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Today's Market WrapUp 01.29.2007 Mon Tue Wed Thu Fri Kirby Archive Contrary
Views on the News There’s been much reported in the mainstream financial media in recent weeks that the commodities bull market is either “long in the tooth,” a bubble looking for a place to burst, or in fact - finished. For regular readers of this space or listeners of Jim Puplava’s weekly radio show, you’ve been reminded on more than a few occasions – bubbles, by definition, are signified by rising inventories or gluts. But for anyone who listens to CNBC or reads any of the mainstream financial press’s offerings – a housing-led slowing of U.S. consumption spells bad times ahead for commodities. The Importance of China Re: Commodities A fellow contributor at Financial Sense, Jennifer Barry, also contributes economic thought in another forum – The James Joyce Table at Lemetropolecafe.com. Over the past couple of years in this forum, Ms. Barry – along with other economic thinkers like Jeff Dahl [CEO - Samex Mining] and others – have developed the thought that China has been hoarding base metals as a “hedge” on their TRILLION dollar foreign exchange position. Last week in the same forum, Dahl surmised that, “…the Chinese have copied a strategy from the gold price managers, only in reverse; instead of hedging metal (selling forward) they have hedged their trillion dollars (sold it forward, while people were still willing to except dollars for real things)!” Mr. Dahl uttered these words just last week in response to Chinese Premier Wen Jiabao, who said, "….The foreign reserves are not treasury capital, but liabilities of the central bank, which means they cannot be used wishfully," said Prof Zhao Xijun with the People's University. China needs foreign exchanges to meet its payment requirement for import and export. Apart from that, the surplus should be best allocated and invested to achieve highest returns, said Lin Yifu, a renowned economist from Peking University's China Center for Economic Research. He stressed that any use of foreign reserves have to be fully discussed and carried out in a very prudent way. "To actively explore and expand channels of using foreign reserves will be a major point in future work," he said. As Dahl sees it, the importance of this speech by the Chinese Premier is this, “…this announcement is basically a "coming out of the closet" admission on their part. Unlike the gold price managers, I don't think that they [Chinese] would "pre-announce" their trade-agenda (purchasing-plans). My bet is that, probably over 70% of the "touted" trillion is all ready spent in forward purchase contracts around the world, for all forms of commodities, that will be regularly delivered on over the next fifteen years or so.” And then Ms. Barry summarized this line of thought so clearly and concisely, The
broad surge of base metals prices, surpassing even precious metals
prices, was a sign of China purchasing metal reserves. Unwilling to take
the haircut on their $1 trillion USD reserves and unable to move enough
money into the tiny precious metals market without driving it sky-high,
the Chinese instead purchased stockpiles of copper, zinc, nickel, lead,
and anything else they could find. Cloaking their purchases in commodity
demand, they drained the LME stockpiles to the bottom. They have
followed up with longer-term purchase agreements with mines in South
America and Africa, assuring that much future supply will go to them as
well. Here, it’s being reasoned that while U.S. demand for base commodities is waning, insatiable Chinese demand for these same goods “trumps” lessened domestic U.S. demand as evidenced by depleted inventories. Full Court Press? For the say-it-isn’t-so types or doubters in the crowd – that anything worthy or credible would never be withheld, willingly misrepresented or outright suppressed by the mainstream financial press, we need only consider either of these fresh-off-the-press – confession fortune cookies; Former Cheney aide parts curtain on media-manipulation tactics WASHINGTON (AP) - A smorgasbord of Washington insider details has emerged during the perjury trial of U.S. Vice-President Dick Cheney's former chief of staff. For example, when Cheney really needed friends in the news media, his staff was short of phone numbers. No one served up spicier morsels than Cheney's former top press assistant. Cathie Martin described the craft of media-manipulation - under oath and in blunter terms than politicians like to hear in public: the uses of leaks and exclusives; when to let one's name be used and when to hide in anonymity; which news medium was seen as more susceptible to control and what timing was most propitious and all candidly described. Certain journalists were rated as friends to favor and critics to shun - a faint echo of the enemies list drawn up in Richard Nixon's White House more than 30 years ago... More Media Mischief To further illustrate exactly how the mainstream financial media is – at times more concerned with other “agendas-des-jours” – we need only stop and consider what Mr. Peter Grandich had to say in response to an editor of a nationally circulated financial publication and the revisionism of his ‘sought’ opinion, “One more comment on certain aspects of the financial media from a personal experience that I believe clearly shows the biases against anything that may not fit into the bullish category: This past fall, I was asked to pen an article about gold for a “very” well-known nationally-circulated business magazine. After completing the article, the “Features Editor”, sent me back the edited version. I wrote back and said in part “… I’m sorry but I can’t in good faith put my name to this article. You took virtually all I said in the interview with the reporter and discarded it for a gold story mostly about just one element of the gold outlook-China. Unlike your version, I don’t believe it’s the driving force for gold and the article has nothing about all the other factors I had previously offered. Anyone familiar with my work would question this article knowing it’s not the key reason for my bullishness.” In the original interview, I spoke mostly about a coming U.S. Dollar crisis and how it would be the key factor for gold in 2007. Here’s what the editor wrote back: “It is possible to change the part about China, but we would feel irresponsible building the case around the dollar decline where there are also numerous reasons to believe that global geo-political forces will not let the dollar hit rock bottom. So all things considered, we will not run the piece.” YOU NEED TO APPRECIATE THIS! Because my commentary forecasted a dollar crisis despite my argument being supported by hard facts and solid assumptions, this nationally-read, so-called financial magazine would not allow my comments because they already concluded that certain forces would never allow such a thing to occur. As far as I’m concerned, not only is this unfair and unbalanced reporting, it’s irresponsible…but not surprising. Ironically, the U.S. dollar had its hardest fall of the year just one day after I received the above comments from that magazine that rhymes with "birth." ...oops!” Mr. Grandich is basically saying there are other MAJOR issues [like trade imbalances, lack of savings, debt, etc.] affecting the dollar than it being simply a China story. The two incidents above, both reported to us in the past couple of weeks, clearly illustrate exactly how the mainstream press is USED to deliver or support preconceived story lines. China And Base Commodities In Context, Perhaps? So, while empirically – a current chart of the price of copper looks like this;
We might be well advised to remember that while this graph illustrates the price of copper falling off a cliff – it really only mirrors the U.S. housing industry to a tee. Perhaps we should all stop and take stock of what is going on regarding copper in China. Remember folks, copper is essential to the build out of infrastructure – equally as is nickel. Has anyone [namely the copper bears] stopped to consider the non-confirmational behavior of nickel recently? Take a look:
Last I read was that China is still expecting GDP growth of double digits++. The dynamic driving infrastructure build out in China is vastly different than “home building in the U.S.” Firstly, in China – infrastructure build out is the NATIONAL POLICY of the best heeled purchaser [the Chinese Gov’t] the planet has ever seen and they keep getting RICHER – as evidenced by their swelling foreign reserve account. While the U.S. consumer is SPENT – we’ve all known that for a long time. Now, China’s exports to the U.S. account for roughly 8% of Chinese GDP. If this trade was cut to ZERO – and how likely is this? – China would likely still have substantially positive GDP growth. Additionally, while the Chinese are well known to be “hoarders” – in the past they have been shown to be totally absent from [or even sellers in] strategically important markets which they CATEGORICALLY MUST be major buyers in – but only for short periods of time – like here and now in COPPER. For those with good memories, it was just a couple of years ago that a China Aviation Oil blew up “shorting oil” – or jet fuel to be more exact – and then hid the loss. I’m sure everyone can appreciate the FACT that China is CATEGORICALLY NOT a REAL exporter of petroleum products. In the meantime – the charts are all “set up” so that a strategic PUSH by a major industry/futures player [like a large investment bank/futures player, perhaps?] on copper in the next few days will have every Technician in the bloomin' world pressing the ejector seats on their positions with CNBC, Bloomberg et al right at their sides TRUMPETING – and giving the play-by-play demise of the commodity bull. Remember folks, asset prices like base commodities are set in global markets – if markets really are “free” – and have been raising largely in response to excessive money [debt] and credit creation. While a housing slump in the U.S. has a definite effect on domestic U.S. demand, growth [and ultimately price] at the margins in many of these base commodities is now set in foreign lands. I’ve said it before but it bears repeating, stockpiles of too many of these strategic base commodities are at historic lows – until that picture fundamentally changes – everyone should treat their investments in companies that produce them accordingly. Today’s Market Overseas equity markets began the week in the green with Japan’s Nikkei Index adding 48 points to close at 17,470. North American markets didn’t fare as well, ending the day mixed. The DOW finished up 3.76 to 12,490.78, the NASDAQ ahead 5.60 to 2,441.10 while the S & P gave up 1.55 to 1,420.65. NYMEX crude oil futures fell 1.47 to close at 53.95 per barrel. On the foreign exchange market the U.S. Dollar Index lost .17 to 84.94. Interest rates backed up 1 – 2 basis points across the curve with the 2-year benchmark government bond ending the day at 4.99%, the 5-year at 4.88% and the 10-year at 4.89%. The precious metals complex had a difficult day with COMEX gold futures losing 2.00 to 644.10 per ounce while COMEX silver futures gave up .12 to end the day at 13.24 per ounce. The XAU gave up 2.53 to 135.26 while the HUI lost 7.44 to 325.09. On tap for tomorrow, at 10:00 a.m. Jan. Consumer Confidence data is due – expected 110.5 vs. prior 109.0. Wishing you all warm thoughts and a pleasant evening! Rob Kirby Copyright © 2007 All rights reserved. Contact
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