Currency/Commodity Markets
As we start the final month of the year we wonder whether it really all come down to the war between fear and greed. The trade, after all, for the year has been to be short the U.S. dollar against almost all currencies while being long commodities. Those hedge funds focusing on international equities- including China- and energy prices have obviously done well to this juncture.
The chart below shows the euro futures, gold futures, and crude oil futures. This past January the euro was trading around 1.30, crude oil in the low 50’s, and gold between 600 and 650. From August into November the three charts are virtually identical suggesting that all three represent the same basic position.
The point is that with only one month left in the year leveraged funds can either push the trend in an attempt to maximize returns or accept that a bird in the hand is worth two in the bush and begin to cover.
Consider the chart comparison at top right of natural gas futures through 2005 and crude oil futures this year. Amaranth Advisors collapsed in the autumn of 2006 after placing huge leveraged wagers on the spread between March and April futures contracts for 2007 and 2008. Since then the CFTC has charged Amaranth with attempted manipulation of the price of natural gas futures.
The chart below right compares crude oil futures between late 1983 and mid-1986 with crude oil futures from late 2005 forward.
The point is that in 2005 we all knew the fundamentals for natural gas were positive because the price was rising. Yet close to two years later with crude oil prices at record highs the price of gas is one good correction away from the trading range set in 2003 when crude oil futures prices were trading between 25 and 30. To the extent that hedge and other funds seem to crowd into the same trades we can’t help but wonder whether fear or greed is going to win out this month.
Short-Term Views
Today we showed the gold/copper ratio and pointed out that copper had been stronger than gold recently. Of course this may not last but for the time being it suggests that the recent lows for the financial sector could be as pivotal as the bottom for the commodity markets in January.
The chart at top right compares the stock price of Merrill Lynch (MER) with gasoline futures. The charts have been lined up so that MER’s November lows are compared to the January lows for gasoline futures prices.
The point is that gasoline futures suffered an intensely negative six months from August of 2006 into January of 2007 and then turned upwards into a powerful rising trend that eventually led to a similar six month bout of pain for the major financials (June into November).
Below right we show MER and the U.S. 30-year T-Bond futures from 1998 while below we show the same comparison between 2005 and the present day.
THE lows for MER in 1998 were made at THE high for the TBond futures. When Treasury prices finally turned lower it marked the end of a period of crisis for the financials in specific and the equity markets in general. The point is that if there was a chart point where the TBonds were likely to struggle it would at or near the 2005 highs around 119 which, coincidentally or not, lines up with MER in the low 50’s. With the TBonds at resistance and MER at the equivalent level of support perhaps it should not be a surprise that virtually ‘out of the blue’ last week the financials pivoted upwards as the gold/copper ratio and energy prices declined. All of which brings us back to the war between fear and greed that we mentioned above.
