Commodities, by 360 Global PM Enrique Abeyta

Location Date: 
May 16, 2011

There obviously has been a lot of discussion about commodities this past week and I thought the charts below were pretty interesting when thinking about what could happen to commodity prices here in the coming months (years). 

The first chart is of the Shanghai Composite Index from the time it bottomed in Nov 2008 to its peak in August 2009 (nine months later) after a basically +100% return. 

The second and third charts are the recent price action in both Silver (+100% return across six months to April peak) and Oil (+40% return across five months).

The basic point is that the underlying fundamentals and performance of the economy in China have been outstanding across the last several years; but after hitting these peak almost two years ago, the stock market there has done nothing.  In fact, it is down some -20% across this period of exceptional fundamental performance.  After the initial fall in early August 2009, there was an initial rally followed by a lower low and then a recovery to a lower high across the next three months before then moving lower.  Note that during this period, the SPX and other global markets actually moved considerably higher.

Right now, I think the charts of many commodities and commodity related stocks are in a very similar situation.  This doesn’t mean that they consolidate for two years (they could) and maybe they simply consolidate for a period of 2 to 5 months now (pretty typical) but I think it is highly likely that the near-term top in commodities has been set.  Especially once we consider that every major economy on the face of the planet (except Japan) is or will be in the process of restraining monetary liquidity now.  Also considering the extreme one-sided consensus of this trade recently (I call it a “Charlie Sheen” trade – winning no matter what), I think this could be a very difficult period for commodities.  Not that they will be down a ton from here but I think it will be quite some time before they move to new highs.

Overall, I would argue this is positive (and potentially VERY positive) for most global markets.  Growth will remain positive, inflation will settle down and multiples are not demanding – especially in emerging markets. 

Enrique Abeyta, 360 Global Capital. 

(Chart sources: Bloomberg)

Jim McGovern