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XMFSinchiruna (27.99)

The Ultimate Commodity Update

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December 18, 2009 – Comments (12)

Those Fools who have been around the Sinchi block a few times may recall the first iteration of the Ultimate Commodity Update from back in March ... when there was virtually no consensus from any corner of the globe about the outlook for demand recovery. At a moment when even China's rip-roaring growth rate appeared susceptible to the paralysis affecting every other corner of the planet, Joy Global urged investors to watch for demand recovery in stages: first stabilization, and then recovery. China's massive stimulus package combined with a constant flow of strategic asset and resource purchases provided the stabilization, which provided a bridge to the additional boost from the now-completed steel industry destocking event in Europe and the U.S., which in turn brings us straight into sustainable demand recovery from China, India, and emerging markets. Last quarter, they expressed some concern over a potential interruption between the demand from Chinese stockpiling and whatever baseline level of global demand exists beneath it, and I think that is still a risk to some degree. I think their analysis was brilliant throughout, and investors who followed Joy Globals' sage analysis and positioned themselves early for the resumption of commodity demand will reap benefits for years to come.

With that in mind, please feast your eyes on the second edition of the The Ultimate Commodity Update

Please don't forget to vote in the poll at the bottom of the article. I always enjoy gauging the community's perspective on the topics that interest us ... I hope you enjoy that as well. I've been using the poll feature very frequently lately ... is it a welcome addition to the articles?? 

After you vote, come back here and discuss your vote, if you wish. What is your outlook for commodity demand during 2010? Do you see a minor hiccup or a major correction when stockpiling efforts cease? For that matter, has anyone among us come across recent data to update what we do know about their stockpiling efforts. I haven't seen direct data about stockpile purchases (imports net of monthly consumption) in at least a few months. I have expected some kind of a correction in products like copper, but so far we've seen no signs of price weakness. Is it possible that stockpiling effort did indeed provide a smooth bridge to underlying consumption-rate demand? What do you think? Perhaps you think I'm wrong to dismiss the role of U.S. and European demand?

Also, the Global Gains guys just returned from India with some bullish things to say about the infrastructure build-out there. The projections from Joy Global and Peabody Energy regarding India's future levels of demand for thermal coal appear well corroborated. Have you Fools staked your claims in the seaborne thermal coal space? What's your vehicle for that exposure?

What is your posture toward commodities right now? Are you accumulating? Holding? Waiting? Avoiding?

Thanks for sharing your thoughts ... each one is worth at least a dime. ;)

 

12 Comments – Post Your Own

#1) On December 18, 2009 at 5:17 PM, lquadland10 (< 20) wrote:

Accumulating.

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#2) On December 18, 2009 at 5:58 PM, FleaBagger (29.42) wrote:

Accumulate, if only I had any capital to use to accumulate them.

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#3) On December 18, 2009 at 6:13 PM, chk999 (99.98) wrote:

Accumulating slowly, not in a mad panic.

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#4) On December 18, 2009 at 6:17 PM, binve (< 20) wrote:

Hey Sinch!

At the present, I view commodites as a hold... for myself! (I will explain what I mean in a minute)

As you know, I am a long term commodities bull. I have not sold any of my long term commodities plays that I loaded up with in Dec/Jan. I plan on holding these for years.

But like I discuss in this post: The Long View - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=314202, the stock market is at a crossroads and I think the US Dollar is going to rally. I do not think it is a new Dollar bull market, but I think it will be a technical bounce that could last 4-6 months.  This will coincide with a portion of the Dollar carry trade unwind.

Equities will resume their bear market slide and I think commodities will pullback a bit also.

So here is the reasoning for my hold call which is for me, not for anybody else

- I already have a very sizeable position in commodities. So I have the luxury of waiting for a pullback.

But here is the deal, this might be a 4-6 month dollar bounce, or it might be a 1 month dollar bounce. It could also be followed by a currency crisis (which are Black Swan events and defy prediction).

So in no way would I *ever* sell commodities or especially gold, to play a Dollar bounce. The risk is being long the dollar / short commodities. Not the other way around. 

But I have the luxury of buying pullbacks because I am hedged against a currency crisis, so I am not worried about commodites taking off without mean. Because I am already on that train.

Someone who has no commodity exposure is in a very different position and my statements would not apply.

Thanks man!

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#5) On December 18, 2009 at 7:35 PM, rd80 (98.69) wrote:

I voted "Inflation looms" in the poll, but was torn between that and "China, India, and emerging markets are blazing the trail." I don't see those as mutually exclusive.

The two dynamics working together should drive commodity prices higher going forward.  Picking up the slack for US and western Europe demand is a daunting task even for China and India.  But, add in US fiscal and monetary policy and nations have a good reason to trade at least some of their $$ stockpiles for oil, steel, copper, coal, etc.

For another nugget of demand growth outside the US, Graham (GHM) reported $9 million in refinery equipment orders from the Middle East, China and the US - nice orders for GHM even tho' it would only be a rounding error for some of the big players.   The CEO's comments on the order mention an "expanding Chinese refining market." 

GHM followed that with another release about a $25 million order from Northrop Grumman for aircraft carrier steam surface condensers - maybe US demand isn't quite dead.  Building 90,000 tons of diplomacy has to make a blip in steel demand all by itself.

Ten cents.

Long GHM

Fool on!

 

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#6) On December 18, 2009 at 8:03 PM, goalie37 (94.39) wrote:

I'm not knowledgeable enough about commodities to know where they are going, but the poll results tell me quite a bit.  88% voted that either China and India will cause prices to rise or that inflation will cause prices to rise.  That's a little too bullish.  They may be correct, but I doubt there are many bargains with almost 9 out of every 10 on the same side of the trade.

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#7) On December 18, 2009 at 9:13 PM, Tastylunch (29.52) wrote:

Always enjoy your Joy Global Ulimate Commodity Updates!

Agree with Binve for different reasons

I see slackening/continual weakness in US consumer demand.

Natural gas plays are the only ones I've bought lately due to seasonality/onset of winter/cuts in production.

I do think some coal plays are interesting, but I haven't resarched them enough lately

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#8) On December 19, 2009 at 2:13 AM, DarthMaul09 (29.95) wrote:

Buying Canadian miners on price pull backs.

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#9) On December 19, 2009 at 2:36 AM, uclayoda87 (29.46) wrote:

I bought USAGX and CEF following the recent sell off.  I had raised some cash in case the Fractals pattern continued and also to secure some winnings before the end of the year.  I am in no hurry to make new large bets yet since I still have a large portion invested in miners, metals and energy.

 

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#10) On December 19, 2009 at 7:47 PM, XMFSinchiruna (27.99) wrote:

Thanks for the feedback, everyone. I'll be back tomorrow with more specific comments ... tonight is for movies and ice cream. :P

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#11) On December 21, 2009 at 9:46 AM, XMFSinchiruna (27.99) wrote:

rd80

Agreed ... this poll was a little different in that I experimented with two pairs of answers that were not mutually exclusive. It was intended to make people really think about their investment thesis relating to commodities, and what they see as the main drivers for upside or lack thereof.

uclayoda87

FYI - I just happened to take a look at the top ten holdings of your pm mututal fund usagx, and wanted to point out that they include a sports equipment manufacturer and a financial company among those top ten ... either that's a mistake with Yahoo's data (not unusual), or this is one seriously wierd precious metals fund. Might be worth a look at the issuer's website.

goalie37

I encounter this mistake quite frequently, so please don't beat yourself up, but the commonly held assumptions about herd mentality being a contrary indicator does not apply to commodity prices. Commodity prices are determined by consumer demand, not by investor demand. Consumers of commodities do not track investor sentiment to cue their buying activities ... they buy goods as demand dictates at prices shaped by available supply relative to that consumer demand.

In other words, if the world needs a certain tonnage of soybeans per year, and a harsh weather event ruins a portion of the annual crop, every buyer of soybeans will expect prices to be higher as a result. That expectation of higher prices is not a contrary indicator ... soybean prices will reflect the crop losses regardless of buyer sentiment.

Just something to keep in mind about how commodity prices differ in nature to stock prices.

binve

I hope you're right, as I would love to redeploy the cash I raised near the dollar's recent low at substantially stronger dollar levels. Unfortunately, I do not see a strong 4-6 month rally as a likely outcome here. I just don't see the dollar index having legs above 80. The Euro could be seriously shaken by a default in Greece and worsening conditions in Spain, and that could lead to a short-lived spike over 80 ... perhaps to 82, but I would be surprised to see anything over that for any length of time.

Now, that being said, I should point out how wrong I was in March 2008. At that time, as you know, the dollar reversed course into a rally that I saw zero fundamental basis for ... and yet it lasted for many months with devastating effect to commodity investors. If panic returns to the markets and people are silly enough to seek safety in Treasuries, then indeed the dollar could rally back hard. Unwinding of the carry trade is a wholly unknowable phenomenon. There are no metrics to measure the size and scope of a USD carry trade at any given time, so in truth any speculation about movements in and out of a dollar carry trade are purely that ... speculation. Some experts believe that a portion of the present carry trade is comprised of long-term investors playing the secular decline in the dollar ... who will thus not be removing their trade into weakness (as their investment positions are hedged, making counter-cyclical moves beneficial).

And finally, I have to pass on one wise reminder from someone whom I consider a currency guru: the U.S. dollar is too broadly governed by fundamental factors at this stage for technical analysis to provide any semblance of predictive efficacy. If the size and scope of your dollar rally expectations hinge upon technical analysis alone, then I encourage you to temper those projections sharply on the basis of fundamental developments. I know that you employ both consistently ... this is just a friendly reminder to perhaps lean towards placing greater emphasis upon the fundamental analysis from here forward.

Currency, pm, and commodity markets will become increasingly volatile going forward. That volatility is likely to be driven by ever more dramatic developments on the fundamental side, and therefore lack the telegraphing signals from TA. I permit TA to encompass perhaps 10-20% of my price projecting efforts at any given time, and am content to wait out any dislocations from fundamental drivers that may result from missing any technically-determined pivot points.

Thanks to all of you for commenting and voting. Fool on!

Remember to keep those fingers moving quickly on the keyboard through January 8 ... we want to raise as much as we possibly can for the Thurgood Marshall Academy. :)

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#12) On January 03, 2010 at 12:34 AM, SnapDave (52.02) wrote:

I believe that the global bull market for commodities lives on as a long-term cyclical event ... having been only temporarily derailed by the aftershocks of a paralyzing financial crisis.

Words out of my mouth.  That's the bottom line. 

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