data is Ordonez talking about?

Oh, maybe the Spanish Central Bank Governor is looking at the latest report from CB Richard Ellis, a consultancy firm in Madrid, which issued a report on Tuesday citing the following statistics:

  • Investment in Spanish Real Estate will double this year, from last year, and reach nearly 10 billion eur. Already, in the six-month YTD period ending in June, investment in offices, commercial centers, and industrial property had risen by +86.0% above the full year total for all of 2005.

Gee, maybe this is what the Spanish and European Central Banks are looking at, when they let loose with their hawkish commentary, making us even more intently focused on the next update from the ECB on Monetary Conditions in the Eurozone in terms of credit growth and money supply.

At the end of the day, until the Fed, ECB, BOJ, and PBOC are all, in tandem, cleared to release the monetary brakes, pressure on the commodities markets, metals, petroleum, building materials and raw materials is likely to intensify until it becomes pronounced enough to give the all-clear signal to the Fed, ECB, BOJ and PBOC.

My firm remains bearish on Crude Oil and Copper, along with the entire energy-related ETF complex and we maintain a short-term speculative stance in gold against which we continue to be bullish on the S&P 500 Stock Index and the Financial Service and Broker Dealer sectors in particular.

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