The Daily Commodities » Commodities

Bonds Bottom as Bond King Sells All

Jordan Roy-Byrne, CMT — Thu, 24 Mar 2011 06:48:46 +0000

In recent weeks it was reported that Bill Gross, head of Pimco, the largest bond shop in the world sold all Treasuries in the massive Pimco total return fund. Pimco is as close as one can get to the Treasury and the Federal Reserve. Former Fed Chairman Alan Greenspan became a special advisor to Pimco and being the largest bond shop in the world, Pimco is instrumental in ensuring funding for Uncle Sam and was also instrumental in the bailouts of Freddie and Fannie.

However, Pimco and Gross are notoriously flaky in their public statements and behavior. In the wake of the financial crisis, it was Pimco who clamored for increased government spending and for a bailout for Freddie and Fannie. Pimco invested heavily in those higher yielding bonds on the basis that the government would bail out bondholders. Only a few years later, we have Gross at the other end of the spectrum, noting the obvious about our deficits and national debt.

So we should all take Gross’ comments at face value and dump our bonds?

The picture shows TLT and the CCI (Commodities). Interesting how Bonds have put in another bottom and have continued their pattern of higher lows. We also note the negative correlation between Bonds and Commodities. Its not a perfect correlation but its an important indicator. The fact that Bonds have put in another bottom and Commodities are well above their long-term moving averages, is reason why we are near-term cautious on Commodities.

The bottom line is one has to study the charts, sentiment indicators and macroeconomic factors rather than listen to so-called experts like Bill Gross, Warren Buffet or any Federal Reserve member. For all we know, Gross could have sold his holdings six months ago and went long days after his public statement.

The inflation trade is raging but Bonds have put in a low. The US Dollar is reaching an oversold extreme in terms of price action and sentiment. This could be the beginnings of a pause or correction in the Commodities bull market. For more analysis and insights, consider a free 14-day trial to our premium service.

Jordan Roy-Byrne, CMT
Trendsman@Trendsman.com
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Marc Faber Outlook on CNBC

Jordan Roy-Byrne, CMT — Tue, 15 Mar 2011 21:16:51 +0000

Marc Faber discusses Japan, Commodities and the general outlook.

Most Attractive Commodities Are Benefiting From QE2

Chris Ciovacco — Thu, 10 Mar 2011 05:17:07 +0000

Haven’t we seen this movie before? The economy enters a recession; we have a bear market, the Fed cuts interest rates drastically flooding the global financial system with cash, and commodity prices begin to soar.

In the United States, the Fed has a handy way to ignore rising commodity prices, something they call core inflation. While most of us eat, drive, and heat our homes, the Fed excludes food and energy from its core inflation reading to remove “volatile” components of the inflation equation.

A March 3 Financial Times article touched on the Fed’s current focus in terms of inflation and monetary policy – the key points related to the commodity markets are below:

Most members of the Fed’s rate-setting Federal Open Market Committee have remained steadfast in their preference for looking at core inflation.
Core consumer prices, excluding food and energy, were up by 1% vs. a year ago in January, while the headline index rose by 1.6%.
“The Fed remains focused on core inflation at the consumer level, which it thinks will be restrained by high unemployment, and largely dismisses higher food, energy, and commodity prices,” said John Ryding, chief economist at RDQ Economics.

The Fed carries our monetary policies, including quantitative easing, by giving freshly printed cash to the network of eighteen primary dealers in exchange for bonds in the dealer’s inventory. Since the real world implementation of monetary policy, including QE2, floods the global financial system with cash, it is easy to understand how some of this money finds its way into the global commodity markets. Since we believe the Fed’s role in today’s asset markets is more significant than even what is perceived by experienced investors, we published a series of articles on Quantitative Easing and Asset Price Inflation in October 2010. Since then, commodity prices have surged. Understanding what QE is and how it works can help you make better investment decisions.

If excess liquidity is making its way through the global financial system, it is helpful to know where the majority of funds are flowing in the commodity complex. Ciovacco Capital’s proprietary asset classing ranking models compare 220 different investment options around the globe, across market sectors, and numerous asset classes, including commodities. Using liquid ETFs as a proxy for the underlying commodities, how do commodity investments compare head-to-head in terms of their outlook for the next three-to-twelve months? The table below shows the results for our March 1 rankings.

While we are not out of the correction woods yet relative to the short-term, as we outlined on March 3, we believe the longer-term outlook for risk and inflation-friendly assets, including commodities is postive.

From a fundamental perspective, the primary drivers of these commodity markets are related to increased demand as the global economy expands and the attractiveness as a hedge against the loss of purchasing power caused by “at-the-checkout” inflation. Below are some specifics related to each commodity or investment:

DBC gives investors exposure to a wide variety of commodities, from zinc to heating oil. With global GDP expected to grow in 2011 and 2012, the demand for commodities should continue to be robust.
Silver (SLV) is the economically-sensitive precious metal cousin to gold. Silver has more real-world uses than gold, including electrical and chemical applications.
Agriculture (DBA) can benefit from rising populations and migrations from the lower to middle class, which are becoming more common in Asia as people move from rural areas to cities.
Gold (GLD) is more attractive than silver when concerns mount related to the economy, geopolitical tensions, and the financial markets. Gold is also attractive to global central bankers and individuals who are concerned about the Fed’s overworked printing presses.
According to the USGS, copper (JJC) is used in building construction, power generation and transmission, electronic product manufacturing, and the production of industrial machinery and transportation vehicles. Copper wiring and plumbing are integral to the appliances, heating and cooling systems, and telecommunications links used every day in homes and businesses. Copper is an essential component in the motors, wiring, radiators, connectors, brakes, and bearings used in cars and trucks.

One of the primary fundamental drivers of the commodity markets is the Fed’s loose policies. Ten-month relative strength, where we chart a commodity’s performance relative to the S&P 500, is one of the inputs in our asset class ranking system. The ten-month relative strength charts below give us a good visual indication of which markets are benefiting most from QE2 and near-zero interest rates.

Post Source: Most Attractive Commodities Are Benefiting From QE2

This Week in Commodities with Ryan Parker

Jordan Roy-Byrne, CMT — Fri, 18 Feb 2011 08:21:26 +0000

Ryan Parker of Equity Brief Capital joins me to discuss Commodities along with Stocks. It’s a difficult environment out there as things are clearly extended. Ryan believes stocks are set for a pullback but that the cyclical top could be early next year or later this year. As for Commodities, he is taking a wait and see approach.

Ryan’s Blog

Why the CRB is Useless for Tracking Commodity Prices

Jordan Roy-Byrne, CMT — Fri, 18 Feb 2011 00:07:45 +0000

In 2006 (correct me if I’m wrong), the weightings in the CRB changed dramatically. The pre- 2006 CRB is now the CCI (continuous commodity index). There is now a dramatic difference between the CRB and the CCI.

In the following chart we plot the CRB and the CCI at the top, along with various commodity sectors. The CRB is 27% below its 2008 high while the CCI is 7.5% above its 2008 high. That is quite the disparity. Which is more representative of commodity prices?

To answer the question we looked at the various commodity sectors. Precious Metals are obviously well above their 2008 high. Livestock and Agriculture have exceeded their 2008 highs while Industrial Metals are within a hair of their 2008 high.

The only sector not to reach or exceed its 2008 high is the energy sector. We show that along with the CRB in the chart below. One can notice the strong similarity between the CRB and energy commodities.

Obviously the weightings between the CCI and CRB are significantly different. Here is a quick look at the weightings. The CCI is first, CRB second.

Softs- 23.5, 16.0
Energy- 17.6, 39.0
Grains- 17.6, 13.0
Precious Metals- 17.6, 7.0
Meats- 11.8, 7.0
Industrials- 11.8, 18.0

Energy’s weighting was jacked much higher while the weighting of the food related sectors (meats, grains, softs) was decreased. The weighting of metals decreased but this was achieved through a significant reduction in weightings of silver and platinum and a rise in the weighting for aluminum.

Overall, the energy sector is the only sector that is not at or above its 2008 highs. Yet because of its massive weighting, commodities as per the CRB, appear to be well-off their highs. This is a problem because most people have no idea that the CCI even exists. Here is a suggestion that commodities have been in a half-lost decade. The author would surely have the opposite conclusion if he looked at the CCI or looked at the various commodity sectors.

I hate to be critical but those who only follow the CRB are doing themselves and their followers a tremendous disservice. They are missing the obvious. The CRB as its presently weighted, is a joke and obfuscates the real happenings in the commodities markets. In the summer, colleague Dave Skarica and I discussed this and the breakout in the CCI, which happened at least a month prior to the CRB. Now we see the reverse. If one looks at the CRB they see a market that just broke higher and is well off its highs. Yet, the CCI suggests a market that is almost in blow-off mode.

In our premium service, we’ve focused entirely on the CCI and as a result, our aggressive portfolio has gained 27% (38% excluding cash) in just a few short months. Consider a free 14-day trial to our service and find out our current views on commodities!

Good Luck!

Jordan Roy-Byrne, CMT
Trendsman@Trendsman.com
Subscription Service

Bernanke’s Hot Hand Keeps Commodities on Fire

Jordan Roy-Byrne, CMT — Thu, 17 Feb 2011 20:01:53 +0000

Video From Forbes:

Monetary Inflation and Supply Concerns Drive Commodities More So Than Demand

Jordan Roy-Byrne, CMT — Thu, 10 Feb 2011 00:53:03 +0000

The mainstream press loves to talk about emerging market demand as a cause of inflation, rising prices and the bull market in commodities. Did emerging markets suddenly begin demanding food, energy and metals in 2001? What about five and ten years earlier? Its a rhetorical question. The conventional wisdom is wrong.

Inflation is driven by low interest rates and lax credit conditions. Severe inflation is driven by the inability to finance or grow out of debt.

Commodity bull markets are primarily driven by monetary factors. Secondarily, a lack of production eventually leads to much higher prices. Commodity industries are cyclical in the long-term. They go from periods of oversupply to periods of underproduction which then creates a lack of supply and a need for higher prices to stimulate new production. The big moves in individual commodities or sectors are driven not from demand but from a lack of supply.

There are numerous examples.

Let’s start with the rare earths. China accounts for 95% of the world’s supply and its projected that within a few years China will not be able to supply its own demand. This is why China is cutting export quotas and may form its own OPEC-like group to control the rare earths market. Sure, their demand is strong but the real problem is there is basically no production outside of China. Molycorp owns the only rare earths mine in the US (Mountain Pass in California) and it hasn’t been in production for years.

Does this industry have too much demand or too little production? Again, its a rhetorical question.

Consider uranium. Most know the story. Its an industry that has lived off of stockpiles for a long-term. That is going to end in 2013 with the end of the Russia/HEU agreement and so more production will be desperately needed in the coming years. Look at the picture below. Reactor requirements (demand) has risen consistently for decades. Obviously, its the supply/production picture which moves the market.

Precious Metals are actually the outlier. It is investment demand that moves the market. Some analysts like to mention global growth and more buying of jewelry but that has little impact on the major bull and bear cycles.

The most absurd theory is that food prices are rising because of rising demand. Did millions more Chinese suddenly begin eating now relative to five or ten years ago? Take a look at this graph from AgoraFinancial.

Growth in population, meat consumption and grain consumption is reliably steady. Food prices don’t rise because there is more demand. That is asinine. Food prices rise primarily because of supply and inventory factors along with monetary factors.

Monetary inflation creates artificial demand which triggers higher prices. Our monetary inflation is exported to China. China takes the incoming US Dollars and prints Yuan to maintain the currency peg. That causes inflation. China then spends money domestically and also abroad, triggering inflation in other nations. Furthermore, inflation raises the cost of production and bringing that supply to the market.

In the big picture, inflation is a major driving force for the commodity sector as a whole. In regards to specific commodities, the real commodities gurus like Jim Rogers and Rick Rule always look first at supply factors because they know that is the number one driving force behind the biggest runs. Presently, the uranium market is in a very large deficit and a surge in production is required over the next five to ten years. Growing demand is just icing on the cake.

Jordan Roy-Byrne,CMT
Trendsman@Trendsman.com
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Jim Rogers Tells CNBC To Change Its Name To CommoditesNBC

Zero Hedge — Fri, 04 Feb 2011 20:33:39 +0000

Jim Rogers, in his latest interview, cuts right to the chase: “I don’t own many equities, because I don’t know what is going to happen in the world economy. I expect more currency turmoil, more social unrest, more governments collapsing. So I am investing in currencies and commodities rather than stocks.” Pretty much like everyone else, as we have been suggesting for quite a while. Rogers snaps at the trademark CNBC question of what he would be investing in: “I have been explaining to everybody on CNBC for a year and half or two now that food prices are going to go through the roof, they’re going to explode. We have serious shortage of everything developing, including shortages of farmers… The average age of farmers in one major agricultural state is 58 years old. In 10 years it will be 68 years old. In parts of Japan they have no farmers… It takes 7 years for a coffee tree to mature. Orange trees, palm trees: you don’t just suddenly snap your fingers and suddenly get some more palm oil. All of this takes time.” So all those who believe that the surge in people rushing to fill the ag arbitrage holes will produce immediate results, may need to wait 3-7 years, dependant on access to manure.

On whether this is not a demand-led inflation in commodity prices:

Whenever governments have printed money throughout history, people put their money in real assets, whether it’s rice or silver or natural gas. People protect themselves, they don’t just say “give me some more paper money.” And if you say it’s not demand: go to India, go to China, see how people are changing their lives and using more.” As for supply: “Commodities are based on supply and demand. You can have demand go down, but if supply goes down more you are going to have a bull market.”

Not surprisingly, Rogers see oil at $150, and the exchange between Rogers and some CNBC guy discussing the role of speculators (it is all the evil speculators’ fault, never the Chairsaint) is worth watching the clip alone.

Rogers’ response to CNBC’s desperate attempt to get him to list a stock or two for the lemmings to buy into, the response is priceless: “Commodities have outperformed stock by 10 times over the last 10-12 years. Why aren’t you doing only commodities. It’s outperformed stocks by 1,000%. To me it’s pretty simple, you should change the name to CommoditiesNBC.”

And, finally, his response to what his stock exposure is is not what CNBC wanted to hear. “I am short emerging markets ETFs, short Nasdaq ETFs.”

Brilliant as always.

Source: ZeroHedge.com

Time for Caution on Commodities

Jordan Roy-Byrne, CMT — Fri, 04 Feb 2011 08:31:53 +0000

Commodities are a very volatile asset class and unlike stocks, high prices will reduce demand while low prices will reduce production and supply. While buying breakouts and momentum in stocks often works well with the right risk controls, buying weakness rather than strength is more advisable in Commodities.

The continuous commodity index (CCI) recently hit an all-time high and has continued to make new highs. The energy and agriculture sectors have been red-hot. Two things concern us in regards to the CCI. First, the market has had a single 8% pullback in the last eight months. Other than that, no weakness for more than a few days at a time. Second, the market is trading well above the 300-day MA. At the top of the chart we show the market’s distance from its 300-day MA.

Also, quite a bit of retail money has suddenly flowed into commodity-related shares. The chart below (from sentimentrader.com) shows the assets in Rydex’ Energy Fund. About two months ago, assets in the fund were less than $50 Million. Now, the total is $152 Million.

We see similar action in Rydex’ Materials Fund. Assets in the fund have tripled in the last six months.

The only aberration is the precious metals sector. We don’t show the chart but assets in that fund declined about 50% since the end of December. Moreover, we recently wrote about how the speculative money in the futures market remains heavily long all commodities (ex Gold & Silver).

We are in a long-term bull market and we believe commodities as an asset class will heat up in the coming years. That being said, commodities are very overbought here and the risk/reward for new longs is unfavorable. We see an intermediate top in the coming weeks or months. We’d advise lightening up on long positions and perhaps using stops to protect profits. This is a volatile asset class and if you exercise patience and use volatility to your advantage, you will likely find a few excellent long opportunities per year. This is not one of the times. Consider a free 14-day trial to our service and find out more about our near and long-term strategy.

Good Luck!

Jordan Roy-Byrne, CMT
Trendsman@Trendsman.com
Subscription Service

This Week in Commodities: Jason Burack

Jordan Roy-Byrne, CMT — Fri, 04 Feb 2011 04:00:49 +0000

Jason Burack joined us and opined on various commodities as well as the big picture.

Jason Burack is an Investor, Entrepreneur, Financial Historian, Austrian School Economist, and Contrarian. Jason co-founded the startup investor education and financial education company Wall St for Main St, LLC, to try to help the people of Main Street by teaching them the knowledge, skills, research methods, and investing expertise of Wall Street. Jason is working on getting up a Wall St for Main St website. In the meantime, you can also find Jason’s articles, podcast interviews, video blogs, and other related content on the popular investing websites: Financial Sense, Seeking Alpha, The Daily Gold, The Financial Tube, and The Daily Commodities.