Commodity complex

Whew! Now that Q1 is behind us, things are bound to get a bit easier right? Let's see. Japan's Tankan dipped to a 4 year low, marginally disappointing expectations. European banks (mostly UBS) have written down nearly $23 billion today, and UBS chief Marcel Ospel has fallen on his sword. Meanwhile, commodities are cratering once again. So nauturally equities are higher this morning!

The equity rally might have something to do with "kitchen sink" writeoffs at UBS, though one might argue that the writedowns late last year were also of the kitchen sink variety. Moreover, given the perception that hedge funds are short/real money underweight, it's perhaps not surprising the new quarter is seeing a smidge of buying.

One market that is not heavily populated by shorts is commodities. Since the middle of March there has been carnage in the commodity complex, a trend that is continuing today. Consider the following:

1) Wheat. The surge in volatility starting in February suggested that speculative participation was becoming prohibitive....and that is now being shaken out. The USDA report suggesting a 6% increase in the next wheat planting doesn't suggest any near-term respite, either.
2) Soybeans. If fresh supply is a reason to sell wheat, then it's trebly so for beans, where the fresh planting will rise by 18%. Goldman Sachs recently put out a bullish beans call; suffice to say at this point the the recommendation looks ill-timed.
3) Oil. The oil price rallied last week in line with EUR/USD, but the tide appears to have turned. The recent uptrend line looks to have broken; a move below the recent low would target around $90 if not a little lower.
4) Gold. Gold bounced smartly off the recent $904 low, trading back above $950 last week. Whoops! That didn't last long, and we've now made a new low this morning. The obvious target is now $850, which not only was the all time high, but has also been resistance/support over the past six months. Incidentally, the price destruction in gold hardly bodes well for EUR/USD....

More fundamentally, if the commodity meltdown continues, then the inflation problem that Macro man has worried about for the past couple of years may need to be shelved temporarily....
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April 1, 2008 at 1:55 PM ×

1. "The surge in volatility starting in February..."

I couldn't get the link to work.

2. GS rec'd long beans? Well, they also rec'd short XAUUSD around 850 at the end of Nov07 (top trade of 08 from FX strategy), and have a history of very bad calls on Fed Funds. They may be the most prestigious/profitable/whatever, but from what I've seen their strategy sucks.

April 1, 2008 at 8:51 PM ×

So DOW is up 350++ led by financials when nothing but bad news in financials came out. And the Paulson plan is less regulation of credit. I love a stampede in the old Westerns, but this is a stampede in a circle.

April 2, 2008 at 3:52 AM ×

Ten Little Banks
Ten little bank boys went out to dine;
One choked his little self and then there were nine.
Nine little bank boys sat up with the Fed very late;
One overslept himself and then there were eight.
Eight little bank boys leveraging to heaven;
One said he'd stay there and then there were seven.
Seven bank boys chopping up dicks;
One chopped himself in halve and then there were six.
Six little bank boys playing with a hive;
The market stung one and then there were five.
Five little bank boys going in for Gore,
One got in to deep and then there were four.
Four little bank boys going out to sea;
A red herring swallowed one and then there were three.
Three little bank boys working in the Wall Street Zoo;
A big bear hugged one and then there were two.
Two little bank boys sitting in the sun;
One got a bank run and then there was one.
One little bank boy left all alone is no fun;
He went and hanged himself and then there were none.