Posts Tagged ‘Commodities’

What a Tangled Web We Have Woven – Inverse Dollar Market Relationship

Thursday, November 12th, 2009

Simply put, the US economic recovery will be short lived if it depends on the dollar going to zero. By design the current US political powers wanted exactly what is happening, weak dollar improves exports and large companies overseas earnings. Unfortunately this prescription for recovery reduces the buying power of the largest consumer in the world, the USA.

This plan for recovery unfortunately seems to leave out one all important component, the US Citizen. Wall Street is getting back to their country clubs at the expense of the 10.2 % unemployed (and growing) by shorting the US Dollar and crowding the commodities trade. Remember last year when the political powers vilified investors who shorted bank stocks, well isn’t shorting the Dollar kind of un-American. What percentage of those banks bailed out where owned by foreign investors.

Over the recent quarter large companies have credited a large portion of their recovery to overseas sales. McDonalds over the past week announced sales for last month showing that US sales were down, but overseas sales were up. If you are a US Citizen you may or may not have money invested in the stock market, but you definitely have Dollars.

One thing is for sure, if you are an American, this recovery is hurting you.

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Posted in Commodities, Currency Market, Economics, Stock Market Actions | No Comments »

Dow 15,000 = $10 Soda?

Wednesday, November 4th, 2009

The Dow Industrial Average has rallied from 6,500 to just over 10,000 in a matter of months. Great news right? Maybe not if you consider at what expense, literally.

In my view the US economy is like a large aquarium. If you lean it in one direction the level may seem like it is going up on one side, but it is always at the expense of the other.

This stock market rally (Since March 2009) is undeniably at the expense of the US Dollar. Every time the dollar is weak the Dow is strong. This weakness in the dollar causes commodities to go up and US buying power to go down. So if the Dow manages to soar another 50%, don’t be surprised when your cost of living soars with it.

The famed “Dr. Doom” Nouriel Roubini has been expressing his concern over the “carry trade” where investors are borrowing dollars (shorting) and buying commodities. Many asset managers of recent have referred to the short dollar trade as “crowded”. This “rally” seems more like a another misuse of leverage. Looks like Wall Street gave up drinking by switching to beer.

Dow Industrial in red and US Dollar in green

Dow Industrial in red and US Dollar in green

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Posted in Economics, Stock Market Actions | No Comments »

Cheeseburger Futures, Options Maybe ETFs?

Friday, October 30th, 2009

We have gasoline futures, why not cheeseburger futures. Traders could speculate on the demand for cheeseburgers seasonally and cyclically. A lot of traders eat cheeseburgers and are amateur cheeseburger producers. This experience would give them great insight into the supply and demand of cheeseburgers around the world.

Trading cheeseburger futures could stabilize earnings of fast food giants. Fast food giants could save on innovation in the production of cheeseburgers because when prices are high their no need to change a good thing. When prices are low they could just stop producing as many cheeseburgers thereby reducing the supply and supporting the futures price, even though demand is falling. Maybe we should also have pizza futures or even ice cream futures.

I hope you could smell the sarcasm. Just my perception on how ludicrous it is to have gasoline futures.

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Posted in Commodities, Stock Market Actions | No Comments »

A Good Leading Indicator – Oil

Thursday, April 23rd, 2009

Crude oil prices over the past few months have show strong resilience to the ever building inventories. Week after week crude oil inventories have built to now a 19 year high reserve in the USA. The stock market seems to be speculating a relatively strong recovery and it seems like oil is attempting to price in the same by shrugging off the overall bearish reports.

Since the stock markets appear to be more speculative than realistic these days, crude oil supplies look to be a better indicator to economic activity in the United States. As the old saying goes “America runs on oil”, so it stands to say that if oil demand is retrenching than probably US production is doing the same.

Here is a chart of crude inventory supplies in the USA:

crude-oil-inventories-4-22-09

Crude oil supplies have continued to build at a relatively quick pace since October 2008. You will also notice that crude oil supplies broke above the June 2007 highs in February 2009 after a brief stabilization of the inventories in January till mid February.

The stock market started its most dramatic decent in October 2008. The stock market over the past month and a half has been rallying off data showing stabilization in the economy from January and February.

Every week a report is released by the Energy Information Administration tracking crude inventory supplies in the United States. Because oil is measured by barrel, coming up with this report is not open to interpretation or future adjustments.

If you believe America truly does run on oil, then this should be a good leading indicator to how fast America really is running.

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Will Oil go to $100 or $10 a Barrel?

Tuesday, March 31st, 2009

Many Energy analysts feel once the world’s economies start to grow again we could see over $100 a barrel of crude again. Their basis for this conclusion is that with oil down near $100 a barrel from its high (and falling), companies and countries will slow or stop their exploration for oil. Less exploration means we will have eventually have a supply shortage. (see Re-flation Trade! Really? for more insight)


This theory is correct, but I believe the timing is too aggressive. There is another theory that does not get as much airtime as the above mentioned which explains how increased commodities prices typically brings increased supply. Basically as commodity prices rise, countries and companies ramp up exploration and extraction of the commodity to cash in on the increased prices. Also with increased prices technology improves and extraction becomes more efficient.

This increase in supply typically overshoots demand. The question is, how long will this process take? The last commodities bubble that popped took place in the early 1980’s. How much supply is really out there? The world for the most part is contracting. The process of rebalancing the supply and demand curve of oil could take some time.

The real threat to this process, in my opinion, is the artificial supply control of OPEC. They have never been successful in their efforts for the long term because their success solely depends on the cooperation of the countries that make up OPEC. If a large percentage of your GDP comes from the sale of oil and your nation is starting to starve because demand has fallen off a cliff, do you sell what you have or hold onto it with hopes that oil prices will be higher tomorrow? I think the answer to that question is, depends on how much cash reserves you have.

Supply and Demand is what sets prices, everything else is just manipulation. Manipulation can only exist in the short term; eventually reality catches up and typically overshoots in the other direction.

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Posted in Commodities | No Comments »