Bruce Pile

History Suggests Bears Are Too Confident

As a PS to my above comment, the Jan '09 rally didn't quite make it to the 140 MA area, but it was a high point. The broad market just isn't making any new highs with those new % above 50 dma highs. Maybe the current decline will only be to around Dow 7700, which would be about a 50% retracement of the March/April rally, but then it would have to climb back to the 140 and this time do a convincing break of it to break out of the bear rally mode.

History Suggests Bears Are Too Confident

The market could go a long way down in that trip from 27.91% bullish to the low 20s. On the 2nd chart, the % of stocks above their 50 dma, it's worth noting that each of those 3 moves up to new highs were trips by the market up to a declining 140 day EMA, where it turned back down each time. And each dip, although higher than the previous dip, was a new low for the market. So while it looks like we have just a short hop to go down to a bottom on the $NYA50R, that may be a long way in the S&P 500.

Commodities: A Wise Long Term Investment

The '73-'80 gold/stock market sequence of movement may be a model of our current situation. Stocks went into a severe bear market in '74 followed by one of the strongest rallies ever in '75 and '76. This stock rally was during a nearly two year slump in the gold bull market of the 70s. But gold turned in August of '76 at $105 and proceeded to $850 over the next three years while the stock rally mellowed into a mainly sideways path bridled by "stagflation".

Our present situation is a severe bear stock decline followed by the strong rally. The gold bull market of this decade has been in a slump since March '08. We've had a stock turn that, for all the leadership groups anyway, happened in November '08. We're beginning to see this lag effect between stocks and gold now with gold igniting into a big climb a year or so after a sharp bear/bull stock market turn.

In a downturn, stocks discount the economy's turn 6-9 months in advance, then the economy slowly begins placing physical demand on commodities, pushing prices up alongside the downturn's easy money inflation forces. Investor speculative demand usually shows up just in front of the change in physical demand for commodities, and we have a lot of that nowadays. So our lag time could reasonably be expected to be shorter than that of the 70s, which was from January of '75 to August '76. If we follow the 70s model, modified for much increased ETF and fund demand, and put a monster gold rally out 6-9 months from the stock turn of November '08, it would predict a strong gold move beginning in the July to October time frame. If you take March '09 as the stock market bottom and use the '70s lag of 1 year and 8 months, it delays the gold move to November '10.

Sugar's Fundamental Shift?

Corn ethanol is virtually useless in replacing oil with it's EROEI of 1.3, meaning that it takes over 20 barrels of finished ethanol product to save one barrel of imported oil. No nation can be self sustaining with corn derived fuel. Sugar ethanol has an EROEI about the same as oil and can effectively replace oil.

At some point, hopefully, the dunce nations (the U.S. is chief dunce) that account for 40% of global ethanol use will abandon the corn growers' political brew and start using sugar like the other 60%. This could add dramatically to the basic recession resistant food demand for sugar. If oil supply destruction continues to catch up to demand destruction, and the oil price heads back into a climb, effective crude replacement could come back into vogue.

Congress has turned a cold shoulder to the Pickens Plan for converting our vehicles to natural gas. Natural gas and sugar are the only two viable replacements for oil on the scale needed. The other options, solar, electric, hydrogen, and the other things do not have the EROEI needed or the near term availability needed. Until cellulose ethanol is developed, sugar may become a very important bridge fuel for years.

Bespoke's Commodity Snapshot (1/12/08)

Of what use is a Bollinger Band anyway? With stocks, you don't really want to go by selling when they are near the upper band because a stock typically rides the upper band all the way up a monster climb. The only time you should be trading in the center of the band is when the stock is wandering and doing nothing. Do you buy a stock to wander or to do a monster climb?

Where's the Bursting Commodities Bubble?

Commodity moves differ from stock moves in many ways, but a big difference is that the major moves have 2 to 4 year durations. If you look at the CRB chart going clear back to the 50s and construct a line going through all the big moves (over 20%), you find that at every single change in direction from down to up, the ensuing up move lasted 2 to 4 years - every single one for 40 years! We have just finished a near two year sinking spell from early '06 as we enter '08, so if this historical pattern continues, we are just starting the next 2 to 4 year climb.

The Coming Commodity Correction: Hedge Your Downside Risk

Corrections happen. The stronger the bull market, the sharper the corrections. There were some in the last commodity bull cycle from '68 to '82, but in this cycle, there is vastly more of a physical need for the real assets in question. In the 70s, there was a huge demand surge in oil, but there was considerable spare production capacity that was utilized to partially meet that surge (It was not just "the embargo" with oil in the 70s. There was no embargo that lasted for the whole decade). In our present bull commodity cycle, we again have a huge demand surge for oil fueled by a BRIC growth that wasn't present in the 70s. But this time, we are close to global production peak and there is essentially no spare capacity to deal with this surge. It's scary when you consider that the price of oil climbed 900% during that 70s surge despite the swing producers being able to ramp production way up to reservoir damaging levels. What's oil going to do this time with no big ramp up coming?

As for agri commodities, there is much more of a physical shortage than in the 70s on crops needed for emerging market food need and the explosion of ethanol use.

As for the rotation of the world's investment money between the stock market and commodities, you probably have a stronger version of that in this cycle too. Think of all that fiat money that has been created out of thin air since the financially staid 70s. There's much more investment money to rotate this time around.

The physical need for commodities being stronger will probably tend to make the corrections more muted than in the 70s, but the attraction of more investment money into the space will probably aggravate the corrections. So they will be an unpredicatable, necessary evil as usual if you are to participate.

Commodities Boom and Rotation

If you look at a chart of the financial asset/hard asset cycle over the last 50 years, you see a pretty smooth cycle length of about 15 years. You can draw a historical mean through it which shows that oil is leading the charge in the new hard asset bull cycle that began in earnest about 4 years ago. The crops are lagging oil and gold and about everything else. Relative to the CPI inflation and to the financial/commodity cycle, they are just now breaking a very long decline, in fact, and the recent strong action is probably more akin to a very long base break than to a bubble.

Ben Bernanke's Tightrope Act

Investor enthusiasm for commodities is nothing new. It didn't start with the current monetary stress over the housing problems. It is, in fact, a large scale bull market that began about 6 years ago (about the same time the housing bubble began). What's new is the added steam the commodities bull is receiving from the basic paper vs hard asset revolution that is taking place.

If you were to plot the relative valuation of the CRB and the S&P 500 over the last 15 years to look at this paper/real thing, you would have the chart shown recently in an article titled "Commodities Secular Bull Continues into 2008" (http:marketoracle.co.uk/Art...). This tell-tale chart shows that, even with the current runup, we have come way down in valuation of commodities relative to paper in general and stocks in particular over the last 15 years and that we probable aren't at the end of the commodities bull, but are entering a new phase of it (commodity bull markets historically run at leat 15 years and we are only about 6 years into this one). After a huge descent from the mid 90s, the chart shows a consolidation pattern over the last 6 years with 3 major runs at a resistance level. The first was in early '03 at the end of the last stock bear market. The second was in the middle of the stock bull market in May '06 when both stocks and commodities got clobbered together. Both of these runs failed to break the resistance. The third is happening now at what may be the beginning of a new stock bear market and this powerfull run has just now broken the resistance level and has a very long way to go before we approach the paper/real levels of the mid 90s. Think back to that time when stocks, intangible intellectual property rights, and complex debt leveraged deals were our preoccupation while we ran around in gas guzzling SUVs not giving a thought to real assets like oil and food. Now the preoccupation is what to do about oil and food and how to clean up the CDOs, CDSs, and other paper messes we have made.

The current "spike" in commodities can't really be compared to say the mid '06 run. There, the stock bull market was intact, the housing problem wasn't upon us yet, and the Fed was in the driver's seat. Now, it is a vastly different market condition. In addition to a strong investor turn away from paper in general and the Fed debased dollar in particular, we have emerging some very strong basic supply/demand forces coming to the aid of commodities like peak oil, peak food, and the combo of the two - the fuel crop frenzy.

Investor enthusiasm = sell is a concept that works well with individual stocks tied to an individual company story or even with a hot sector. But it's not so true of the more large scale, rare bull markets that tend to involve many sectors and have the legs to run well past initiating enthusiasm and attention. It is precisely this kind of more investable bull area that you want to find, not avoid.

Too Much Money Chasing Too Few Commodities

Even if there were no currency debasing issues, most things in the commodity space should be entering a long bull market simply due to supply and demand for global construction metals and the imposition of fuel crops on an already maxed out food crop market. When you look at what just the currency issue is doing with a commodity having little practical use, such as gold, it suggests a compounding effect where the things of the most vital practical use, such as food and fuel, may attract money at a faster rate adding still more to their appeal as a dollar hedge.

The crops market in particular will be under huge pressure from the effects of peak oil and the aggressive but misquided food based ethanol mandates. Compounding idiocy with stupity, our government has responded from their 35 year sleepwalk on energy policy with the idea of hogging the food supply to make a low EROEI foreign oil replacement that actually displaces very little oil and serves only to add severe food inflation to severe oil price inflation, which they greatly help out with their severe currency debasing campaign. How many "stupid" pills do these guys take a day? If they're going to do ethanol, wait intill the high EROEI, nonfood cellulose designer feedstocks are out of the labs in a few years instead of grabbing up whatever happens to be laying around in our backyard and causing inflation havoc.

Commodity Analysts Believe the Party's Over

These same analysts published an article right here at seekingalpha.com back on September 20 titled "Currency Analysts Expect Dollar to Strengthen" complete with the photos above. They projected a chart of Euro vs Dollar that had it going down to around 1.32 in March '08. Well here we are and they were like way wrong on that. They don't seem to have a grasp of what's taking hold of commodity vs circulating currency markets. Their predictions sound similar to what Steve Forbes and the majority of analysts said about oil in mid '05 - it has got to go down from this ridiculous spike up to $50/barrel because it has gone up too far too fast. They made no attempt to understand what was behind it.