Commodities Rout

"BHP Billiton has lost 41% of its market capitalisation this year. Anglo American has shed over 66%"

Seeing this morning's comments on the shocking performance of big mining stocks prompts me to stick this up:

Reuters/Jefferies CRB Commodities Index     Source:  StockCharts.com

That's the lowest for a very long while.  Yes folks, it's not just oil, commodities are having a lean time of it.  To be fair, BHP has other problems as well, it never rains but it pours etc.

They will be hoping CU's mission to China this week can stir up demand a bit ...

ND

Glencore / Commodities Update: It's Serious

Source:  FT

The Glencore story is developing fast and there's spin aplenty in the air.  The company, and others of the commodities fraternity like Trafigura, wish it to be known that (a) they are nicely diversified and (b) there's no great Systemic Risk here:  "here are some arguments as to why commodities trading firms do not pose systemic risks".  Move along, everyone.

Well (c) Glencore may be diversified but the market sees it as a natural physical long position, and is treating it thus; and (d) whatever else, some of the firms we know about (i.e. the publicly held ones) look pretty under-capitalised - don't they ?!  Actually, very under-capitalised.

The oldest problem.  And that takes us back to Enron. 

Now look at the percentage of the FTSE that is represented by commodities firms of one sort or another (and see Stephen L's comment on pensions in the earlier post linked above).  Systemic risk?  O-oh yes.

ND

Glencore: Enron Mk2?

What comes to mind when the share price of a monster commodities trader falls off the edge?  Enron, that's what.

For readers too young to remember, Enron rose from being a near-bankrupt US gas pipeline company in the mid 1980's to becoming the pre-eminent market-maker in energy and a host of other commodities in less than 15 years, at the same time as forcing through market liberalisation in gas and power across most of the western world (with every man's hand turned against them, which makes the achievement all the more remarkable), going on to revolutionise the markets for coal and paper+pulp, and developing Enron Online, the biggest B2B platform the world has known.  And there have been 14 years since it went under!

But under it went, and the reason was the oldest in the book: under-capitalisation, with profits way, way ahead of cash-flow.  (Yes, many of the more lurid Enron stories were true; and yes, they had laid waste to the Californian electricity "market"; and yes, the CFO had his fingers in the till - but none of these alters that basic, simple underying fact:  under-capitalisation.)

I know *ahem* a lot about Enron and nothing in the same detail about Glencore.  But I recognize an over-extended trading shop when I see one.  Enron's demise caused a lot of dominos to fall (in strikingly slow-motion, as I recounted here), including carnage in the banking sector; and there must be a decent chance the same will happen now.  Anglo American is being mentioned in same breath as Glencore and one strongly suspects that a few more Swiss-based firms will be under pressure.

Could a Glencore melt-down (which hasn't happened yet) be as bad as Enron's back in 2001?  Glencore per se is a lot less commercially significant than was Enron that time.  However, the global financial situation is a lot less robust now.  In 2001, the great restructuring houses were fresh from their exploits in the Asian crisis of 1997-8, and were certainly up for fixing the energy sector's woes without too many widows and orphans feeling the pinch (beyond the families directly impacted in the failing energy merchants  -  why are American employees allowed, nay encouraged, to invest their pensions in the shares of their employer?!)  Even British Energy, a very awkward casualty in the protracted aftermath, was put back on its feet without there ever being much risk insolvency would cause its reactors to pop from neglect.

Falling dominos this time around may hit the ground with a thump, and find no medics on hand to resuscitate them.

ND

Trading Update - Back Into Silver

Well, the bottom for silver was $33 as foreseen, but for various reasons I let it pass, and only got back in at the end of last week, at a little under $36. I'd be surprised if there isn't at least 10% to be had before the summer doldrums - purely MHO of course, and these are crazy 'conspiracy' markets.

Gold, needless to say, has soldiered on almost oblivious to the May massacre. Ditto oil: Brent has stayed resolutely in 3 figures throughout the carnage, and is now back on the steady rising trend that began at $70 less than a year ago (from under $40 at the end of 2008, lest it be forgot).

So - QE3 ? or even permanent rolling QE. It won't just be the FTSE that will see the 'benefit' ...

ND

Oil & That Commodities 'Correction'

So what was that all about last week then, eh? I'm not going to spend much time here on silver, entertaining though it may be, because it is a thin market and crazy things mean less there than elsewhere. Here's a link for those who are interested: I'd say the conspiracy theory must broadly be correct but I'm certainly not going to argue the toss.

Unless the silver thing does actually turn really nasty, oil matters a lot more. Really nasty ? Well, if it causes life-threatening problems for JPM or HSBC (the big short positions); and/or encourages the US authorities to indulge in one of their really brutish, statist interventions like Roosevelt's 1933 confiscation of gold. When you read what transpired over Lehmans, AIG et al in 2008, you needn't harbour any illusions about due process in the Land of the Free.

So what about oil ? This was my 2011 prediction:

"Oil to be in 3-digit territory by year-end and to stay there forever. It will cross the 100 line earlier than that, but there is scope for some dithering on either side initially. Cowardly caveat: a combination of second-leg global recession in 1H11 plus absence of strife in Caucasus / Middle East / Nigeria etc could delay the timing."

Not much in need of revising there (and no shortage of strife). Brent was at $93 at the time, WTI at $89: it didn't seem a particularly bold prediction, but I can point you to some 'professional' econometric forecasters who had it staying in 2 figures for the whole of 2011.

Last week's commodities action, with oil as the centrepiece, is interesting for a number of reasons. (1) Goldman Sachs seemed to know it was coming; (2) it followed Obama's little tantrum (and the UN's !); (3) it has suited those who are trying to levitate the USD right now. For now.

That's where it gets complicated, however, because of course most people would reckon that in the long-term the US is deliberately devaluing the $ via inflation. I'm not going to attempt to summarise here the full conspiracy theory which synthesizes all this stuff. There is a simpler point to make, however: the commodities avalanche was led by gold & silver. Now in a world of leveraged trading and ever-increasing margin calls, a sudden big movement can force big liquidations automatically. So any liquid assets stand to be hit in the storm, and commodities fit this bill pretty well. The rest is a self-feeding downward spiral - until some big cash buyers with a strategic outlook on life come to the party ...

Anyhow: the price of oil remains squarely in 3 figures even after last week's 'rout', and why shouldn't it stay there ? Only Global Recession 2 could undo this, and of course the two are teleologically intertwined. And I do mean global: continuing misery in US / EU / Japan alone won't do the trick, IMHO.

Views ?

ND

Trading Update: Silver: Wow !

That was the week, that was. Having misread the overnight Sunday downtick and added to my stash (and made a day-trader's turn of 4%), it soon became clear this was ugly. On Wednesday I bailed on the main stash (of silver: the gold is a long-term thing), realising a gain for 2011 of a tad under 30%. Of course, last Friday on an MTM basis it had reached 45% ...

All credit to Bullionvault whom I use for PMs: they made a very fair market continuously, throughout all the parabolic carnage. PS that is not a recommendation: but it is certainly a commendation of the highest order.

Debate now rages as to whether Friday marked the bottom. If & when a bottom forms I expect to be back in again, because I have come to like the dynamics of silver a lot.

Next week I will do a proper post on the mayhem in PMs, oil etc. For now, suffice to say, the whole commodities thing reeks of manipulation - details to follow. The Big Boys are lashing out; there may be worse still to follow in this regard; and it's a very dangerous arena for anyone trading on margin (which I never, ever do). When the elephants fight, the ants get crushed.

Unless they are very nippy !

ND

'Duplicitous Toerags': Quote of the Day

"The Lib Dems are duplicitous toerags, though I have to say they are very good ministerial colleagues" - Tory minister

Ah - that's the way we like our insults !

An amusing end to a crazy week. Let the fun begin.

ND

Will Glencore be the new Lastminute.com?

Glencore, a huge secretive partnership that controls much of the world's commodity trade, has had an embarrassing few weeks as it looks to do an IPO that has a sole reason of making its staff billionaires and millionaires. They don't say this, but the IPO papers put together don't have much of a story to tell as to why they need all this external investor money.

Of more interest, is the sell-off in the commodity markets of this week. They had been on a big bull run so these things always correct, but the sell -off is sharp.

One is reminded strongly of former top of the market deals, RBS buying ABN AMRO and Lastminute.com listing in the hype of the internet boom - and this is just UK deals. in the US you have AOL-Time Warner the daddy of all bad deals.

Glencore is yet to hit the market, but the joie de vie is draining fast. Glencore's float will be stage managed (by underselling to tracker funds, the initial price will be at the low end of the range etc) to make it go up on its first day - but when we look back in a year's time - will we see this as the moment of hubris?