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TMFSarahGen (98.10)

Commodities, COT, Barrons, should we all SELL SELL SELL?



March 29, 2008 – Comments (7) | RELATED TICKERS: SPX , MON , OIH

We are facing a worldwide shortage in all major commodities.  Truth?  Well, it's certainly become a strong belief of many folks.  And the dollars have flooded into commodity index funds, etf's, etc.  And it's not just you and me, it's big pension funds, etc.  This week's Barron's cover has a picture of a bushel of corn.  The lead story:  Commodities Boom:  Danger Lurks.   The subheading? Legions of small investors have driven commodity prices to levels that can't be supported for much longer. Take a cue from industry insiders: They're selling.

Now it's not so simple as sell, sell, sell, but it never is, is it?  The experts are conflicted.  You've heard Jim Rogers, the big commodities bull state on every news business channel that he believes we're in a multi-decade run.  And there is, of  course, the short term and long term story.  If you read Rogers' books or hear him speak, he considers a 30-40% correction standard in a commodity bull story.  Ouch! 30-40% down before going back up again?

There are some great articles out there and plenty of arguments.  The basic bull argument is that the developing countries are going through major booms that mean massive consumption of resources.  This is a once in many decade story, and it's not going to slow down.  The bear case is mostly related to the slowly American economy along with a bubble in commodities.  The argument is not that the some commodities aren't scarce, but that the prices have gotten ahead of themselves.

You know we're at least in a serious bull if not near the top of it, when even the night-time talk show hosts are talking about the price of oil, the price of corn, and stockpicking shows are suggesting the crop report this Monday is a major event.  Well, it is a major event, but there's not much I can do about it.

It took me months and months of following commodities to learn of some of the resources that very serious investors were following.  So I thought I'd link a couple here.  I'm going to start with the COT report.

Know what the COT report is, where to get it, and how to understand it. 

The COT (Commitments of Traders) report comes out every week from the US Commodity Futures Trading Commission.  It contains data on positions on futures.  Many look to this report to get an idea of where the smart money is going, and not just for corn, oil, wheat, but also for the S&P and Dow which also have futures trading.

An excellent overview and description of the COT report is here on Investopedia.  Take a look, they do a great job explaining in a short overview the what/how/why of the COT report.

You can take a look at the reports for yourself on the CFTC website.  The COT reports are free and available to everyone.  CFTC's COT reports are here.

I point out that the COT report is free, because there are a lot of high-priced services that will charge you for  information about the COT reports.  I would ask you to ask yourself: 1, why consider paying for this info when you didn't even know it existed before reading this post; 2, why pay when you can interpret the data yourself.

In my opinion, this is similar to the many sites that will sell you data on insider buying which is available and free on the site.  They display it nicely, and extract information (for example interpreting "A" means "acquire" i.e., buy, and "D" means "dispose" i.e., sell, but you could get it free for yourself from our government. 

Now with that introduction, here's a link to one of those services.  I'm linking to this because Steve Briese does have a free blog, has written an excellent book about the COT report, and mostly because he wrote a nice long article describing everything he thought they should have included in the Barron's article.  And since the Barron's article is not free, I thought this is an excellent substitute (or addition if you've read the Barron's piece).

Steve Briese's expansion on his comments in the Barron's article are here at

I know this blog post doesn't answer the question "should we all sell, sell, sell?"  And it's probably generated more questions than answers, but that was my goal.  When I first heard about the COT report I felt like there was one more big secret that professionals knew that I didn't.  Well, now you know about it.  Take a look.  Read Steve Briese's article.  Decide for youself. 


Have a great weekend! 



7 Comments – Post Your Own

#1) On March 29, 2008 at 6:24 PM, abitare (29.51) wrote:

Let watch what JR has to say:


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#2) On March 29, 2008 at 7:31 PM, ATWDLimited (< 20) wrote:

Great post, I am going to say hold short for 1 moth and sell, than wait till bottom of correction in a few months. 

Hey, Come view the The official Dollar Report, its loaded with analysis of the dollars actual value, that you cant get anywhere else, since I calculated it all my self and made the graph for inflation, GDP, M3 and Debt and compared them as backings per dollar.

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#3) On March 29, 2008 at 9:00 PM, ResearchLover (70.73) wrote:

He (SB) doesn't sound at all optimistic for stability in commodities short to mid term. The COT looks quite useful, but one question: M3 futures are in there even though the Fed hasn't bothered considering M3 since 2006?  ATWD's own post has me worrying about leverage of the money supply leading to long term problems, but it looks like M3 or the rough equivalent for each major currency has balooned in recent years relative to the strict M0 money supply, leading me to believe that this phenomenon has more to do with something fundamental changing in how money flows between currencies.  Offhandedly, wouldn't it be convenient to determine the contribution, or correlation, of emerging market currency/(USD, other developed nations basket of currencies) increases relative to, say, grain price increases, if emerging market demand is indeed driving price increases and not speculators in develped nations?  I think it's time that the assumption that emerging markets are the dominant force driving the price increases be put to the test on a commodity by commidity basis, and sort out which ones could first show a pullback, where the correlation to those currencies relative strength is weak.

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#4) On March 30, 2008 at 2:43 AM, cluelessmorgan (82.63) wrote:

recommend for good info

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#5) On March 30, 2008 at 12:17 PM, XMFSinchiruna (26.55) wrote:

Great post SarahGen.  My philosophy is to remain long through all corrections until the fundamentals change, and as ResearchLover astutely points out above, the leading fundamental indicator is the USD.  In real life, I am always locking in some profits in silver and gold on strength, and I watch the COT constantly for clues as to when to do that.... since the major institutions that manipulate those metals prices downward do so using massive short positions on the futures markets, which shows up on the COT.  There was evidence fron the COT that the present correction was coming, though I didn't react accordingly as much as I would have liked.  Still, as you know, I believe this particular correction will be very much shorter than most, especially since there is a very real and acute shortage of physical silver at the moment.

RL, it's not that the gov't isn't bothering with M3... they still have the number... it's just that they discontinued its publication... i.e. they're keeping it from you.  That action alone should serve as a warning for the kind of inflation we have coming down the pike.

Gold and silver should be grouped seperately from most commodities, since they have tangible monetary value and so must track the inverse of the USD with significant correlation.

Oil... I think the oil market was orimed for a correction at $110, but after watching it hold $100 so effectively during this correction, that indicates some very bullish interest at $100, suggesting the insitutional players are forecasting much higher oil.  Otherwise, that sudden reversal would have broken through closer to $90.

Natural gas is well overdue for a rise.  It should have been fllowing oil up all through 2006/2007, but didn't.  It has a lot of catching up to do (kind of like silver relative to gold).

As for food items... I honestly don't follow those markets as closely, but there are substantial murmurings of shortages coming.  Rice rose by 30% overnight the other day when China announced something about exporting less.  Corn dedicated for ethanol as mandated by US law is constraining the supply for food items, as I've read in many articles.  Apart from that I don't know, but I get the sense these prices are going still higher on expectations of further inflation.

Copper is bullish.  It just broke out again recently.  There are only a handful of very large deposits, and the demand story in Copper from China is significant.

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#6) On March 30, 2008 at 3:49 PM, mandrake66 (71.39) wrote:

Thanks for the info Sarah. Commodities are a really confusing mix of fundamentals pointing one way and speculation pointing another, along with other complicating factors) and it's difficult to get a near-term sense of where things are going to go. I've avoided commodities and commodity-related equities so far both in real-life and in CAPS, but I'm trying to read up on things as much as possible.

It's such a small market with so much unanticipated money pouring in that it's hard to conclude it's not the next big bubble. On the other hand, the demand for raw materials is clearly high and likely to stay high long-term, though a global recession could put a crimp in it for a while. And on top of everything else, most of these commodities are dependent on the strength of the dollar, while gold is a 'flight-to-safety' play. It's all very confusing for an amateur onlooker, and seems to be just as confusing for seasoned pros.

My own conclusion for the time being is that prices went through the roof quickly and with no obvious fundamental reason, therefore a speculation-led bubble. I expect to see prices in all commodities pull back sharply at some point this year. A deepening recession will likely do it, which would crimp demand, cause other currencies to fall against the dollar, and cause many investors to sell their commodity-related holdings to raise cash when many of their other holdings are illiquid. In this scenario, commodity prices could crash rather hard.

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#7) On March 31, 2008 at 11:07 PM, jester112358 (28.07) wrote:

When Barrons cover story says buy, you should sell and vice versa.  This is a great contrarian indicator!  Do the opposite.  Are speculators and hedge funds playing a role in the short term behavior?  Certainly.  Should you care if you understand the longterm macroeconomics driving commodity prices?  No, except for taking advantage of dips to buy.

The reason commodities have more real upside potential is that everything has to go perfectly, no bad weather, no political disruptions of supply etc. to match demand.  In other words no black swan events such as massive crop failures due to excessive drought in Australia, too much rain in the plains region of the US (a real problem for wheat production this year)   Its the news the market can't possibly anticipate that drives panics as I'm sure you've observed from the BSC "credit event".  So, if you believe as I do that there exists a greater likelihood of more unexpected bad news for supply of oil, natural gas, food than good news, you cannot go wrong being in commodities for the next several years.  The historical negative correlation of commodities with the equities market is well established and I believe we are an economic period most close historically to the 1970s which was terrible for the equities markets but great for commodities.   Thus, I am heavily weighted in oil, natural gas, metals, Ag stocks and currencies such as the swiss franc and japanese yen in both caps and real life.  And short all financials, especially investment banks and retail.

 Really enjoyed the video of Jim Rodgers.  I read his commodities book a few years back.  Prior to that had no interest in this investment area.  It pays to expand your horizons through education!

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