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Tuesday, February 18, 2020

Did the Commodity Bull Get Gored?

Date: Monday, January 15, 2007
Author: Bill Bonner, The Daily Reckoning

The fact that it’s smoky in Melbourne again seems appropriate. Visibility is down to just a few hundred meters, which is more than you could say for commodity markets. The stock market can see just fine, apparently, with the ASX/200 set to follow the Dow to a new high.

It brings us back to that question again, does the stock market lead the economy or does liquidity lead the stock market? It’s an important question. If liquidity leads the stock market, then stock prices don’t tell us much about what to expect from future corporate performance. Instead, they reflect a cash-driven global asset binge. And it’s hard to have a discerning asset palate when everyone else in the room is shoving cake down their throats.

It looks like the hedge funds and traders are finished liquidating positions in industrial metals and energy, at least for a few days. Copper had its biggest weekly decline in ten years last week. Gold fell to a three month low. Oil was down eight percent for the week.

Did the commodity bull just get gored? Like last week, we’d ask if any of the assumptions of the bull market in resources have changed in the last two weeks. China grows at ten percent. India enters a commodity intensive phase of its own growth. And production of most industrial metals remains tight.

None of that may matter to traders, however, many of whom were sitting on large paper profits. And many of those industrial metals were sitting on record highs. The profit-taking seems sensible to us, if overdone.

It could also be that the hot money is moving from the metals to the “softs.” Corn rose to a ten-year high on the back of demand for ethanol. Wheat rose on concerns that farmers would plant corn instead of wheat, tightening wheat supplies in a hungry world. And cotton rose too, for no particular reason that we can see.

Our main point today is that the volatility in the commodity markets speaks more to the short-termism of money shufflers than the real and strong currents of supply and demand in the global economy. If resource prices correct, that should produce better buying opportunities in resource-related stocks. That means that the next few weeks could be the best chance you’ll have in the next five years to buy great resource companies at good values. Stay tuned.

Your alternative, of course, is go abandon the resource bandwagon and hope on a hedge fund. “Listed hedge funds are gaining favour with investors as more would be willing to switch from traditional private limited partnerships to publicly traded shares sold by hedge funds,” according to Shanny Basar in a wire service report.

Why would you want to buy shares in a hedge fund management firm, you ask? The return of course. If you can’t get ten percent in copper, why not a hedge fund?

The only problem we see is that we don’t really know what a hedge funds assets are. Is it the traders? Or is it the investments? “Hedge Funds in Bidding for Ameriquest,” we read in today’s New York Post. If the hedgies are lining up to buy the assets of a defunct sub-prime lender in the States, we’d be wary. Give us BHP over a suburban mortgage any day and twice on Sundays.

Finally, is Sunni-dominated Saudi Arabia crashing the oil price to starve Shiite-dominated Iran of much-needed hard currency reserves? Iran has threatened to use ‘the oil weapon’ in the past against the United States. But it was crashing oil prices that starved the Soviet Empire of the money to be militaristic in 1989. Is the Saudi Royal family doing it again? Let us know what you think at dr@dailyreckoning.com.au