Commodities euphoria may signal bubble(oil,steel,etc)

The Standard ^ | 04/26/05

[TigerLikesRooster]

Commodities euphoria may signal bubble

April 26, 2005

Goldman Sachs analysts sent crude oil prices soaring when they said March 30 that the price could eventually reach US$105 (HK$819) a barrel.

To Larry Berman, chief technical strategist at CIBC World Markets, it had the whiff of late 1998, when analyst Henry Blodget forecast Amazon.com shares would hit US$400 a share.

They did - and then tumbled 80 percent over two years, signaling the end of the technology bubble.

A forecast like Goldman's ``does typically mark the euphoria that's seen at market extremes,'' Berman said.

After a two-year surge in commodities such as oil and steel, analysts including Berman and Merrill Lynch's chief European and global equity strategist, David Bowers, said prices may be nearing a peak.

Their reason: A slowdown in the United States, which could curtail the resources boom led by China. The possibility raises doubt about another piece of conventional wisdom: that inflationary pressures will force the Federal Reserve to keep raising US interest rates throughout the year.

``What people think of today as an inflation problem could, in 12 to 18 months' time, turn into a margins problem as new supply starts to come on stream,'' said Bowers.

The strategist, who also advised switching to cash in 2000 before the plunge in technology stocks, wrote in an April 4 report the ``resources bubble'' may burst.

Bowers said investors are counting on US consumers to keep boosting spending at more than 3 percent a year, driving growth in China, the largest user of steel, copper and cement.

``What if they're wrong?'' he asked. After the United States posted a record trade deficit in February and retail sales slowed, economists cut their estimates for first-quarter growth.

Morgan Stanley's Richard Berner slashed his forecast to 3.1 percent from 4.1 percent.

Commodities prices have dropped in recent weeks. After touching a 24-year high on March 16, the Reuters-CRB Index of 17 commodities has declined 2.8 percent. Crude oil futures have fallen 5 percent since reaching US$58.28 a barrel on April 4, the highest since the contract began in 1983. Aluminum is down 8.2 percent from its March 10 high on the London Metal Exchange.

Another leading indicator, the cost of shipping dry bulk materials such as iron ore and coal, has dropped 27 percent since its December 6 record on the London-based Baltic Exchange's Baltic Dry Index.

The question is how seriously to take such signs. Goldman's analysts said in their report they expect a ``super spike'' as commodities prices rise over several years, pushing shares of oil and gas companies up 80 percent. China reported last week that gross domestic product rose a greater-than-expected 9.5 percent in the first quarter. ``The market is underestimating the strong industrialization that's taking place in China, as well as other emerging countries,'' said US Global Investors fund manager Brian Hicks. ``We're in an upcycle for commodities.''

At the same time, analysts such as Lombard Street Research say that, behind the official picture, there are hints that Chinese growth is flagging.

The nation's crude oil imports fell 1.6 percent to 29.6 million tonnes in the first quarter, according to the Customs General Administration of China. By next year, China will become a net steel exporter, suggesting domestic demand is cooling and adding to world supply. Steel imports fell 35 percent as exports surged almost four times to 2.1 million tonnes last month. Automobile sales fell 3.2 percent to 811,300 units in the first quarter after growing at 15 percent last year and 76 percent in 2003.

China is due for a ``hard landing,'' Lombard economist Diana Choyleva said in an April 20 report. The London-based consulting firm predicted China's nominal growth in gross domestic product will plunge by the end of next year to 4 percent, the weakest since 1999.

The potential warning signs come against a backdrop of price pressures in the United States. Consumer prices in March had their biggest jump in almost three years, jarring investors.

Analysts at firms including Goldman Sachs, UBS Securities and JPMorgan Chase predict the Fed will boost its benchmark rate to 4.25 percent by year's end. Since June, the Fed has lifted the rate by a quarter-point seven times to 2.75 percent.

Rising oil prices may do some of the Fed's work for it, preventing the need for so many rate increases as consumers slow other purchases, according to economists including Michael Gregory, senior economist at BMO Nesbitt Burns, and Peter Buchanan at CIBC World Markets. Stagnant wage growth will help keep a lid on spending, said Mesirow Financial chief economist Diane Swonk.

There is evidence consumers are balking. Wal-Mart Stores, the largest US retailer, predicts first-quarter earnings will rise at the low end of its forecasts, partly because of higher oil prices.

``An increase in fuel is a decrease in disposable income,'' Wal-Mart chief financial officer Thomas Schoewe said April 5. ``Many of our customers live paycheck to paycheck.''

In March, US retail sales excluding autos and gasoline had their first decline in almost a year.

During the technology bubble, investors who raved about a ``New Economy'' forgot that it ultimately depends on consumers, who always prove cyclical, said Bowers.

That may be no less true this year for the US consumer, facing little growth in wages, a squeeze from oil prices and the end of a mortgage-refinancing boom that supplied extra cash, according to CIBC World Markets. ``It suggests the Fed's march to monetary neutrality will be a lot shorter than people suspect,'' said chief economist Jeffrey Rubin. He predicts the Fed will stop raising rates when its benchmark reaches 3.25 percent.

[TigerLikesRooster]

stock --> mortgage --> commodity --> ???

Maybe they could bid up Renminbi, too.

[the invisib1e hand]

forecast like Goldman's ``does typically mark the euphoria that's seen at market extremes,'' Berman said.

or, putting another face on it, such a forecast takes advantage of the euphoria that's seen in markets from time to time.

[Mulder]

Some believe we are in the first phases of a major commodity bull market. (Read "Hot Commodities" by Jim Rogers).

Like all bull markets, there will be pullbacks. Nothing goes straight up or straight down.

[the invisib1e hand]

anyway what it signals is screaming demand worldwide.

[NonValueAdded]

bump

[tm22721]

stock --> mortgage --> commodity --> ???

The timing of the next bubble will be up to the next Fed chairman, probably 'helicopter' Bernanke.

BUMP

[2banana]

Goldman Sachs analysts sent crude oil prices soaring when they said March 30 that the price could eventually reach US$105 (HK$819) a barrel.

To Larry Berman, chief technical strategist at CIBC World Markets, it had the whiff of late 1998, when analyst Henry Blodget forecast Amazon.com shares would hit US$400 a share.

To make money, you must but low and sell high. It sounds simple but the hardest thing in the world to do is to sell when everyone else is buying and to buy when everyone else is selling...

Also to add to the above, 2 bdr shack in NYC or LA for $700,000...

[Dilbert56]

"Slowdown" in the US economy? We heard that in 4Q04 when preliminary results said growth fell to 3.1%. Final numbers put it at 3.8%. I'll believe the 3.1% numbers when they're final.

[sixmil]

Interesting thought, but is there really speculative demand for commodities now like there was for stocks and still is for real estate? If someone were to say that the next stop for fed induced inflation is commodities, that might be a better guess.

[redgolum]

For later

[Rodney King]

I wish they would do me a favor and bid up cotton.

[M. Espinola]

Jim Rogers new book is a must read even for those already trading commodities.

Some classic examples of out of control commodity related bull markets would be Palladium incredible price jolt from just under $200 per ounce to $1,100!

Those with properly positioned 'puts' made more on the down side of the Palladium market then many did on the bullish side.

The leading contributor to skyrocketing commodity prices are the booming Red Chinese economy, plus India's emerging economy.

Traders who went out one year in Crude Oil 'call' contracts back in Oct-2003, picking up dirt cheap $45-$50+ 'calls', when crude had sunk back to $30ish a barrel, cleaned up profit wise since oil rocketed from $30 to over $50 a barrel in less than a year's time! Each penny up/down in oil is worth $10. Recent one day moves either up or down have seen oil clinb or fall 100 to 250 pennies worth in a single trading session!

Crude Oil chart

Currently there is serious profit taking in the crude oil market possibly sinking price levels to the mid to low $40's per barrel. The lower the prices falls the cheaper calls will become in the $50 & low $60 which should be viewed as have very favourable profit potential over the longer term since there are OPEC problem producing nations out there such as 'nuclear' Iran, communist Hugo Chavez' Venezuela, and unstable Nigeria, plus Indonesia, Saudi Arabia & Iraq. Major pullbacks in crude should be viewed as buying opportunities especially if oil drops below $40 a barrel.

Copper prices for example, at the end of 2003 were fluctuating between 68 & 72 cents. Red China's strong appetite doubled the price Copper chart

Aluminum is another construction winner. Platinum has more than doubled over the last 4 years Platinum chart

The Euro has shot up from roughly 85 cents in 2002 paired off against the U.S. Dollar to $1.35 recently, but the current price level has reversed a little to $1.28 which is assisting the U.S. Dollar back into possible bullish territory. Note the slight upward curve in the Dollar this chart, although she is still stuck in a sideways mode.

Coffee has been doing wonderful on the bullish side, doubling in price for the last 6 months. Coffee

A top may have been place, too early to be definite.

All those devastating Florida hurricanes gave Orange Juice a nice shot in the arm from near record low prices last season. Orange Juice

Another currency which has shown incredible profits for those with longer term 'calls' since 2002 has been the British. Pound. Lately the Pound has been in range of $1.86 to $1.92 against the U.S. Dollar.

What you stated is so true. "Like all bull markets, there will be pullbacks. Nothing goes straight up or straight down."

Once Red China really begins to feel the adverse effects of petrol fueled inflationary spiral the boom in certain commodity markets will crash quickly such is in the construction metals and even grains to a degree. We may already be witnessing some metals price pullbacks.

[kinghorse]

escalating commodity prices is the ball carrier for the first leg of a bull market. Technology carries the ball last before the correct.

[jiggyboy]

GS is the biggest crook on Wall Street, and has been for some time. You really don't have to do any more research or trading than just waiting for their criminally fraudulent "projections" to become so outrageous that you hear them on the nightly news instead of in the internet stock sites. Then do the opposite with everything you've got in your account.

[the invisib1e hand]

Funny. I was talking with a gold trader the other day who used to work for them. he called them The Evil Empire. What with having spawned the likes of Jon Corzine and Robert Ruin, (freudian typo), I'd have to say it's a strong case.

[montag813]

Goldman Sachs analysts sent crude oil prices soaring when they said March 30 that the price could eventually reach US$105 (HK$819) a barrel.

The ONLY reason Goldman gave that absurd forecast was so it could sell its massive crude futures and oil services stocks to stupid buyers at the highs, which they did.

Anyone who believes any phony "report" from a firm such as Goldman deserves to take a bath.

[montag813]

anyway what it signals is screaming demand worldwide.

The oil bubble was 90% speculative. Demand levels are LESS than they were at $35/barrel.

[sully777]

Oil speculation never made sense bump

[sully777]

Tiger, it's like I said here http://www.freerepublic.com/focus/f-news/1377807/posts:

"To: SierraWasp; All

I don't buy all the negativity, but some of it sure is intriguing!!! (human nature, I guess)

China boom slows=oil glut=oil futures bubble bursts is a scenario lightly addressed here http://www.freerepublic.com/focus/f-news/1376091/posts.

I am not negative just positively pissed that I'm paying unreal prices based on unreal speculation that is driving our economy into the ground for the short-term profit of a few rats.

Snipped from article " Top energy derivatives trader Goldman Sachs (GS.N: Quote ,Profile ,Research ) said in a report on Thursday the oil markets might have entered a "super-spike" period, which could eventually drive prices toward $105.

'That was a pretty big call by them and the market is just assessing where supply and demand really sits,' said David de Garis, senior economist at ANZ Investment Bank in Melbourne."

Recap: Top oil trader Goldman Sachs speculates $105 (largest stake will benefit company in claiming speculation). Market is unsure (no hard facts to back up GS claim) nevertheless raises futures prices based on GS' report. Spot markets react to futures market. Gasoline prices rise based on artificial report on a futures market. Common person sees prices rise without knowing the facts behind the hikes.

Subliminal recap: Here's a raspberry (Soros) to all the kind folk (Berkshire Hathaway) that are investing (Goldman Sachs) in the oil scam to our long-term hurt ($4 a gallon in Hawaii stops tourism).

23 posted on 04/05/2005 10:19:21 AM PDT by sully777 (It's like my momma always said, "Two wrongs don't make a right but two Wrights make an airplane.")

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And you responded:

To: sully777

Re #23

The art of massaging mass psychology to make hefty sum of money. This is pretty close to getting something out of nothing.


24 posted on 04/05/2005 10:24:33 AM PDT by TigerLikesRooster

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It's also here http://www.freerepublic.com/focus/f-news/1393810/posts?page=48#48

And here http://www.freerepublic.com/focus/f-news/1382304/posts?page=27#27

And here http://www.freerepublic.com/focus/f-news/1393777/posts

And here http://www.freerepublic.com/focus/f-news/1388012/posts

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Watching and waiting for the pop. My profits are low and I can't afford to raise prices so I can lose all my customers (cut off my nose to spite my face).

[sully777]

Once China completes its Three Gorges Dam (which is infrastructure not ecomomic vitality) all materials necessary for its success will no longer be needed. The market must adjust to the newer and lower demand.

In other words, word to tthe wise, we've peaked. FReep investors should back out ASAP from further investments in commodities (unless they play short) or find themselves holding the bag.

I don't know if I'm reading the oil futures correctly, but back in the early winter, futures were trading at $25-28 for the FY2006 and 2007 based on then current stockpiles and production. Now that we see an emerging glut, am I correct in assuming a lower price than 25-28 (allowing for free flow of commodities as the rule)?