Category Archives: commodities

Who wants coffee?

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Not many traders, apparently. Sentiment has been low for most of 2012, never even once reaching 50% bulls according to DSI. The latest slump has made futures traders extremely bearish on the beans for three weeks now, but in the first half of 2012 we saw this condition sustained for longer than I’ve ever witnessed on a contract. Despite a preponderance of bears, the price continued to slide, even at an accelerated pace, before a small rally this summer. Prices and sentiment have since returned to their lows.

Daily close, cents per pound:
coffee 2010-2012

Despite all of this bearishness and a 50% decline, coffee is still not particularly cheap by historical standards. It has been working off a mania that resulted in a parabolic doubling in 10 months from summer 2010 to spring 2011. I can’t publish the data, but picture bullishness alternating from medium-high to very high for the duration of that rally. This probably goes a long ways towards explaining the steady decline and bearishness. Prices have now returned to the base of that ramp, but if we look at a long-term chart, we can see that the spike was the final blowoff of a bull market coinciding with the general commodity boom, and that today’s price is still triple the 2001 lows. Commodities are cyclical and tend to swing from extreme to extreme, adjusted for inflation, so coffee wouldn’t be historically cheap today unless it were under $1.00/lb.

Monthly close (through Oct):
coffee 1982-2012
Indexmundi.com

I don’t see any great opportunity in coffee either way at present. It just makes an interesting study in herding behavior.

BTW, has anyone else noticed that retail bean prices at fancy grocery stores increased from the $7-10 range to the $10-13 range a couple of years ago? This coincided with the futures spike, but the correction hasn’t been passed on to consumers. Some players in the supply chain are likely enjoying fatter than usual margins.

Natural gas a value and sentiment play

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Here is a chart of US natural gas (source) going back 25 years. Adjusted for inflation, gas has never been cheaper. Compared to oil and coal on an energy equivalent basis, gas is far cheaper than it has ever been.


Here are three big US gas producers, Chesapeake, Encana and Southwestern, all of whom have been beaten down to 2008 levels (chart from yahoo):

Finally, here is a composite sentiment measure (sentimenttrader.com), which suggests that investor sentiment, which is a contrary indicator at extremes, has never been more negative on the sector:


An NG long could even be paired directly against a crude short, since such a large difference between NG and crude or coal simply cannot last in a market economy. Even if gas stays low as economic activity slows, crude will likely come down.

Is the bounce about over?

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Glancing around at the commodity and global stock markets, it looks like the bounce from last month’s lows has been adequate to reset psychology for another decline. This is not to say things have to drop this week, but if prices fail to push higher gravity could take over, as the general climate appears to be shifting back to de-risking and deflating (credit downgrades, budget cuts, poor housing sales, lack of hiring, treasury bond strength, etc).

China is the perfect proxy for risk appetite, as it had the biggest stock bubble and action there is linked to gobal consumer demand and industrial commodity prices. Here’s a long-term view of FXI, the ETF of largecap Hong Kong-listed Chinese shares. The big bounce ran out of steam last October, after which prices have made a series of lower lows and lower highs, the definition of a downtrend. Daily RSI and MACD suggest that short-term upside momentum may be stalling:

TD Ameritrade

Taking a look at a 4-hour chart of SPX futures (ES), I wouldn’t necessarily expect stocks to keep dropping this week. In fact, it would be somewhat clearer if we got one of those rollercoaster topping patterns over the coming days, where stocks rally and fall by 2-3% for a few times to bleed off the momentum, such as they have done at the last three intermediate-term tops in October, January and April.

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If SPX sticks to that topping pattern, it could fill the box I’ve drawn below on the daily chart, meaning another try or two at 1130:

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Weakness developing in commodities

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Checking the 15-min bar chart, copper and oil are not looking too spirited.

Here’s oil:

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And copper, same scale:

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And of course platinum and palladium are looking busted. Daily charts here.

Platinum:

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Palladium:

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The technical damage in these metals is probably not a good sign for gold and silver either.

Silver’s daily chart leaves a thing or two to be desired:

Don’t count on a big rally in commodities.

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Yes, the “inflation/risk trade” is moderately oversold, but when oil, copper and the like start to fall, they can just slide straight down for months. I believe that the commodity rally of the past 15 months was just a dead cat bounce correcting the crash after the massive 2007-2008 bubble.

Now that we’ve had that correction (and then some when it comes to the metals), there is little reason for prices to remain elevated. The supply/demand situation today certainly doesn’t justify $3.00 copper or $1.00 nickel or zinc, and demand will be even weaker in a year when the construction bubbles in China, Australia and Canada are over.

Here’s a pattern I see in crude. Now that the uptrend (higher highs, higher lows) is busted (we made a lower low), all rallies may be short and weak:

TD Ameritrade

Copper’s uptrend is still technically intact but very weak(see RSI), and it could play out the same way:

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Of course, if a large rally does develop, it will just be more fodder for the bears. I’ve entered a short on copper at $3.13 today, and am prepared to add to the position. I’ve also just picked up some July puts on crude futures (expiry June 17). I don’t like near-term options, but these got cheap today and will pay off 25:1 if oil is $55 three weeks from now.

If another broad-based rally in risk assets develops, I’m covered with longs on stock futures. However, I would not be surprised to see stocks (and the Euro) rally for a while here while commodities decline. When trends start to exhaust correlations can break apart.

Carbs to make a comeback?

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Trader sentiment on the grain complex (corn, wheat, rice and especially oats) has been very bearish for weeks, but prices have stabilized and RSI is turning up. This could be the set-up for decent rally, especially if general risk appetite comes back for a couple of weeks.

Here’s a chart of wheat going back to 2003, weekly scale:

TD Ameritrade

And here are oat futures:

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You can see in these that the grain complex went through a mania in 2007 and early 2008 with the rest of the commodities, but that froth was quickly blown off in the crash. Prices are in rather neutral territory on a longer-term basis, which you can see for yourself by checking 25-year charts on indexmundi.com or futures.tradingcharts.com.

Commodities crash underway: straight down or choppy?

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Commodities did spectacularly well from winter 08-09 to winter 09-10. Many tripled in price, such as oil, copper and palladium. The world seemed convinced that another great phase of inflation was underway or would start real soon now.

The reality is that demand is anemic and that there has been little or no economic growth. The only exceptions are property bubbles in China, Australia and Canada that are just running on fumes, where America’s was circa 2006. The commodity bounce was purely a technical reaction from an extremely oversold condition, exacerbated by mistaken faith in Keynesian policies deployed worldwide. The rally began to stall out from mid-autumn to this March, and is now starting to roll over in force.

Here’s a 3-year chart of copper, a very liquid and widely followed market. Many believe it is an economic guage, but this is nonsense IMO, since it was trading well under a dollar as the economy was booming a decade ago, and like a lot of other commodities was very expensive in the stagnant 1970s (and right now of course). Prices are driven first and foremost by fads. Why else would you expect it to trade at $3.50 in the middle of a deflantionary depression when stockpiles are huge?

Stockcharts.com

I don’t like to brag, since I get plenty of timing wrong, but back in April I noted the divergence in RSI and MACD right as copper made its top around $3.60.

Another favorite guage of risk appetite is the silver:gold ratio, which has remained stalled for the better part of a year now, and looks set to decline again:

Stockcharts.com

Also check out the palladium:gold ratio, since palladium experienced a major speculative bubble lately which has started to crash very hard:

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Here’s oil, West Texas Intermediate… in all of these commodity charts, note the severity and unrelenting nature of the last drop in 2008. There were few rallies where one could safely get on board for a short sale — you were either short from the top for the ride of your life or just had to watch.

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I’m not expecting a lot of chop in these markets. I’d love a nice rally here to increase short positions, but it’s not the nature of commodities to take their time on the way down. Traders had months to see this trade coming and set up shorts, but for those who don’t over-leverage themselves it is by no means too late to get on board.

By the way, the commodity currencies (Australian, New Zealand, Canadian dollars, Brazilian Real and South African Rand) have also started to fall hard but have a long way to go to correct their rallies from last winter.

Want to see one commodity market that we’re definitely not too late to short? Gold and silver mining stocks (GDX ETF below). The gold bugs have been extremely confident and their ranks have swelled lately, so a deep set-back is much needed in this sector. After all, mining stocks often have a greater correlation with the S&P 500 than with the gold price (which I expect to fall, though not as much as stocks).

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Ironically, I’m part of a group that’s building a huge database and stock screener in this space, called the Mining Almanac. Launching our beta site right at the top of a commodities bubble couldn’t be worse timing, so I’m trying to make lemonade and using it to search not for value stocks (what I designed it for) but the opposite so that I can short them!

For safety, don’t buy gold stocks, which are a financial asset with value contingent upon stock market conditions, tax laws (seen in Australia lately as their leftist government has slapped an extra tax on the mining industry) and myriad operational concerns. Along with plenty of cash and treasury notes, buy gold itself, either stored in your name in a vault oversees or in your personal posession. Gold is money, and in a deflationary depression with undertones of currency crisis, you want the very best.

Bill Fleckenstein, gold and silver bull, says no manipulation conspiracy

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Here’s the interview with Eric King.

Fleckenstein makes excellent points about the “jihad” against the bullion banks, explaining the ridiculousness of the GATA-type theories. He points out that they are often net short futures simply to hedge their long positions in physical, and that lots of people who work on those desks are PM bulls. He knows a few market makers at the big banks, and says they have been bullish all the way up.

Despite the supposed manipulation, gold is up 4-5X since these theories took hold in force. Why haven’t the supposed shorts “blown up”? As for the central banks, they thought gold was worthless and sold tons near the lows, but now they supposedly think “it’s so magical” that they have to keep the price down?

The futures manipulation theories are just a “loser’s lament,” as Jim Grant says. Get this: he says that big-time short seller Jim Chanos is on the PPT! I can’t confirm that, but would be very interesting and put to bed a lot of nonsense if true.

The discussion of manipulation starts about 3/4 of the way through (to jump to it, place the marker over the “t” in Fleckenstein).

Fleckenstein seems to be a huge silver bull, expecting physical demand to soar. He entertains the possibility of silver reaching some “silly” price level. The wealthy have not taken big physical positions in silver, but if they did, the market could go “wacko.”

Also discussed: the US health care bill, inflation, bailouts, Greece, and home foreclosures.

Jim Rogers discusses his euro long and stock shorts

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I happen to have similar positions at the moment, though unlike Rogers, I’m a bear on commodities and China, which he seems to be perpetually long.  Here’s today’s Bloomberg interview.

Take-aways:

- Long euro as a contrary position. Too many shorts out there.

- All these countries (Spain, Portugal, UK, US) are spending money they don’t have and it will continue.

- ECB buying government and private debt is wrong.

- EU is ignoring its own rules about bailouts from Maastricht Treaty.

- Governments are still trying to solve a problem of too much debt with more debt.

- Fundamentals are bad for all paper currencies. Good for gold.

- Is “contagion” limited now? Well, for those who get the money…

Here’s a longer interview from a few days ago on the same topics as well as stocks:

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- Rogers has a few stock shorts: emerging market index, NASDAQ stocks, and a large international financial institution.

- Rogers owns both silver and gold, but is not buying any more. He’s not buying anything here, “just watching.”

- Optimistic about Chinese currency. Expected it to rise more and faster, but still bullish.

- Thinking of adding shorts in next week or two if markets rally (my note: they have now).

- “Debts are so staggering, we’re all going to get hit with the problem,” no longer just our children and grandchildren.

David Rosenberg warns: Chinese stocks lead commodities markets.

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I’ll let his chart do the talking:

Source: gluskinsheff.net

To very little fanfare, the Chinese stock market — the first index to turn around in late 2008 — has slipped into a bear market. It is down 15 % from the nearby high and 20% from last year’s interim peak. Why this is important is because the Shanghai index leads the CRB commodity spot price index by four months with a 72% correlation (and over an 80% correlation with the oil price). Don’t get us wrong — we are long-term secular commodity bulls; however, we have been agnostic this year from a tactical standpoint — never hurts to take profits after a double!

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