Oil Breaks $35: Commodities Snapshot

Friday, December 19th, 2008

It wasn’t that long ago, June 19, 2008, we had a conversation with Stephen Briese, author of the Committments of Traders Bible about the imminent bursting of the oil and commodities bubble (200 Days of Oil Supply Held Long by Speculators). That was just weeks before the price of oil (and other commodities) peaked at 147. In that conversation, Briese made the firm statement that oil could drop as low as $30, which is why we are bringing it back to your attention. It was very very hard to believe that it could come true, but here we are. Here is that conversation again:

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9 min. 18 sec.

Oil is trading around $34.71 down $1.51 from yesterday’s close, as of the writing of this article.

Here we display Bespoke Investment Groups handy commodities at a glance roundup. They do an excellent job of creating graphs like these that make it relatively easy to see where prices are in relation to their 50-day moving averages. The green shading represents two standard deviations above and below the commodity’s 50-day moving average, and moves above this shading are considered overbought or oversold.

Gold, Silver have recently broken out from their oversold positions very nicely into overbought territory. In the food segment, Corn and Wheat have also had a break out off their oversold bottoms and nearing overbought territory. The rest however have continued to see weakness.

Tags: Bottoms, Briese, Committments, Commodities, Commodity, Creating Graphs, Gold Silver, Investment Groups, Moving Average, Moving Averages, Oil Supply, Press Play, Price Of Oil, Roundup, Segment, Shading, Snapshot, Speculators, Standard Deviations, Wheat
Posted in Commodities, Gold, Markets, Oil and Gas | No Comments »

Greenback slumped on the canvas

Friday, December 19th, 2008

Bernanke & Co. on Tuesday signaled to the financial markets that they were hell-bent on pursuing an “inflate or die” approach to rescuing the ailing US economy and fending off the forces of deflation. The Fed is now inflating at a level possibly not seen before by a developed nation since Weimar Germany.

Since the credit crisis started intensifying in July, the dollar benefited from a global flight to safety in US Treasuries and a scramble for dollars to repay USD-denominated debt. The deleveraging process effectively created a short position in the greenback.

But more recently, US-specific worries concerned with public debt expansion and the potential inflationary implications of quantitative easing dawned upon battle-weary investors, causing the dollar to reverse the uptrend that had commenced in July.

The US Dollar Index (i.e. a trade-weighted basket) has not only breached its 50-day moving average convincingly, but seems to be forming a top of at least medium-term significance (see chart below). The fall from grace was brutal with the Index recording its largest six-day decline (from December 10 to 17) ever, setting up an assault on the key 200-day line (often seen as a crude indicator of the primary trend).

The US currency also suffered its biggest one-day slide against the euro on Tuesday, and plunged to a 13-year low against the Japanese yen. (Also see my weekly “Words from the Wise” review for comments on currency movements.)

The table below shows the performance of the US Dollar Index, as well as a number of major and emerging-market currencies against the US currency. Gains against the US dollar (green) / losses (red) are given for (1) the period since the dollar’s high of November 20, (2) the period from the dollar’s July 21 low until the November high, and (3) the year to date.

Click on the image for a larger table.

The devaluation of the US dollar de facto exports deflation and depression, raising the question of how long it will take before other countries retaliate and embark on “beggar thy neighbor” currency debasement. China is already in the process of “managing” the renminbi lower, Russia’s central bank has signaled it would step up devaluation, and the Bank of Japan and others might also consider intervention.

“Either we are going to pay for our policy sins via higher interest rates or a weaker dollar. And for an economy that is as levered as the one in the US is, the former choice is not an option,” said Stephanie Pomboy (MacroMavens). “So a weaker dollar is the natural valve.”

US creditors - such as China - with large hoards of dollars are growing increasingly nervous, and the dollar is likely to come under additional pressure if foreigners stop finding dollar assets an attractive proposition. The only way the US can attract foreign capital is by offering a higher interest rate or making its assets cheaper through a weaker currency.

Jim Rogers commented as follows in a Bloomberg interview: “… the dollar is a terribly flawed currency. I hate to say it, but my goodness, they’ve messed up the dollar badly. So, I don’t like to do it, but I’m going to sell all the rest of my dollars sometime in the next few days, weeks, or months … Again, I don’t like saying it, but I’m afraid the dollar is going to go the way the pound sterling went.”

The speed of the dollar’s decline has been such that it is quite likely to see a relief rally before the downtrend resumes. Arguing for a temporary hiatus from a fundamental viewpoint, Stephanie Pomboy said: “… right now, we are enjoying some real competition in the ugly contest from the currencies of the European Union and the United Kingdom, and that will probably persist for a while because they are in pretty bad shape, and they are a little bit behind the curve relative to us.”

Lastly, a sustained break in the uptrends of the US dollar and the Japanese yen – low-yielding currencies previously used for funding risky investments – should indicate that forced selling due to deleveraging is starting to subside. As this situation plays itself out, we should see a return of confidence and a calmer period for stock markets in general, and also some support for precious metals and commodities. The dollar may be down for the count, but could herald a sense of normalcy in broader markets.

Tags: Canvas, Credit Crisis, Currency Movements, Devaluation, Emerging Market, Fall From Grace, Financial Markets, Global Flight, Greenback, Japanese Yen, Moving Average, November High, oil, Public Debt, Short Position, Treasuries, Uptrend, Us Currency, Us Dollar Index, Weimar Germany, Worries
Posted in Commodities, Credit Markets, Economy, Emerging Markets, Markets | No Comments »

Rio Tinto/BHP Billiton at parity

Friday, December 19th, 2008

Yep, the share prices of the two mining giants have crossed. After suffering another sickening fall on Thursday, Rio shares (down 10 per cent) are now trading at £10.40, about 4p lower than BHP’s.

This is seriously embarrassing for Rio. After all, BHP’s abandoned bid was pitched at a ratio of 3.4:1.

Of course, the reason Rio is being dragged lower is debt. And Rio has a lot of it - $40bn to be precise, against a market value of $27bn.

The company says it will be able to meet its debt repayments ($8.9bn is due next September) and does not need a rights issue.

But the market doesn’t believe Rio, and the result is a sinking share price.

Since BHP walked away last week, Rio shares have fallen 58 per cent.

Related links:
No respite for Rio - FT Alphaville

Source

Tags: Alphaville, Bhp Billiton, Bid, Debt Repayments, Ft Alphaville, Giants, Lot, Parity, Reason, Respite, Rio 10, Rio Tinto, Share Price, Share Prices, Shares
Posted in Markets | No Comments »

Paul Krugman: The Madoff Economy

Friday, December 19th, 2008

The costs of “America’s Ponzi Era”:

The Madoff Economy, by Paul Krugman, Commentary, NY Times: The revelation that Bernard Madoff - brilliant investor (or so almost everyone thought), philanthropist, pillar of the community - was a phony has shocked the world, and understandably so. The scale of his alleged $50 billion Ponzi scheme is hard to comprehend.

Yet surely I’m not the only person to ask the obvious question: How different, really, is Mr. Madoff’s tale from the story of; the investment industry as a whole?

The financial services industry has claimed an ever-growing share of the nation’s income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it’s … had a corrupting effect on our society as a whole.

Let’s start with those paychecks. … The incomes of the richest Americans have exploded over the past generation, even as wages of ordinary workers have stagnated; high pay on Wall Street was a major cause of that divergence.

But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.

Consider the hypothetical example of a money manager who leverages up his clients’ money…, then invests the bulked-up total in high-yielding but risky assets… For a while - say, as long as a housing bubble continues to inflate - he (it’s almost always a he) will make big profits and receive big bonuses. Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big - but he’ll keep those bonuses.

O.K., maybe my example wasn’t hypothetical after all.

So, how different is what Wall Street in general did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply stealing his clients’ money rather than collecting big fees while exposing investors to risks they didn’t understand. … Still, the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear.

We’re talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing - and it probably was - we’re talking about $400 billion a year in waste, fraud and abuse.

But the costs of America’s Ponzi era surely went beyond the direct waste of dollars and cents.

At the crudest level, Wall Street’s ill-gotten gains corrupted and continue to corrupt politics… Meanwhile, how much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?

Most of all, the vast riches … undermined our sense of reality and degraded our judgment. Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? … The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.

After all, that’s why so many people trusted Mr. Madoff.

Now, as we survey the wreckage and try to understand how things can have gone so wrong, so fast, the answer is actually quite simple: What we’re looking at now are the consequences of a world gone Madoff.

Tags: Bernard Madoff, Bubble Bursts, Divergence, Financial Superstars, Housing Bubble, Hypothetical Example, Incomes, Investment Industry, Money Manager, Ny Times, oil, Paul Krugman, Paychecks, Philanthropist, Phony, Pillar, Ponzi, Richest Americans, Risky Assets, Toxic Waste, Wages
Posted in Economy, Markets | 1 Comment »