Thursday, January 19, 2012

Non-Predictions 2012 - Commodities

TMM note that with the rapidly changing policy mix in Europe from “suicidal” to “Die Hard”, making calls on commodities is first and foremost a question of how much QE there is: if the deflationary environment and crisis risk is kept at bay in Europe it isn’t as if things are going to be peachy in Europe but risk assets will run, not least of all because last time we saw this much of a policy response from November 2008 to March 2009 commodities ripped.

Now, TMM would note that if the US continues to recover with Europe at least stabilized and housing in particular continues to recover we could get to year end and be talking *gasp* rate rises and not just fiscal drag which just might turn the USD from a legally acceptable form of toilet paper to legally acceptable tender. So folks lets be honest: there’s commodity fundamentals and then there’s central banks that can do a lot to make fundamentals not matter in the slightest. So with that caveat (“all non predictions subject to global M3”) we present our Commodity Non-Predictions:

1) Platinum will NOT under-perform Silver.

TMM have covered platinum before – the macro context of the world’s largest producer here and the threat of electric vehicles to Platinum Group Metals seems to be handily suppressed which can mean only one thing – cost push inflation plus a demand recovery = this should go up. Now TMM can’t rule out Eurostupidity so we are going to offset this with Silver which is sitting at ~300%+ of cash costs unlike Platinum which is only about 50% above cash costs and which as previously discussed seems oversupplied if one discounts the tinfoil beanie brigade. Oh, and it’s a really pretty chart from the long term:

The shorter term:

And realises high teens vol versus the hi-ho silver 45% whipsaw show.

2) Copper Is NOT Going Anywhere.

TMM think that copper is in no man’s land. To wit:

  • expanding supply coming online end of 2012 and 2013 (-).
  • China committed to property controls (-).
  • While also loosening credit (+).
  • US building recovery being priced into equities (+).
  • But little follow through in OECD demand yet (-).

To that end we think copper is not going anywhere exciting this year, so buying OTM anything in copper seems rather unappealing to TMM.

3) Oil Vol Will NOT Disappoint.

TMM think Oil is the complete opposite of copper this year. In TMM's minds, there are three things that could happen this year, all of which mean Oil will move a lot:

  • Iran blows up, Oil goes to $150, global growth collapses.
  • ECB-driven reflation, more growth, demand sends Brent back to $120+.
  • ECB-driven deflation, double dip, $90 oil.

To that end while crude vols have ticket up somewhat they still look appealing at ~23% to TMM, right in the historical complacency zone.

And with that, TMM will try and motivate themselves to come up with some Equities & FX Non-Predictions.


Patrik said...

WTI vols at 23%? yes, I'd buy that, but the implieds you'd look at with front ATM vols around 29% and a contango making it 33% in june and decent smile on top of that you're looking at more like 36% for 10-15d straddles. That's a lot less obvious when fixed contract (not 1st nearby) average realized vols over a 6 month period for the dec11 contract came in around 35-36% (covering the US downgrade period and strong comeback). Not obvious either way to me at the moment.

Tradebot said...

I like platinum. It is as close to win-win in commodities space, as in the bear case of deflationary recession centre banks will just QE to ad infinitum. Bull case is self explanationary.

Add HUGE political risk residing in South Africa and the upside could see XPT @ $2000 easily.

Dee Dee Humberside said...

Reposting my comment lost at the end of the race against the machine...

With your non prediction on UK10s, upside risk in energy, and Merve likely to be the most proactive of the big 4, isnt owning the UK breakevens a cleaner play than shorting the nominals?

Anonymous said...

Out of curiosity,how about NG? It's (US contract) down 33% from a month ago, at about decade low. I'd have thought that at this price it should be pretty economic to LNG to Europe from the US - possibly better economics and definitely much better politics than building a pipeline from Russia.

Leftback said...

Natty gas defies rational analysis, but not gravity. Take a look at the 5y chart. Now as Crocodile Dundee said:


UNG: The Ultimate Falling Knife

Leftback said...


Ambrose has noticed another falling knife, Italian M3, is descending even more rapidly than Berlusconi's trousers at a Bunga Bunga party:

Italian M3 Cliff Diving

Leftback said...

Technicals department has noted:

DAX closed at 3 month high, at late October levels. Resistance overhead:

DAX 3-month chart

This is perhaps THE chart to watch.

willem said...

Patrik, great notes on the intricacies of the vol argument. I agree w this sentiment for the most part, while higher realized vol is likely I'm not sure there is enough 'value' sitting around.

S J Morton said...

I am not convinced copper is going nowhere. Chinese inventories are rising, property prices are falling, and Australian employment is falling. European QE will probably help for a while but I'm looking to sell higher levels.

Leftback said...

A few notes on Greece and Portugal that confirms what TMM suspected about the declining market for sovereign CDS as the end game approaches.

Greece, Portugal and CDS

Take your profits and move on to the next PIIG in line seems to be the modus operandi....

Amplitudeinthehouse said...

The trendfollowers in yet?..

Leftback said...

FTSE, CAC, DAX all flat as a pancake. This is the hardest part...

The Waiting

abee crombie said...

trend followers unite..equites cant even pull back from this 2 week run, wow! either this is a vicious head fake or this year we are going to up 20% in SPX

wheres 'c to argue with me

Leftback said...

See the silly rally continue.
Don't short it.
Enjoy watching your longs appreciate.
Sell some junk you wanted to unload.
Watch for sectors of weakness.
Try out a few small hedges, if you must.
Ignore the media.
Smile, you are making money.

ahnn said...

Great explanation but there's always a way to go with copper. Platinum will always be there just like gold and silver and it will definitely go up.

cash for platinum

Amplitudeinthehouse said...

Sitting here does spoos collapse
watching bonds wither away
pulling my hair as time lapse
the west coast may find a way
the markets samsara never stops
overcrowded the herd may flop
oh no spoos at the close pop
sit here watch ever realms mop.

Kerpal said...

Sell 5yr USD/JPY vol, put it in a box and don't look again for 4years and 364 days. This has to be the answer.

Leftback said...

Something off the top, sir? Or just short back and sides?

Haircut Calculator

eveningstar said...

Oil price movements - I would go for your third prediction: ECB-driven deflation, double dip, $90 oil - maybe also due to easing of oil supply; Libya opening up the tap...

CV said...

So, how many of you BSD caught that NG1 knife ... ?


CV said...

I am wondering on the catalyst here ... just a decent short squeeze or is the announcement by CHK to reduce production a sign of things to come for the major producers.


Patrik said...

CHK announcement causing a bit of a bounce. I think more talk than substance personally. At least for the moment.

Leftback said...

Claus, that particular knife has emasculated a number of BSD. Interesting though as it looks like a squeeze, and does indicate that there may be a lot of active shorts in NG rather than total disinterest.

Something on Spain:

Spain's Regions and Their Debt

My Spanish isn't fantastico, but I did understand "Un modelo insostenible". The implication of a lot of what we have read on the topic is that Spain is now playing the game of "pass the parcel" between the regions and the central government, only when you unwrap the last layer there isn't actually any cash inside. Real debt levels may turn out to be "muy grande", but "que sera, sera".