This is a tough one.
There is a frenzy of hyena attacks led by Gross and Greenspan attempting to talk down the markets, trying to remind us how terrible everything is and pushing the Fed to lower rates further at their upcoming meeting. This was timed with the release of Fed minutes (that a former Fed Chairman would have gotten an early copy of) that show the Governors are worried about a further downturn. Since the Fed is also very concerned about inflation though, with Fisher (Dallas) and Plosser (Philly) voting against the rate cut.
Fisher stated: "That focusing on measures targeted at relieving liquidity strains would improve economic prospects more quickly and lastingly than would further reductions in the federal funds rate at this point." – That's a pretty dangerous dose of rationality if it catches on! This is very bad news for commodity bulls, who need more financial voodoo to prop prices past the 50% gains they tacked on since last Q1. As we've been saying for quite some time, it's possible for one commodity to spike up but when they all try to spike up at the same time, people simply start running out of money. If the Fed and the Administration don't keep fueling the commodity fire with more money drops, like any blaze it will eventually exhaust itself as it runs out of combustibles.
Still you can't seem to stop investors from rushing into commodities because they WERE up 50% LAST year, ignoring the fact that for the previous 100 years they averaged 5% and that, IF THEY WERE TO AVERAGE 50% FOR JUST 2 MORE YEARS, then a gallon of gas will cost $8 and a gallon of milk will cost $9 and gold will be $2,000 an ounce and the lousy 100% gain they make on the commodity bets won't buy them a decent bottle of champaign to celebrate with.
I've decided that the problem with commodity investors (and many investing classes) is that they don't live in the real world. Our modern market systems make it possible for kids to graduate college, never have a real job and become traders who are given Billions of dollars to invest before they are 30. They view the market as some sort of video game and have no sense of the reality of the numbers they are playing with. A lot of technical analysts have slipped into this trap as well, believing things can go up or down in ridiculous moves based on the prior ridiculous moves, completely ignoring the fundamentals of the thing they are investing in (if they even know or care what company or commodity is actually represented by the chart they pass judgment on).
This is the farce we are all participating in. Only a clueless kid with a $1M New York City apartment and a Porche in a $1,000 a month garage that he never drives and a house in the Hamptons he never visits could possibly believe that buying oil at $110 a barrel is a good investment. You need to be severely detached from reality to think that a planet with an average per capita GDP of less than $16,000 will continue to consume energy at the same rate when the price doubles.
The traders, of course, live in the US, Europe and Japan, who use 1/2 of the World's oil but account for less than 15% of the world's popullation. The other 5Bn people have an average income of less than $8,000 a year and can hardly be expected to pay $10 per gallon to fill up the Hummer, or even the scooter for that matter. Habits can, will and are changing rapidly and demand is being destroyed at an astounding clip. At the same time, even developed countries are being crippled by skyrocketing commodity prices, leading to further consumption cutbacks. Right now commodities, like houses did at the peak, are surging forward based on the "bigger idiot theory" but we are running out of idiots and woe unto the last idiot left holding the bag full of $1,000 gold (was $450 in 2005).
We have the oil inventories today and last week there was an 8M barrel build in crude but, more telling, the March inventory levels of inventories were down just 1 Million barrels from last year, even though imports were down 4.7%. Gasoline supplies were up 10.7% from last year (when oil was trading at $60) despite the fact that refinery utilization is at 10-year lows. This has caused a 21.8% spike in Blending Components, with 113.6Mb waiting to be demanded vs. just 93.9Mb last year. Net imports of petroleum products are off 14.9%, down 350,000 barrels a week while oil used by refineries is off 3.2%, with close to 500,000 barrels a week less being refined this year compared to last. Let's keep this in mind while they lie to us on CNBC!
Aside from the obvious lack of interest in oil in the longer-month NYMEX contracts, Bespoke Investments points out that commodity analysts have been ratcheting down their forecasts across the board with a 10% decline in Natural Gas and a 20% decline in oil projected betwen now June (see chart above).
When commodities will finally break and whether they will take the rest of the markets with them remains to be seen. For now, we will watch the action from a fairly neutral position. Asia fell off another point this morning but we've been ignoring them all week so why stop now? Now confirmed BOJ Governor Shirakawa warned that the rise in energy and raw material prices is causing Japan's economy to lose momentum so now we have another commodity hawk in the G7. Meanwhile, 3 Japanese steel makers agreed to pay BHP $300 per ton for coking coal, up from $98 last year – we'll see if this finally affects X, which has been on a tear for 2 weeks.
![[Image]](http://s.wsj.net/public/resources/images/OB-BG508_Boeing_20080409085412.jpg)
Europe is flat ahead of tomorrow's G7 meeting where the IMF's projections of $975Bn in housing losses will be the main topic of conversation. The BOE is facing a rapidly declining Pound against the Euro but may have to cut rates again as UK housing prices continue to fall, this should be a great help in keeping US comparatively less sucky for global investors.
BA finally announced the official delay on the Dreamliner and we are going to be thrilled with our BA calls as we played this one right, things indeed are no worse than expected and now we have another 10-year franchise-making aircraft to look forward to before the next time someone can find a reason to sell this stock. Gee, a plane that uses 20% less fuel is popular – who'd have thought? Not the army, of course, which went with the gas-guzzling EADS bid!
Waters will continue to be choppy today so we will stay on our toes and oil inventories are at 10:30 and we'll have to do a little adjusting around that, no matter which way the market goes. So far, so flat this week though and flat is good – we could use the rest ahead of expirations!
