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Another Commodity Correction, or Deflation?
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Friday September 15, 2006
Vol. 8 No. 185 |
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In Today's Letter:
Comment: Another Commodity Correction?
Offshore: World Tax Union
Wealth: Latin America Makes an Investment Comeback
Privacy & Rights: Now Crooked Police Can Find You
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Another Commodity Correction, or Deflation?
Dear A-Letter Reader,
Is this another bull market correction or the beginning of the end for raw materials?
For the second time in less than four months commodity indexes suffered a major bruising on September 11. From its all-time high in May, the CRB Index now stands 15% lower. Meanwhile the Goldman Sachs Commodity Index (GSCI) has declined 13% from its multi-decade high in August.
And for the first time since the commodity bull market began in earnest in the fourth quarter of 2001, all benchmarks are lower over the last 12 months or barely in the plus column. The same is true for the 2006 calendar year period. All barometers, except the GSCI, are now in negative territory. Indeed, if you stripped-out the blazing performance of the base metals over the last 12 months, all indices would be further in the red.
So, is this the end of the line for raw materials? Has the five year bull market ended as crude oil, natural gas, coal, gold, silver, sugar and the grains all head to the basement in September? I don't think so...and I'll tell you why.
First, let's examine some commodity history. Commodity bull markets typically last eight to 15 years or even longer. This bull market began in late 2001, making 2006 only year five in the long-term cycle. Despite the big gains for some commodities (energy, base metals, precious metals), raw materials remain extremely cheap when adjusted for inflation since they peaked in 1981.
Though I would argue that base metals prices such as copper, nickel and zinc are perhaps a bit too speculative, there are sound economics justifying the higher prices. Not a booming demand, mind you, rather a lack of spare capacity in the world. It's the same with oil, gold, silver, platinum, and eventually many of the soft agricultural commodities, namely the grains.
Remember, commodities are the most volatile asset class. Sure, we've all enjoyed the huge gains over the last few years. Over half of all my recommendations since 2003 have been riding the wild commodity bull - and virtually all of these selections have surged. But periodic bouts of manic volatility are bound to occur in commodities. It's the nature of the beast. But we've held the line and continue to recommend holding these great companies...because in view of the long-term commodities cycle, it's the wise choice.
The secular forces that instigated this bull run back in 2001 are still very much intact. Major supply imbalances, rising demand, a weak dollar and the strongest concerted global economic growth cycle since the late 1970s.
China is the fastest-growing commodity consumer this decade and her economy is gradually slowing. But I'll bet it won't collapse ahead of the Beijing Olympic Games in 2008 - it's too important that China declares her brilliant economic achievements as the world focuses on the Asian Dragon, and they're not going to let the opportunity pass them by.
Finally, there's another trend to keep in mind when you're considering the commodities market...
When long-term U.S. interest rates are below 5%, it's probably not the time to get bearish on global economic growth and commodities. Keep in mind that previous economic recessions began with the Federal Funds rate closer to 7% and long-term rates at 6.5%, or higher. Global liquidity has eased somewhat since mid-May. But overall, bank lending is still very robust around the world and companies are still logging respectable earnings growth, though likely to be moderated over the next several months. Unless a geopolitical event happens that tips the global economy into recession, this bull market will still be alive and kicking.
ERIC ROSEMAN, Investment Director
On behalf of The Sovereign Society
EDITOR'S NOTE: Come 2008, Olympic fans from all over the world will turn their eyes to Beijing for the Summer Games...but for investors, the time to pay attention is now. To find out more about the 24-month profit cycle that is just getting underway as China gears up for its Olympic coming-out party, click here.
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NYMEX Insider: Oil's Rebound "Could Begin as Early as Tuesday Morning at 10 a.m."
According to a senior energy trader with a personal connection to the market makers setting crude oil prices in New York, a sudden wave of demand for 145 million barrels could flood the markets come Tuesday morning... This $10.8 billion explosion could "catch the whole world off guard" while sending oil off on a 33% price rally...
Here's how this trader's close connection expects to leverage the coming rebound into a 528% windfall, and how you could join in...
LINK: http://www.isecureonline.com/Reports/DFT/EDFTG909/
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EU Seeks Worldwide Taxes
The EU tax directive in effect since last July has been a miserable failure, fortunately, producing relatively little in revenues. Billions in capital has fled from EU member nations to safer havens, such as Hong Kong and Singapore. Having seen little in the way of tax collections under this cross-border withholding tax scheme, the EU now wants to go global and try and force non-EU nations to knuckle under to its tax collection demands. Sir Ronald Sanders, Antigua and Barbuda's former senior ambassador, warns that the EU has its tax guns aimed at governments and financial authorities in the Caribbean "seeking to push their tax net beyond their own shores." Urging resistance to the EU tax plans, he warned that jurisdictions that may be under the gun include Hong Kong, Singapore, Japan, Macao, Bahrain, Dubai, Canada and The Bahamas. Perhaps the EU should be known as the WTU -- the World Tax Union.
BOB BAUMAN, Editor
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Lack of Office Space Sends Asian Real Estate Higher
Hong Kong and Singapore are expected to witness strong growth in prime office rents in Asia over the next five years. Hong Kong's privacy, investment perks, and business-friendly laws are attracting more and more businesses to this ideal Asian location. The result? Asian office space is at a premium. In fact, the lack of new office space is causing rents to soar, according to C.Y. Leung, chairman of DTZ Debenham Tie Leung, a prominent Asian real estate investor. Hong Kong's Grade A office rents are likely to rise 70% from now through 2010, followed by Singapore with a 69% increase. Singapore is rapidly becoming one of Asia's leading financial centers and emerging as a hub for offshore private banking, which is just another reason businesses are moving there. Plus, Singapore's capital values are about half the 2,300 Singapore dollars ($1,466) a square foot of built-up space prior to the Asian financial crisis of 1997-1998. All this business moving means investors should get a toehold in these Asian markets. Right now, I'm particularly long and strong on Singapore real estate, including one of Singapore's oldest and largest commercial REITs. TSI members should already be in tune with this, if you aren't, check out this month's issue. If you're not a member, see the further resource section to find out how you can subscribe.
ERIC ROSEMAN, Investment Director
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Your Online Privacy Now Subject to Crooked Law Enforcement Officials in Totalitarian Nations
Thanks to the U.S. Senate, police in other countries will soon be able to obtain information about what U.S. persons do on their personal computers. That includes such paragons of democracy such as Albania, China and Uganda, just to name a few.
The culprit is the Cybercrime Treaty, drafted nearly a decade ago by European bureaucrats and backed by both the Clinton and Bush administrations. Under the treaty, police in one signatory country can force police in another one to investigate any alleged crime that involves, in even the most remote way, computers or the Internet.
Let's say you collect memorabilia from World War II and offer to sell an item from your collection to someone from Germany or another country that restricts or forbids sale of such items. German officials can demand that U.S. agents obtain your computer records from your Internet Service provider, without your knowledge, and turn over that information to police there. It doesn't matter if the conduct you engaged in is perfectly legal in the U.S.-if it offends someone in another country, your privacy is at risk.
The real problem will come when information is turned over to a country like Albania, where Russian organized crime has heavily infiltrated the police. Once fraudsters gain access to your billing and browsing records, they can steal your identity and use it for whatever criminal purpose they have in mind. Plus they'll be able to crack down on any of their own citizens with the temerity to speak up in opposition.
What to do? One of the best defensive strategies is to use an Internet "proxy" service, which acts as an intermediary between you and the Web site to which you're connecting. One good choice is Armorware - see the further resource section below for more information.
MARK NESTMANN, Privacy Expert & President of The Nestmann Group
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