Posts filed under “Commodities”

There Goes the Neighborhood Correlation !

The WSJ has an article today looking at the ending of highly correlated asset classes. It seems that Equities are no longer correlated to the US Dollar and Gold as closely as they have been over the past 2 years. If history holds, this is positive for both the economy and markets longer term. It suggests a return to normalcy in investing.

Consider: Way back in the fall of 2008, just as the collapse in banks was picking up speed, the markets gave a fascinating warning sign: Many different asset classes that were normally non-correlated — equities, dollars, gold, fixed income, commodities, convertible bonds, real estate — suddenly became extremely correlated. This is typically a very strong warning sign.

Why? These assets classes normally trade on primarily differing inputs. They are the at core of a diversified asset allocation model specifically because they all trade so differently.

When all of these different asset classes suddenly start moving in lockstep, it is because the same too factors were driving them: Liquidity and Fear.

In the past, this high correlation occurred prior to major dislocations. (I have a study I need to dig up that shows exactly when and how this happens).

Here’s the WSJ:

“After a long stretch in which macroeconomic hopes and fears dictated the rise and fall of stocks, bonds and commodities—known in the market as the risk-on, risk-off trade—there are tentative signs that more-traditional concerns are reasserting their power.

In recent weeks, for example, moves in stocks and the U.S. dollar have had little connection—a breakdown of the trend during much of 2010, when they were virtual mirror images of each other. Stocks were considered risky and would rise when investors were feeling confident, while the dollar was a haven, benefiting when investors were worried.

Commodities, too, have broken away from rising and falling with risk perceptions. Now more old-fashioned concerns, like the weather, are having an impact. Corn, soybean and wheat prices jumped this month after supply estimates were cut due to dry weather in South America and floods in Australia.”

I am not sure I would agree with the title — it is not that markets are rediscovering the fundamentals, it is more that the sentiment trade is fading, and fund managers seem to be slowly getting over the trauma . . .

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Source:
Markets Rediscover the Fundamentals
MARK GONGLOFF
WSJ, January 24, 2011
http://online.wsj.com/article/SB10001424052748704115404576096510662027504.html

Category: Commodities, Fixed Income/Interest Rates, Gold & Precious Metals, Markets, Technical Analysis

Cattle Prices Stampeding

MacroMan points out that Live Cattle Futures have gone parabolic; Daniel Dicker blames speculative derivative traders and a lack of oversight as the cause. I have no idea what is the underlying driver, but we are now at record prices for Live Cattle Futures — will Beef soon follow? > Source: Global Macro Monitor

Category: Commodities, Inflation, Regulation

Stocks Oil, Gold, Bonds for the Long Run?

I find I enjoy analyzing equity markets more than any other. But as I have always said, you must always be objective when reviewing the data. And what does that data show? Stocks have not been the best performing asset class over the past 40 years. Outperformed not just by Oil and Gold, but Bonds…Read More

Category: Commodities, Investing, Markets

Baltic Index Overwhelemed by New Ships

We haven’t looked at Baltic Dry Index in a while – Despite the high CRB Index, the BDI has not managed to rally much off its post crisis lows. The reason for this: Massive over-building of new bulk transport ships. Here’s Bloomberg: “At a time when analysts anticipate record profits for the biggest mining companies…Read More

Category: Commodities, Transports

Was 2010 Commodity a Rally in a Bear Market ?

Chris Kimble writes: The CRB index had a huge rally from 2002 to 2008, followed by an decline over 50%. The 2009/10 rally took the CRB index back to its “50% Retracement level” as well as two key resistance levels, at the same time. Is a “Head & Shoulders” pattern at hand as well? >…Read More

Category: Commodities, Technical Analysis

Its Too Early to be Bullish on Nat Gas

I mentioned last week that we like the Energy sector, particularly Oil and Coal. The two stocks mentioned Arch Coal (ACI) and SunCor (SU). Several people tagged me to ask about Natural Gas.The bullish argument is rising oil prices will drag Nat Gas with it. The bear case, however, is controlling at the moment. Given…Read More

Category: Commodities, Energy, Technical Analysis

Winding Down with an Xmas Rally

Here we are beginning the final 2 weeks of the year. The economy continues to limp along, improving, albeit rather slowly. “Recession fatigue” is likely to make this holiday consumption spree appreciably better than the past 2 years. Markets have looked a bit tired — and yet — every opportunity to see big whackage has…Read More

Category: Commodities, Fixed Income/Interest Rates, Gold & Precious Metals, Markets, Psychology, Really, really bad calls

Emerging markets: the risks are increasing

Emerging-market equity prices as measured by the MSCI Emerging Markets Free Index are primarily driven by commodity prices and in particular by metal prices as measured by the Economist Metals Price Index. Currently emerging-market equities are approximately 8 – 10% overpriced given the level of metal prices. Sources: I-Net Bridge; Plexus Asset Management. The ratio…Read More

Category: Commodities, Think Tank

Commodity prices – on a knife’s edge

by Prieur du Plessis, writer of the Investment Postcards from Cape Town ~~~ The prices of industrial metals find themselves at crucial levels as indicated by the Economist Metals Price Index in U.S. dollar – the latest number is my estimate. The upward trend since the market bottomed in the first quarter of last year…Read More

Category: Commodities, Think Tank

CFTC Judge Allegations Should Concern Investors

“It’s an open secret among my brethren that if you get Levine, he’s not going to rule for the investor.” -Steven Berk, an investor protection attorney in Washington > Michael Hiltzik of the Los Angeles Times takes Judge Painter‘s CFTC accusation against his fellow judge Bruce Levine to a new level: “It would be hard…Read More

Category: Commodities, Legal, Really, really bad calls