Daily Market Reports | Nov 01 2008
By Rudi Filapek-Vandyck
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”
Charles Dickens, A Tale of Two Cities
As Incredible October has come to an end, and with November likely to start on a positive note (at least in Australia and the rest of Asia) I thought it apt to open the final Overnight Report for October 2008 with one of the most famous quotes in English literature. Amazing how Dickens’ description of the French revolution appears to summarise the month past so well.
European shares gained around 2% on Friday and US shares chimed in with a 1%-plus gain, keeping hopes alive we might finally see a more prolonged bear market rally develop. Technical chartists of all sorts have done their best during the past week to suggest exactly that and certainly Friday’s gains would fit in such a scenario. But first let’s have a quick overview of why I chose to open today’s story with Dickens’ quote.
If October has taught us one thing it is that nothing is impossible. Deleveraging, repositioning and repatriating have become the terms du jour and the result has been currencies shifting by whole cents -within hours, not days, let alone weeks or months as they used to- while commodities sank to depths not even the most bearish market commentators would have thought possible. As far as share markets go, “rollercoaster” is probably the best description available, with a strong downward bias. And with worldwide legal bans on shorting this has implied that October offered no place to hide.
Ironic, isn’t it? Authorities put a ban on shorting and equity markets experience their largest falls in many, many years. Noise. There’s lots of it in bear markets.
Just for the record: the Dow put in its worst performance since 1998. The worst performance in a decade thus. Not the worst performance ever. It’s good to keep a perspective on things.
The good news is, however, that the week past marks the Dow’s best one-week percentage gain since October 1974. The Dow gained 11.3% from Monday to Friday. The S&P500 gained 10.5%. The Nasdaq gained 10.9%.
Friday’s gains came amidst some very, very disappointing economic data. Trading volumes were still on the thin side so conviction remains low. According to a US Commerce Department report, US consumers cut their monthly spending for the first time in two years during September. That’s 70% of the world’s largest economy spending less.
An index of consumer sentiment by Reuters and the University of Michigan revealed the steepest monthly fall on record. The Chicago Purchasing Management Index came out lower than expected, indicating overall business activity in the Midwest came to a virtual halt in October.
None of these data should come as any surprise though. The world’s largest economy is in recession. The ramifications will be global. Note, for instance, the latest data from China, released in the week past, indicate a much sharper deceleration of the economy than previously thought possible. The Chinese already cut official interest rates three times in a relatively short time span. At Morgan Stanley economists have now taken the view there will be four more rate cuts in 2009.
All this is not good for the prospects of yesteryear’s market champions, commodities and energy.
If you thought October was a bad month for equities, spare a thought for commodities, copper and oil in particular. If “downhill rollercoaster” says it best what happened to global equities, for commodities it’s simply “off a cliff”. Just take a look at any three month chart for copper or for oil and you’ll agree the less words I use in this context the best.
There is, however, no coincidence in play. Both copper and oil had peaked relatively late in the year. Other commodities had already fallen a lot from their peaks earlier in the cycle. Pure logic therefore dictates that copper and oil had more to lose. So they did. And so they will. Don’t think this deflating bubble is now ripe to be inflated again. This correction has further to go still. We have yet to see the worst of the slumping global economies and demand for commodities is falling each and every day.
Even the more bearish commentators are surprised by the speed and magnitude of what is happening at the moment. UBS oil specialists cut their WTI oil price forecast this week to US$60 per barrel for next year. One of the key sentences in their update, I believe, is “demand declines we now project for the OECD are more significant than any we have seen since the early 1980s”. It wasn’t that long ago that I quoted a report by GaveKal which predicted exactly this would happen.
Around the same time I published a comparison between crude oil and what had happened to uranium. Uranium seems to have bottomed at US$44/lb in October. If my comparison holds true we might see crude oil below US$50 per barrel by early 2009.
The best way to look at copper and oil these days is as former leaders of the bubble who have been turned into laggards during the correction. This suggests both have more falling to do and that is exacty what I think you will see in the months ahead.
Coincidentally, media reports on Friday quoted unnamed traders in China saying the Chinese government (through the State Reserve Bureau) had decided to cease all buying of copper until 2009. Copper fell 38% between the first and the 31st of October. That’s about twice the losses most equity markets recorded for the month.
Meanwhile, stockpiles of copper in warehouses monitored by the LME reportedly gained 6,775 tons, or 3%, to 230,650 tons, the most since March 2004. Inventories in warehouses monitored by the Shanghai Futures Exchange declined 20% in the week ended yesterday. Makes sense.
Analysts at UBS -this is pure coincidental, I have no bias towards this Swiss investment bank- on Friday lowered their copper forecast to an average US$1.30/lb (US$2,865 a tonne) for 2009. To put this in perspective: year to date average for copper is currently US$7600 per tonne or US$3.46 a pound.
On Friday, copper closed at US$4155/t and US$1.89/lb. That is still 30% above what UBS analysts believe the metal’s price will average next year.
Don’t you love it when all those experts who missed the turn of the cycle now pop up on television and talk about “a dip in a long term uptrend”?
Aluminium, the laggard that simply missed its own moment in the sun during the past years of the Super Cycle, lost 16% in price over the past month. UBS now predicts the metal’s price will average US$0.75 a pound, or US$1,653 a tonne in 2009.
On Friday, aluminium closed at US$2064/t and US$0.90/lb. The difference with UBS’ revised projections (and again these are averages, not low points): circa 20%.
LME stocks for aluminium have now risen to the highest level since February 1995 at 1,524,325 tonnes.
To complete the picture, Base Metals reports nickel tested support at US$10,934 a tonne, the ten-day moving average, and closed back up US$200 at US$12,100 a tonne. Nickel was the standout performer amongst metals on Friday. Tin closed at US$13,450, down US$1,150 or 7.8%, ignoring a 55-tonne inventory drop to 3,715 tonnes, a new low since July 2005. Lead was steady after strong gains on Thursday. Zinc, well, zinc saw both stockpiles and its own price fall this week. One Friday the loss was US$35 to US$1125/t.
Someone somewhere called October “the worst month in commodity history” (I think it was in a Bloomberg report, but I am not 100% certain).
I simply respond with a quote of one of my own stories, published on August 13 (see FNArena website under Rudi’s Views for the full story):
“I am not seeking to be sensationalist just for the sake of it, but I am nevertheless making the following statement with an iron conviction: if the dust has settled post the current price correction across the commodities complex it will have turned out to be the most severe correction investors have seen for many, many years. It will certainly be much bigger than anything they have seen since 2002, when the initial beginnings surfaced of what later became a once-in-a-lifetime Super Boom for commodities.
“The good news is that commodities and investors, both true to their inner nature, will casually overshoot in their current direction and thus prices for base materials, and for shares in companies related to those materials, will become much cheaper than can be justified on fundamental grounds. Thus a fertile base will have been created for the next leg of what we all have come to know as the Commodities Super Cycle.
“Yes, and of course!, this story is far from over, if one takes a longer term view. From a shorter distance, however, this will look like a running train passing by at high speed. Better to take a step back and take your time.”
Similar to the quote I used on top of this story, I could not have formulated it better this time around.
Greg Peel will be back on Tuesday.
