Monday July 25, 2011
Here is a link to an important paper predicting commodity price peaks in 2011. One can follow the links to the PDF for the actual paper which in fact is quite readable unlike many academic papers. We will summarize it for you a bit later.
The PDF linke is
http://arxiv.org/pdf/1107.0480v1
I note that the number of hits for this site has declined lately. Actually that would reflect what is no doubt a belief that we have 'lost our way' and that we have failed to produce any home runs hits, such as buying Apple at the recent low of $319 and capturing the run up to $390. And we certainly missed jumping on the Swiss France for its recent run up. But the nature of financial markets is to get everyone on board when in fact they should be watching the 'train leave the station.' Our view here has been that the US would re visit the financial lows of late 2008 and that readers would be better off preparing for that eventuality.
In the academic paper referenced above, a group of Russian researchers at Cornell have
called the top in silver to the very day May 1
Suggest that Crude Oil topped at $112 for WTIC
suggest a final high for gold for this Wed July 27 at $1600+
Now let's recall what the Market Perspective has had to say. The academic paper uses complex math formulas to obtain a best fit approximating the past peaks of financial bubbles.
We are using the observance of various inconsistencies or divergences between prices of commodities and the industries that support the production of those commodities. We have repeatedly stated that when PTEN re visits its high of 2008 at $35, this will be an important occurrence. We noted again this weekend that PTEN and XES are making new highs while the price of crude is not. This is the classic divergence which occurs at market highs. The price of a commodity (whale oil in 1849) is not continuing to rise while the price of equipment (whaling ships) does continue to rise. Okay we cannot produce graphs to show that happened (but it did there are no whaling ships in Boston today) but we have been showing XES is up while oil is flat.
In our last graph this weekend we noted that coffee had dropped 20% in the last couple of months yet no one seems to have noticed.
Energy Service XES versus Energy WTIC
XES the Energy Service ETF is in green, Crude Oil WTIC is the red black bars. This is a classic divergence, Wiley Coyote (XES) is chasing the Roadrunner (crude oil) off the cliff. This sort of divergence occurs at market highs in commodities. Those in the industry believe that the demand will never end. Indeed this past week I clipped a comment out of the newspaper from Halliburton.HAL simply stated they could not provide the services being demanded of them. I took this photo this weekend in the Oil Rich Counties of West Texas. CDL stands for Commercial Driver's License.
My point is that such billboard advertisements indicating desperation for employees occur at market tops, not the at the start of something big. All over the Permian Basin people were driving fancy 5,000 + pound pickups. I observed they all seemed to cost $30,000; one local remarked he wished that was all his had cost!
The newspaper was chock full of ads begging for employees. The sounds of trucks going and coming from the fields were continuous outside my motel. But the chart above, which is just about three years from the peak in 2008, says we should be alert for topping action.
Silver and Crude Oil
Silver in the red black bars, Crude Oil in the black line. Both peaked May 1.
Livestock and Lumber
In case you think I am cherry picking major markets to bolster my case, consider Livestock and Lumber.
COW is livestock and LUMBER is in green. Cattle herds are being sold off due to the drought. And there are fewer buyers coming in to purchase cattle as they cannot be supported with this weather. The continued increase in unemployment means there are fewer people who can buy homes; hence building lows and there is less demand for lumber. Trust us, the price of lumber is the leading indicator for homebuilding.
A Celebratory Top in the Aussie, Loonie, and Gold
The Canadian Dollar CDW, the Loonie, is represented by the red black bars.
The Australian Dollar XAD is the green line.
Gold is the gold line.
All three are celebrating tops. The two currencies are from commodity producing countries and so they have tracked the price of gold.
The US dollar is totally out of favor and is the black line at bottom. As Steve Kaplan noted this weekend, to buy low and sell high you first have to buy low. Conversely I would observe that one can sell high. Is there anyone with the courage to short the FXC, the Canadian Dollar ETF or the FXA, the Aussie Dollar ETF?
We will continue to track these developments. All the things we have discussed here this past year are now happening. We have seen the tops in oil and silver, gold awaits a final fling amid the breakdown of debt discussions.
Here is another anecdote. Lake Nasworthy in San Angelo, TX is the only constant level lake in West Texas. Prices of property there now rival those on Lake Travis near Austin Texas. As one person remarked to me, who would imagine people would pay $500,000 and up for Lake Nasworthy? Indeed, it only happens at market tops which are always hard to imagine.
We have observable tops in
silver
lumber
cattle
crude oil
Gold is the last man standing along with the currencies of commodity producing countries which are after all derivatives of the gold price.
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