Thursday, March 20, 2008

Have commodities finally hit the wall?

I have been (incorrectly) forecasting that the commodities bubble was going to burst "any day now" for about three years now, causing me to miss out on a huge potential gain. Sigh. But, now, maybe commodities really are bumping into "the wall" and primed for a big fall. Commodities, especially gold, had been viewed as a safe haven relative to U.S. stocks, but yesterday gold actually fell sharply even as U.S. stock prices fell. That was unusual. Of course, a single day does not establish a change of trend. Still, it does give one pause. Then today I read an article in The New York Times by Diana Henriques entitled "Commodities: Latest Boom, Plentiful Risk" that tells us:

But this market, despite its glitter, offers risks of its own, including some dangerous weaknesses that are impairing the ability of regulators to police fraud and protect investors. Commodities are also vulnerable to the same worries affecting the rest of Wall Street, where on Wednesday the Dow Jones industrial average plunged almost 300 points, erasing more than two-thirds of Tuesday's steep gains.

Moreover, the biggest speculators and lenders in the commodities markets are some of the same giant hedge funds, commercial banks and brokerage houses that are caught in the stormy weather of the equity, housing and credit markets.

As in those markets, an evaporation of credit could force some large investors -- especially hedge funds speculating with lots of borrowed money -- to sell off their holdings, creating price swings that could affect a host of marketplace prices and wipe out small investors in just a few moments of trading.

"Right now is a very scary time" for commodity market regulators, said Michael Riess, a director of the International Precious Metals Institute, a consultant to commodities investors for more than 30 years. "It's not a question of overregulating or underregulating. It's a question of just being swamped by volume, volatility and a dramatic shift toward speculative interests."

That last phrase is key: "a dramatic shift toward speculative interests." The huge run-up in commodities prices is not about fundamentals or demand in India and China, but simply the fact that speculators have targeted commodities for their latest speculation, much as in the past dot-com stocks and home real estate were target by speculators. And we know how those movies ended.

The article closes with this cautionary characterization:

But some with experience in the commodities market remain nervous about the new money pouring in so quickly.

Commodity trading firms that have survived for any length of time have excellent risk-management skills, said Jeffrey M. Christian, managing director of the CPM Group, a research firm spun off from Goldman Sachs in 1986. Mr. Christian said he was less certain how the newcomers would deal with risk.

"You have the stupid money coming into the market now," he said last week. "And I think the smart money is beginning to get a little frightened about what the stupid money will do."

Yes, by all means watch out for where "the stupid money" is flowing.

Look for some undervalued markets to go after, not the markets that have been hot for many months if not years.

That said, I am still unable to predict with certainty that this time commodities really have hit the wall.

I think some of it may depend on whether the U.S. economy weakens a lot further. If so, commodities will fall like a rock. But if the U.S. economy continues to at least barely hang in there, hovering at the edge of recession, commodities speculators will likely continue to hover as well. In truth, I believe in the "hovering" economy more than a steep recession. Maybe in fact commodities will be our best indicator about the health of the U.S. economy.

One final thing I would say is that the U.S. economy always was, is now, and always will be much less like a well-oiled machine but much more like the old-fashioned Wild West. A boom here, a bust there, but always something interesting going on somewhere. Sometimes it is boom almost everywhere, but that is the exception rather than the norm. Only the media ever makes it seem as if the economy is booming (or busting) everywhere.

 -- Jack Krupansky

1 Comments:

At 2:50 AM EDT , Anonymous Anonymous said...

Your blog layout is so much better. Thanks for your efforts. I’ve been learning to respect technical analysis and incorporate trading strategy much more. Great+Thanks.

What is 'Recession Proof'?

You can almost hear the wallets snapping shut. Folks are cutting back on their spending every way they can. According to

those who know, we are either in a recession, or are about to be. I would hate to be trying to sell real estate or new cars

right now. Talk about hitting your head against the wall. Ouch!

That got me to thinking of what businesses make sense during a recession. Certainly health care does. Baby boomers are

going to need every kind of health care imaginable. For all I know, economic bad times makes people sick too.

Other types of businesses that should be recession proof include vital home repairs, like plumbing, electrical, and roofing.
Folks can't put off fixing a clogged toilet or a leaking roof just because they're a little short on cash.

And you know what they say about death and t.ax.es. A well-run funeral home or a tax consulting business shouldn't be hurt

by an economic downturn.

But all these jobs require training, and even certification. And that takes time. By the time you've learned one of these

trades, the recession may well be over. That got me to thinking about one business that's truly recession-proof, and you can

get started almost immediately: Day Trading.

Day Trading refers to the buying and selling of stocks within the same trading day. I know what you're thinking: how can a

day trader be successful when the stock market is down, day after day? Well, day traders profit from volatility - when there

are big swings in stock prices, there is money to be made.

It used to be that Day Trading was only done by financial institutions with access to technology and information. Now,

almost anyone with Internet access can become a day trader, if they know what to do.

Manny Backus

P.S. Learn a 'sleazy' trading technique used by a select group of traders to bank lucrative, net stock returns of $223.00,

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