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Bloomberg: Commodities Begin Bull Market Amid U.S. Drought - Fullermoney

Bloomberg: Commodities Begin Bull Market Amid U.S. Drought - Not many people forecast the developments cited in this article. Here is the opening:

Commodities entered a bull market as grains rallied amid the worst U.S. drought in half a century, while the euro climbed on optimism leaders will make progress taming the debt crisis. The Standard & Poor's 500 Index failed to remain above a four-year high.

The S&P GSCI gauge of 24 raw materials rose 0.9 percent to 675.55 and has jumped 21 percent from this year's lowest close on June 21. The euro strengthened 1 percent to a six-week high of $1.2488. Ireland's nine-year bond yield dropped below 6 percent. Germany's two-year yield rose above zero for the first time in more than five weeks. The S&P 500 slipped 0.4 percent to 1,413.17 after climbing as high as 1,426.68.

The drought that has parched fields in the U.S. Midwest sent soybeans to an all-time high on the Chicago Board of Trade today and the U.S. Department of Agriculture has cut its corn harvest forecast by 27 percent since June. As Luxembourg Prime Minister Jean-Claude Juncker, head of euro-area finance ministers, prepares to visits Greece tomorrow, optimism about Europe's efforts to fight its crisis wasn't enough to push the S&P 500 to a new high.

"We've come a long way and we're approaching some long- term resistance points" in the stock market, said Paul Zemsky, the New York-based head ofasset allocation for ING Investment Management. His firm oversees $170 billion. "That's causing people to pause a little bit. We're going to need some real news to break through these levels and we're not getting any right now."

My view - It has been fashionable, not least among holders of government bonds, to either deny the existence of a commodity market supercycle or that any inflation was occurrijng in the west. Well, the unweighted Continuous Commodity Index (CCI) (Old CRB) (historic, weekly & daily) shows the supercycle commencing in 2002 clearly enough. It was partially retraced during the sharp recession commencing in 2008 and also by the global economic slowdown beginning in 2Q 2011. However, an important low was reached in early June, just above the psychological 500 level, and following a period of sideways ranging CCI extended its rally today.

The world has been unlucky recently, in terms of commodity price inflation, because the recent rise in CCI was triggered by supply concerns for staple foods. Usually, it is a pick up in global demand which lifts commodity prices in line with stronger global GDP growth. Unfortunately, the US drought has had a devastating affect on corn (weekly & daily) and soybean (weekly & daily) yields. Prices are still rising because this shortfall can only be partially offset by supplies elsewhere.

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Peter Bennett's Personal View: The One They Still Love To Hate - Japanese Equities - My thanks to the author for this authoritative report, published by Walker Crips. It is posted in the Subscriber's Area but here is a brief sample:

Commentators are routinely scared by the deflation - and they endlessly chorus headline gross government debt - some 200% of GDP.

This incurious view needs more examination than just knee jerk reaction.

1) As a general reality, in the first instance the economic "lost generation" didn't actually happen. In real, deflation-adjusted terms GDP has shown annualised growth of 1%±. A GDP figure alone is, as you know, meaningless, unless it is also population adjusted. Japan has had a declining population for some time (0.6% p.a.). Further, for what it is worth, just as I believe US inflation is understated I have seen it suggested that Japanese deflation is understated. Possibly by 1% or more. In reality, one could thus be looking at real GDP per head growth of nearer 3% per annum. Japanese GDP, real per head, exceeded that of the USA this century up until the tsunami. US GDP per head, adjusted for inflation, may well be negative over many years back. Certainly, if you believe, as many do, that the underlying statistics that make up the GDP figure need substantial negative adjustments (recent bulletins).

My view - Fullermoney is privileged to post some fine reports but this is certainly one of the most interesting and informative that I have seen recently. It is also controversial, albeit intelligently so in my opinion, so it should appeal to contrarians.

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Email of the day -
On robotics:

"Thank you again for highlighting the "robot" industry today. Could you please review some "good" robot manufacturing companies?

"I enjoy all your audios, but I thought Eoin's big picture audio last Friday was especially good."

My comment - Thanks for the feedback and a question certain to be of interest to a number of other subscribers.

Several small Californian companies were mentioned in the article posted yesterday. They are worth monitoring but I would look first at the more established firms in this exciting field. Eoin and I reviewed them this morning.

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Additional commentary by Eoin Treacy

Email of the day on bull markets and South Africa:

Thanks for the great service. I do appreciate it.

Firstly, may I ask if you could update the chart for Tripadvisor which seems to stop in June?

Secondly, do you have a view about how long the current bull market might go on for? Assuming we are still in a period of declining valuations, it already seems quite long-lived to me. Incidentally, I have noted your positive comments on the South African market with interest. Valuations of consumer stocks are now historically at very high levels (P.E.'s ranging from 18 to 36). The currency also must be vulnerable. I noted recently that prices for groceries in Paris were cheaper than in Johannesburg. Now, that's unusual!

My comment Thank you for your kind words and Tripadvisor has now been updated. Let me take your questions in order.

A dictum from The Chart Seminar is that we need to foster the humility to allow markets unfold without telling them what to do. No one knows how long the current three-year bull market will persist. Monetary policy is still accommodative and we are presented with a broadly trending environment. When the three-year progression of higher reaction lows, that has been evident since 2009, is eventually broken we will have some evidence of medium-term trend change.

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Bear Market in Tin Shuts 70% of Indonesian Capacity This article by Yoga Rusmana and Maria Kolesnikova for Bloomberg may be of interest to subscribers. Here is a section:

Most smelters have closed, said Hidayat Arsani, the president of the Indonesian Tin Mining Association. The price just cannot cover the cost. Ideally, the price should be around $21,000 or $22,000 a ton. If this continues, we can't work anymore.

My view The focus of most Industrial metals commentary has been on the demand side of the equation, with fears for the slowing global economy, the Eurozone's hardship and China's migration to a more consumer oriented growth model predominating. As a result of these concerns, monetary policy remains extremely accommodative, particularly in Europe, Japan and the USA.

On the supply side of the equation we have long defined the bull market in commodities in terms of the rising cost of production. As the above story reiterates, the marginal cost of production for tin has increased substantially over the last decade. Despite its steep decline over the last year, tin still trades at more than double the highest level posted between the early 1990s and 2003. The fact that this pricing level represents a Rubicon for smelters highlights the continued pressure experienced by producers.

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Sensex soars by nearly 200 points; Infosys gains 3 pc This article from PTI may be of interest to subscribers. Here is a section:

Brokers said heavy rain in some parts of the country today eased worries of a possible drought. A fall, though marginal, in retail inflation in July also boosted the sentiment.

Retail inflation declined to 9.86 per cent in July from 10.02 per cent in June.

Investors were also buoyed by Finance Minister P Chidambaram's asking banks on Saturday to cut interest rates and keep EMIs at affordable levels to encourage sale of consumer durables to restart the engine of manufacturing.

My view Most of what one hears about India these days tends to be rather negative. The views expressed range from impatience with corruption to stagnant government policies and persistently high inflation. The Rupee has been among the weakest currencies in the world over the last year and erratic policies on taxation have deterred foreign investors. Against this background it is easy to become disillusioned with the country as an investment destination, but India has a history of being forced by circumstances to adopt reforms.

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MAG-net (Mines Advisory Group) City Networking Event I have accepted an invitation to speak at the next MAG-net sponsored networking event to which I am greatly looking forward. Cleaning up landmines is a charity I believe just about everyone can get behind.

It will be held on September 5th at 18:00 in the London Stock Exchange Building on Paternoster Square. If you would like to attend please contact Wendy Gyngell at [email protected] .

The Chart Seminar in 2012
Our remaining confirmed venue for 2012 will be in London on November 22nd & 23rd at the Radisson Edwardian Hampshire on Leicester Square.

The full rate is £950 + VAT. (Please note US and Australian delegates, as non EU residents are not liable for VAT). The early booking rate of £875 for non-subscribers expires on September 30th. Paid-up Fullermoney subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates. 

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