Blimling and Associates Blog

With commodity prices perking up anew, speculators are once again finding themselves near the spotlight. The lights are not as bright as they were last year, but that could change if prices move higher -- particularly crude oil prices. Today, the Seeking Alpha website features a lengthy article by analyst Philip Davis asserting that the energy markets are, well, a scam. A scam, he claims, that is 50 times greater than Madoff. The commentary strikes us as being a bit over-the-top, with a "Goldman Sachs rules the world" type paranoia undercutting what is actually a data-rich argument.. It is thought provoking, however, particularly concerning the role allegedly played by the emergence of the off-shore, essentially unregulated Intercontinental Exchange (ICE). There are also interesting tidbits about index funds:

Index Speculators have now stockpiled, via the futures market, the equivalent of 1.1 billion barrels of petroleum, effectively adding eight times as much oil to their own stockpile as the United States has added to the Strategic Petroleum Reserve over the last five years. Today, in many commodities futures markets, they are the single largest force. The huge growth in their demand has gone virtually undetected by classically trained economists who almost never analyze demand in futures markets. As money pours into the markets, two things happen concurrently: The markets expand and prices rise. One particularly troubling aspect of Index Speculator demand is that it actually increases the more prices increase. This explains the accelerating rate at which commodity futures prices (and actual commodity prices) are increasing.

It's not a bad read. And, if nothing else, it serves as a reminder that the role of commodity markets in day-to-day life is likely to come under more rather than less scrutiny going forward.

The Global Oil Scam: 50 Times Bigger than Madoff

Economic news out of China continues to surprise to the upside. Newswires this morning feature stories about positive data on several fronts. Namely, in October, industrial sales climbed 16.1% and retail sales climbed 16.2%. The New York Times reports that:

Taken together, the data confirmed a picture that has been emerging over the past few months: buoyed by a huge stimulus package announced a year ago, as well as by lower interest rates and greatly increased lending by state-owned banks, China has recovered much more forcefully than other leading economies. Analysts at Australia and New Zealand Bank said in a research note that the latest data showed that economic activity had accelerated in October, propelled by strong domestic demand, and they said they expected fourth-quarter gross domestic product to grow at an annual rate of 10 percent.

The Times article goes on to say that it is not clear sailing on all fronts, pointing specifically to concerns about an asset bubble developing. But 10% annualized growth is nothing to sneeze at.

In dairy market terms, China is widely believed to be a big bid in the world market for powders. Domestic consumption is improving -- a report in The People's Daily last week said that demand is at 90% of pre-melamine levels -- and domestic supply may be down as a function of the same scandal. 

To say we should be keeping an eye on China is easier said than done...but we should be keeping an eye on China.

The November 3 Global Dairy Trade Auction results are as follows:

The average price of all products was 3,684 USD/MT, up 20.7% from the previous auction.

This equates to approximately $1.6711/lb, up $0.30/lb from the previous event.

On July 31, USDA announced a temporary increase to support prices for nonfat dry milk and cheese.

We have confirmed with USDA today that those measures expired at the end of October.  Product manufactured in November and December (and going forward) and offered to USDA will be valued at levels in existence prior to the increase, or $0.80/lb for powder, $1.1300/lb for block cheddar and $1.1000/lb for barrel cheddar.

However, product manufactured in September and October and offered to USDA within 60 days of make will continue to be priced at the temporarily increased levels.

For the first time since June, front-month corn futures have popped over the $4.00/bu mark, with upward momentum driven by forecasts calling for an extended period of wet, harvest-delaying weather as well as continued weakness of the US Dollar. The cost of milk production is going up...

A number of restaurant chains will be reporting quarterly results over the next two weeks. Today featured reports from Brinker (EAT) and Sonic (SONC). The story for the latest quarter remains largely unchanged: earnings topping estimates despite soft same-store sales.

Brinker earned $0.17/share, beating estimates for $0.15/share. Revenue, however, was down 21% as same-store sales across the company were down 6% (Chili's, Maggiano's, On-the-Border). On the earnings call, CFO Chuck Stonseby made the following observation in response to a question about sales performance month-to-month (courtesy of seekingalpha.com):

If we went down period by period in the first quarter, July was down 8.8% for Brinker; August was down 3.1%; and September was down 5.4%. So we did see some recovery from July into August. And then we got off the 3C [promotion] and went to a more full-price promotion and gave back a little bit of that same-store sales gain.

Customers, in short, are responding to price promotion...and when the promotions are less attractive, the customers don't come. 

Sonic Corp topped analyst expectations by $0.04/share; same store sales were down 4.5%.

Restaurant driven demand for dairy products and other commodity foodstuffs continues to lag...

The Financial Times today offers interesting analysis of the trend toward decline in the value of the US Dollar. It opens by looking square on at the issue:

For those who have long feared that the financial crisis – which has dented confidence in US economic leadership, capital markets and public finances – might end in a dollar crisis, this is a dangerous moment. With fear of global meltdown receding, the dollar is no longer supported by safe haven flows – investors taking refuge in low-risk and highly liquid US Treasury bills. But the daunting job of putting the US economic house in order again has barely begun.

There is plenty of on-the-one-hand/on-the-other-hand back and forth in the text, but overall the FT does not appear to think alarm is warranted. Caution? Perhaps. Alarm? Not really.

Even after the latest moves, the dollar is only fractionally below where it was at the start of the crisis in August 2007. Analysts say its recent retreat in large part reflects the normalisation of financial markets. Indeed, one big driver of dollar weakness has been a swing in US demand for foreign assets – with bullish US investors starting to load up on overseas equities again.

In addition, the authors are not convinced there are great alternatives:

The euro has won respect but is not backed up by a single sovereign debt market. The economic and demographic foundations of the yen are weak and China’s renminbi is not even fully convertible. Minor currencies such as the Australian dollar cannot absorb large inflows without becoming quickly overvalued. Moreover, economies with dollar pegs that stopped buying dollars would soon find their currencies appreciating against that of the US. It is more likely that those trapped in dollars but unhappy about low rates on US Treasuries will try to buy higher-yielding US private sector assets. While the financial crisis shattered confidence in some US credit markets, the Treasury market remained highly liquid throughout. It functioned, as advertised, as a global haven – arguably proving that US government bills are still the best assets to have in a crisis.

Down But Not Out (subscription may be required)

The Goldman Sachs Commodity Index closed at 488 today and the breakout on the weekly chart looks for real:

The continuing dismal (and in our view, disheartening) performance of the US Dollar is putting fuel in the commodity tank on a regular basis. Today the USD hit 14-month lows:

Commodity prices have reached an important area, with products such as crude oil pushing up against year-to-date highs. A look at the  Goldman Sachs Commodity Index nicely illustrates the general situation. Since May, the GSCI has traded in a range bounded by roughly 400 on the downside and 480 on the upside. On Tuesday, the GSCI settled right at about 484, right at the top of the range. A push through the upside resistance would be viewed as bullish, suggesting another leg up in the energy, metal and grain markets.