I just listened to it again, and I thought it really deserved its own post.
It is one of the best financial interviews on the web for two reasons.
1. Kyle Bass is a smart cat
2. He masterfully and subtlety slaps around the female interviewer with skill never seen on television.
Some dimes that Bass drops:
“You can’t hate the mirror because you are ugly.” (I may bite this one).
“Capitalism without bankruptcy is like Chritianity without hell.”
“Buying gold is just buying a put against the idiocy of the political cycle. It’s That Simple”
“You know how screwed up Europe is when you have an Italian central banker and a German pope”.
“The only way to quote resolve any problems in Europe is to have massive debt restructuring…
One of the things we’ve said in our office recently is you know how screwed up Europe is when you have a German pope and an Italian central banker. We have a scenario today in which debt has grown globally in the last nine years from $80 trillion to $210 trillion. Global credit market debt has grown at 12% a year for the last nine years, while global GDP has grown at 4. We’re in a scenario where the PIIGS have sailed into a zone of insolvency. When you sail into the zone of insolvency there is no quote solution for you. The bill is due and you have to pay the pill. What has to happen is it is of our opinion that these debts have to be written down, it’s that simple.
Basically you’re saying if Germany goes joint and severally liable with the profligate idiots of southern Europe will that quote solve the scenario? Think about this. Let’s assume Germany goes to doing a eurobond and Germany takes on these… first of all German constitutional court has already ruled that that’s illegal in Germany, but let’s assume that they get over that and they go ahead and issue this bond. What would that do for the profligate members including Greece when Greece says, “OK we’re all in, we’re good, you’re lending us more money, we have a big debt problem and you’re lending us some more and now we can borrow a little cheaper,” and then Greece keeps spending, and they go back to Germany and say, “OK Germany I need some more money.” Germany says, “No, we’re going to impose this real austerity on you now.” Greece says, “Fine, we’ll default.” Every single time from now on Germany is in the exact situation it’s in today. We call it in Texas a Mexican Standoff, meaning there’s no winner. The profligate members will always have Germany by the short hairs every time this scenario comes up. So I disagree. I don’t think that Germany will end up going all in. It would not be to the benefit of Germany to do so in the long run. Let me ask you this question: How many of your relatives would you go joint and severally liable with?”
We as a society must stop pretending. Most of us think that we still have money in the bank to protect, so we go along with the game of extend and pretend. For some of us, the game has already ended. The rapacious zero interest rate policy that I call Bernankecide has already robbed millions of savers of their life savings. This is the reality that has yet to hit home for many Americans who are content to wallow in the status quo. Unfortunately, the longer it takes for them to wake up, the worse their, and our, fate will be.
My mother and millions of other senior citizens are among the victims of the game that policy makers and those who empower them are playing. Their life savings are gone because Bernankecide, the financial genocide of the elderly, forced them to spend their principal. Now the government is indirectly confiscating 8% of my income because I must support my mother. That percentage is likely to grow as her health deteriorates.
Millions of other boomers are in the same boat. They are forced to pay this immoral hidden tax because Ben Bernanke decided that the innocent must pay for the sins of the guilty. While Bernanke’s ZIRP goes on allowing the banksters to continue to collect their fat bonuses, it steals the savings of millions of Americans, eliminates their disposable income, and cuts the spending power of millions of others who must now support those rendered destitute. The guilty benefit, and the innocent are punished.
Bernanke knows that, yet he continues to side with the criminal bankers in support of the financial genocide of the super elderly, and their children, the baby boomers who must increasingly support them.
If you’re looking for a safe place to put your investments, Chad Venzke has a suggestion: Dig a hole in the ground four feet deep, pack gold and silver in a piece of plastic PVC pipe, seal it, and bury it.
The 30-year-old central Wisconsin resident trusts no one but himself to store and protect his gold and silver—not banks, not investment funds, and certainly not the government. It’s precisely because of this suspicion of institutions that he invests in those metals to begin with. In case of emergency, “you always want to have your precious metals within arms reach,” he says.
Venzke is hardly the only investor who wants his precious metals nearby at all times. A pound of gold worth about $24,000 can easily fit in a pocket; how to protect it is a decision that carries expensive consequences. Do-it-yourself investors who don’t trust banks must find creative storage options, whether burying gold in the yard, submerging it in a koi pond, stashing it behind air-conditioning ducts, or placing it under carpets. All these options are debated in online gold and silver investor forums. They’re also debated and demonstrated in youtube videos, including one by Venzke that has been viewed more than 7,000 times.
Christina Romer had traveled to Chicago to perform an unpleasant task: she needed to scare her new boss. David Axelrod, Barack Obama’s top political adviser, had been very clear about that. He thought the president-elect needed to know exactly what he would be walking into when he took the oath of office in January. But it fell to Romer to deliver the bad news.
So Romer, a preternaturally cheerful economist whose expertise on the Great Depression made her an obvious choice to head the Council of Economic Advisers, gathered her tables and her charts and, on a snowy day in mid-December, sat down to explain to the next President of the United States of America exactly what sort of mess he was inheriting.
Axelrod had warned her against pulling her punches, and so she didn’t. It was not a pleasant presentation to sit through. Afterward, Austan Goolsbee, Obama’s friend from Chicago and Romer’s successor, remarked that “that must be the worst briefing any president-elect has ever had.”
But Romer wasn’t trying to be alarmist. Her numbers were based, at least in part, on everybody else’s numbers: There were models from forecasting firms such as Macroeconomic Advisers and Moody’s Analytics. There were preliminary data pouring in from the Bureau of Labor Statistics, the Bureau of Economic Analysis and the Federal Reserve. Romer’s predictions were more pessimistic than the consensus, but not by much.
By that point, the shape of the crisis was clear: The housing bubble had burst, and it was taking the banks that held the loans, and the households that did the borrowing, down with it. Romer estimated that the damage would be about $2 trillion over the next two years and recommended a $1.2 trillion stimulus plan. The political team balked at that price tag, but with the support of Larry Summers, the former Treasury secretary who would soon lead the National Economic Council, she persuaded the administration to support an $800 billion plan.
Ingrid Casares & Chris Paciello Back in Biz with The Light Group at the Delano?
If you believe the rumors, South Beach is about to go retro, back to the days when people actually danced at clubs, when real celebrities came to party because they wanted to and not for a carefully orchestrated, trite tabloid photo op, and when the words South Beach and hip together in the same sentence was anything but oxymoronic. That’s right, we have excellent sources telling us that the Captain and Tennille of 90s Miami nightlife, Chris Paciello and Ingrid Casares, are teaming up again, this time as partners in the food and beverage operations at the Delano left recently vacant by Jeffrey Chodorow, who was bought out by the hotel’s owners, Morgans Hotel Group, for $20 million.
Chris Paciello back on South Beach scene at Delano
For the first time since he was released from federal prison five years ago, Miami Beach’s fallen nightscape overlord has returned to where it all started.
Chris Paciello, now 40 and described by some who have run into him as “subdued and humbled,” is settling down at the Delano Hotel.
He’ll be living there for the next few months as he works to give back to the legendary beachside resort its No. 1 ranking among hipsters and celebrities.
Deja view: Mixed reviews on the return of Chris Paciello
Ever since we broke the news that old school South Beach club guy Chris Paciello was returning to his old stomping grounds and possibly reuniting with his former partner Ingrid Casares in the nightlife biz, the reactions have been as polarizing as the Tea Party vs. the Democrats only, instead of tea, it would be vodka. On one side you have the champions, cheerleaders and aging club kids who can overlook his past and subscribe to the Nostalgia Party (there’s already a Chris Paciello Fan Club and “Chris Paciello, The King Is Back” page on Facebook), while on the other side you have those who say it’s just wrong to glorify the return of someone with a criminal past—we’ll call them the Concerned Party. Both sides will argue back and forth over this until the lights come on in the new Light Group-sanctioned Delano hot spot, so there’s really no end to the debate.
Some say people are jealous or nervous that the reunion of the team some say made South Beach the nightlife capital it once was will ruin their own businesses, and others say that people are downright nervous in general, not for business purposes, but for reasons involving personal safety. It’s no secret Paciello had a violent past, for which he has served time in prison. It’s no secret that he had enemies, some who still live and work on South Beach. We spoke to nightlife veteran Gerry Kelly, currently serving as marketing and nightlife operator at Trio On the Bay, who worked with Paciello and wasn’t exactly BFF with the guy back in the day. “I was surprised to hear he was returning to Miami,” Kelly admitted. “I do believe we all learn from our experiences in life. Miami’s nightlife and entertainment culture has changed so much since the late 90s that we all have to adapt and change to keep up with the never ending new trends. The city is definitely big enough for everyone and I wish him the best.”
‘Limelight’: The Rise And Fall Of The Church Of Rave
On Friday, a documentary ostensibly about the rise and fall of a one time club king named Peter Gatien opened in New York (it opens around the country next month). In the early to mid-1990s – the height of rave culture in the U.S. – Gatien owned the biggest clubs in New York City, including Limelight, which lived in a deconsecrated Episcopal Church in the Chelsea neighborhood. Today Gatien lives in Toronto, where he was deported in 2003 after pleading guilty to tax evasion. And Limelight has become a mall. It calls itself a “Festival of Shops.”
Much of the story told in Limelight will be familiar to readers of Clubland, a book chronicling mid-’90s nightlife written by Frank Owen, who covered Limelight at its height and followed its scandalous end in the pages of local alternative weekly the Village Voice. It certainly was to the documentary’s director, Billy Corben, who read the book as he was pursuing another documentary about the man who ran the biggest club in Miami in the mid-’90s. Owen appears frequently as a kind of expert witness in Limelight.
“I had read Clubland because of our interest in Chris Paciello and Liquid in South Beach, and the Miami angle,” says Corben, best known for 2006’s Cocaine Cowboys. Corben and producing partner Albert Spellman still intend to make a movie about Paciello. But first, they’ve made Limelight, which focuses on Gatien, the eye-patched Canadian nightclub impresario who owned Limelight, Palladium, Tunnel and Club U.S.A., who was brought to trial by the City of New York under mayor Rudolph Giuliani’s mid-’90s crime crackdown, alleging that Gatien was overseeing a massive drug ring in his clubs.
A few days ago, all the locals were surfing the main beach break.
I decided to take a long walk around the point and take a look at this cove beach I spocked a few days earlier on a jog before the swell came. (I have a unique ability to find secret spots and set ups).
I anticipated correctly as I was able to surf this perfect right hand tube off the rocks to the head. No one out. (Took a picture from high above on the cliff after the session. It was bigger/better earlier, when I surfed it.)
What’s up now?
Now, you ask, “Where exactly is that spot?”
Do me a favor.
But I will say it is kind of near here:
Or maybe not.
In Gold News:
The gold bug has hit the shopping center.
Gold Max — said to be he largest chain of jewelery-purchasing stores — says it’s on track to open 100 gold-buying shops in Southern California within the next year. It already has seven Orange County stores.
Jim Rogers breaks down commodities from an old interview.
Jim Rogers : Missing out on Commodities?
Matthew Bradbard’s daily commodity round up:
Brace for the Fed as we expect it to be a market mover. Indecision in the oil market as prices close virtually unchanged today. If we fail to make a new contract high in the next few sessions we should resume the set back we’ve been forecasting, in June that would be a trade over $114.05. A settlement below the 20 day MA should confirm a move lower but before either scenario happens we’re just guessing, that level is $108.90 in June WTI. We suggest the sidelines in natural gas willing to be a seller on a spike higher. We cut losses for clients that still held bear put spreads in the June ES; it resulted in a loss of approximately $400/per position including fees.
Jim Rogers: Buy the rmb [renminbi, the Chinese currency].
Bill Bonner: We are in a period much like the period following WWI, in which the great debts and losses of the war had to be reckoned with. It is an era of great risk. The U.S. faces many of the same challenges faced by Germany and England after WWI. Like England, it has huge debts. It is a waning imperial power. And it has the world’s reserve currency. And like Germany, it is attempting to fix its problems by printing more money. This is not a good time to be long either U.S. stocks or U.S. bonds.
Peter Schiff: Don’t be suckered into the idea that recovery is just around the corner. The current climate is like living in a hurricane or earthquake zone; it’s important to stay vigilant because you never know when disaster will strike. Physical gold is the financial equivalent of a flashlight, first-aid kit, and store of canned goods. It’s a basic way to protect yourself from any eventuality. From there, if you’re looking for returns, there are plenty of foreign markets with strong fundamentals, as well as commodities that feed those markets.
Investing in the U.S. is now driven largely by force of habit. It’s a habit you should resolve to break.
Jeffrey Christian: Do not invest based on what you believe, but on what you know. Gold is a market, like other markets. It rises and falls. You probably want to stay long gold on a long-term basis, but may want to cull the weaker gold assets from your portfolio in the first quarter, and put some hedges in place to protect a long-term core long gold position against the potential of significant price weakness over the next two years or so. Such a period of weakness would be an excellent time to add to one’s gold assets.
John Williams: As an economist, I look for the U.S. dollar ultimately to lose virtually all of its current purchasing power. Accordingly, for those living in a U.S. dollar-denominated world, it would make sense to move to preserve wealth and assets over the long-term. Physical gold is a primary hedge (as is silver). Holding some stronger currencies outside the U.S. dollar, as well as having some assets outside the United States, also may make sense.
Steve Henningsen: Dramamine (for volatile markets), a stash of cash (for potential investment opportunities), and move some of your assets offshore if you haven’t already.
Frank Trotter: My advice is first to look at the other side of your balance sheet – the liability and risk equation – before seeking out absolute gains. What are your goals, what resources do you already have to meet those goals, and what events (health, income stream, upheavals) might impact these risks? Place some assets to hedge these risks directly, then look to diversify globally into markets with higher growth potential than we see here at home, and that may balance your global purchasing power risk. Almost like a religion, we have had the phrase “Stocks are the only legitimate hedge against inflation” beaten into our heads. I say, look at assets that define inflation like commodities and currencies and evaluate where these fit into your risk portfolio.
Krassimir Petrov: Last year I recommended silver, and I would stick to silver again, despite the phenomenal run in 2010. Then it gets tricky. I usually don’t recommend diversification, but now I would again recommend a broad portfolio of commodities. Investing in 2011 should be easy: stay out of real estate, out of bonds, out of fiat currencies, and out of stocks; stay fully invested in commodities, overweight gold and silver.
What to watch in 2011: stay focused on the sovereign debt crisis and bond yields. Spiking yields will trigger the next stage of the crisis.
Bob Hoye: Once past the early part of 2011, the best returns are likely to be obtained from the junior gold exploration sector.
When comparing other asset classes we do not think that commodities are superior, though we do like the non-correlation to other asset classes. The performance of most commodities is independent to the performance in the stock market, bond market or real estate market. The U.S. stock market has just clawed back to levels seen before the financial crises, while the jury is still out on whether the housing markets have bottomed yet? With yields at near record lows in the Treasury complex we doubt a sizeable allocation here is the answer for investors either. Because we are clearly in a bull market in commodities, with a number of them reaching record if not multi-decade highs, we suggest getting on board. Many investors I speak to feel they have missed the boat. I disagree, while I feel the train has left the station we think there is much more upside in the quarters and years to come. Additionally most commodity investors are not long only so there will be opportunities to speculate on price depreciation as well.
Find below a brief overview broken down by sector as to what we feel 2011 has to offer commodity investors.
Agriculture: If the first month of trading in the grain market is any indication of what is to come, expect your grocery bill to increase this year. Since the October USDA crop report we’ve seen a bullish sentiment in the grain complex. Ending stocks in corn have been reduced to their lowest level since 1996/1997 pushing the stocks to usage ratio to under 7%; the second lowest in history. The increased usage from China and abroad should mean exports ramp up in the United States again this year. Weather is the wildcard currently in the South American crop and then in the United States in the spring and summer. It is not just the United States that is dealing with tight stocks as the world stocks/usage ratio is just 14.5%, the second tightest setup since 1973. Ethanol usage is perhaps even a bigger wildcard as the demand outlook is unclear. My belief is that corn prices still need to move higher to curb demand and to attract more acreage.
Wheat was the first major agricultural market to surge to record highs in 2008/2009 but of late the price action has taken a back seat to soybeans and corn. The end result was because prices reached such extremes, we’ve seen production increases globally that have tempered prices. Wheat will continue to react to movement in the dollar and on growing concerns of food inflation. The two biggest countries that could affect movements in wheat are Egypt and India. Egypt, being one of the largest wheat exporters, has been forced to build reserves because of the drought in the Black Sea region. While India has harvested a bumper crop in 2010, they still maintained a ban on wheat exports. The underlying quandary abroad is increased food insecurity. United States farmers have done a good job of taking advantage of higher pricing as ending stocks in 2010/2011 are projected to be the second highest in history. Assuming normal weather we believe the wheat market will see increased supplies and we could see prices trade back near the $6 range.
Like many commodities China has been the driving force in the soybean market. For many producers they can say 2010/2011 will be their most profitable years ever. You have not seen a more significant jump in acreage because the margins at the moment are even better for corn. Case in point is the soybean/corn ratio, which at 2.1 is near the lower end of the 30-year range. Given the current fears of a possible drought in South America and a late start to plantings, coupled with the surge in demand from China, we think 2011 will be another bullish year in the soybean complex, albeit particularly volatile. Demand is undeniable but there may have been too much weather premium built into the market, so on ideal weather expect that premium to be stripped out of the market. As it stands now the world’s balance sheets are showing a production surplus but the recent reductions are far from bearish. There may be more upside in the months to come but with record net longs in place we think there is more potential downside surprise than upside in the immediate future.
Softs: Volatility was the name of the game in sugar in 2010, as prices more than doubled reaching multi-decade highs by Q4. As we enter 2011, if we see continued weather issues in Brazil it could set the stage for an additional price surge as we’ve been unable to truly rebuild supplies with growing demand after the previous deficit. World sugar stocks remain near 17-year lows and the stocks/usage ratio is dangerously narrow. Weather was the problem last year with a drought in Brazil, the Black Sea region and Russia contributing as well were floods in Europe and Thailand. Major weather events shifted what was expected to be a 4-6 million tonne build to potentially no surplus or another deficit. China’s output is expected to recover but the problem may be that their usage may grow at a faster pace. It’s feasible that China could become a major importer in 2011. In our view, it would not take much to see the tight supply imbalance to make sugar a good candidate to buy and hold after we get a 10-15% correction in the next few months.
For the first part of 2010, coffee traded sideways and then from June on, prices appreciated 70% lifting coffee to over $2/lb. for the first time in nearly 15 years. Beginning stocks were tight to begin with and much like sugar, adverse weather in South America helped propel prices higher. We go into 2011 with coffee too pricey and it would take a healthy correction for us to get interested in longs. In fact, aggressive traders could gain bearish exposure to play a 10-20% depreciation in Q1 and Q2. The fundamental picture is mixed with very tight ending stocks, but we should have ample supply as across the globe is expected to have record production.
Cotton futures surged to all-time highs in 2010 and currently look poised to challenge those levels once again. Exports have continued to increase in the face of the market making new highs, so until we see that let up expect the trend line near $1.30 to act as solid support. Because high prices to date have yet to ration out demand, we will likely see fresh highs. If demand continues to expand into 2011 this could pose a major problem even with the domestic crop getting off to a good start because if the Asian demand is growing at a faster pace we still need to rebuild US stocks. Cotton will need to capture 2-3 million additional acres in 2011 but the challenge is other crops i.e. corn and soybeans may be more profitable. We do however feel that in time, likely several months when we start to experience a slowdown, a trade back under $1 is not out of the question. The fact that the December 2011 is trading at a 37% discount to the front month is an indication that these levels are not sustainable.
OJ was sideways for the first part of 2010 before trending higher from mid-year trading to $1.80; levels not seen since early 2007. We start 2011 with a positive outlook on OJ but like coffee we expect to experience a correction early this year that could drag prices closer to $1.50. A drought in Brazil could take some supply off the world market. That may be able to be offset by larger crops domestically in California and Florida. The problem with that scenario is OJ prices may be more susceptible to price spikes on a freeze in the United States or increased hurricane activity. We would be a buyer between $1.40/1.50 and a seller closer to $2.00.
An attempt at cornering the cocoa market last year was the major headline as grindings in Europe and North America were showing their first gains in over a year. Those actions caused a price spike on both the LIFFE and ICE exchanges during Q2. Once delivery had passed prices quickly turned around dropping 15-20% depending on the contract month. From there we’ve seen a rebound lifting prices back to the upper end of the trading range. The forecast in 2011 is for cocoa supplies to exceed demand, reversing a 2010 production deficit. Major cocoa producers including Ghana, the Ivory Coast and African nations are all expected to have production increases year over year. We expect that if the economy globally remains stable and we experience a resumption of the downtrend in the US dollar we can see prices approach $3500/3600 by Q3.
Metals: A record high in 2010 and the 10th positive year in a row…yes folks gold. This market has attracted gold bugs, safe haven investors, those looking to diversify and perhaps the most influential the ETF crowd. Gold undeniably has become the quintessential flight to quality instrument. From currency issues to the sovereign debt debacle, even uncertainty in the Treasury market, gold remains a popular diversification play in most investors’ portfolios. We suspect we could get a major shake out in gold sometime in Q1 or Q2, somewhere in the neighborhood of 5-8%. In fact it may already be underway. Central banks are far from the best market timers and because they recently shifted from being net sellers of gold to being net buyers, the timing would be appropriate. We continue to suggest being net buyers on setbacks but typically will trade options against futures or incorporate a strategy with both gold and silver for our clients. We do not see a trade below $1250/ounce this year and on the upside we suspect we could approach $1500/ounce.
Gold made the headlines but silver had performance that far outpaced gold last year and we suspect that to be the case in 2011 as well. Prices have retraced off a 30-year high above $31/ounce, and just in a few short weeks we’ve traded nearly 13% off those levels. In January alone, we’ve witnessed a 50% Fibonacci retracement taking prices near $27/ounce for the first time in two months. We view solid support approaching the 100 day MA at $25.50. Silver has been far more volatile (i.e. risky to trade) than gold in the years past but those with the stomach are advised to scale into longs on set backs, as we have a target of $40/ounce by late 2011 or early 2012.
As the recovery took hold and industrial demand re-emerged, copper prices have soared gaining nearly 250% off their lows in late 2008. As there were rampant fears of a double-dip recession, a number of copper producers reduced their production and even eased back on their exploration/mining efforts. So it was a double whammy when supplies were slack and demand came back into the market. As LME copper stocks and Shanghai copper stocks declined throughout 2010 that added fuel to the fire. If we were to see a bump in copper stocks on either exchange we could easily see a trade back to $3.00/lb. which is approximately the median price for copper over the last five years. At $4.30/4.40 we feel prices are over inflated and in the weeks and months to come we anticipate a trade back near $3.45/3.60. While we rarely trade copper for clients we do follow the price action as it is one of the best barometers for gauging the health in the economy.
Energies: A day rarely passes when I don’t hear someone say oil prices are too high, but it’s all relative and I do not share that opinion. Several years ago one of my managers told me as a trader “to dispend my disbelief.” Translation: We’re in uncharted waters and prices will move substantially higher…six years later I accept that statement as truth. I get the argument that based on supply, prices should be lower but more and more oil is treated as an investment vehicle and in some instances even a currency, so fundamentals in my opinion do not play as large a role as they did in past years. Above ground world supplies are near record highs but current demand, and more importantly, future demand expectations are escalating. Refinery interruptions and violence in oil producing regions around the world have in the past and will continue to cause price volatility. 2011 will likely be a bullish year for oil once again as we assume a buy dips mentality expecting prices to see $110/115 by Q3 with solid support between $75/80. One must remember it is not always about oil either, sometimes the tail can wag the dog; as RBOB and heating oil may determine price direction in oil.
With refinery rates as low as they have been it has been an anomaly for RBOB stocks to stay at elevated levels but that has been the case now for several quarters. Ethanol production continued throughout 2010 to post record highs. This may become a larger factor in 2011 as the government has paved the way for increased usage. Weighing first the supply situation in RBOB the current US operating rate is extremely low and it would not take much to cause price instability. Domestically the demand side has shown signs of life, as travel and usage have started to bounce back. To really see demand eat into the exorbitant supply we will need to consistently consume in excess of 9.0 million bpd. That in itself could get prices moving north or continued refinery glitches. We see a range between $2.00 and $3.00/gallon in 2011.
Heating oil was range bound for much of 2010 for the most part wandering in a 50 cent range. A colder winter across much of the country has started to boost demand and will start to eat into the burdensome inventories. It will take a significant jump to put a dent though as we’re coming off record distillate stocks of nearly 176 million barrels in August 2010. The pivot point into 2011 should be if demand can exceed 4.5 million barrels per day. In recent quarters supplies have exceeded demand but exceptionally cold temperatures can change the scope in the coming months. The US refinery operating capacity is also at lower levels so fundamentally we have a bullish set up. Expect increased volatility on weather and refinery issues much like RBOB. We see a range between $2.25 and $3.25/gallon in 2011.
Natural gas was one of the worst performers in 2010 and remains one of the cheapest physical commodities. There is one reason why natural gas has remained at discounted levels relatively close to the cost of production, an overabundance of supply. New all-time highs were reached last year in regards to inventories. A bottoming process has occurred in the last several months, as the market appears to have found equilibrium. We see natural gas as more of a trading range market in 2011 and we will be trading both sides with clients; likely buying near $4 and selling above $5. For this market to gain any significant traction we would need to see either a further cut in rig production, higher oil prices forcing increased usage in natural gas as an alternative or a policy shift from Washington to encourage greater usage. Short covering may also be a potential catalyst being we have a significant short interest with speculative dollars.
Currencies: The currency market is largely guided by direction in the U.S. dollar, which in 2010 was all over the place, gaining 15% in the first half of the year and then falling 10%. The two main questions in determining the direction of the dollar in 2011 will be the impact of a quantitative easing measure taken by the Federal Reserve and if the Fed starts to raise interest rates this year. In recent years the weakness in the dollar has been a key catalyst for a surge of capital into emerging markets and commodities. We expect this scenario to resurface the second part of 2011 but to kick off the year we could see a strengthening in the greenback. Solid support is eyed around the 75.00 level and stiff resistance comes in at 84.00.
The Euro is caught in a tug of war between the perceived strength in Germany and France and troubles in Greece, Portugal and Ireland. The direction in the Euro will largely be impacted by whether the ECB will need to resume monetary easing and how the markets deal with Trichet’s exit. The same trading range that has contained prices in the last six months should maintain the restrictions between 1.2600 and 1.4200.
The Yen was supported due to safe-haven buying and implications due to the carry trade in 2010. This strength has caused severe problems in their economy predominantly with their exports. Expect a series of interventions by the BOJ in 2011 in an attempt to cap further upside. Do not expect the same near 20% appreciation in 2011 that we witnessed last year. In fact, a trade over 1.2500 is not in our forecast and we think a dollar rally could take prices back near 1.1500.
The Swiss franc also found investors interest when looking for a flight to quality taking prices to near record highs for much of 2010. As fears ease around the globe and on a continued set back in gold expect the franc to trade down to the mid .9000’s.
The new government austerity measures in the UK may ease the pain in the Pound momentarily but the quantitative easing should outweigh the positives, so we anticipate further downside. We suggest using the rally we’ve seen in the first part of January to gain bearish exposure. Stiff resistance is eyed between 1.6300 and 1.6500 and we feel we’ll get a steady slide closer to 1.5000 in the quarters to come.
Given that the dollar has such a grave impact on the price of commodities it would only make sense for the commodity-driven economies which include Australia, New Zealand and Canada and their respective currencies, to be impacted by the underlying fluctuations in commodity prices. That being said, further strength should support these three crosses so our suggestion would be for most of 2011 to trade from the long side. Additionally, in New Zealand and Australia the positive interest rate differential should serve as a supporting factor.
Financials: The U.S. equity market far exceeded my expectations last year advancing from mid-year on gaining 10-20% depending on the index tracked. It would appear there is little to no fear from the sub-prime crisis or at least the powers that be have swept these concerns under the proverbial carpet for the time being. While in some sectors we did see top-line revenue gains for the most part the bottom lines appear better because of aggressive cost cutting measures. In order for the trend higher in stocks to continue into 2011, we need to see increased positive corporate earnings, real job growth, a bottom in the real estate market and for consumer spending to truly re-emerge. Low interest rates and the quantitative easing that has taken place could aid in an extended recovery in the short run but we do not feel appropriate for an improvement longer term as we’re kicking the can down the road. All the good news, in my opinion, is factored in and if and when additional shoes drop we may see a 10-15% plus correction. We’ve been thinking this for the last two months and obviously have been premature. We do not expect to see the Dow trade above 13000 and see the upper band in the S&P at 1400 this year. As for downside in 2011, we see 10000 and 1000 respectively.
The rally in the Treasury market in 2010 was largely a reaction to the sovereign debt issues abroad and the threat of a double-dip recession. The rally that took place in the first half of the year was erased in the second half as prices ended the year only marginally higher in price and lower in yield in the long end of the curve. In the short end, prices remained at elevated levels due to the Fed’s desire to focus on the short to middle part of the curve. The sporadic back and forth between the US and China and their pace of debt purchases also contributed to volatility throughout 2010 and will likely persist into 2011. Pay very close attention this year to the monthly capital flow report. If the price of commodities continues to increase the Fed’s hand may be forced resulting in raising interest rates which would have a direct impact across the curve. Continue to monitor the monthly PPI and CPI figure for signs of inflation increasing or abating. We have a sell rallies mentality in this complex in both the short end and long end of the curve.
Livestock: The cattle market saw a major recovery during much of 2010 as improving demand in the U.S., a strong recovery in exports, lower imports and declining production all contributed to an aggressive climb higher in prices lifting cattle to record highs. After the decline in pricing in 2008/2009 cattle reached low enough levels that producers reduced their herds. To complicate the situation a surge in corn prices left the market without an incentive to encourage herd expansion. Beef production is expected to increase Q1 and Q2 of 2011 but the increase is expected to be one of the smallest in the last decade. Exports have started to pick up and as demand increases domestically we see prices trading to new record highs in the coming months.
After a rough few years of major losses in the hog industry a decline in hog supply and demand coming back on line has helped improve margins and cause a major rally in recent months. Nearby futures put in a major low in August of 2009 and have not looked back since more than doubling in value in that time frame. Margins are improving as hog producers are making money again but the surge in inputs will undoubtedly prevent a large increase in herds. Exports have also slowed so we will need to work off some production into the spring of 2011 but then we expect another surge higher. The game changer this year is how large the increase will be in US pork exports.
Conclusion: What an investor should obtain from this report is that commodities should be a portion of your portfolio; a conservative investor should have an allocation of approximately 5% and an aggressive investor is advised to have approximately 20% of their portfolio in commodity futures and options. This can be through a commodity account with a brokerage firm or an allocation to a managed futures fund. In our opinion, there will be ample opportunities across all seven sectors to be both long and short. However one must respect the trend as we see more upside to come, so get involved because investors that ignore the price action in commodities do so at their own peril.
For specific strategies contact us via e-mail http://www.mbwealth.com or telephone at (888) 920-9997 / 954-929-9898. For the most part investors reading this analysis want to be more hands on, however we suggest taking a look at our managed futures section and consider diversifying further via CTA’s with proven track records.
Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.
Maybe I have a bias since I run a Commodity brokerage and recently set up a CTA but I believe commodities are currently the best game in town. Please do not misinterpret me that does not mean commodities should be perceived as a get rich quick scheme or commodity trading is even appropriate for every investor. Trading commodity futures and options is extremely risky and not for the faint of heart. In my eyes commodity investors must posses two things, first the financial wherewithal and second the intestinal fortitude. We suggest conservative investors have 5% of their portfolio exposed to commodities and aggressive investors have no more than 20% of their portfolio exposed to commodities.
Reviewing what happened last year in commodities: Metals traded higher for much of 2010, standouts include copper and gold reaching record highs while silver appreciated nearly 85%. As did more obscure markets like pork bellies and cotton trading at record highs. Sugar and cocoa hit their highest level in three decades. And while oil is well off its 2008 peak near $145 trading at current level prices are higher than before the collapse of Lehman Brothers. It has been a good two years for commodities as a whole; the Dow Jones-UBS Commodity index was higher by 16.8% in 2010 after an appreciation of 19% in 2009. The run higher in commodities is largely due to unquenchable demand from China and other emerging markets. We see no let up on demand in the immediate future and identify further complications by the slackening growth in drilling, exploration, mining and farming. More money chasing fewer opportunities could also be a contributing factor. Capital is finding its way into this asset class via hedge funds, pension funds and institutional investing. According to Barclays Capital as much as $136 billion of new money may have found this space in the last two years.
There is no question bulls were in the driver’s seat in the metals complex in 2010. Gold continued to shine last year marking its 10th straight positive return. Economic instability and fear of inflation were contributing factors but perhaps increased investor demand may have been the major catalyst for gold performance. Platinum and palladium were along for the ride jumping on the back of a global recovery in the automobile industry. Resurgence in industrial demand helped lift copper to record highs and aided in a near 85% appreciation in silver as well.
Last year in agriculture we started out seemingly with a supply/demand balance but circumstances quickly changed. A drought in Russia sent wheat prices soaring with corn and soybeans along for the ride. Corn ended the year up gaining over 50%, soybeans just under 35% while wheat racked up a respectable 58% appreciation. Floods in Pakistan cut the cotton harvest short and Chinese imports soared resulting in record high prices in cotton. Coffee gained nearly 80% due to some weather issues in South America, so Mother Nature played her role in 2010 increasing price instability in a number of commodities. We are not out of the woods yet as dry weather in South America currently could threaten the size of the harvest once again causing price spikes in agriculture markets in 2011. A further game changer is what decision farmers make domestically when choosing what crop to plant and how much acreage to allot.
The energy complex had its moments in 2010 but for the most part the headlines in commodities were elsewhere. Robust demand globally was tempered by record-high stockpiles. The stock market and oil for most of the year were heavily correlated so large economic forces were a bigger factor in 2010 than in years past. Prices of WTI oil remained within a $30 band in 2010 ending the year higher by just 15%. According to the IEA global oil demand was at an all-time high in 2010 and expected to expand in 2011 so it would not take much to see the price spikes in oil that we’ve grown accustomed to in recent years. On the supply side a number of producers have curtailed their spending due to the financial crises and have yet to come fully back on line. The distillates (HO and RBOB) followed suit tracking oil for most of the year and that should remain the case in 2011. Natural gas was among the worst performing commodities in 2010, down 20%. Prices were weighed down by increased supplies and weak demand.
Find above the major happenings in the commodities market and below the major events that shaped 2010 as a whole:
Major happenings in 2010, in no particular order:
GM predicted they would make money in 2010, a bold prediction for a business that exited bankruptcy in the summer of 2009.
The CBO predicted that the nation’s jobless rate will not return to 5% until the middle of the decade.
Ben Bernanke won Senate confirmation for a second term as Federal Reserve chairman.
The Dow finished down 3.5% in January, its weakest month since February 2009.
The New Orleans Saints won the Super Bowl, suggesting an up year for stocks for believers of the Super Bowl Predictor theory.
European leaders refused to let Greece succumb to a credit crisis.
Iraqi elections opened to violence and fraud claims.
The Federal Reserve announced they will end their purchase of $1.25 trillion of mortgage-backed securities. One of its main supports for the economy.
The House approved a historic healthcare overhaul.
President Obama signed the healthcare overhaul into law.
Greece won support for a deal that could lead to a bailout, as leaders of the 16-nation euro zone backed an accord that the IMF would serve as a back drop should the nation’s debt intensify.
President Obama proposed more oil drilling in the Gulf of Mexico.
Q1 ended on a positive note with the Dow gaining 4.1%, in a volatile three months.
Alan Greenspan came under criticism as the former Fed chairman for his role in the financial crises.
President Obama and Russian President Dmitry Medvedev signed an arms-control pact, dubbed New Start.
World leaders pledged to secure nuclear fuel by 2014.
Ash from an eruption of a volcano in Iceland drifted across Europe causing the largest airspace shutdown in years.
The Dow closed above 11000 for the first time since September 26, 2008.
A BP operated oil rig in the Gulf of Mexico exploded and sank spewing oil for months.
Greece’s credit crises spreads to Portugal.
New York’s Time Square was evacuated as a car-bomb plot was evaded.
“Flash Crash” Dow closed down 3.2% after an apparent trading glitch sent the index down nearly 1,000 points intra-day.
President Obama picked Elena Kagan as his Supreme Court nominee.
The European Union agreed upon a $955 billion bailout plan for the euro-zone.
Goldman Sachs reported they did not have one single daily trading loss in the Q1.
David Cameron took over as Britain’s prime minister.
General motors reported its first quarterly profit in three years.
Germany banned some types of naked short-selling in an attempt to avoid “excessive price movement.”
BP came out reporting that the oil leak was far bigger than originally estimated.
The Dow dropped 7.9% in May, its weakest May since 1940.
BP began its “top kill” operation to stanch the oil flow.
The SEC signed off on new “circuit breaker” rules designed to tame volatility in individual stocks.
The UK government unveiled a shake-up of its financial regulatory system that will consolidate power within the Bank of England and dissolve the FSA.
China’s decision to make its exchange rate more flexible showed a desire by the government to set its economic diplomacy on more sustainable footing.
President Obama relieved Gen. Stanley McChrystal of his Afghanistan command.
House and Senate Democrats took a decisive step toward a historic remapping of financial regulation, reaching a legislative compromise that will put the banks and financial institutions under tighter government control.
Russian and US officials completed a spy swap.
The US issued a new ban on deep water drilling until November 30th.
Congress approved an overhaul of financial regulation, its biggest expansion of government power since the Depression.
China passed the US to become the world’s largest consumer of energy.
European banks passed a round of government stress tests.
US bank failures topped 100 for the second consecutive year.
July became the deadliest month ever for US troops in Afghanistan.
Wheat prices surged 8% after Russia announced a ban on grain exports.
Japan’s Nikkei slipped into bear market territory.
Dow fell 4.7% in August; it’s worst August in nearly a decade.
Five year anniversary of Hurricane Katrina.
Central banks around the world laid out Basel III; intended to ratchet up capital requirements.
US poverty rate hits 14.3%; a 16 year high.
Silver traded to levels not seen since 1980.
Gold closed above $1300/ounce for the first time ever.
BP’s Gulf of Mexico well was declared as permanently sealed.
The Dow had its best September since 1939; ending Q3 up 10.4%.
The White House lifted its ban on deep-water drilling in the Gulf of Mexico.
The GOP took back the House and the Democrats held the Senate.
The US military began accepting openly gay recruits for the first time ever.
The Fed announced it will buy $600 billion of Treasury’s over the next eight months in a bid, known as quantitative easing hoping to stimulate the economy.
A key gauge of US inflation date fell to its lowest level since 1957; when record keeping began??
Gold topped $1400/ounce for the first time ever.
General Motors went public.
Europe issued a $90 billion bailout of Ireland and crafted a blueprint for its rescue.
Silver traded to a 30-year high approaching $30/ounce.
The Treasury sold the last of its Citigroup common shares.
President Obama announced a tax deal that would extend the Bush cuts, reduce payroll taxes, extend jobless benefits and set the estate tax at 35%.
Moody’s warned about Spain’s ability to service its debt.
Congress approved the new tax legislation.
All the major US indices finished the year in the green; the Dow higher by 11%, the S&P ending higher by 13% and the NASDAQ jumping 17%.
Many other important events took place during the year, but a generation from now, as we read the history books we will see these as the highlights.
Find attached the 2010 high, low, open and close data for the major commodities.