2011-03-01

Market Sentiment: GSCI Total Return Commodity Index in Longest Winning Streak Since 2004

Speculators have been driving these prices to the stratosphere. They will unfortunately most likely hold onto their positions when they will drop and hit the ground.
March 1 (Bloomberg) -- Metals, crops and fuel beat stocks, bonds and the dollar for a third straight month, the longest stretch since June 2008, as inflation lifted cotton and cocoa and investors speculated violence in the Middle East and northern Africa will restrain energy supplies.

The S&P GSCI Total Return Index of 24 commodities gained 3.8 percent in February and rose for a sixth consecutive month, the longest streak since 2004, data compiled by Bloomberg show. [...] 
Faster global growth pushed up raw-material prices since September and gains accelerated after riots toppled leaders in Egypt and Tunisia and threatened Libya’s Muammar Qaddafi. At the same time, central banks in emerging economies from China to Russia are raising interest rates and boosting reserve requirements at banks to fight inflation, holding back equities.

“These commodity price increases are staggering,” said Kevin Rendino, a money manager at New York-based BlackRock Inc., which oversees $3.45 trillion. “Each commodity is different, but there is a supply issue for oil. There has been real economic demand for these commodities since the economy began recovering.”
IMHO the previous two paragraphs are just rationalization and do not reflect any real fundamental change.
[...]
Cotton advanced 14 percent to a record $1.9123 a pound, leading gains in crop prices. Production in China, the world’s biggest importer, fell 6.3 percent to 5.97 million metric tons last year, the third consecutive drop, data from the National Bureau of Statistics in Beijing show. Futures have risen 32 percent in 2011 through February, the biggest gain to start a year, according to Bloomberg data starting in mid-1959.
[...]
“The dominant influence with regard to strength in commodities is equally split by global demand and dollar weakness,” said Liam Dalton, president of Axiom Capital Management Inc. in New York, which oversees $1.4 billion. “In terms of traditional inflation in the U.S., we have a very tough time getting that going right now, whereas in some of the overseas markets like China, India and Brazil, there is potential for inflation because of tremendous organic demand.”
The Dollar is quite stronger than when it bottomed a few years ago. Global demand, I can't tell, but I can tell that European and American demand must be quite lower as well.

These prices are completely disconnect from reality and if I were not a believer of the sentiment driven markets, I couldn't believe people are thinking about fundamentals in the face of record unemployment in western economies, revolutions in middle east and sovereign defaults in Europe... What's going on in speculators mind? They are high on Bernanke's and Trichet's deadly drug.

7 comments:

Tiho said...

Yes these evil speculators have been driving these prices to the stratospher.... again! You sound like a politicians pej.

And just like politicians, you also do not understand futures markets. How can speculators drive up commodity prices when in futures markets for every speculator there is a commercial who is going short the commoditiy? I tried to explain it to you last time, but you just don't get it.

Instead of following the media news, you should do a bit of knowledge seeking yourself!

Dave said...

Tiho,

The COT doesn't support your claim.

pej said...

@Tiho:
Indeed the COT doesn't support your claim, quite the contrary.
Speaking of which, you haven't been blogging for a while, and you used to write two very good sentiment reports a week. What's going on with you?

Moreover, I am still trying to understand the statement that many make about futures markets: "for every long there is a short so speculators cannot drive the price". What does that supposed to mean? Why the fact that there's a buyer and seller would mean you cannot change the price? Should the price remain flat and never change just because there's a buyer and a seller? Why doesn't the same apply for stocks? There's also a seller for every buyer, right?

Finally, history has showed at various occasions that commodity markets can be cornered: the Hunt brothers did so in Silver in 1979. In 2010, Anthony Ward single handedly cornered the Cocoa market: http://seekingalpha.com/article/215288-cocoa-market-almost-cornered-by-hedge-fund-manager-anthony-ward

@Tiho @Dave
Moreover, a few things I should have maybe mentioned in a post:

1- Even commercial hedging can show speculation, not from the bank traders themselves, but from producers. For example, when gold miners decide to stop hedging, they basically enter the business of speculating on the rise of the price of gold.

2- When there are genuine production concerns/issues, such as oil for the time being, given that supply becomes really tight, it becomes a lot easier for speculators to drive the price very high and very quickly.

Tiho said...

I haven't been blogging as of late because I have been speculating, like an evil speculator should, on further rises in commodity prices and commodity equities! In other words make money while rest of people try shorting the commodities bull market. It's a full time job and I do not have as much time as I would like to write pretty sentiment posts these days.

Back on the topic of futures markets: Speculating in futures does not change the underlying price. It is open interest buying (not volume). So if I speculate long, I have to find a commercial who will hold a same contract short and these contracts STAY OPEN. They are not closed transactions which change the supply. We don't actually buy the underlying commodity (some do take delivery).

When you buy stocks you actually take them off the market and hold them in a fund. This transaction is known as volume and not open interest. That is because I bought the stock and took delivery of it. This changes the supply.

Those evil speculators... damn those speculators haha!

Dave said...

@Tiho

I'm not a commodities expert, but it seems pretty clear that even if it doesn't immediately change the supply, it does immediately change the price.

If the contract isn't rolled over, then it does affect the supply - when delivery is taken.

pej said...

@Tiho:

I'll have to side with Dave here. The fact that you are a commercial hedger or a speculator doesn't affect what type of futures contract you're buying or selling. So you are affecting the supply and demand for these contracts and hence affecting the price.

Imagine BP wants to sell 1,000 contracts of oil. Current price is $100. If there were no speculators to buy this oil, and only some refiners who need to buy 900 contracts, then the price would fall, as the bid is for 900 contracts and the ask for 1000. On the other hand, if you have speculators who come and outbid the refiner for say 300 contracts, they will:
1- have to make a bid higher (so the price of oil goes up)
2- change the actual available supply of those contracts to the refiner (there's only 700 left) so the refiner will have to bid for 200 more contracts at yet a higher price (so the price of oil goes up, again).

I do not understand your reasoning.

Note that I never considered speculators as evil, i believe everyone should be able to do what ever they want with their private property. And money is (actually, should be...) a private property (but the governments do not think so).

Opulenta said...
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