Commodities tipped to collapse

[rederob]

I think a good starting place might be in actually ensuring that your *facts* are accurate, and not just an opinion off the top of your head.
If you understood the implications of the yield curve, a timeframe would suggest itself.
jog on
d998

ducati
There seem to be very few threads where you are taken seriously.
There is data available to end September 2006, rather than accounting estimates for 2005.
"The European Union remained the largest trade partner of China, with a bilateral trade volume of US$194.4 billion in the first three quarters, according to the customs administration. Then come the United States, Japan and the Association of South East Asian Nations." (http://www.chinadaily.com.cn/bizchina/2006-10/13/content_709732.htm)
As for yield curves, the question was put to you as it is you who has faith in its forecasting capacity.
Yet again you obfuscate.
You continue to castigate others with sweeping "nonsense" assertions as you hold true to arcane accounting methodologies that simply present numbers into an agreed set of books in accordance with international standards.
Then you suggest these numbers, typically quite outdated given the speed that markets move, have a capacity to forecast the future value of companies.
I shall continue to "read" the markets as I see them, continue to make mistakes, and continue to prosper in that manner that I do.

 

[michael_selway]

What signals a recession?
A prolonged yield curve inversion. Something like this;

Hi can you tell me more about "inverted yeild curve" in general

to be honest i have no idea why a prolonged inversion would "signal a recession"

thanks in advance

MS

https://www.aussiestockforums.com/forums/attachment.php?attachmentid=5452&stc=1

 

[wayneL]

Hi can you tell me more about "inverted yeild curve" in general

to be honest i have no idea why an inversion would "signal a recession"

thanks in advance

MS

https://www.aussiestockforums.com/forums/attachment.php?attachmentid=5452&stc=1

<sarcasm> It's different this time </sarcasm>

 

[theasxgorilla]

Inverted yield curve means that longer term bonds (loans) are offering yields lower than shorter term. An example of this in Australia might be the 2-year fixed rate mortgages being lower than the current variable rate. In this scenario why wouldn't you fix?

The bond investors of the market opt for longer term bonds with lower yields because they're predicting that short term yields will fall below the levels of the long term soon enough, and for long enough, to make their longer term investment more profitable.

When you fix your mortgage in preference over the more expensive variable rate, you are betting against the bond investors.

Falling short term rates are usually indicative of an enconomy that has slowed (recessed even) and needs stimulus. It doesn't always happen that an inverted yield curve means that a recession is coming but it happens statistically often enough for economists to pay attention.

 

[clowboy]

Inverted yield curve means that longer term bonds (loans) are offering yields lower than shorter term. An example of this in Australia might be the 2-year fixed rate mortgages being lower than the current variable rate. In this scenario why wouldn't you fix?

The bond investors of the market opt for longer term bonds with lower yields because they're predicting that short term yields will fall below the levels of the long term soon enough, and for long enough, to make their longer term investment more profitable.

When you fix your mortgage in preference over the more expensive variable rate, you are betting against the bond investors.

Falling short term rates are usually indicative of an enconomy that has slowed (recessed even) and needs stimulus. It doesn't always happen that an inverted yield curve means that a recession is coming but it happens statistically often enough for economists to pay attention.

Good explanation....

Particulary like how you made it revlevant to everyone with the fixed/var payments example

 

[ducati916]

rederob

ducati
There seem to be very few threads where you are taken seriously.

I agree. Everyone hates the contrarian, you could almost add, by definition.

There is data available to end September 2006, rather than accounting estimates for 2005.

And it is from the

(China Daily)
Updated: 2006-10-13 08:37

Which I'm quite happy to use as evidence, therefore;

It brought the country's trade surplus to US$109.9 billion in the first nine months, exceeding the US$101.9 billion for all of 2005.

Exports totalled US$91.64 billion in September, up 30.6 per cent from the same month a year earlier, and imports rose 22 per cent year on year to US$76.34 billion.

Intresting however the ratio of Exports to Imports, as is noted here;

In a bid to keep trade balanced, the Chinese Government should encourage more imports instead of merely dampening exports, suggested Shen Danyang, a researcher with the Chinese Academy of International Trade and Economic Co-operation, a think tank under the Ministry of Commerce.

He said a decline in the growth rate of exports would result in a slowdown of GDP growth and loss of thousands of jobs.

"Increases in imports promote economic growth and create jobs and tax income although they might exert pressure on some industries or sectors," Shen said.

As already discussed in this thread, China has subsidised unprofitable business, [and I used Steel as the example] to maintain exports at high levels, to maintain high[er] employment.

Shrinking exports to the US are a phenomenon of units shipped + dollar value or [exchange rate] If therefore exports are measured in dollar terms, a depreciating dollar and appreciating Euro, will change the value of the measured exports...........having said that, Europe has certainly on the basis of this article surpassed the US, so apologies for my dated data.

Accepting that this is the case this suggests that;

*Europe is in economic expansion, and increasing imports from China as a component of an increase in total trade [exports + imports]

*The US is in decline in total trade [which has been the case argued by myself]

Europe taken as a whole has not been growing YOY.
Czech Rep. 6.2%
Hungary 3.8%
Poland 5.5%

These are the three leaders, France, Germany & the UK are in the doldrums, and they also happen to be three of the larger world economies, and the larger of the European economies.

Therefore, it would seem quite possible that the growth in exports to Europe from China, measured in dollars, exacerbated by exchange rates, is due more to the shrinkage in US imports from China, due to a consumer slowdown, than huge growth from Europe, that is sclerotic [excepting the 3 hotspots].

As for yield curves, the question was put to you as it is you who has faith in its forecasting capacity.

Really.....where?

However, I shall answer the question because the later explanation misses the point [not that the information is incorrect, just the wrong emphasis]

Yield curves are very important to forcasting recessions when they are of a maintained duration because they illustrate the tightning of the credit cycle, viz Banks borrow short and lend long.

When they cannot do this, they cannot lend, thus there is a tightning of credit, and liquidity of capital, this is the basis of any carry trade.
Therefore, if the curve stays inverted in the US for at least 12mths, the US will go into recession.

If is the word to focus on.
The Fed. will be aware of this, and [rightly or wrongly] will possibly act to prevent this from happening, they will possibly [attempt]to do this by lowering the Fed Funds rate. This is why currently the Bond market is discussing rate cuts.

You continue to castigate others with sweeping "nonsense" assertions as you hold true to arcane accounting methodologies that simply present numbers into an agreed set of books in accordance with international standards.
Then you suggest these numbers, typically quite outdated given the speed that markets move, have a capacity to forecast the future value of companies.

This is in reference to BHP and related analysis [opinion].
Absolutely, and I shall continue to argue my point until I see something logical, coherent, sensible, or overwhelming mathematical evidence that incontrovertibly proves me incorrect.

Then you suggest these numbers, typically quite outdated given the speed that markets move, have a capacity to forecast the future value of companies.

Since I have valued BHP using my arcane, outdated, etc methodology, what has actually happened in the market?

Why, BHP has fallen in price, and *real* analysts have downgraded both BHP & RIO, while I *downgraded* them months ago.

What valuation metrics do these guy's use?
Gee, they use forward NPV valuations.

I shall continue to "read" the markets as I see them, continue to make mistakes, and continue to prosper in that manner that I do.

Of course you will.
I shall also continue to read and disagree, [or agree] with said interpretations.

jog on
d998

 

[coyotte]

Whilst the big boys can borrow YEN or EURO @ st low rates , would this negate any analysis of the US yield curve ?

It would seem that CBs have lost control untill the BOJ decides it wants a higher yen


Cheers

 

[rederob]

ducati
The simple question that you continue to avoid is "when will commodities collapse"?
By this I mean a time frame, not a set of circumstances which is self evident.

 

[ducati916]

ducati
The simple question that you continue to avoid is "when will commodities collapse"?
By this I mean a time frame, not a set of circumstances which is self evident.

As to being self evident, you and BSD, totally missed the self evidency, nattering endlessly on about how China is the only story in town, dismissing any other attempt at a balanced analysis.

jog on
d998

 

[EasternGrey1]

ducati
The simple question that you continue to avoid is "when will commodities collapse"?
By this I mean a time frame, not a set of circumstances which is self evident.

Let me have a go. I can only express my own opinion, the tealeaves haven't yet been picked that can give scientific certainty.

So that I don't have to heavily qualify every little statement I make, I'll begin with a general qualification: I really don't know much about commodities, so don't believe anything here. If I get anything totally wrong, this is where I warned you!!

Commodities (I mean metals) won't all collapse at the same time. Some will drift down, rather than "collapse". Some will stay strong for quite a while at least.

Overall demand will generally stay strong for all commodities for several years, thanks mainly to China. There looks like being a blip originating from the US at some time (which will hit commodity prices), but it might not last long so I am ignoring it for now and concentrating on the longer term picture. [If it's the timing of the blip that we're actually concerned about, then I would guess around mid 2007).

IMHO the place to look for clues to commodity prices is supply. [Warning - I am entering an area of even lower knowledge]. My understanding is that copper supplies are quite flexible, so the copper price is more at risk of declining soon than, say, Nickel or Zinc, where I believe it will take a year or two or more to crank up supply significantly. Lead and Silver probably line up with copper.

Iron ore supply is pretty tightly controlled by the big 3(?) so iron ore prices are likely to remain firm.

Gold supply is inflexible and increasing Asian affluence will over time push up the gold price at a greater rate than inflation (Pierre Lassonde: "The current price cycle is very similar to what we saw in the 1970s -- a very long, extended cycle, and this one is powered by China and India"). The yellow book predicts a heavy drop in demand for gold in 2006, but it doesn't seem to be happening. I think gold miners will be a good place to look for investments that will ride out successfully any blip in the US economy or $.

I'll add in my feelings on oil: We are at or near "peak oil". If the world gets serious about greenhouse, and reduces demand while increasing alternative energy supply, the upward pressure on the price of oil will ease. However, the oil producers can and probably will stop the price dropping, and any disruption to supply will cause a price spike. I will remain invested in oil companies with long term supply reasonably well assured, but will take some profit on any price spike.

Was any of that any use?

 

[noirua]

The very recent downgrading of the mining majors is on the basis of a US slowdown and the affect of a possible rise in the US currency from here. Commodities may still drift in price across the board despite a US Dollar rise.

This slowdown world-wide will come even if some countries are hit first. The US and Australia have been hit with property price falls whilst many countries still have rising property prices.
London, UK, saw a 12% rise in property prices in the last 12 months, as the UK is more a buy and rent culture with rich Eastern Europeans and Arabs arriving in their droves.
Australia may well see this happen more as rich Asians, who trade with Aus, see opportunities not far across the waters.

 

[rederob]

As to being self evident, you and BSD, totally missed the self evidence, nattering endlessly on about how China is the only story in town, dismissing any other attempt at a balanced analysis.

jog on
D

I think there is a gulf of difference between the matter of the US being less relevant, which is my thesis, and that of China being the only story in town.
An issue that continues to escape the genius of ducati is that US manufacturers are continuing to move into China to make products for a global (rather than purely local, ie US) market.
Apart from that, we are a long way from seeing India hit its economic straps, while Russia and Brazil are also playing catch-up.
Hardly a single-focus on China!
Moreover, with the doomsayers continuing to be out in force, why have commodities - apart from copper - not yet got back to balance?

ducati yet again refuses to answer a simple question.

EasternGrey1
Thanks for your commentary.
I, too, am very keen on oil for the longer term.

 

[stoxclimber]

Was any of that any use?

Exactly what rederob is asking of ducati..a prediction which can be proved correct or incorrect in the future...which ducati for some reason will not provide.

 

[wayneL]

Some interesting analyst views from bloomberg, via TickerSense

2007 Expected Commodities Price Changes

The table below highlights the consensus opinion on where commodities prices will go in 2007. The estimates are from numerous analysts polled by Bloomberg. The expected percent change for each commodity is calculated by the difference in the year-end 2007 consensus and the current price. Interestingly, the only three commodities that are expected to rise in 2007 are the three tracked mostly by the mainstream media -- oil, natural gas, and gold. All other commodities are expected to decline, with lead expected to fall the most.

 

[BSD]

Would at least have to say from that graph that Nickel and Zinc are 'cum-upgrades'

40% falls are not happening with the current supply/demand functions.

Consensus is fleeting and in many cases, lagging

This also gives a great picture of the banks hedging their bets again for another twelve months. Remember, most banks have copper long term prices at $1.20 (or less) - they need to draw a downward line through 2007 and 2008 to get to their ridiculously low long term number.

These are the forecasts that the banks are using to get the forward PEs on the majors at 10 times in the coming years - so commodities can do pretty poorly before the equities are getting downgrades.

On another note, that US jobs number on Friday night didnt look too recessionary to me.

Goldilocks gets another win over the Bears for another month/quarter it appears!

 

[rederob]

At present I put tin and copper as most likely worst performers next year.
I think silver will be an outperform, while gold will do its usual annual spurt before its usual annual retreat - expect a 20% rise over today's gold price.
There is a general tightness to metals that is not going away.
Moreover, the longer it lingers the higher prices are likely to climb in the near term before further consolidation.
There is little present evidence that consumers are walking away from base metals, except for copper in the US. However, this is being countered by a view that China may substantially increase its copper imports in 2007 after the SRB has discontinued destocking its strategic reserves.
Irrespective, production costs will ensure that if the likes of copper hit $1.50 any time soon, many producers will shut up shop as they won't have the margins to capitalise ramped up production. So look for producers scaling back output if inventories begin to climb too rapidly.

 

[wayneL]

On another note, that US jobs number on Friday night didnt look too recessionary to me.

Most economists who look deeper than the raw numbers point out that job creation has either been low paying jobs in the health (LOL) sector or McJobs. Hardly encouraging for long term job market strength.

Goldilocks gets another win over the Bears for another month/quarter it appears!

Goldilocks at least had empirical evidence as to the temperature of the porridge etc.

I wouldn't categorize US investors as in Goldilocks mode at all... rather, spin induced delirium.

Cold porridge is "just right", hot porridge is "just right" too... even no porridge is "just right".

Some comments around:

"THE FED'S STATEMENTS reflect how the members of the central bank's Federal Open Market Committee perceive the economy. The slightest changes are scrutinized for clues about where interest rates may be headed. The Dec. 12 statement announced that the Fed was keeping rates steady at 5.25%, its fourth pause in a row after 17 increases in 17 meetings. The Fed is betting slower economic growth and falling energy prices are easing inflation pressures -- meaning no reason to raise rates more, but no need to cut rates yet, either. Below are the differences between the October statement and the December one."

...and from Barry Ritholtz:

Raymond James' Jeff Saut offers his take on the recent market action:

As for the “here and now,” we have deemed the recent performance by the major market indices to be somewhat “unnatural.” Markets typically go up, correct by 25%, and then re-rally if they are going to trade higher.

This, ladies and gentlemen, has not been the case recently as the averages have “unnaturally” vaulted higher without so much as ANY correction. We have suggested this phenomena was triggered by Goldman Sachs’ re-weighting of its much institutionally indexed commodity index last July. Why Goldman would mysteriously reduce the weighting of gasoline from 7.3% to 2.5%, in a gasoline-centric economy, and stage those reductions incrementally right into the November elections is a mystery to us, but there you have it.

Following that, the Department of Energy mysteriously said it would not add to the Strategic Petroleum Reserve (SPR) until after the winter months, even though the SPR was below prudent norms. This is also a mystery to us, but once again there you have it.

Then, when it looked like the equity markets were set-up to correct (read: decline) in mid-October, the NYSE petitioned the SEC, and was granted, a mysterious reduction in margin requirements for an already over-margined hedge fund community. And that “mysterious surprise” gave the major market indices another leg-up (read: re-rally). Again, why in the world one would introduce more leverage into an already over-leveraged hedge fund community is a mystery to us!

Also mystical is why every time the equity markets look like they are set up for a downside correction, do “buyers from Mars” appear in the futures markets to prevent a decline? We have documented such occurrences in past missives where those “mysterious buyers” have shown up at 6:30 at night and “bid” the S&P 500 futures from 1375 to 1397 (or +22 points) in a mere two minutes, but that is a discussion for another time.

The current unnatural state of the equity markets continues to leave us cautious; although we have learned the hard way it is difficult to “break” the equity markets to the downside during the ebullient month of December. Consequently, our sense is that the markets will consolidate here and then attempt to trade higher into year-end. If the S&P 500 can vault above 1415, with conviction, we can see near-term objectives into the 1440 – 1445 level. While we are disinclined to play the indexes on a trading basis, we have purchased some stocks recently in investment accounts. (emphasis added)

Jeff has been around a long time, has a great track record, and is a wizened Market observer. When someone like him says that market action is unnatural, its worth considering . . .

 

[BSD]

Also mystical is why every time the equity markets look like they are set up for a downside correction, do “buyers from Mars” appear in the futures markets to prevent a decline? We have documented such occurrences in past missives where those “mysterious buyers” have shown up at 6:30 at night and “bid” the S&P 500 futures from 1375 to 1397 (or +22 points) in a mere two minutes, but that is a discussion for another time.

I read a lot of Ray Jay's stuff and find these comments remarkable.

Are they saying the Fed/Govt are propping-up equity markets?

In my view, nobody (no matter how leveraged) could manipulate the US equity markets for very long.

The 'buyers from Mars' could buy futures all they want; but if the physical doesn't catch-up they will quickly run out of ammo against the arbs.


I haven't seen too much negativity about the employment number.

The 'McJobs' comments regularly come from those who thumb their nose at 'service' jobs. These comments fly in the face of the orthodoxy from 10-20 years ago that said service industry jobs were simply a sign of a strong first world economy.

Better to have a service industry than a 15% unemployment rate.

 

[CanOz]

You know if there wasn't an election coming up with GWB in it, i would think your all nuts and need to be locked up for extreme paranoia. But he changes everything................to be honest, i'm starting to feel a bit nervous too, and i'm looking for a safe place...but still just watching every day.

Thanks for the post Wayne, thought provoking.

Cheers,

 

[rederob]

Some analysts are also upgrading their metal price forecasts:
http://ctv2.theglobeandmail.com/ser...213/business/Business/businessBN/ctv-business