Commodities And Glencore's Perfect Timing

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Includes: DBC, DJP, GLCNF, GLD, GSC, GSG, IAU, OIL, USO
by: Carlos X. Alexandre

Sometimes I look back and read some of the smart and dumb things that I’ve written, and the commodity current state of affairs just crossed my mind. I wrote the article “Glencore (OTCPK:GLCNF): IPO of the Decade, Or Another Blackstone?” on March 14, and I am not trying to recycle old news here, but rather to learn from the past.

In view of Glencore’s IPO being the talk of the town at the time, the summary about Glencore that I borrowed from Reuters and offered back then painted a very clear picture of what the company does.

In the world of physical trading - buying, transporting and selling the basic stuff the world needs - Glencore is omnipresent and controversial, just as Goldman (NYSE:GS) is in banking. Bigger than Nestle (OTCPK:NSRGY), Novartis (NYSE:NVS) and UBS (NYSE:UBS) in terms of revenues, Glencore's network of 2,000 traders, lawyers, accountants and other staff in 40 countries gives it real-time market and political intelligence on everything from oil markets in Central Asia to what sugar's doing in southeast Asia. Young, arrogant and often brilliant, its staff dominate their market. The firm's top executives have forged alliances with Russian oligarchs and well-connected African mining magnates. Like Goldman, Glencore uses its considerable heft to extract the best possible terms in every deal it does. Some might add that Glencore also fits the description that Rolling Stone magazine gave to Goldman: "a great vampire squid wrapped around the face of humanity."

I ended the article as follows.

Not that every IPO sends a strong message, and that all players are shrewd or clever, but when did Goldman Sachs go public? Smack at the cusp of the dot.com bubble: May 1999. Thus the question is “Why is Glencore going public, when for the past 40 years the company operated happily without sharing its secrets and success with investors?” One must look at the core business, and what the company does best and knows best, how to trade commodities - from gold to oil, wheat to corn, it touches just about everything consumed by earthlings.

Although I have voiced my opinion on how commodity prices are not justified by the economic background, the call here is not that I am a guru and that I predicted the commodity doom. That would be dishonest. And Todd Harrison, one of the most honest traders and writers that I have encountered, summarizes that thought quite well in a recent article.

Nobody “knows” what the future holds; as I’ve repeatedly shared, anyone who claims to is not to be trusted. All we can do is map a spectrum of future outcomes, assign probabilities for those outcomes, sync risk profiles with time horizons and allow for an ample margin for error. There are no magic pills or blanket solutions for what ails us; we’re in uncharted waters but we cannot let ourselves succumb to the perfect storm.

Regarding the stock market he also added that “nestled within the aforementioned spectrum is the potential that we’ll revisit the March 2009 lows,” to which I will add that if that becomes the case, the “probability” of attempting to revisit the 2007 highs is very low, and the process will not be as simple as the 2009 rebound.

The point is that Glencore got my attention mainly because the company is better positioned to evaluate the global commodity markets than anyone else. The question is whether the doom will turn to boom in short order, or whether the commodity depreciation process has further to go? Considering the various PMI readings on a global scale and currency trends, I’ll bet on the probability of the latter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.