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Bears rule the commodities markets now--here's how to tell when we might have bottomed
12/20/2011 7:43 pm EST
The bears are in a big majority in the commodity markets right now. So much so that net long positions across 18 U.S. futures and options fell by 9.6% in the week ended December 13, according to the Commodity Futures Trading Commission. That took net long positions to a 31-month low. The Standard & Poor’s GSCI Index of 24 commodities dropped by 4.5% last week. The S&P GSCI Index closed last week down 19% from its April high.
It’s easiest to summarize the thinking of the few remaining bulls. Barclays Capital argues that supply in key commodities is so tight that even modest demand in 2012 will push up prices in the early months of the year. Goldman Sachs, similarly bullish, has maintained its overweight rating on the sector and sees a 15% gain in the commodities index over the next 12 months.
The bears are having none of it. To them the current rout is just the beginning of a decline that will dominate 2012. Emerging economies are slowing and Europe is on the edge of a recession that will cut global demand even further. Bears are looking for a second monthly decline in China’s factory output in December, for example, and a fifth straight monthly decline in EuroZone manufacturing.
I wouldn’t argue that the bears are wrong about the next six months. I think the global economy—and the economies of the EuroZone and China—will continue to slow into the middle of the year. My view—and here’s where I differ from the bears--is that growth in China, Brazil, and other emerging markets is likely to bottom around mid-2012. The pickup in the second half of the year won’t be eye-popping, but it should be enough to convince markets that global growth isn’t headed for the big drop that traders and investors now fear.
Markets are so negative now and are getting more negative weekly that this modest change in expectations should be enough to produce a stronger stock market—in emerging markets and the United States anyway—in the second half of 2012. (Who knows if the EuroZone will manage to put the worst fears behind it by then. I doubt it.)
The more fear in the market now the bigger the potential rebound when the end of the world doesn’t arrive.
Right now options to protect against losses in Chinese stocks cost the most since August 2010. And I expect them to get even more expensive because Goldman Sachs’ far more numerous bearish counterparts on Wall Street are calling for, what Morgan Stanley called “a multiyear deleveraging and de-globalization cycle” in a December 16 report. Deleveraging by European banks, Deutsche Bank said in a December 5 report, will result in a severe reduction in financing for commodity trading that could send raw materials prices plunging in 2012.
I think the euro will provide a good indicator in 2012 for how low everything might go and when it might be safe to stick more of your anatomy deeper into the water. It looks like the euro has finally started to crumble below the $1.30 level that has marked the bottom of its range in this crisis. Bears are looking for $1.20, $1.15 or even parity with the dollar. I certainly wouldn’t use any specific level as an automatic signal for anything, but at $1.20 or $1.15 I’d certainly want to take a look around and see if the risk/reward ratio has shifted enough to make taking what is now the contrarian position attractive.
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