Jim Rogers Expects US Dollar To Fall And Remains Bullish On Commodities

Posted on Bloomberg.

• Nov. 25 (Bloomberg) -- The U.S. dollar will be “devalued” as policy makers seek to weaken it, undermining the greenback’s role as an international reserve currency, said Jim Rogers, chairman of Rogers Holdings in Singapore.
  
  “They think that if you drive down the value of your money, it makes you more competitive, now that has never worked in history in the long term,” said Rogers. The ICE’s Dollar Index has gained 18 percent since Rogers said in an interview on April 27 he expected a dollar rally “about now.”
  
  The U.S. dollar gained since June 30 against all the 16 most-traded currencies except for the yen as investors fled for the perceived safety of Treasuries after the global financial crisis struck, tipping the world into recession. U.S. politicians are seeking to reverse those gains to revive growth, Rogers said.
  
  The dollar is “going to lose its status as the world’s reserve currency,” Rogers said yesterday in an interview with Bloomberg Television. “It will be devalued and it will go down a lot. These guys in Washington, they want to debase the currency.”
  
  Rogers said that he is buying the Japanese yen. All of the 16 most-active currencies have weakened against the yen this year, with South Korea’s won falling 45 percent as the worst performer.
  
  The ICE’s Dollar Index, which tracks the greenback against the currencies of six major trading partners, fell to 86.028 as of 11:55 a.m. in Tokyo from 86.081 late in New York yesterday. It reached 88.463 on Nov. 21, the highest level since April 2006.
  
  Plan to Exit Dollars
  
  The U.S. currency’s rally has “already lasted several months” and “will probably go into next year,” Rogers said. “What I plan to do sometime during this rally is to get out of the rest of my U.S. dollars.”
  
  “If I were doing it today and what I have done today is buy the yen,” Rogers said. “But, it is also an artificial move that’s going on. It’s a difficult problem to find out what is a sound currency.”
  
  Democratic lawmakers including Senator Charles Schumer of New York said this weekend they plan to design a package as large as $700 billion and deliver it to President-elect Barack Obama on his first day in office. Obama has called for a large economic-stimulus package, saying the U.S. faces the loss of “millions of jobs” unless immediate steps are taken to stimulate growth and rescue the nation’s automakers.
  
  Buying Commodities
  
  Rogers also is buying commodities, saying their “fundamentals have not been impaired and, in fact, are improved.”
  
  “In mid-October, I started buying commodities, I started buying China and I started buying Taiwan,” he said. “I bought them all, but I’ve been focusing more on agriculture. I mean sugar is 80 percent below its all-time high. It’s astonishing how low some of these prices are.”
  
  Sugar surged the most in two weeks yesterday amid speculation that higher crude-oil prices will boost demand for alternative fuels, including ethanol made from cane.
  
  Raw-sugar futures for March delivery rose 0.44 cent, or 3.9 percent, to 11.72 cents a pound on ICE Futures U.S. in New York yesterday. The gain was the biggest for a most-active contract since Nov. 4. Sugar has declined in each of the past three weeks.

Source: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=axUDVSTZ1k3g

Another View On Why Commodities Are Plunging

Blogged the other day: Conspiracy On How The Commodities Markets Were Rigged!

The GlobeAndMail carried the report on what Donald Coxe is saying, The real reason commodities are tumbling

• “This has done more damage to my personal wealth than anything in the last 20 years,” he said in an interview yesterday. But he has too much respect for how the U.S. authorities engineered the collapse in commodities – a move he said was necessary to shore up the global financial system – to be bitter.
  
  “My attitude is, goddamn it, they're good … it was brilliant.”
  
  To understand why commodities are plunging now – the S&P/TSX plummeted another 488 points yesterday – you have to go back to mid-July, when the U.S. Federal Reserve and Treasury first announced steps to support mortgage giants Fannie Mae and Freddie Mac.
  
  The move, which ultimately led to the Treasury taking control of Fannie and Freddie this week, touched off a chain-reaction of market events that culminated with the wrenching decline in commodities.
  
  According to Mr. Coxe, the Fed's ultimate goal was to trigger a rally in financial stocks, which would, in theory, help banks hammered by the credit crisis raise fresh capital and repair their balance sheets. To accomplish this, the decision to support Fannie and Freddie was deliberately announced on a Sunday, which had the effect of maximizing the reaction from thinly traded financial stocks on overseas markets.
  
  Because many hedge funds were using massive leverage to short financials and go long on commodities, when North American markets opened and banks initially rallied, the funds were forced to cover their short positions.
  
  At the same time, the U.S. dollar was rallying because the risk of holding Fannie and Freddie paper had diminished. The rising dollar, in turn, made commodities less attractive, giving funds that were already scrambling to cover their financial shorts another reason to dump oil, grains and other commodities.
  
  The losses were swift and dramatic. On the Friday before the July 11 announcement, crude oil closed at $145.18 a barrel. Over the following five days, it plunged 11 per cent. “Leverage was being unwound dramatically,” Mr. Coxe said on a conference call last week. “We had a true panic.”
  
  As oil and other commodities were tumbling, fears about the slowing global economy were mounting, giving resources another push downhill. This was also in keeping with the Fed's wishes, because lower commodity prices would help quell fears about inflation.
  
  Mr. Coxe has no proof that the Fed and Treasury acted in concert to boost financials and sink commodities. He is basing his assertions on conversations with hedge fund managers and on years of watching financial markets. “There's no doubt whatever in my mind” about what happened, he says.
  
  The future is less certain, however. Now that Freddie and Fannie have been nationalized, the credit crisis is still very much alive and financial stocks are looking as shaky as ever. As for commodities, once the current storm passes, Mr. Coxe is confident they will recover.

On today's Financialsense.com market wrap, market commentator, Michael Shedlock made a rebuttal on Coxe's claims on his editorial, Commodity Bulls Jump the Shark

• While it is true the Treasury is guilty of blatant manipulation when it comes to the bailout of Fannie Mae and Freddie Mac, the dollar did not rise nor did oil or commodities drop because of it.
  
  Let's take a look at charts of the US dollar and crude in the aforementioned five days around July 11 when crude started to plunge.
  

  
  
  
  
  The chart clearly shows that crude started to plunge long before the dollar rally. Right off the bat we can clearly see Coxe is off on his timeframe in regards to action on the US dollar.
  
  Furthermore, the odds of a Fannie Mae bailout causing crude to plunge immediately but the dollar to stay flat for two weeks then soar are virtually zero.
  
  Yes, Coxe is correct that Paulson wanted to ignite a rally in financials, but when it comes to Fannie Mae (FNM), Washington Mutual (WM), Freddie Mac (FRE), Lehman (LEH), and others, I believe one needs to take a look at actual results before making claims of brilliant execution.
  
  Here are the actual results: Fannie Mae and Freddie Mac are both trading under $1. Lehman is under $4. Washington Mutual touched $1.75. Do "brilliantly executed plans" as Coxe puts it, always succeed so spectacularly? If that's success, pray tell what constitutes failure?
  
  The plain fact of the matter is there were many fundamental reasons for the dollar to rally, and it did. Likewise there were fundamental reasons for Fannie and Freddie to become worthless, and they did, in spite of admittedly massive intervention (manipulation).

Shedlock then continues..

• People will see what they want to see, but the dollar rallied because there was every fundamental reason for it to rally. Was there jawboning by Paulson and Trichet? Of course there was.
  
  However, the market ignored Paulson's jawboning for forever and a day, while Trichet's statements were in regards to a weakening Europe that is now clearly deteriorating rapidly. The dollar was poised to soar on the story of a weakening global economy that was supposed to decouple from the US but failed to do so.
  
  Carry Trade Blows Sky High
  
  A massive unwinding of the carry trade is now fueling the dollar rally. Huge speculation by traders shorting the Yen and going long the Euro, the Pound, the Australian Dollar, and the New Zealand Dollar is being unwound.
  
  Similarly there was massive speculation by traders shorting the dollar and going long the Euro, the Pound, the Australian Dollar, and the New Zealand Dollar. That too is being unwound.
  
  Those sorry bets were made on the misguided belief that Europe, Asia, and especially China would decouple from the US. In other words, massive bets were made that the tail would wag the dog. Now we see how foolish those bets were, especially for the Johnny-Come-Latelies who plowed into the trade just as it was about to reverse.
  
  New Zealand, Australia, Germany, Ireland, Spain, and the UK are in or rapidly sliding towards recession. This is an enormous fundamental factor and very supportive of a strengthening US dollar.
  
  Inquiring minds may wish to read Carry Trade Rout Continues for more details.

Do read rest of Shedlock's artiucle here

Conspiracy On How The Commodities Markets Were Rigged!

FinancialSense's market commentator, Rob Kirby has a very interesting piece on how the commodities markets were rigged!

1. .. In what many folks might disregard as an unimportant revelation, the Bank of Montreal’s Don Coxe provided in his weekly web-cast to the bank’s institutional and private banking clients, a telling descriptive [transcript available here] of recent market events where he lays out how the Federal Reserve and the U.S. Treasury in conjunction with the CFTC and SEC “RIGGED” the recent collapse in commodities complex and the accompanying bounce in financials to purposely destroy people who were making commodity bets and shorting financials.

Kirby continues..

1. The unintended beauty [sic] of Cox’s words is that they “drip” with nuance illustrating the incestuous relationship between the Federal Reserve / Treasury and one of their favorite private sector agent / provocateurs - Goldman Sachs.
   
   This space has extensively documented the role of both Goldman Sachs [primarily in the investment banking / commodities space] and J.P. Morgan Chase [primarily in the commercial banking / interest rate complex] and their use as “TOOLS” to implement Federal Reserve Monetary Policy via stealth, all the while trying to maintain the illusion of “free markets.”
   
   If my read on these goings-on is only half correct, this grand stage illusion of a charade is about to come to an end.

Read rest of it here: The Stars are Aligning - But For What?

Jim Rogers Blasts The Insanity Of the Feds while remains bullish on Oil & Commodities

Here are some latest comments from Jim Rogers.

• Jim Rogers: Oil Bull Market Has Years to Go
  
  Thursday, June 12, 2008 5:18 PM
  
  The bull market for oil has many years to go before it peters out, says billionaire Jim Rogers, chairman of Rogers Holdings.
  
  There are several factors for this view, but the primary one is that "known sources of petroleum are dwindling," Rogers told Bloomberg in an interview.
  
  Global oil supplies could fall far short of need and expectations in the next 20 years, reported the International Energy Agency in mid-May. The agency long expected supply to rise to meet demand of 116 million barrels a day by 2030.
  
  It now expects oil output to struggle to reach 100 million barrels in that time frame.
  
  These market conditions will make life difficult for airlines — and airline stocks — well past 2010 and will also impact Federal Reserve policy in the coming months, Rogers said.
  
  Rogers has proved astoundingly prescient since suggesting that investors buy into the older, industrial economy back in 1999 when gold and oil were coming off 25-year lows and when the Internet stock market was soaring.
  
  Now in his mid-60s, Rogers retired from full-time work when he was 37, and invests for fun. ( source of article: here )

And fresh on Forbes.

• "We think the bull market in commodities still have a long way to go, especially when you look at growth rates in China, India, the Middle East, North Africa and throughout most of the developing world, where demand for just about every commodity is rising at unprecedented rates," Rogers said. ( Taken from Forbes article here )

Do note that Jim Rogers made them comments when he announced he is teaming up with S-Network Global Indexes to launch The Rogers Van Eck Hard Assets Producers Index. Unlike the Rogers International Commodity Index, the new index tracks the performance of companies that deal in commodities--rather than performance of the commodities themselves.

And in another article on MoneyNews, Rogers blasts the insanity of the US Fed

• Jim Rogers: Helicopter Ben Bernanke 'Insane'
  
  Friday, June 20, 2008 2:40 PM
  
  The Fed, explains commodities bull Jim Rogers, has made things worse by printing huge amounts of money, causing huge inflation, and driving the dollar down.
  
  Plus, American taxpayers will have to pay off the $400 billion spent on Bear Stearns.
  
  "If the system is so fragile that the collapse of the fifth-largest investment bank in America could bring the whole thing down, what’s going to happen in a few years when the No. 2 or No. 1 banks go bad?" Rogers asks.
  
  "What’s Bernanke going to do, get in his helicopter and fly around the country repossessing cars and houses? This is insane."
  
  So, Rogers say he's buying airlines.
  
  It's counterintuitive: Twenty-four airlines went bankrupt last year, and five of the seven largest U.S. air carriers went bankrupt during the past decade.
  
  "That’s great news," Rogers says. "Bankruptcies are signs of bottoms, not signs of tops."
  
  "I fly a lot and planes are full," Rogers notes. "You read every day that the airlines are cutting capacity and raising fares. How much more bullish can you get?"
  
  Rogers' current investment picks also include Swiss francs, Japanese yen, agriculture and oil — but no financials right now.
  
  "I'm short on the investment bank ETF, which means I’m short on all of them," Rogers observes.
  
  "Some of these companies have horrendous balance sheets."
  
  Financials go for unbelievably low prices in bear markets, he points out, but this bear hasn’t hit bottom yet.
  
  Rogers — who is also short Citibank and Fannie Mae — says the excesses in financial markets have been far too great.
  
  "You don't see any 29-year-old cotton farmers driving Maseratis," Rogers says.
  
  "But a lot of 29-year-olds on Wall Street are driving them. This is not the way the world is supposed to work."
  
  However, the oil bull market has years to run, Rogers says, even though big market reactions can still occur.
  
  He points out that the price of oil has dropped by 50 percent twice since 1999.
  
  "Unless someone discovers a lot of oil very quickly in accessible areas, we’re running out of known oil reserves," Rogers says.
  
  "If the price of oil goes high enough, they’ll be drilling on the White House lawn and Buckingham Palace."
  
  And because food reserves are at their lowest level in 50 years, unless someone starts bringing on a lot more capacity soon, Rogers believes the agricultural bull market has got a ways to go, too.
  
  Meanwhile, prices for nickel, zinc and silver are down 50 percent to 80 percent from their historic highs, yet Rogers is waiting to add more of these commodities to his portfolio.
  
  "It looks like Congress is about to do something that will drive commodity prices down, and that will create a fantastic buying opportunity," he says.
  
  Rogers advises investors, however, not to panic in bear markets.
  
  "Bear markets perform a necessary service by cleaning out the system," he says.

Oil & Commoditities: Speculation or Case of Supply/Demand?

Blogger Seng posted the following comments on the following posting: More Update on Timber Sector

• Actually, it's interesting to compare timber with oil, as prompted by raymond above.
  
  1. It's true timber takes 20-30 years to grow new and replace. But what about oil? 2 billion years to grow and replace? :-) I would say oil is a lot harder to replace than timber, once consumed.
  
  2. Yes, higher timber prices benefit direct producers more since their profit margins are geared. But I wouldn't write off the Oil & Gas players off so quickly, particularly those that are involved in E&P. Since one is comparing long term, imagine a world when more and more oil is consumed. Already, global consumption outstrips supply ("peak oil"). If exploration activities stops, how long will existing stocks & reserves lasts? What will happen to this world when globally, there is insufficient oil? I shudder to think of it, because it is almost certain we will see ridiculously higher levels that will make $120 looks very cheap in comparison. If there is a global shortage, countries will certainly go to war to control oil for their own consumption. The world then may look more like Mad Max than what we know today. So, it's clear that Exploration activities can never stop. The world cannot afford such a scenario to eventuate. It must pursue alternative energy sources as well, but that has its own political problems. I think Raymond may be underestimating the potential impact of global oil shortage on the Oil and Gas industry.
  
  3. On the other hand, if there is timber shortage, somehow, I don't think countries will bother going to war for it. Alternative building materials already exist in abundance.
  
  Of course, this is extremely long term view, and I personally don't invest based on such super-long term considerations. (Some might disagree with me and argue that this might happen sooner and within my lifetime).

Following this, Seng highlighted the link to Michael Masters's testimony on the the driving factor behind the surge in commodity prices before US Senate Committee on Homeland Security, http://hsgac.senate.gov/public/_files/052008Masters.pdf

Now this article has generated lots of comments. One was written by one of SeekingAlpha contributing writer, Philip Davies, Commodities Prices: Speculation Exposed

• The most exciting thing that happened Tuesday was the testimony of Michael Masters to the Senate Committee on Homeland Security (who have sweeping powers) as he spilled the beans and gave the Senate a very detailed inside view of exactly how speculators are the primary cause of high commodity prices.
  
  Don't look for any commentary on this in the WSJ or most media outlets, you would think this entire investigation isn't going on as you watch CNBC wearing their Oil $130 party hats this evening!
  
  What we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets: Institutional Investors. Specifically, these are Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments and other Institutional Investors. Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant.
  
  With very bold categories in his presentation like "Index Speculator Demand is Driving Prices Higher" Masters lays out a simple and compelling case that illustrates how over $250Bn of speculative money has poured into the commodities markets since 2003, driving the average cost of commodities indexed up 183% WITHOUT ANY SIGNIFICANT INCREASE IN ACTUAL DEMAND.
  
  It's not just oil, there is a chart on page 4 of his presentation that shows how on Jan 1st 2003 sugar futures stockpiled totaled 2.3Bn pounds. On March 12th of this year, speculators had stockpiled 48Bn pounds of sugar. Soybean oil went from 163M pounds to 4.5Bn pounds, corn from 242M bushels to 2.4Bn bushels, coffee from 195M pounds to 2.4Bn pounds. wheat from 166M bushels to 1.1Bn bushels. Even cattle and hogs have had 10-fold increases in speculation. This is your "demand," 10 month supplies of commodities removed from the markets over 5 years and held by speculators who point to the "demand" as evidence of a tight supply - A TOTAL CROCK!
  
  Speculators "consumed" as much additional oil as China in the past 5 years (848M barrels) while gasoline stockpiles have risen from 1.1Bn gallons to 3.5Bn gallons and natural gas stored by speculators has gone up from 331M BTUs to an insane 2.3 Billion BTUs. Aluminum - 10x, Nickel - 5x, Zinc - 10x, Copper - 7x, Gold - 10x, Silver - 15x — Madness!

And of course, my favourite newsletter from John Mauldin has written a piece too, Whither the Price of Oil? (subscription required.)

• Those Nasty Index Speculators
  
  Are institutional investors in the form of large commodity index funds the reason behind the current rise not just in oil prices but in the prices of seemingly all commodities? Michael Masters, a long-short hedge fund manager, in testimony before the Congressional Committee on Homeland Security and Governmental Affairs, said:
  
  "You have asked the question 'Are Institutional Investors contributing to food and energy price inflation?' And my unequivocal answer is 'YES.' In this testimony I will explain that Institutional Investors are one of, if not the primary, factors affecting commodities prices today. Clearly, there are many factors that contribute to price determination in the commodities markets; I am here to expose a fast-growing yet virtually unnoticed factor, and one that presents a problem that can be expediently corrected through legislative policy action."
  
  You can read the entire testimony at http://www.mcadforums.com/forums/files/michael_masters_written_testimony.pdf, but let's hear the basics of his argument:
  
  "What we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets: Institutional Investors. Specifically, these are Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments and other Institutional Investors. Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant.
  
  "These parties, who I call Index Speculators, allocate a portion of their portfolios to "investments" in the commodities futures market, and behave very differently from the traditional speculators that have always existed in this marketplace. I refer to them as "Index" Speculators because of their investing strategy: they distribute their allocation of dollars across the 25 key commodities futures according to the popular indices - the Standard & Poors - Goldman Sachs Commodity Index and the Dow Jones - AIG Commodity Index."
  
  These index funds are composed of a number of commodities. While oil is the biggest component of the various funds, they also have exposure to grains, base metals, precious metals, and livestock. When you buy one of these funds you are buying a basket of commodities.
  
  Why would an investor want exposure to a long-only index of commodities? Perhaps for portfolio diversification, as commodities are uncorrelated with the rest of the portfolio, or as a way to play the growing demand for commodities of all sorts from emerging markets, as a hedge against inflation, and so on. Mainline investment consultants began to suggest a few years ago to their clients that they get into the commodity market on a buy and hold basis, just like they do with stocks and bonds.
  
  And they have done so in a very large way. As the chart below shows, at the end of 2003 there was $13 billion in commodity index funds. By March of this year, that amount had grown 20 times, to $260 billion. Masters also shows that this corresponds with the stratospheric rise in commodity prices. In many commodity futures markets, index speculators are now the single largest participant.
  
  
  
  Is Correlation Causation?
  
  There is no doubt that the rise in the investment in commodity indexes and the rise in prices correlate significantly. But does correlation necessarily mean that there is a direct cause and effect? Masters says it does. (Later we will look at arguments against this view.)
  
  As an illustration, he shows that the rise in demand for oil from China in the past five years has been 920 million barrels of oil per year. But index demand (the word Masters uses) for oil has risen by 848 million barrels, almost as much as another China.
  
  And Masters gives us facts that are interesting. There is enough wheat in the index speculator "stockpiles" in the US to feed every many, woman, and child all the bread, pasta, and baked goods they can eat for the next two years - about 1.3 billion bushels. Yet wheat has soared in price.
  
  As the prices of the indexes have risen, the demand for the indexes has grown. And these indexes are not price sensitive. If a billion dollars is invested in a given week, the index funds simply buy whatever allocation of futures contracts is needed to make up their index, at whatever price is offered.
  
  For the first 52 trading days of the year, demand for commodity index funds grew by more than $55 billion, or more than $1 billion a day. And as Masters points out, "There is a crucial distinction between Traditional Speculators and Index Speculators: Traditional Speculators provide liquidity by both buying and selling futures. Index Speculators buy futures and then roll their positions by buying calendar spreads. They never sell. Therefore, they consume liquidity and provide zero benefit to the futures markets.
  
  "Index Speculators' trading strategies amount to virtual hoarding via the commodities futures markets. Institutional Investors are buying up essential items that exist in limited quantities for the sole purpose of reaping speculative profits."
  
  And now we get inflammatory:
  
  "Think about it this way: If Wall Street concocted a scheme whereby investors bought large amounts of pharmaceutical drugs and medical devices in order to profit from the resulting increase in prices, making these essential items unaffordable to sick and dying people, society would be justly outraged."
  
  What about position limits? Aren't there real limits to the amount of a physical commodity that a fund or speculator can accumulate? Masters points out that there is, but the CFTC has given investment banks a loophole, in that they can sell unlimited size positions in the OTC swap markets if they hedge the positions.
  
  So, a hedge fund could buy $500 million worth of wheat, which would be way beyond the actual market position limit, through a swap with a Wall Street bank, without having to worry about position limits. And there is no doubt that large purchases of any commodity will drive up prices, at least in the short term.
  
  What does Masters think Congress should do? Prohibit pension funds from commodity index buying, close the swaps loophole on speculative positions, and make the CFTC (Commodity Futures Trading Commission) provide more transparency as to who is buying commodities. That would stop those nasty index speculators from driving up food and energy prices. Prices would come back down and we could all go back to driving our SUVs without having to worry about the cost.
  
  Well, then, maybe not. It is not that simple. While there is no doubt that excess demand in the form of index buying can have a very real effect -on prices, it is not the whole story.
  
  What an index funds does is buy a futures contract for a given commodity when money is first invested. Say that contract is six months out. When the contract is one month from expiration or delivery, the index fund sells that contract and buys another contract six months out. They sell before the contract could have an effect on the cash price of the physical commodity. The cash price is determined by supply and demand.
  
  Let's look at supply. Masters mentioned wheat. Yes, the index speculators have built up a large futures position. But that is not the same as a large physical position. With demand soaring abroad and droughts crimping supply, the world's wheat stockpiles have fallen to their lowest level in 30 years, and stocks in the United States have dropped to levels unseen since 1948. That could go a long way to explaining rising wheat prices.
  
  Corn? The USDA is expected to report corn stocks for the year ending Aug. 31, 2009, to fall to 685 million bushels, according to analysts surveyed by Thomson Reuters, down 47% from 1.283 billion bushels in 2008. The corn crop season ends on Aug. 31. (They expect wheat and soybean stocks to rise, for which we can be thankful.)
  
  Bob Greer, executive vice president at PIMCO, rebuts Masters arguments in a very cogent paper recently sent to me. He argues that index funds do not affect the price but may contribute to volatility.
  
  "Some market observers have tried to tie the level of inventories to index investment, most notably in crude oil. Their arguments take one of two forms:
  
  "1) The indexer's act of selling the nearby and buying the distant contract forces the futures curve to be upward sloping (future price is higher than nearby price). This creates an incentive to own inventories and earn the "return to storage" represented by the slope of the futures curve. The act of increasing inventory keeps the commodity off the market, thus decreasing supply.
  
  "2) A variation of the above argument is that the short seller, who takes the other side of the indexer's purchase, needs to protect their position by buying and holding the physical commodity.
  
  "It would be nice if either of these arguments were true, in which case, the developed world would not be hostage to the Organization of the Petroleum Exporting Countries (OPEC). Any time we needed to increase crude inventories, we need merely to bring in more indexers, and the inventory would appear. In fact, the explanation for inventory levels of any commodity is much simpler. If, in the cash markets, production exceeds demand, inventories will rise. Otherwise they will fall. That is why, in six of the last eight years, global wheat inventories fell, regardless of index investment (USDA). That is why from 2006 to 2008, crude oil inventories declined and the crude oil curve went from upward sloping to downward sloping, in spite of increasing index investment (EIA). Furthermore, the second argument above breaks down when applied to non-storable commodities such as live cattle."
  
  Further, Greer shows a chart from Deutsche Bank which highlights the fact that many commodities which are not in the index fund portfolios have risen higher than exchange-traded commodities (rice, for instance). Look at the chart below:
  
  
  
  Greer concludes with these important paragraphs:
  
  "Regarding intrinsic value, commodity futures prices converge to cash prices, and cash prices are set by the level of demand to consume physical goods such as steak, gasoline, and Wheaties. The price setting mechanism is not based on possibly erroneous assessment of a financial statement, nor on irrational exuberance. In commodities there is an outside measure of intrinsic value--the cash market--that is not dominant in equity, real estate, or tulip bulb markets. As actual commodity prices go higher or lower, they reflect consumption requirements for actual products, many of which are not very storable.
  
  "This is a sharp contrast from internet stocks or vacation condos, which are subject to speculative bubbles. Unfortunately, our conventional wisdom regarding factors that create bubbles is rooted in asset classes like stocks and real estate, asset classes that have fundamentally different characteristics than physical and futures markets.
  
  "Coincidence is not the same thing as causality. It is a coincidence that commodity index investment has increased in the last few years just as commodity prices have increased. If there is any causality, it is the other way around. Rising commodity prices have caused an increased interest in commodity investment. And it is certainly causality that fundamental supply, demand and inventory factors have driven commodity prices in many markets higher, whether or not those are markets in which index investors participate. This is the same causality that has driven commodity prices both higher and lower for many decades."
  
  Where Will Oil Prices Go?
  
  So, let's look at the fundamentals for oil. While a large part of this week's rise in oil was short covering (you can tell that from open positions), the supply of oil was down 7% from last year, even with demand beginning to fall. But there is an interesting footnote to that statistic, which we will visit later. Look at the chart below from http://www.economy.com/:
  
  
  
  Notice that supplies turned down sharply this last month, while the momentum of falling supply had been dropping since January. That is to say, the change in crude oil stocks was a negative 10% in January and was a little over -4% a month ago, falling to -7% today. But this is in the face of demand slowing. Today we learned that gasoline usage was down 4.2%, as prices are finally changing American driving behavior.
  
  Jakab Spencer noted in his always interesting Dow Jones column that there is a disconnect between the New York Stock Exchange and the New York Mercantile Exchange, just one mile apart. The NYSE is pricing in $75 oil in oil stocks, while the futures market is surging over $135, and there are calls for near-term $150-a-barrel oil. The stock market is telling us that oil, at least in futures terms, is in a bubble.
  
  And frankly, if you listened to their testimony, and more importantly pay attention to their actions, oil company executives simply do not believe that the price of oil is going to be $135 a barrel for the next few years. If they did, they would be punching more holes in the ground in places where it might be expensive to get the oil to market - but at $135 a barrel it would be profitable.
  
  And then there is an odd circumstance in the oil picture that I think may suggest that we could see a break, and perhaps a violent one, in the near term for the price of oil.
  
  Where Are All the Tankers?
  
  For a few weeks now, observers have noticed that Iran is leasing tankers and storing oil in them. At about $140,000 a week or so, that is expensive storage. At first, conspiracy theorists were wondering if they were preparing for some kind of war or attack. But more conventionally, it may be they are having problems selling their oil. Their oil is not very high-quality, and there are only a few places that can take it and refine it. India, China, and the US are among the countries with refineries that can take Iranian oil. (And yes, George Friedman of Stratfor tells me some of it does end up in the US from time to time.)
  
  India's refiners are telling Iran they no longer want their oil, preferring the higher-quality oil that is readily available in the area. So Iran has to decide whether to send it to China or "repackage" it so that it can end up in the US, while they try to get refiners in India to change their minds. Thus, they are leasing tankers to store the oil they are pumping.
  
  I called George about six this evening and asked him about the Iranian situation, as that is a lot of oil that could come on the market at some point, as well as a possible reason that oil supplies are down. George has analysts on top of this situation.
  
  He told me, "John, it's more interesting than that. It is not just Iran. Today we started checking on how many tankers Iran had, and soon discovered that there is a serious tanker shortage. Lease prices have soared in the past few weeks. It is clear there are a lot of speculators betting that oil is going to rise to $150 or so and are willing to pay very high prices for keeping the oil on the seas waiting for higher prices. It is a speculative boom."
  
  He then told me about flying into New York in the early '80s. Outside the harbor were 30 or so tankers just sitting, waiting for prices to continue to increase as they had been doing for some time. When they did not, they all tried to get into the harbor at the same time, and of course they couldn't. It was the top of the market. Prices dropped, and the owners of the oil had to go to the futures market to hedge what they could. I had heard that story, but George saw it with his own eyes.
  
  Almost everyone (except the stock market) is convinced oil is going higher in the near term. As I noted above, this week's rally was partially due to short covering by large institutions and companies which had sold production far into the future at much lower prices. They finally threw in the towel and took off their hedges.
  
  Is it 1980 All Over Again?
  
  We may be getting ready to stage a very interesting economic experiment. Is Masters right that prices are driven by speculation, or is it supply and demand? Follow me on this one. I am not saying that this will happen, but it is an interesting scenario.
  
  Many developing countries subsidize the price of oil to their citizens, so they do not feel the pain of higher oil prices. But the headline of today's Financial Times is that Asia is finally getting ready to cut their subsidies as oil rises to $135. The awareness that they need to allow market conditions to prevail is finally being acknowledged, as they cannot afford the subsidies. This is going to help drive down demand for oil over time.
  
  As demand starts to fall, let's remember that the storage facilities for oil waiting to be refined are a finite item. If all those tankers end up needing to find a home at the same time, even as demand for oil is going down, you could see the price of oil go down rather quickly in the short term.
  
  If you are leasing tankers to deliver oil that is already hedged in price, you want to get it to port as soon as possible so that your lease payments stop as soon as possible. You only hold it on the high seas if you think the price is going up by more than your carrying costs (the cost of money and leasing the tanker). If you start to lose money, you sell your oil on the futures market and get it to port as fast as you can.
  
  Now, here is where it could get interesting. Oil is the biggest component of the commodity index funds. If oil drops and looks likely to go lower, then the massive buying of these funds we have seen in the past few months could dry up. As Dennis Gartman says, it takes a lot of buying to make the price of something to go up, but it only takes a lack of buying to make it go down. And if there is net selling?
  
  If we see money start to flow out of the index funds (and ETFs) because of momentum selling, that means the funds are not only selling their oil components, but also the grain and metal and meat. If the index funds are the key component in the rise of prices, we should see the price of all commodities go down in tandem and in sympathy. If oil is the only thing going down as index funds go down, then it is a supply-related issue.
  
  But what if index funds continue to grow? If there is an abundance of oil, it will eventually show up in the spot price, as storage will be lacking, no matter what the longer-term futures prices do. The market will soon tell us whether index funds are a major factor. I tend to think that even while index fund buying is bullish, it is not the major factor that is the driver of commodity prices. And even if it is significant in the short term, in the long term fundamentals will drive the true price.
  
  If it is simply index speculation, it will end in tears when the fundamentals catch up.
  
  Let me say that I believe the long-term price of oil is going much higher. I was writing about $100 oil two years ago. $150 and $200 oil is in the cards at some point in the future. If you have not read the Outside the Box from last Monday, you should. My friend David Galland points out that Mexico, which supplies 14% of US oil, is likely to be a net importer of oil by the middle of the next decade, as their internal demand increases and production decreases. Iran will be a net importer within six years for the same reasons. Russia's oil exports are down this year, as are Mexico's. Energy costs are going to rise in the next decade, and maybe much sooner.
  
  You can click on the following link to read the Outside the Box on where oil exports are headed in our future. And Casey Research does some top-notch analysis of energy investments (not just oil) in a very reasonably priced letter, if you are inclined to invest in individual stocks.
  
  As for today, if I was in a long-only commodity index fund, unless my time horizon was very long I would be watching it closely and have some close stops. And I might wait until I saw what the price of oil was going to do. If you have some profits, then you might want to think about taking some off the table. Just a thought.

End Of Commidities Bull? BDI and Bear.

Blogged last Thursday: Buying Opportunity for Planters?

What was asked is this correction in the commodities market a healthy correction or is this the the end of this massive bull run.

Today, CNBC delivered more clues and it published the following, Commodities Bubble Burst? Big Clue Comes Next Week

• Investors wondering whether the agricultural commodities bubble has burst will get some important clues in next week's annual crop plantings report, considered a bellwether for the direction of farming activity for the year.
  
  Analysts are looking for the Department of Agriculture's March 31 survey to show a decrease in corn acreage over last year's record planting, as well as a pronounced increase in soybeans and more wheat in the ground.
  
  But what those projections will mean for investors remains to be seen. Commodity analysts are expecting volatile planting numbers this year, with the weather and direction from traders to play a major role.
  
  Wet conditions in the heartland, for instance, could depress the amount of corn acreage, raising its price in turn. Soybeans, meanwhile, likely will get more attention this year after losing acreage to corn in 2007 due to a sharp increase in demand for ethanol. Wheat also will be in flux, its price subject to possibly lower demand due to resumption of planting worldwide after a year of a supply-constricting global drought.
  
  How the three major agricultural products fare is of major concern as investors wonder whether the commodity's bullish run of record-setting prices will continue or has run its course.

The article continues by saying.

• "Planting intentions are very important to how our supply and demand balances will look this coming year," said Melvin Brees, an agricultural economist at the University of Missouri's Food and Agricultural Policy Research Institute. "One of a number of factors is the unpredictability of the weather."
  
  Corn takes the biggest hit from bad weather, as it needs to be planted the earliest of the other major crops. It also does not plant well in saturated soil and requires the most fertilizer, which has become more expensive as the United States has lost its place as the world's primary manufacturer.
  
  Continued rainy conditions, or an excessively wet spring, could alter the agricultural commodities market dramatically, sending corn prices well higher on less supply.
  
  "That would create a huge amount of volatility in the markets," Brees said. "With supplies as they are, you would probably see a sharp market reaction."
  
  
  Despite a record corn planting last year, there was only a slight increase in carryover — the amount that's left over from the previous harvest — to the spring. Should corn production drop this year, that could make supplies very tight and become a bullish indicator for prices. The same thing goes for wheat and soybeans, both of which also saw low carryover rates, attributable to surging demand from emerging markets across the world.

But what was most worth noting was the following two statements..

• Other commodities, such as gold, platinum and oil also have seen record runs, but there is sentiment that the end may be near. The commodities run has been fueled by speculators and those cashing in on the weak dollar, the currency in which most commodities are traded.
• "I would not call the long-term trend over by any means. This very recent weakness that we've seen was more a function of speculators getting washed out," Kub said. "The entire market is not a bubble. There was just a part of it that needed to get washed out. The fundamental trends ... they're still in place."

Fundamental trends still intact?

Fundamentals are part of everything but surely what we have seen are bubbles of epic proportions. Or am I delusional?

In another article from CNBC. Oil Extends Slide on Dollar, Demand Worries

• Oil prices fell more than a dollar Monday, extending a slide from last week's record to nearly 10 percent amid a recovery in the U.S. dollar and lingering worries over slowing energy demand.
• "We suspect that the correction in commodities still has some ways to go, and we could push somewhat lower from here," Edward Meir with MF Global said in a research note

Gold last traded at 918.00. On March 17th it traded for 1,032.70 an ounce!

The BDI is now at 7684. Down another 117 points. Down 8 days in a row! Which would means that the BDI has retraced swiftly a massive 1000 pts since it recovered back to a high of 8600 almost 2 weeks ago.

What gives?

In an intersting editorial Pressure on Baltic Dry Index by Manas Chakravarty and Mobis Philipose.

• Strange things have been happening to the Baltic Dry Index, the index covering dry bulk shipping rates and widely seen as a leading indicator of global economic growth. After rising to an all-time high of 11,039 last November, the index nearly halved to 5,615 in January, but has since recovered some lost ground, moving up to more than 8,600 last week. But it has started falling again since then and on 19 March, it was at 7,801

I hold my reservations against the BDI being used as a leading indicator of global economic growth. Yes, there are justifications for it but there are other variables that can have a massive impact this index. Shipping rates depends on the availability of ships. And sometimes ships might not be available or shipping could be halted by severe weather. As seen last month, severe snowstorms caused havoc on this index (see Baltic Dry Index And China Snowstorms? ). And last but not least, epic bubble prices on commodities had a massive impact on the rise of the impact.

Anyway the above editorial made several strong points.

• The answer lies in commodity prices. Industrial commodity prices, too, have started moving up after falling for much of last year. And as commodity prices have risen, so have the freight rates for carrying those commodities.
  
  The demand for commodities depends a lot on Chinese demand and that has so far held up pretty well. For instance, China’s imports of iron ore were up 33% year-on-year in February. But growth may cool off if the Chinese government tries to curb inflation.
  
  More significant is the fact that bulk shipping rates are falling. That, says a Citigroup research report, is “a red flag for the Baltic Dry Index rally and raise questions about the industry’s confidence in its sustainability”. Citi analysts point out that the supply of ships is going to rise substantially in 2009 and 2010. Demand growth, on the other hand, is not likely to keep pace with the supply of ships, although the supply-demand balance this year is, according to the analysts, “debatable, but precarious”.
  
  The upshot: “The bullish argument for bulk shipping is that we’ll see massive ship delays out of China, while the bear arguments are that ship supply growth will still be at all-time highs in 2009–11 and/or commodities will lose their steam as we learn not to underestimate the impact of a slowing US on emerging markets and their seemingly decoupled commodity demand trends.”
  
  The sudden fall in commodity prices over the last couple of days will add to the pressure on the index.

Bear Stearns and JP Morgan?

OMIGOD!

Totally ludicrous!

Do read Rob Kirby's piece on it, Dubious Deliberations

• Do these grotesque proceedings, from start to finish, not reek of a snake-oil-swindling carnie act?

Last but not least, posted on CNN: Don't trust the Wall Street rally

How now Brown Cow?

Buying Opportunity for Planters?

Highlighted on the Business Times: Commodity Roundup: CPO futures sharply lower

• CPO FUTURES
  
  CRUDE palm oil (CPO) futures prices on Bursa Malaysia Derivatives ended sharply lower on weak demand yesterday, dealers said.
  
  Market sentiment was also subdued ahead of the public holiday today, one of the dealers said.
  
  The fall in soyoil futures on the Chicago Board of Trade also weighed down market sentiment for CPO, he said.
  
  At close, April 2008 declined RM89 to RM3,344 per tonne, May 2008 eased RM105 to RM3,345 per tonne, June 2008 went down RM120 to RM3,330 per tonne and July 2008 dropped RM119 to RM3,320 per tonne.
  
  Turnover was lower at 17,935 lots from 21,356 lots on Tuesday while open interest declined to 41,228 contracts from 43,406 contracts.
  
  On the physical market, March South was lower at RM3,400 per tonne from RM3,450 per tonne previously.

However, highlighted on the Star Business: 2nd-tier planters in for a rebound

• Second-tier plantation stocks on Bursa Malaysia are expected to rebound soon on short-term speculative buying, analysts said.
• The major beneficiaries of the recovery include Sarawak Plantations Bhd, Sarawak Oil Palms Bhd (SOP), Rimbunan Sawit Bhd, TH Plantations Bhd, IJM Plantations Bhd, Tradewinds Plantation Bhd and TSH Resources Bhd.
• The price of crude palm oil (CPO) has retraced by about 30% to RM3,390 per tonne to date from a record RM4,486 per tonne. However, Aseambankers, in a recent report, said it is “not ruling out the possibility of another round of speculative buying stemming from the US Fed interest rate cut.”

Two issues.

1. Does the current sell down creates a buying opportunity, given the fact that despite the current plunge in the CPO futures, based on the current ASP (Average Selling Price) sold by our planters , represents insane profits?

2. If so, why 2nd-tier planters? If this indeed is a buying opportunity, why don't one focus on market leaders? Market leaders lead. 2nd-tier will be 2nd-tier.

How?

Which brings me to this article posted on Singapore Business Times, Can plantation stocks hold out?, which I feel is an excellent second opinion on this issue!

• FIRST came the spillover effect from market fears that the assets of Indonesian oil palm producer First Resources would be auctioned off. Now, plantation stocks - and these include First Resources - have been dealt another blow as the price of crude palm oil (CPO) plunged on Tuesday.
  
  It seems that the earlier optimism surrounding these stocks has quickly dissipated upon a loss of support from CPO prices. But is the selldown really justified, or are short-term fears clouding the good growth stories that these stocks offer?
  
  Though most of these counters have recovered some ground from Tuesday's plunge, it now seems that the earlier knee-jerk reaction has thrown ice on previous propositions that this sector could weather a market downturn well.
  
  Some analysts, however, believe that the valuation of Singapore-listed CPO players has gone down to levels where investors can start to do bargain-hunting. There are good reasons for their optimism. After all, should investors peek through the smoke of market volatility and fear and look at the fundamentals, this sector has some compelling stories.
  
  Before the CPO price shock, some good news appeared to be surfacing at Wilmar, which has submitted a request to the Chinese government to raise its branded cooking oil price. The Chinese government wants to increase supplies after price controls imposed in January cut the retail stockpile and has asked Wilmar, among other companies to increase consumer sales.
  
  For Indofood Agri, the integration with Lonsum, a listed company in Indonesia in which it bought a majority interest, is expected to provide a significant near-term catalyst for the company, given the possibilities for cost savings and the pooling of expertise, according to Macquarie Research.
  
  Things are also looking brighter for First Resources now, after fears of an output cut this year were allayed when it clarified that its founder and former shareholder Martias had fully paid off damages of US$38.3 million and that Indonesia's Corruption Eradication Commission has withdrawn its intention to auction off three of First Resources' plantation and milling assets that were deemed to be related to Martias.
  
  In addition, the earnings growth outlook for these CPO players remains robust. For instance, analysts' mean earnings estimate for First Resources stands at 1.19 trillion rupiah (S$177.7 million) for FY08, up from 431 billion rupiah for FY07. For Wilmar, the estimate is US$870.9 million, up from US$580.4 million for FY07. And for Indofood Agri, it's 1.66 trillion rupiah for FY08 compared to 889.1 billion rupiah a year ago.
  
  But in the face of fears and a loss of market confidence, these prospects can end up being overlooked.
  
  That is the disconnect happening in the plantation sector - even if CPO prices and earnings are still on the rise, fears of heightened risks can continue to choke share prices.
  
  This is reflected in UOB KayHian's view on the sector. Despite higher CPO price assumptions and earnings forecasts, it is keeping an 'underweight' rating on Malaysia's plantation sector, citing political uncertainties, higher sector risks from high CPO prices, huge inventories and government intervention, as well as demand risks from biodiesel losing its shine.
  
  Rising risks in this sector would naturally point to lower PE valuations and hence, further downside. But it remains to be seen if such a lacklustre view of the Malaysian plantation sector will trigger a reassessment of Singapore-listed plantation plays as well.
  
  While earnings visibility remains clear and balance sheets remain fundamentally sound, these factors could pale in the face of further knee-jerk reactions to volatile CPO prices and fears of heightened risks.
  
  And it is unclear if good news from this sector is now enough to make jittery investors take another look. But if analysts' buy calls can still be counted on, it may pay to take a closer look at stocks that are trading below or close to 10 times forward PE - stocks such as First Resources, Indofood and Golden Agri.

More worrying is the immediate weakness in several commodities. Gold Leads Commodities Plunge on Outlook for Dollar, Economy

• March 20 (Bloomberg) -- Gold headed for its biggest weekly drop in 25 years, leading a drop in commodity prices, after the dollar rallied and concern mounted a U.S.-led slowdown in the global economy will reduce consumption of raw materials.
  
  Oil fell below $100 a barrel for the first time since March 5, soybeans dropped for a second day and copper had its biggest two-day decline in seven months. The UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials is having its worst week since at least 1997, led by declines in soybeans, cocoa and cotton.
  
  There is ``a glaring divergence between escalating commodity prices and waning world economic growth,'' James Steel, an analyst with HSBC Securities in New York, wrote in a report e- mailed today. It is ``no longer assured that commodity price appreciation is a safe one-way bet.''
  
  Gold in London has plunged 12 percent from its record $1,032.70 an ounce on March 17 after the Federal Reserve cut its overnight-lending rate less than expected by 75 basis points to 2.25 percent. The dollar has recovered 2.8 percent from an all- time low against the euro and rallied 4.6 percent from a 12-year low against the yen.
  
  Commodities have advanced in each of the past six years, driven by demand from China seeking to feed its population and power its expanding economy. The dollar's slide has boosted demand for raw materials, which become cheaper for buyers holding other currencies, while some investors are seeking higher returns following a slump in equities

How?

If commodities all over are correcting or plunging in a drastic manner, then perhaps isn't it much better to adopt the side lines approach?

As mentioned in the Bloomberg article.

• `Absolutely Enormous'
  
  The money flowing into commodities is ``absolutely enormous,'' James Proudlock, commodity product head for Europe, Middle East and Asia at JPMorgan Securities Ltd., said at a sugar conference yesterday in Geneva.
  
  There are 361 commodity funds that had $98 billion in assets as of Feb. 28, compared with 345 funds with $80 billion at the end of 2007, he said.
  
  The rally, according to Paul Touradji of the $3.5 billion hedge fund Touradji Capital Management LP, was a ``buying orgy'' that had inflated prices and increased the risks of a collapse.
  
  Commodities ``have all gone parabolically higher on frenzied money flow,'' New York-based Touradji wrote to clients March 10. ``Unless that money flow continues ad infinitum, in which case prices would go to infinity, then the fundamentals had better be improving as quickly as prices have been, otherwise there is nothing else to keep the markets at these levels.''

Which is rather confusing for most. A Falling Dollar Should Contribute More Strength to Commodities

• A falling dollar should also contribute more strength to commodities. But yesterday gold and oil fell quite a bit. What gives?
  
  The dollar had a rare moment of inspiration. It was delusional inspiration, though...it won't last. Besides, commodities have other reasons to go up than dollar weakness. Our French technical and currency guru, Gabriel Andre, explains:
  
  "Commodities are negatively correlated with the US dollar, and in the short-term the US dollar is oversold. Many traders feel the Fed has played its hand fully, and see this as a reason to buy back into the dollar…in the short term, that is.
  
  "But with cheaper commodities, there are likely to be bargain-hunting investors looking for a good entry point into the market. Further down the track, strong demand from Asia for real goods is likely to continue. Tangible assets still have the wood over financial assets…so cheaper commodities will generate more buyers, particularly in gold.
  
  "A fall in gold gives it buying strength, technically…and it will enjoy fundamental demand from those wishing to hedge against an inflation and the long-term dollar weakness."

Posted on cnbc.com, Commodity Market's Roiling Riptides Of Prices

Posted on Reuters. COMMODITIES-Crumble on Global Flight from Risk

And the following posting is worth reading: DELEVERAGING- Gold and Commodities Teetering on the Brink of a Bear Market?

The author, Nadeem Walayat, asks the following.

• Gold and other commodities plunged below key short-term support levels following Tuesdays US Interest rate cut to 2.25%. The consensus seems to see this as a healthy correction or is this a signal for a potential end of the commodities bull market?

He continues.

• Gold and Commodities are NOT immune to the impact of deleveraging, as evident by the sharp drop in Gold yesterday

Are we seeing deleveraging?

What say you?

HwangDBS goes Overweight on Planters

Got this copy of report on HwangDBS commentary on the plantation sector from a pal.

• OVERWEIGHT KLCI : 1,173.2
  
  A dichotomy in the making
  Trading at a deep discount. Plantation stock movements have recently been more akin to the broad market indices rather than their intrinsic values. This, we believe, might be due to reassessment of market risks and to a certain extent, fears that a weak US economy could translate into a correction in commodity prices. The fact is palm oil price momentum had remained strong relative to our assumptions. YTD CPO futures prices for March 2008 delivery averaged RM3,471/ton, even after accounting for the sharp correction in the past week. CPO prices may need to drop further to around RM2,800 to match our full year average of RM3,100/ton. But even based on these assumptions, plantation stocks are still trading at a deep discount. While it is true that most of the other stocks are also trading at attractive levels relative to our target prices, we believe that the gap for plantation stocks is too big to ignore.
  
  Well timed correction in CPO prices. We believe CPO futures’ recent surge past the RM4,200/ton mark had more to do with speculation of a jump in Chinese demand – largely following the soybean complex – rather than a significant jump in demand. Indeed, over the past six months, protests against rising food prices in several countries meant two things:
  
  1. The governments of consuming countries would have to better manage supplies of oilseeds and vegetable oils to cushion the external price shocks (refer to our Plantation Sector report dated 14 February 2008); and
  
  2. Excessive price drops are unlikely, since demand should pick up again as soon as that happens. In the near term, CPO and soybean oil prices may have some more room to correct because their prices have moved ahead of other vegetable oils. But to the same level of YTD appreciation of competing oils, primarily rapeseed oil.
  
  IOI Corporation is an integrated plantation with one of the highest yields in Malaysia, one of the largest oleochemical manufacturing capacities in the world, and recently expanded into Indonesia. IOI is favored for its active capital management and ROE in excess of 20%
  
  IJM Plantations is a large-cap pure plantation play operating in Sabah. It has 57,472 hectares of plantation landbank – around 26,500 hectares of which are located in Kalimantan, Indonesia.
  
  KL Kepong’s management is known to be conservative. Growth for this stock had been gradual but steady. KLK has a strong balance sheet and is expected to have net cash of RM720m (67 sen per share) by end FY08F for future expansion.
  
  Sime Darby is a GLC conglomerate with businesses in plantations, property, heavy equipment, motor vehicle, energy and utilities. It is the largest listed by planted area, largest property by landbank and potentially the owner of Bakun Hydroelectric Plant
  
  TSH Resources is a small cap play benefiting from aggressive acquisitions in Indonesia since 2004 that provided immediate volume growth. TSH earnings are also from wood flooring, cocoa processing, carbon credits, and a 800k MT p.a. refinery (50:50 JV with Wilmar).

Here is a snapshot their price targets.

• Reiterate Overweight call. We are keeping our CPO price forecast of RM3,100/ton for this year, RM2,800/ton for next year and RM2,650/ton for 2010. Bear in mind that our valuations are based on DCF from FY09F onwards. This means that the current share prices are implying bleak CPO price outlook and ignores long-term earnings expectations from volume growth.
  
  We maintain our Overweight rating for the sector, as we do not expect plantation operations to be affected by the outcome of the election; the main drivers remain global pricing and export-driven volume growth.
  
  Following the recent drop in share prices, all the plantation stocks under our coverage are trading at deep discounts to their respective fair values. IOI Corporation’s valuations are undemanding, while KL Kepong and IJM Plantations look attractive given that they should book good earnings over the next four quarters. We also upgrade Sime Darby to Buy (from Hold) as the share price has dropped by 21.7% since we downgraded the stock to Hold on 28 February. Our price target is now adjusted to RM12.40 from RM12.60, after factoring in lower multiples for property (down to 10x from 13x) due to potential delays in project launches and the impact of its current litigation case in Indonesia, which we estimate could cost the company RM122m (c. 4% of FY08F earnings). We believe the discount that Sime Darby is trading at now is too large to ignore. For small caps, we still like TSH Resources.
  
  For Singapore, we are reiterating our Buy call for Wilmar International; and for Indonesia, we recommend Bakrie Sumatra Plantation and London Sumatra Indonesia for significant upsides to our target prices

Game of Love - Santana featuring Tina Turner!

Is the Good Times over for Commodities?

Firstly, there was this CSLA report urging caution on commodities.

Here is a snippet posted on Bloomberg.

• Sept. 12 (Bloomberg) -- Investors should be wary of commodity-related shares because a slowdown in U.S. economic growth may dent demand for crude oil and metals, according to Christopher Wood, CLSA Ltd.'s global equities strategist.
  
  Fund managers should instead be favoring stocks that will benefit from the end of interest-rate increases in the U.S., such as Hong Kong developers, Wood, 49, told reporters yesterday on the sidelines of a CLSA investor conference in Hong Kong.
  
  ``As more evidence of a U.S. slowdown materializes, commodity prices will come under pressure,'' the Jakarta-based strategist said. ``That makes me cautious on commodity stocks in the near term.'' Wood was ranked the second-best Asian strategist in Institutional Investor's 2006 survey.
  
  The International Monetary Fund estimates the U.S. economy, the world's largest, will grow 3.4 percent this year, slower than 2005's 3.5 percent. The slowdown comes after 17 interest-rate increases in the past two years by the U.S. Federal Reserve to curtail inflation.
  
  BHP Billiton and Nippon Mining Holdings Inc. led a slump in commodities stocks in Asia today. Nippon Mining, Japan's biggest copper producer, fell 4 percent to 819 yen. BHP, the world's largest mining company, tumbled 3.9 percent to A$25.10.
  
  A measure of energy-related stocks including PetroChina Co. is the worst performing of 10 industry groups in the past month on the Morgan Stanley Capital International Asia Pacific Index. The energy index has slumped 8 percent in that time, as oil lost 12 percent. The broader MSCI index dropped 0.7 percent in the past month.
  
  Good Call
  
  Crude oil in New York fell for a sixth day, its longest losing streak in almost three years, on signs fuel demand growth will slow with the global economy. Prices have fallen 16 percent from a record $78.40 a barrel on July 14 as evidence mounts that the U.S. economy is slowing and Middle East violence is easing. Oil was recently at $65.75 a barrel in after-hours trading.
  
  ``Oil's been rallying all year on geopolitical reasons, not macro economy,'' said Wood. U.S. economic growth of below 2 percent annually might drag oil prices to $50 a barrel, he said.
  
  The strategist was a journalist with the Far Eastern Economic Review and the Economist before joining investment banking in July 1994. He moved to CLSA in February 2002.
  
  Wood in May forecast Asian stocks would extend their declines from a record close on May 8. MSCI's Asia Pacific measure has fallen 1.5 percent since the end of that month and is down 12 percent from its high.
  
  Currency Peg
  
  An index of raw materials producers such as BHP Billiton on the MSCI benchmark has declined 2.2 percent in the past month, making it the region's second-worst performing industry group.
  
  An index of six metals including copper on the London Metal Exchange dropped 4.6 percent yesterday, as signs of weakening global economic growth prompted investors to sell commodities.
  
  ``Commodity stocks have pretty well had their run,'' said Donald Gimbel, who helps oversee $2 billion including BHP shares at Carret & Co. in New York. Commodity ``prices may continue to rise but at a much lower rate. I think it really is time to look at other parts of the economy'' to invest in.
  
  Hong Kong developers will benefit as the Fed's rate increases draws to a close, Wood said, without naming any specific companies. The Hong Kong Monetary Authority last month held its key lending rate steady, echoing a Fed decision to leave U.S. borrowing costs unchanged.
  
  Hong Kong's monetary policy typically follows the Fed because the local currency is tied to the U.S. dollar.
  
  The latest move by the Fed's policy makers may help revive Hong Kong's real-estate market, which cooled as borrowing costs climbed. The value of property sales in July tumbled 42 percent from a year earlier, the biggest percentage drop in six months, according to government figures.
  
  ``An environment of falling rates will support property stocks in Hong Kong,'' Wood said. ``I would be wanting to move more money from commodities to interest-rate sensitive'' shares.

Well, the guys at FSO, they have a show every weekend and here is a snippet of the transcript posted on their website.

• The Commodity Boom Is Not Over
  
  JOHN: Well, Jim, people are chattering away out there, talking about the rise in oil prices, the rise in gold prices, the rise in commodities, the bubble we have going here. So if we do have a bubble. Is the bubble going to burst? Or is this simply – to coin a phrase – in the markets a midcycle adjustment?
  
  JIM: You know I strongly disagree that we’re in a commodity bubble because one of the things that are very characteristic of a bubble is you see excess surplus or supply come into the market as a result of prices that we’ve never seen before. I mean just take a look at what happened to stocks, technology companies and internet companies. We had just this plethora of IPOs and people going public trying to raise money in the tech bubble, and we saw a surplus of just about everything – in telecom broadband. Just surpluses of everything that you can think of. When it comes to commodities right now, we do not have an abundance of surpluses that we can say this is very bubble-like – that we have more than we need, or because the inventory levels –just like housing are at such levels that there’s such a big supply of housing on the market – or big supply of commodities on the market you know this whole thing’s going to burst. We just don’t have that. So I would disagree rather strongly with the concept that this is a commodity bubble. I’m more in the Jim Rogers camp, the Marc Faber camp, who think that this is a long term cycle, that these things tend to last around 18-20 years – a couple of decades in length and there’s a reason for that and we’re going to get to that in just a moment, but you know, I disagree with the bubble assumption. [1:08:37]
  
  JOHN: But Jim, there are critics of the bubble. You keep hearing this all the time. For example, why should oil prices go up? I mean there’s no increased usage here, so obviously this is something on the part of price-gouging on the part of the oil companies.
  
  JIM: You know, if you look at, for example, demand for commodities, especially in the Western world. You’re right, John, it’s only up about 1%, not rather strongly. And I think this was one of the arguments, for example, Bill O’Reilly was making against the oil companies. He would say, “Gosh, you know, demand for oil in the United States has been flat, it hasn’t been up, how come prices are up?” And he’s absolutely correct when he says that. If you just look at consumption of commodities from the point of view of the demand side – whether it’s copper, lead, zinc, energy – it’s up marginally in the Western part of the world. It’s up a little over 1%. And quite honestly, the greatest increase in demand for commodities is coming from Asia, especially China and India. They are really accounting for the greatest marginal increase in demand for commodity products.
  
  But that is only looking at one side of the equation. The problem this time is on the supply side. Ok, we’ve got the demand side, which has been moderate in Western countries, stronger in Asian countries especially China and India, but you know the demand side has been rather moderate. So you can make the argument: gosh, demand is not that high in those parts of the world, and if the economy is going to slow down as the experts are predicting, well therefore the demand will slowdown along with it, and this whole thing is going to come crashing down. But if you look and take that argument, and most of the arguments I’ve taken a look at, that’s what they’re saying, you’ve got to look on the supply side. And the real problem with any bear market as we had in commodities that lasted more than two decades, what happens in a bear market? Companies go out of business because they can’t compete because the price of what they sell goes down, they can’t make a profit, the weaker companies go out of business, the stronger companies consolidate, the industry contracts. Eventually nobody invests in new plant and equipment, nobody invests in going out and looking for oil, nobody invests in going out and looking for mines. I mean, what mining company was spending a ton of money in the late 90s trying to find new supply? In fact, it wasn’t until recently – 2004 and 2005 – that an increase in mining expenditures and exploration actually took place. So, looking at the demand side is only half the equation. [1:11:25]
  
  JOHN: So Jim, if we go back and look at things we’ve talked about here on the program before – go back to 1985, world demand for oil was 60 million barrels, the world supply was about 70 million barrels, so we had a surplus of 10. That no longer exists, and in oil and other areas what we could be looking at is maybe the surplus for the commodities are just simply gone. They don’t exist.
  
  JIM: Yes, I mean you don’t have a surplus of a lot of commodities. It takes time, for example, you’ve recently heard about the new oil discoveries in the Gulf. Just as if you go back to the oil discoveries in the North Slopes of Alaska, and the North Sea at the end of the 60s, it was a full decade before that oil could come online and supply. It’s going to take a while for any new discoveries to come online. It takes a long time today – 7 to 10 years – to bring a mine into production. You don’t just go out and poke a hole in the ground, discover new oil and it’s on the market on Monday. And it’s the same thing with mining.
  
  And the other thing is one of the things we’ve also been talking about on the program, there is a lot of skepticism in the mining industry and the natural resource industry. There’s a lot of guys that are running mining companies today that have spent the bulk of their careers in a bear market. And when you go through a bear market that lasts for two decades, it’s kind of like somebody that went through the Great Depression. That has an impact on you in terms of how you’re going to spend money. These guys are not cutting loose with the checkbooks in the same way that they might have done let’s say towards the tail end of the bull market in the late 70s. [1:13:21]
  
  JOHN: We talk a lot about mining and exploration and a lot of the companies out there are increasing their exploration budgets, but you seem to have a different take on that.
  
  JIM: You’ve got to remember what has happened to the mining industry and the energy industry. Yes, energy exploration has increased in dollar terms; yes, mining exploration has increased in dollar terms. But last year alone, if we take a look at a year over year period price inflation in the mining industry is up over 35%. I can’t read a quarterly report by a mining company talking about what their cost structure – you know, the cost of steel has gone up, the cost of labor has gone up, the cost of acquiring earth moving equipment has gone up, the cost of acquiring trained geologists and skilled personnel has gone up, benefit costs have gone up, energy costs have gone up. And so yes, the price of gold has gone from 250 to over $600 but margins have not gone up in the same measure, and the reason is cost structures have also gone up.
  
  So it’s a little misleading if you say, “well, gosh there’s an x amount of dollar increase, that means sure we should see a lot more supply.” Remember, a lot of those dollar increases are simply going to keep pace: it costs more money to get a trained geologist today, it costs more money to get a permit today; it costs more money to get a drilling rig. I mean just take a look at some of the day rates for drilling rigs even in the oil industry. You have drill ships in the Gulf of Mexico that are getting over half a million dollars a day today, versus ¼ million dollars a day two or three years ago. [1:15:07]
  
  JOHN: If we look overall, both the mining and the oil companies seem to be spending more money, so at least you would think on the surface that we would be seeing more supply out there.
  
  JIM: Yes, there’s more money spending, but you know what, John, one of the things, and this is as everybody knows I’m a big believer in peak oil, in fact at our client meeting that comes up at the end of September, I’m presenting the culmination of almost 3 years worth of research and over 70 books in my conclusion. I’m a big believer in peak oil. And one thing we’ve seen is the discovery rate of new exploration has been very disappointing by any historical standards or even past standards, let’s say in the last decades. So the correlation between increased spending for exploration and future output gains or results is considerably weaker this time. You’ve also got the same thing outside of companies like Aurelian that made a major find in Ecuador, there just haven’t been a lot of elephants. Yes, we’ve just got news this week, for example, that Chevron and Devon and Statoil have made a major discovery in the Gulf of Mexico, or that perhaps Mexico has made a discovery. But John, it may be 10 years before we get the full benefits of all of that coming online. So you’ve got to take the time factor between discovery.
  
  There’s always this inclination in my mind that people make, and I think this is how the media tends to distort this: “Wow, this is a big discovery” or “I can’t believe the size of the Aurelian discovery in Ecuador, so all this gold is going to come online.” It may be a major new mine, it may be a major new oil discovery but from the time of discovery, the lag period could be 7 to 10 years. In the meantime, demand continues to grow each year.
  
  And the other thing that you have to look at is depletion. If you have a mine, you may mine that mine and over a 10 year period you’ve gone through your high grade, you’re going to lower grades, it’s getting more costly, and the amount of ore that’s left to process may be diminishing. You also have the same thing with oil fields that you pump out at a very high rate when you first bring it online, and then eventually you start getting into a decline rate as depletion starts to set in. So that’s another thing you have to factor in. [1:17:46]
  
  JOHN: Yes, let’s tag in on something you and Dave talked about earlier that right now it’s actually cheaper to go out and buy somebody today than it is to do your own work.
  
  JIM: You know if you take a look at what happened in the last bear market, we got these big behemoths in the mining industry. You know, it’s hard to believe that for example, over half of the world’s copper is produced by a handful of companies – about 7 or 8 companies. Just take a look at the gold mining industry, the behemoths – the Newmonts, the Barricks, and the Anglos, some of these companies. You know, it is very hard to replace that, and you’ve got this mind set with a lot of these guys who have come through this bear market who say, “you know what, do I want to really sit there and expand capacity.” What they’re doing, John, and you’re seeing this over and over again, and I think you’re going to see this accelerate, is what a lot of the mining executives, even the oil guys are thinking, it’s far easier to expand their capacity via mergers and acquisitions than by developing new mines. Because let’s face it, if you’re going to go out and discover new oil, you’re going to go out and discover new copper, lead, zinc, mine a new gold mine, a new silver mine. You’re going to have to go out there, and you’re going to have to stake a claim, you’re going to have to drill it, you may get dry holes when it comes to oil or natural gas, you may get dry holes when it comes to discovering gold and silver. And even if you do find it you’re going to have to spend a couple of years drilling it out, you’re going to have to go to feasibility, you’re going to have to get environmental permits, and then who knows, you may get ready to bring it online, and then Greenpeace or some environmental group shows up and says, “nope, we’re going to stop this.” And so you’re fighting the environmentalists. And so there’s also a risk there.
  
  You have no assurance today that even if you find something that you can bring it online. There’s a lot of risk. So a lot of these guys are basically saying, “you know what? It is far easier to focus more on buying somebody else.” And this is also a function as you see the industry become more concentrated as it has – whether you’re looking at the oil industry or the mining industries – companies just become more focused on projects that produce relatively quick returns to their shareholders. They get more cautious about these risky adventures of going out and trying to find a new project or a new prospect. And so how can you get immediate benefit? Well, here’s a junior mining that’s selling at a discount below market value, let’s buy it. Or here is an oil company that has good natural gas reserves, let’s buy it. Or here’s a copper company, or a lead and zinc company, let’s go out and buy that. So that’s what we’re seeing in the news, and that’s what these guys are thinking because that’s really the way the industry functions.

http://www.financialsense.com/fsn/BP/2006/0909.html