Commodity Bulls Should Be Grateful to the Fed

Commentators claim that commodity prices have recently risen because of the expectation that the Fed seems about open the money taps much further. Until unemployment diminishes and credit supply recovers, the real economy will not be able to absorb a lot of additionally created liquidity. Therefore, this extra money will largely flow to the financial markets.

In the past years, investors have increasingly regarded commodities as a normal part of a properly diversified portfolio. So if more money becomes available to the financial markets this will not just put upward pressure on stocks but also on commodity prices. The RJ/CRB index breaching resistance at 284 confirms this. Many analysts anticipate an additional upswing. They base this on a looser monetary policy by the worlds’ biggest central banks (with the ECB the notably exeption) and consistently high economic growth on the emerging markets in Asia and South America.

However, from a non-USD investor perspective I could equally explain the rise since June in the RJ/CRB index based on dollar weakness (see also the chart). One could argue that the expectation of further quantitative easing by the Fed has depressed the dollar, which “automatically” drives up commodity prices (always quoted in USD).

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September Strength Should Continue

Those of you familiar with the game of ice hockey will understand what I mean when I write, “it’s time to check the goalposts”. A good netminder will, with his stick, periodically bang the goalposts behind him in an effort to make sure all the angles are covered. Well, the same theory applies to those seeking to invest successfully. The markets have experienced a nice run in the 1st half of September and it’s now time to check the proverbial goalposts.

The market equivalent for a piece of iron painted red to which I refer can best be described as the relationship between the carry trade (expressed by the AUD/JPY), the NYSE Composite and the credit markets. We used these three factors to check angles back in April with our successful ‘Stalking the Bear’ series. And then again in July with our correct ‘change in trend may be in the offing’ comment. So, without further delay let’s check the posts….

Post 1: Below you will see a weekly chart of the NYSE Composite. This is an update to the chart that first appeared on this blog in the post ‘Stock Market Strategy: Irresistible Force Meets Immovable Object’. Please note that the red ‘immovable object’ of a downtrend has been breached and the black ‘irresistible force’ of an uptrend remains intact. So, for the moment, intervention and liquidity creation trumps economic reality. Score one for the bullish camp and look for a continuation of the September strength…..

click to enlarge images

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Why You Should Pay Attention to the Chinese Energy Policy

Back in March 2009, Wall St. hit bottom and the world markets entered one year long rally. The fact is that the Shanghai stock market index bottomed earlier in December 2008 (see plot below). Back then, China started the biggest stimulus package and pushed its GDP growth over 10% in the following year. Most countries worldwide benefited from China's move.



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