🕐18.09.08 - 21:40 Uhr
Leveraged Hedge Funds are Major Drag on Commodities Markets - by Frank Holmes
Sep 15 2008 4:06PM
Leveraged Hedge Funds are Major Drag on Commodities
Leveraged hedge funds are selling billions of dollars worth of commodities
investments to meet their redemption demands, and this is another severe
short- term factor driving down prices.
Our funds own similar stocks, and
thus we are caught up in this powerful force that some have described as a
"mechanical sell-off" by hedge funds and banks that need liquidity.
Adding to the downward pressure are other rumors that "rogue" hedge funds
are attacking like sharks when blood is in the water.
These predators are
allegedly aggressively short-selling the stocks that are in the portfolios
of their vulnerable peers, which sends prices even lower.
These hedge fund sharks dont care about fundamentals or portfolio turnover;
theyre just short-term traders hungry for a quick profit.
Record Valuation Lows
We do care about fundamentals, and the long-term fundamentals for the
commodities sector stocks look healthy.
These stocks are trading at very low
price-to-earnings ratios and at large discounts to cash flow.
As we have
published in the past and featured in these special commentaries, different
commodities rotate in leadership each year; however, long-term supply
constraints have not disappeared, and demand from global infrastructure
spending continues to remain robust.
Gold
Oil
Morgan Stanley recently published a research report on the global mining
sector that concludes that we are still in the early to middle years of a
commodities supercycle.
We agree with this viewpoint, given that many of the
key fundamental drivers that have sustained this trend remain intact.
We use oscillators as a tool to monitor price movements over a rolling
60-day trading period.
The intensity and magnitude of these price swings,
which we measure in bands representing standard deviations above and below
the long-term mean, can provide a clue that a price reversal may occur.
On the gold and crude oil oscillators above, it appears that those two
natural resources are deeply oversold.
Golds price is more than two
standard deviations below the long-term mean over the past 60 trading days,
and oil is nearly that far down.
The price drop has had a profound impact on
the price of the equities linked to these resources.
US Dollar
The rising dollar has also contributed to the recent decline in the price of
commodities and commodity stocks.
Both gold and oil prices tend to move in
the opposite direction from the dollar.
The dollar is up about two standard
deviations over the past 60 trading days-you can see on the dollar chart
above that this has happened only a handful of times in the past decade.
You can also see on the oscillator that once the dollar is up two standard
deviations, it usually reverses direction and starts correcting to the mean
long-term price.
If the current rally follows that pattern, we could soon
see the dollar again losing value, which would be supportive of oil,
commodities and gold.
Commodity Prices are cyclical and move in unison
This chart from Morgan Stanley goes back more than 200 years to show
cyclical trends in commodities prices.
What you see here is that the
upswings tend to be sustained for long periods of time before retreating.
These commodities supercycles often last 20 to 25 years, according to Morgan
Stanleys research, and if the current one follows the pattern, we have many
years to go before it plays out.
The key drivers are the rapid economic
growth in China and infrastructure spending in other large emerging markets.
While were in the midst of a supercycle, there are periods of short-term
volatility that can be caused by any variety of factors, among them supply
and demand issues, governmental policies and market sentiment.
Infrastructure Spending
The leveraged hedge funds and their problems arent the only reason for the
current volatility in commodities markets.
Theres also been reduced demand
for these resources and worries linger about the tender state of the U.S.
economies and the prospects of a deep global economic slowdown.
Infrastructure spending is the foundation of future commodities demand.
We
are looking at strong and steady growth in infrastructure spending over the
next decade, with most of the billions to be spent on building roads,
airports, power generation.
More than $21 trillion is expected to be allocated to infrastructure in
emerging markets from this year through 2017, most of it in Asia, followed
by Russia and Eastern Europe, and Latin America.
China alone accounts for nearly $9 trillion in this long-term estimate and
Indias share is pegged at close to $3 trillion.
Billions more will be spent
in North America, Western Europe and Japan to repair and replace aging
infrastructure.
The government in Beijing has made it clear that strong economic growth is
its priority, even if it leads to higher inflation.
But that pace of growth,
in China and elsewhere in the developing world, cannot continue without more
and better infrastructure.
This recognition that infrastructure spending is
a down payment on future growth may keep these projects a priority even in
difficult market conditions.
by Frank Holmes
CEO and Chief Investment Officer
*****
Frank Holmes is CEO and chief investment officer at
U.S.
Global Investors, a Texas-based investment
adviser that specializes in natural resources, emerging markets and global
infrastructure.
The companys 13 mutual funds include the Global
Resources Fund (PSPFX),
Gold and Precious Metals
Fund (USERX) and Global
MegaTrends Fund (MEGAX).
For more insights and perspectives from Frank Holmes, visit his investment
blog "Frank Talk" at www.usfunds.com/franktalk.
Please consider carefully the funds investment objectives, risks, charges
and expenses.
For this and other important information, obtain a fund
prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS
(1-800-873-8637).
Read it carefully before investing.
Distributed by U.S.
Global Brokerage, Inc.
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notice.
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