Author Topic: another leg down in commodities?  (Read 5979 times)

ratiman

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another leg down in commodities?
« on: March 26, 2016, 09:04:37 AM »
There seems to be a consensus that we have seen a bottom in oil and that commodities have also seen the bottom. Commodities are actually below what was a very significant level. If this were a stock, would you want to be long?



Meanwhile deflation is relentless. Again, if this were a chart, would you want to be long? 




Moving on to commodity stocks, they look mostly like this, bouncing up against a long downtrend:





ratiman

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Re: another leg down in commodities?
« Reply #1 on: March 26, 2016, 09:05:54 AM »
So what happens to the stock market if commodities head even lower? Has the market really priced in the possibility that we could see the CRB 30% lower? And why is that inconceivable?
« Last Edit: March 26, 2016, 09:18:39 AM by ratiman »

Green King

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Re: another leg down in commodities?
« Reply #2 on: March 26, 2016, 10:04:53 AM »
you should be asking. Is the Iranian supply priced into the price?
« Last Edit: March 26, 2016, 10:17:53 AM by Green King »
GK

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Re: another leg down in commodities?
« Reply #3 on: March 26, 2016, 10:14:34 AM »
You should go buy shares of Fairfax. Maybe that they will accept their paper at the soup kitchen?

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ratiman

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Re: another leg down in commodities?
« Reply #4 on: March 26, 2016, 10:26:09 AM »
My point was just to say, look at these charts, the trend is still down. Do you want to bet on these long-term trends reversing any time soon?

There are lots of scenarios in which commodities head lower. China could have a 1998 style Asia currency crisis. Kyle Bass and Chanos could be right about Chinese debt/overproduction. Dollar could go higher. Slowdown in US economy could exacerbate the oil glut. Commodity bankruptcies (which haven't even really gotten started) could send deflation throughout the economy. Iran and Libya could return to the oil market. So there are lots of scenarios. My really simple point was, do you want to bet on this trend reversing? Do you think that the long term deflation trend is reversing? What if it's just getting started, at least in commodities? 
« Last Edit: March 26, 2016, 10:30:02 AM by ratiman »

Green King

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Re: another leg down in commodities?
« Reply #5 on: March 26, 2016, 10:34:59 AM »
My point was just to say, look at these charts, the trend is still down. Do you want to bet on these long-term trends reversing any time soon?

There are lots of scenarios in which commodities head lower. China could have a 1998 style Asia currency crisis. Kyle Bass and Chanos could be right about Chinese debt/overproduction. Dollar could go higher. Slowdown in US economy could exacerbate the oil glut. Commodity bankruptcies (which haven't even really gotten started) could send deflation throughout the economy. Iran and Libya could return to the oil market. So there are lots of scenarios. My really simple point was, do you want to bet on this trend reversing? Do you think that the long term deflation trend is reversing? What if it's just getting started, at least in commodities?

A lot of people are making the bet by buying oil companies. For me it is just too hard It could go either way. If you find a positive carry or a good asymmetric bet it might be interesting. but as ERIC says make sure that it is non recourse.
« Last Edit: March 26, 2016, 10:37:00 AM by Green King »
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ratiman

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Re: another leg down in commodities?
« Reply #6 on: March 26, 2016, 10:48:04 AM »
I've seen the same thing, people seem to think oil has put in a bottom. Somebody on twitter saying "oils dark days are increasingly behind us."

OK, here's the chart for energy index XLE, still below the trend line despite 25% rally:





« Last Edit: March 26, 2016, 10:49:51 AM by ratiman »

Packer16

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Re: another leg down in commodities?
« Reply #7 on: March 26, 2016, 10:56:07 AM »
I think you need divide commodities into that which we consume and are not replaced quickly (oil and gas) and those we use that can be recylced (metals).  Also for oil and gas, the current replacement oil for declines is from unstable places versus more stable places when oil prices were higher.  If one of these unstable places blows up then oil will skyrocket like it did in the 1970s.  I agree with your overall commodities hypothesis with exception of oil and gas for the reasons listed above.  If you do not have exposure to oil and gas this may not be a bad time to get that exposure, you just need to ensure your company will make it out of this downturn.

Packer     

ratiman

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Re: another leg down in commodities?
« Reply #8 on: March 26, 2016, 11:11:51 AM »
I think you need divide commodities into that which we consume and are not replaced quickly (oil and gas) and those we use that can be recylced (metals).  Also for oil and gas, the current replacement oil for declines is from unstable places versus more stable places when oil prices were higher.  If one of these unstable places blows up then oil will skyrocket like it did in the 1970s.  I agree with your overall commodities hypothesis with exception of oil and gas for the reasons listed above.  If you do not have exposure to oil and gas this may not be a bad time to get that exposure, you just need to ensure your company will make it out of this downturn.

Packer   

Oil does look like a no-brainer investment at this point, at least if you're holding for the long term. That's what makes me a little suspicious. Have we reached the point of max pain in oil? XLE is still above 2012 lows. Is that really a bottom? I would like to see huge bankruptcies in firms like CHK and WLL, stocks trading at huge discounts to PV-10, suicidal notes from retirees on Seeking Alpha, utter capitulation and disgust. I don't see that. I see bullishness, despite no signs at all that we are out of this oil bear market. Natgas is at $1.88. What happens if it goes to $1.50? I don't see people really considering that path.

Remember what happened to the coal bulls.
 
« Last Edit: March 26, 2016, 11:20:12 AM by ratiman »

ratiman

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Re: another leg down in commodities?
« Reply #9 on: March 26, 2016, 11:32:31 AM »
$6B of XLE shares have been created since the peak in June 2014. So the public (I assume the public buys ETFs) has been net buying during this decline. During one week during the decline last December, buyers created nearly $800M of XLE. Over the same period (since 6/2014) XLB destroyed $3B shares and EEM $9B. So within commodities energy has definitely been the most popular.