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Five Things You Need to Know: China, Oil, Commodities, Dollar, It's All Good!

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What you need to know (and what it means).

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Minyanville's five things you need to know to stay ahead of the pack on Wall Street:

"XO, Mom. It's ok, it's alright, nothing's wrong." - Elliott Smith

1. It's All Good!

Naturally, you must be wondering why would we lead off this week's Five Things You Need to Know for Monday with a quote from a deceased songwriter/musician. We'll explain:

  • A confluence of positivity is gripping the newswires this morning... and just in time.
  • With global markets from London to Germany to Hong Kong shaking to the tune of anywhere from 1% to 2.4%, we could use some good news, right?
  • The uncanny timing of so much good news this morning, which we'll get to momentarily, somehow reminded us of the reassuring Elliott Smith lyrics above from the song "XO."
  • Elliott Smith died in 2003 at age 34 from two stab wounds to the chest.
  • The stab wounds were reportedly self-inflicted, though forensic evidence remains inconclusive. "It's ok, it's alright, nothing's wrong."
  • Now, for the good news...


2. China Gets With the Program

After a heap of praise and a stern sentence from Treasury Secretary John Snow last week, China got right on revaluing the yuan at a quicker pace.

  • China's central bank set the trading benchmark for the yuan under 8.0 to the dollar for the first time this morning.
  • What does it mean they "set the trading benchmark"?
  • The People's Bank of China sets a central parity rate for the yuan against the dollar each trading day. The yuan is only allowed to trade by 0.3% above or below that point of central parity point during the trading day.
  • The yuan was revalued on July 21, 2005, after which is was no longer pegged to the dollar but allowed to float against a basket of currencies for the first time.
  • The float is not a free float, however, and the central parity rate of 0.3% means China has only revalued to a tight range.
  • Since the dollar is down more than 5.5% since July 21 of last year when China loosened its peg, that means the yuan is down against the basket of currencies it is measured against too.


3. Oil Supply Outpacing Demand!

Saudi Arabian Oil Minister Ali al-Naimi said Monday that global oil supplies are outpacing demand!

  • Apparently, the price of crude oil is not totally inelastic!
  • Minyanville Staff, what do you mean "inelastic?", you ask.
  • Good question. Economists speak of things, such as commodities (oil, corn, sugar, copper) as having a supply and demand relationship that is either elastic or inelastic. Why? Because it sounds cool to say something is inelastic or elastic.
  • If supply and demand is elastic, this simply means that rising prices will diminish demand and increase supplies naturally.
  • If supply and demand are inelastic, this simply means that rising prices have only slow and modest effects on demand.
  • An example of a commodity whose supply and demand is thought to be very inelastic is crude oil.
  • How do we know this? We simply look at crude oil demand relative to prices.
  • Since 1998, the price of crude has risen by about 300%.
  • Since 1998, U.S. demand for crude has risen from a bit more than 18 mln barrels per day to nearly 21 mln barrels per day.
  • Even in Western Europe demand for crude has risen from about 15 million barrels per day to about 15,5 million barrels per day.
  • China's oil consumption has nearly doubled since 1998, to more than 7 million barrels per day.
  • Ok, so back to the Saudi oil chief who says supply is outpacing demand. What does he know that we don't? Asked about the impact of high prices, al-Naimi said: "In general, when prices are high, people check their pockets and when they are lower, they open them," according to Dow Jones News Service.
  • In general? Yes. For crude oil, demonstrably not.
  • Did we mention that China, with a population of 1.3 bln, is doubling the sale of autos every year?


4. Gold, Silver, Copper Meet Sir Isaac Newton

Gold was down more than 2% below $700 an ounce in early Monday trading, while silver was off nearly 7% in a bout of "profit-taking".

  • Good news! Gold and silver and copper were off anywhere from 2%-to-7% today.
  • Why is this good news?
  • Gold is often viewed as an "investment" of last resort because it is cash flow negative, which means it costs money to own real, physical gold.
  • This is less problematic with the new gold ETFs, of course, assuming they are indeed backed by physical gold, and the liquidity has improved.
  • But a spiking gold price is often viewed as problematic for financial markets due to its use as an inflation hedge, and its perceived "last resort" investment status forecasting potentially a confidence crisis in paper-assets for any number of reasons.
  • The last thing a central banker printing fiat currency wants to see is a rising gold price.
  • Meanwhile, copper has almost doubled this year, and as Justin Lahart describes in this morning's Wall Street Journal "Ahead of the Tape" column, copper is viewed as the metal with a "Ph.D. in economics."
  • So, for markets that are reportedly focused on Fed "tightening," a word we use very loosely here in Minyanville, and potential for inflation increasing, this is all good news!
  • The fact that the selloff in the metals is clearly "profit-taking," according to mainstream media, as opposed to "profit-taking's" darker cousin "loss-giving," is also good news!
  • Good news is everywhere!


5. Dollar Reserve Status Successfully Saved, Crisis Averted

This morning the dollar is back up above 84 to as high as 84.61. Clearly, the dollar crisis has been averted and the greenback's role as extra special reserve currency to the world is once again safe and secure.

  • Remember when we talked about the dollar on Friday? Well, all problems aside, the dollar is still the world's reserve currency.
  • What is a "reserve currency"?
  • A reserve currency is a currency used by the majority of world governments as their foreign exchange reserve to help stabilize their own currencies.
  • A reserve currency is also the international pricing currency used for the most global trade - oil, for example, is priced in dollars. (More on that in a moment).
  • A currency gains status as a reserve currency based on a number of factors, including economic, political and societal stability.
  • This means that America's political stability, its fair legal system, it's free society is clearly perceived as worth a premium.
  • One more thing: back to the oil being priced in dollars. What is interesting to us at Minyanville is that because oil is priced in dollars, the weaker the dollar gets, the cheaper oil is for foreign countries. Hmmm, interesting.



THIS CONTENT IS FOR EDUCATIONAL PURPOSES AND IS NOT INTENDED AS ADVICE.

Minyanville contributors may trade securities that are discussed on the site, both before and after the articles are published and/or may have a position in such securities for either personal or firm account(s). Minyanville contributors will indicate whether he or the firm has a position in stocks or other securities in any of the companies he discusses in an article. He will not disclose his or the firm's ownership of any securities issued by companies that are not discussed in an article. The disclosures will be accurate as of the time of publication of an article and may change at any time thereafter without notice to the reader.

The information on this website reflects an analysis of market conditions by Minyanville contributors and should not be interpreted as or deemed to be a recommendation to any investor or category of investors to purchase, sell or hold any security. Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Minyanville contributors will not respond to requests for individual and specific investment advice.

The views expressed on this website are solely those of the writers whose articles appear on this site and do not necessarily reflect the views of the Fund or of any other person except where expressly indicated.

Copyright 2006 Minyanville Publishing and Multimedia, LLC. All Rights Reserved.

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No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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