Some contrary copper talk

There really isn't a commodity that hasn't gone up dramatically this year [edit: ok, I forgot about natural gas, it has dropped like a rock]  as a counter response to the dramatic fall in prices last year, a flood of central bank liquidity, and hopes for a strong worldwide rebound.  Copper has not disappointed.  At $3.00 / pound it is nearly back up to the $4 highs of 2008. 

Is this dramatic run up in copper prices justified? I'm beginning to wonder.  I began examining copper in an attempt to see if the inventory increases in oil were consistent with other raw materials.  Like oil, copper's inventories continue to rise worldwide.  As you can see from the graphs below inventories are steadily marching upwards worlwide. 

The graphs only go back 5 years but futher back inventories peaked (for COMEX + LME) at around 1,250,000 metric tons in 2002.  Copper was also around a buck a pound back then. Today the world is at at less than half that inventory figure.

What then is keeping copper prices so elevated? In the short term a serious equipment failure at BHP's Olympic Dam mine gave boost to copper and uranium prices.

I see two major longer term factors giving a lift to prices, the dollar and a mindframe of a recovering global economy.   The trend is also upwards and this market seems to be very much driven by technical trading more than anything else right now.  If the world economy does not rebound and the dollar stops dropping I think copper prices could rapidly reverse.

Right now I'm not really long or short copper or any copper producers, but I'm investigating further.  If copper inventories keep rising the bulls are going to have a harder time justifying prices at their current levels.

Simon Hunt has been extremely bearish on copper recently.

My skeptical view of the copper rally has also put me at odds with the Chinese pig farmer trading community. 

Many thanks to Sober Look for his assistance in acquiring some of this data.

Source:

Bloomberg - Chinese copper inventories

Kitco metals

Housing starts -- looking through the noise

Much has been said regarding the nascent recovery in housing and home prices due to rebounding prices and activity.   Unfortunately I think the popular media is only looking at the very seasonal activity and extrapolating the data incorrectly.  The Big Picture blog (2009, October 25)  astutely shows the details of this seasonality.  As you can see from their graph, it is much better to look at the 12 month moving average of housing starts to extract the true trend.  The average continues to drop, although the rate of decline is slowing. 

In short, don't go hopping up and down like a bunny on one month's housing data, you need to look at the 12 month average to divine what is really happening.

Currency and stock market gyrations

For those of you who happen to follow the markets every day, the last few sessions have been extremely odd.  I have some non equity concurrent indicators I follow and they suddenly stopped working about 3 sessions ago.  I don't day trade so I haven't been whipsawed in my personal or clients' accounts, but the action in the market has taken on a different tone in the last few days. 

Today the market was up nearly 1+% and then down nearly 1+% within an hour and in the currency markets the dollar is stronger against most major currencies.  Here's some pretty pictures to show what I mean.  For the Canadian dollar and Yen, up is a stronger dollar.  For the Euro and Australian Dollar, down is a stronger dollar.  (Look at the fraction symbol and you'll figure it out)

These are all hourly charts from freestockcharts.com

Australian dollar is has punched through all 3 moving averages: The 20, 50, and 200

Canadian dollar has been in an downtrend for a few days.

Euro getting whacked today?  It also just moved through the 200 hour moving average.

Like the Canadian dollar, the Yen has been weakening for several days.

These are only hourly charts but it does show 'something happening' and a possible change in direction for the dollar.  Will the dollar actually change direction or is this all one big head fake to sucker in the dollar bulls? 

Don't know but get out your popcorn and watch the show.

Fuel Substitution between energy types

I was reading this article from Sober Look blog a few weeks ago and thought I'd investigate further into the ability to switch fuels from coal, natural gas and oil for electricity generation.  To quote:

Fuel switching is actually quite common at power plants, the biggest users of natural gas. Many modern power plants can switch between gas and fuel oil, and many can switch to coal as well.

In fact cheap natural gas has created an oversupply of coal as well.

EIA: A generating unit capable of burning more than one fossil fuel is referred to as a dual-fired unit. Some dual-fired units can only burn one fuel at a time (that is, the fuels are fired sequentially), while others can burn more than one fuel simultaneously (concurrent firing of different fuels). A sequentially fired unit generally uses one fossil fuel as its primary energy source, but can switch to a second fossil fuel as an alternate energy source.

I perused the Energy Information Adminstrations web site and found some confirmational data. 

Here's the year to date (through July 2009) energy production from various sources

Coal  -13.1%
Natural Gas +1.7%
Petroleum Liquids -8.6%

It is apparent natural gas production has been favored in the US over coal and petroleum based products this year due to the low price of natural gas. Considering the continued drop of natural gas prices I would conclude the share of production from natural gas will increase for the year.
 

Additional data can be found at the EIA website showing total electricity production as well as products consumed.

Electricity production from coal is down and as you can see from the chart, coal inventories are up. (EIA source)

I understood the possibility of fuel switching from a petroleum based product to natural gas, but had always assumed natural gas has always been cheaper to run than petroleum.  So why run petroleum at all?  I'm concluding the petroleum only power plants are older, more expensive and only run when electricity demands outstrips supply from cheaper sources such as coal, natural gas, nuclear, etc.

This is where the mindset of contstant growth can trip you up.  Total electricity production in the US is down so far for 2009.  In that situation, the first power plants to be shut down would be the most expensive, the oil based power systems.   

When electricity demand returns and the less expensive natural gas and coal based power generators are running at full capacity, only then will more expensive additional oil generators will be turned on. 

Sources:
http://www.eia.doe.gov/cneaf/electricity/epm/table1_1.html

http://www.eia.doe.gov/cneaf/electricity/epm/epm_sum.html

Who is buying all the Treasury debt? a.k.a how bankers are bad traders

Like a worldwide version of Where's Waldo,  a lot of people want to know who is buying all the US Treasury debt being produced by a yawning budget deficit and when they will conversly dump them on the open market.  The Chinese and the Federal Reserve are the first people on everyone's list, but here's another. 

Presented is US Government Securities at all commerical banks.  The first graph shows the absolute change year over years, in billions of dollars.  As you can see US banks have added nearly 240 billion dollars to their portfolios in the last 12 months.   Unfortunately this has not absorbed the entire supply of new issuance in the last 12 months, but it takes a serious chunk of the notes out of circulation.  As this data series is released weekly, I'll be watching it closely to see if the bankers are buying more US debt in the near future. 

Here is the data in a slightly different format so recent events do not dominate the picture, it shows government debt holdings on a year over year percentage basis.  What struck me about this graph is how the banks seem to be adept at raising their treasury holdings as the recessions appear to be ending as shown by the gray vertical shaded areas. 

The bankers appear to consistently purchase US debt just as the recession is finally ending (remember the recession 'end' is backwards looking and it can take several months before a recession is declared as over) and from a trading perspective at exactly the antipodal time to reduce credit risk. 

Also, a bank loading up on US debt is less likely to be making conventional loans to consumers and corporations.  They only have so much room on their balance sheet to hold securities and with all things being equal (yes, I know they aren't)  US Government debt purchases crowd out the possibility of making conventional loans.

Hey, look at that.... Inverse correlation between (US debt) and (loans and leases) on banks books!  It appears the bankers are still running scared and loading up on US treasuries.  Also, look at how loans are declining on a year over year basis, something that has not happened over the entire time period in this graph.  Corporations can access credit via other means (commercial paper, debt markets, etc) but the decline in bank lending  is troublesome.

Hugh Hendry on Chinese Yuan, gold, stocks, potash, and agriculture

It's a busy Hugh Hendry day.  Here's some video interviews from this morning.

Hugh Hendry on Chinese Yuan (CNBC, 2009 October 16)  - China doesn't and or can't free the yuan from the dollar and how this creates stress on Europe and Japan.  Lower dollar values are improving China's trade position.

Hugh Hendry on Agriculture and Potash (CNBC, 2009 October 16)

Hugh Hendry on Gold and Stocks (CNBC, 2009 October 16) -- Hugh states stocks and gold are very crowded trades.


Some very different perspectives.

Inflation update

A little inflation update for you.  The CPI inflation numbers and its various components were released today.  Click on the picture at right to examine three sections of the inflation number:

The graph is of  year over year percentage change to reduce seasonal fluctuations. 

CPI for all urban consumer in blue

CPI less food and energy in red

CPI housing component in green

Both headline CPI and the housing component are in negative territory (that's deflation folks) and the CPI less food and energy continues the slow drop towards zero.  The housing component has never been negative until this current recession since the data series began in 1967.