Tuesday, May 13, 2008

CRB Index

All this talk about 'speculation' in the commodity markets, crude in particular, day after day, on pom pom TV, compelled this post. The news that Indian authorities are suspending trading in selected commodities, only adds to that desire. Funny how we can always count on the authorities to do the wrong thing at the wrong time. Yup suspending trading will really curb the price rises, or maybe declines. Hey Mssrs. Paulsen and Bernanke, let's suspend trading in CDO's, CLO's, RMBS, et al and all our problems will be solved ! Suspend trading in the pricing of anything we don't like. Capitalism at its finest, you hear that China, Cuba, North Korea !

Of course it has nothing to do with hair-brained, or should I say brain dead policy would it? I caught a piece on pom pom TV discussing crude, and a trader opined there was about $50 speculation premium in crude. I couldn't stop laughing. Try this on for size, how about 100% of the price of crude is speculation. You speculate when you keep your savings in cash as you risk inflation eroding your purchasing power. You speculate when you keep your life savings in US dollars as it fluctuates against other currencies, but according to Ben Bernanke and Newt Gingrich, you need not worry a wit with what the dollar does;

"My guess is, the dollar will stabilize, to the huge disadvantage of the euro. The only zone where the dollar's value matters to us is the purchase of oil. If we weren't buying foreign oil, we wouldn't care about the value of the dollar."

Yup, from the former speaker of the House. And it we didn't travel and do business elsewhere we wouldn't care. Gotta love it. I just don't know whether to laugh or cry!

The point I am making is that basically speculation is 100% of the market. Some months back, I believe during the Israeli, Lebanese conflict, when crude was in the $60-70 range and Barton Biggs claimed there was a $20 fear or risk premium in crude. Barton is a very sharp guy but was very, very wrong. The point here is who cares whether speculation is 20, 40 or 70 percent of the market, it is a colossal waste of mental capital. Besides, as I have often said, an investor is a speculator who has made a mistake and will not admit it and take his/her loss.

This being said, lets have a look at the CRB index (chart above). Does this look like a bubble to you. What this looks like to me is a very orderly market. Draw an upsloping trendline from the low(350 level) in mid January of this year, and you get touches in early April (380 level) and early May (395 level). Now draw a horizontal line across the top at the 420 level and you have a nice ascending triangle which implies, now, a target of 490. Keep this in mind when the talking heads on pom pom TV try and tell you commodities and in particular crude is in a bubble. Yeah, you know, the exact same ones who never saw the tech bubble or the housing bubble coming now are qualified to see a commodity one. Comical, truly comical.

That being said shakeouts will be common, head fakes, reversal fake outs, etc. Only the strong and well capitalized will survive. Caveat emptor.

Good speculating to you all !

Open Positions:

Long 6 units Currencyshares Japanese Yen ticker FXY @ $88.55 stop at $91.40
Long 1 unit Allis-Chalmers ticker ALY @ $14.45 stop at $16.64
Long 2 units Ultrahort Real Estate ticker SRS @ $85.35 stop at $84.84
Long 2 units Ultrashort MSCI ticker EFU @ $76.25 stop at $74.34
Long 2 units Powershares DB Agriculture ticker DBA @ $36.35 stop at $36.46
Long 2 units Ultrashort S&P500 ticker SDS @ $57.05 stop at $56.14
Long 1 unit Ultrashort Russell 2K ticker TWM @ $74.60 stop at $69.92
Short 2 units Daimler AG ticker DAI @ $86.20 stops at $82.48/$81.38
Short 1 unit Brinker Int'al ticker EAT @ $21.25 stop at $24.14
Short 3 units Retail Holders ticker RTH @ $96.72 stop at $98.56
Short 2 units Goldman Sachs ticker GS @ $197.95 stops at $192.14/197.68
Short 1 unit Darden ticker DRI @ $37.30 stop at $40.27
Short 2 units Lehman ticker LEH @ $43.70 stop at $47.46

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