Wednesday Outlook: Commodities, Emerging Markets

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Ongoing worries in financials coupled with a gonzo inflation number had investors scrambling to reverse course yesterday and so far this week. You can tell I don't like trading ranges. If that's what we're in, then high cash balances are appropriate. On the other hand, if we're about to start another leg lower beneath prior lows, then so be it since I like trends.

The dollar rally and short commodity trade maybe went too far too fast. Sometimes traders will close a good position just to cover losses from another sector. That may seem odd but who said The Street was logical?

Today we get energy inventories and the drama within financials continues to build.

Let's see what happens.

Disclaimer: Among other issues the ETF Digest maintains long or short positions in IWM, UWM, XLY, XLV, RXL, XLP, UGE, IEF, UUP, DBC, DEE, GLD, DZZ, EFA, EFU, EEM, EEV and FXI.

Comments

[Philly Jim:]

Anything can happen at any moment and the world economy seems to be a hair away from a global depression. Though the ECB, FED and BOE seem to be scratching each other's back at the moment, we can expect some commodities (oil & gold) to "decouple" from their presupposed levels and possibly get a mind of their own or rather a mind created by frustrated traders with little faith in the murky global financial system. I'd like to think China is doing wonderful and no longer needs the "West" to move forward; reality is, these emerging markets are running on vapors from the drunken buying binge westerners have been on for the past 10 years and those checks are gonna start bouncing from skyscrapers to the rice fields. Reality is hitting home and banks are waking-up with a severe hangover and serious lessons to be learned. I just really hope the U.S. gov't catches up and begins monitoring financial conditions in realtime rather than waiting for something bad to happen then making a move. A lot of lessons can be learned from the past decade that can "fine tune" the U.S. economy and get all cylinders firing again. The eastern allure has been demystified, the information age ushered in and now it's time for professionalism to reign and exceed expectations in the West. The states will need to sacrifice some welfare expenditures and expect a period of stagflation in order to balance their budgets and weather this credit storm.

2008 Aug 20 07:09 AM

[gabe borens...:]

Clearly ,the PPI is an abberation and it did not pick up the recent minor commodity price implosion.More important,at the CPI level the data may be overstating the rate of inflation.Almost 70% of Americans are (were),the home owners .The CPI includes changes in rents ,not the home prices.If home prices were substituted for the rent component ,the drop in the rate of inflation would be noticeable.In addition it is clear that other than gasoline ,just about every consumer item is on sale.The CPI is not picking this up..As the global deceleration becomes more pronounced,the crude prices will likely sharply decline.Tell Detriot about the inflation ,they are not likely to understand the word given the economic state of the automobile business.In fact I would argue that over the longer period of time,the high energy prices are deflationary as the decimate the real disposable income causing implosion of the consumer demand for the other goods.
In the meantime we are on the way to recovery .The problems have been identified and addressed .The investors and economists should review the word monetary lag which would then eliminate the investment hysteria.
On the other hand if the FED,the investors and some of the financial institutions had behaved more responsibly 18 months ,we would not have to experience the current" trauma". One more time ,it is not the U.S that will be the economic issue in the period ahead,it is Europe and Emerging market economies (includes many Asian countries),that are about to feel the unprecedented economic pain.
As long as there are radically different opinions,the market volatility will continue.Market is consolidating and poised for a major rally in the period ahead .

2008 Aug 20 08:05 AM

[Umm, yeah:]

@gabe - if you're going to count house prices deflating today, then you would've needed to count them massively inflating 3+ years ago.

2008 Aug 20 08:52 AM

[simplesimon:]

Very thorough outlay of the big picture. Thanks. And I like the metaphor of a 'stampede'. ( the cowboys of old used to chase down and 'rope and hog tie' the leader to stop the stampede; and don't we wish there were a few of those brave souls now! ) A flock of birds, or a school of fish also works. So, we knew the economy would contract...so when the figures come in, "we" ( they?) wheel like a school of fish even though there is no shark, just photographers ( bean counters ) . I freely admit that i , personally am not in the loop, nor an expert - hence the moniker, 'simple simon'...but there are cash rich ( cash drunk ) sovereign funds, and others, 'poised' , as the last commentator said, to ameliorate or 'deflate' the current panic. For those folks ( sovereign funds like Dubai ) 25% loss of a trillion here and a trillion there, doesn't matter that much, if there is a hundred trillion remaining to squander somewhere. It's the small potatoes 'flock' that needs realistic assessments via 'big picture' analysis like this here. Thanks again.

2008 Aug 20 09:32 AM

[jjc7477:]

Gabe,

I'm in Detroit and believe me, we have inflation AND deflation here. Homes and businesses deflating while costs and taxes inflating. I think you should seriously take off those rose colored glasses you wear and take a good look around. It may be true that the European and emerging nations will feel dramatic pain, but if you think that's going to be our resolution here, you are very sadly mistaken my friend.

2008 Aug 20 12:33 PM

[xander:]

usa is not detroit .

2008 Aug 21 03:30 AM