I want to go on record as labeling these past few months of commodity trading activity the Commodity Bubble. And now that it's been called a bubble, let me tell you: It has burst, and stocks will be the beneficiary.
While checking out the charts of some commodities, I noticed something. If an energy/industrial commodity has an active futures market, it tends to be spiking. If not, it tends to be flattish. Hmm.
Aluminum is spiking, steel is not.
Oil is spiking, coal is not.
Is there a pattern here? Is the whole "shortage" trade just hedgies gunning commodities in the futures market? Interesting, very interesting food for thought.
The bursting of the commodity bubble might pop the only mo-mo trade left, but in the intermediate term, it is very good for most stocks. It also would help the
pause the interest rate hikes. So net-net, this bursting should be a positive for the financial markets.
For further evidence of a commodities bubble, look at the demand side of the equation, specifically with oil. Conventional wisdom holds that the emerging economies of Brazil, Russia, India and China (BRIC) will generate significant commodities demand for a long time.
I too believe these economies present excellent long-term growth opportunities, and I like the BRIC story. But I like to go a bit deeper and look at the real numbers. So let's do that.
Everyone knows that explosive growth in energy demand from BRIC will support ever-higher oil prices. Well, we have the data, and the numbers say not so fast.
Brazil doesn't consume much oil, not even registering in the top 10-consuming countries through 2004.
The former Soviet Union consumed 3.7 million barrels per day last year, as it did in 2000. Not much growth there.
Other Asia (India) consumed 8.7 million barrels, up less than wildly from 8.5 million in 2004. Not much growth there either.
China, the source of infinite demand growth for every commodity, consumed 6.6 million barrels per day in 2005. That was up from 6.4 million in 2004. Not very impressive.
So, even with rapid growth in the BRIC economies, oil consumption slows dramatically. The pricing mechanism works, as it should in a capitalist system.
Few investors really get how much demand growth slowed in the BRIC countries last year. The BRIC story makes for a great sound bite, but the numbers are quite different.
I do not have the statistics for copper or aluminum. They may be different from oil. But for oil demand, the rapid price spike has dramatically tempered consumption growth. Incorrectly, commodity traders think otherwise.
At the time of publication, Marcin was short oil, although positions may change at any time.
Robert Marcin is the founder of Defiance Asset Management, a private investment management firm. Client accounts managed by Defiance Asset Management often buy and sell securities that are the subject of commentary by Marcin, both before and after it is posted. Under no circumstances does this column represent a recommendation to buy or sell stocks. This column is intended to provide insight into the financial services industry and is not a solicitation of any kind. Neither Marcin nor Defiance Asset Management can provide investment advice or respond to individual requests for recommendations. However, Marcin appreciates your feedback;
to send him an email. Marcin is not required to update or held responsible for updating any portion of this column in response to events that may transpire subsequent to its original publication date.