Eric Roseman's Eruptions: Stocks, Global Markets and Commodities BLOG

The View from London is Grim

I always love visiting London. It’s an amazing city with a great vibe and fantastic museums. Like New York, it’s pretty hard to be bored in London.

Yet things are grim at the moment, very grim…

Britain is in the midst of its worst economic contraction since 1992. Sixteen years ago, the United Kingdom exited the ERM, or the European Exchange Rate Mechanism, and devalued the pound by a fifth almost overnight; George Soros infamously made over a billion dollars betting on that outcome and sterling was humiliated along with the Italian lira, which also collapsed.

Prior to July, the pound was surging versus the dollar and, until recently, had traded more than 2 to the dollar – an all-time high. But in the span of just a few months the pound has crashed, plunging more than 25% vis-à-vis the buck at 1.48.

At first glance the City of London seemingly looks busy enough and traffic remains as chaotic as ever in this bustling European capital. But make no mistake about it: London is hurting.

Approximately 6% of the United Kingdom’s GDP, or gross domestic product, is derived from financial services and more than 20% in London alone. It’s a significant statistic that continues to handcuff this great country because, like the United States, the U.K. ran wild in real estate speculation and is now paying the consequences for “bubbles” that were created in many cities, including London.

British banks, like most of those in the United States, are effectively bankrupt. The U.K. government has already nationalized or partially nationalized several banks, including recently, Royal Bank of Scotland.

The Bank of England was late to the interest rate cutting party this year and probably caused the country more harm than good at balking at larger interest rate cuts earlier in 2008. British lending rates now sit at their lowest levels in more than 40 years.

But in one of the most sobering developments in credit markets lately, I notice it now costs more to insure the United Kingdom against bond default than some of its banks, such as HSBC and Lloyds. Credit default swaps, which insure against bond defaults, hit an all-time high last week for several countries, including the U.K., the United States, Germany, France, Italy and Spain.

Like many European nations, the U.K. is now on course to issue a record amount of financing through gilt issuance. When credit markets finally recover and calm down, I expect long-term interest rates for the world’s biggest borrowers in this crisis to rise significantly, including the United Kingdom and, of course, the United States.

Government bonds are enjoying a safe-haven label over the last 16 months; at some point, however, investors will turn this story upside down and demand higher rates as issuance overwhelms the market. The Europeans, including Britain, will issue more than $1.3 trillion dollars in bonds in 2009.

Today I’m visiting several successful British money-managers that have earned more than 20% in profits this year – a remarkable achievement amid the worst calendar year for U.S stocks since 1931 and global equities since 1974. I’ll share their insights tomorrow.

Focus on Busted Credits and High Income in 2009

"This aging stock bull market is looking increasingly like a scarred prizefighter after winning too many championships. Indeed, the market is looking increasingly fragile, bruised and battered since the bear market low in October 2002."

In January 2008 I made the above observation about stocks as the market was coming undone. Of course, almost a year later the stock market has collapsed with stocks likely to post their worst calendar year of performance since 1931. Over $10 trillion dollars of global stock market value has been wiped-out in 2008.

So is it time to start looking at stocks again? Despite several bottoms over the last 14 months can we expect stocks to finally form a meaningful rally? From their lows on November 20, stocks have now gained 10%.

Indicators Flash “Buy”

Many market indicators I track are flashing “Buy” since late November. These include high institutional and hedge fund cash levels, extremely bearish investment advisor sentiment readings, big dividend yields for many global markets in excess of benchmark ten-year government bond yields and a rash of hedge fund closures and failures.

Also, individual investors have been dumping stock funds like crazy since July with record net outflows over the last five months and the VIX Index (CBOE Volatility Index) remains highly elevated amid total fear in the market.

Stock market valuations, though not dirt cheap, are certainly looking far more attractive compared to just 12 months ago.

Valuations and dividend yields, which can typically point to either an over-extended or undervalued market, now show fair value for U.S. stocks and high value for European, Asian and emerging market equities following even bigger declines for these markets.

Stocks in Europe yield 5.9% and in Japan the TOPIX pays a 3% dividend – the highest in more than 28 years. Indeed, compared to stocks, government bonds are richly valued and pay the lowest yields in years and, in some cases, decades.

Explosive Bear Market Rally Coming

I’m certainly not bullish by any means. The long-term implications of mass government intervention, widespread regulation and control of several important industries, including finance, won’t encourage bold risk-taking for a long time. Credit markets are grudgingly healing, banks largely won’t lend and TARP and TALF sponsored government programs are taking too long to filter through the economy.

There is absolutely nothing in the cards to suggest a new bull market is on the horizon.

But, like the 1930s, the stock market can post a major short-term reversal and shock the bears with big double or even triple-digit gains. It’s hard to say what might trigger a major reversal; Obama’s inauguration in January, lower LIBOR and inter-bank lending rates or, possibly, a weaker Japanese yen might offer such a catalyst.

The last credit crisis of this magnitude occurred in the 1930s. Judging by trends during that tumultuous era, stocks can indeed post some huge gains, even in a bear market. For example, from its lowest point in June 1932, the Dow Jones Industrials surged more than 162% in the proceeding twelve month period. But by 1937, the Dow began crashing again, plummeting 55% and losing another 28% in 1938 before finally bottoming in 1942.

After crashing more than 45% off the October 2007 all-time highs, U.S. stocks might be attempting to finally muster a bottom. Any rally, however significant, should be viewed in the context of a secular bear market; the badly shattered economy is in no condition to build on a sustainable long-term rally like the 1990s or 1980s.

New Market Leadership: Go for Credit

Ahead of the upcoming bear market rally investors will have to find new leadership. It’s highly unlikely that energy stocks or emerging markets will lead any recovery, however short-lived. Instead of riding a frantically erratic stock market that continues to trade at near-record volatility levels, I would encourage investors to begin accumulating long-term positions in busted credit markets.

The epicentre of this financial crash lies in the distressed credit market – and that’s where investors should focus their buying strategies. Income is vital right now.

The entire spectrum of non-Treasury securities has been crushed since September, including investment-grade corporate bonds, convertible bonds, mortgage-backed agency debt and TIPS, or Treasury Inflation Protected Securities. Emerging market bonds, municipal bonds and junk debt or high-yield bonds have been slammed even harder but should still be avoided as defaults, failed auctions and currency issues plague these credits.

But several other areas of credit look highly compelling.

Investment grade bonds, for example, plunged to their lowest levels since 1981 in September and yield 8.38%, according to the Barclays Capital U.S. Corporate Index.

I don’t know about you, but an 8% or 7% yield today looks mighty appealing. Instead of chasing stocks at these prices, which might yield a terrific trading opportunity, most investors won’t get off the bus on time, similar to 1937 when equities began crashing again.

High grade corporate debt at least offers the investor a combination of above average income, the possibility of capital gains at these low prices and, in some cases, implicit government guarantees on bank debt and agency bonds, which still yield about 5.5% or more compared to expensive Treasury’s.

Nobody can claim that corporate bonds, agency debt or convertible bonds have truly bottomed after more than 16 months of utter panic and several crashes. Yet, as value investors, this is precisely the time to start purchasing these distressed securities.

Ahead of any bear market rally at least conservative investors can ride out the cycle without picking a top before stocks crash lower again. Best of all, those juicy yields and bombed out prices should eventually translate into impressive double-digit gains for investors regardless of where stocks trade.

Hedge Funds Fail in 2008, Industry Contracts

Back in late September I was surprised to learn that SAC Capital, one of the largest hedge funds in the world managed by Steven Cohen, decided to pull the plug on their vast $16 billion dollar hedge funds.

In hindsight, this was a smart move by Cohen because his trading models apparently became dysfunctional following the collapse of Lehman Brothers Holdings.

Approximately two-thirds of all hedge funds trade credit markets. Most investors think hedge funds overwhelm equity market trading, and, to an extent, that’s true; but the bigger boys play in credit.

When your trading models cease functioning, the right thing to do is to stop trading, raise cash and wait out the storm. That’s what SAC Capital did. But the majority of hedge funds, overwhelmed by the massive demand from investors to redeem, instead chose to freeze redemptions, which logically compromised their portfolios because of forced sales. That’s especially the case when your assets are partially illiquid. It’s a snowball gathering momentum in the Alps; the outcome is horrid.

In addition to investing in distressed debt and other segments of fixed-income, including leveraged loans, asset-backed lending and convertible bond arbitrage, these managers used to employ up to 10 times leverage or more. All of this is now unwinding over the last few months as losses hit all-time highs for hedge funds in 2008 – the worst year on record. Latest estimates point to a 25% loss for the median hedge fund this year compared to -40% for the S&P 500 Index and -45% for the MSCI World Index. Already more than 15% of all hedge funds have closed or failed.

For hedge funds, the party started to fade in July when commodities began to implode. Worse, Lehman’s failure in mid-September accelerated the crash in credit markets resulting in formidable losses for many hedge funds in September and October. November was no different.

I’m still a fan of hedge fund investing. Still, I’ve tempered my enthusiasm for this asset class compared to ten or fifteen years ago. My favorite hedge funds are those specializing in bankruptcy reorganization, distressed debt and asset-backed lending – sectors of the market that require acute credit risk analysis that’s way above my head. These managers deserve to be paid the big bucks if they can make money collateralizing loans and assets and figuring out exactly what some of these companies are really worth.

What really irks me is the long/short hedge fund sector disguising themselves as “hedge” funds in the first place. In reality, most long/short hedge funds don’t know how to hedge properly and fail to beat the market – still charging you 20% of profits. Shorting stocks is an art; most managers just don’t know what they’re doing.

Not all hedge funds bled this year. Some global macro hedge funds made a killing in 2008 while managed futures gained big profits riding trend-following trading models. These guys were net short equities, long bonds, short commodities and long the dollar since July or August.

The rest of the hedge fund industry is now living on borrowed time. This nonsense of locking-up investor capital for 5 years, charging a 20% incentive fee for generally failing to beat the market and providing poor transparency is over. Redemptions continue to flood the industry this fall and, ahead of December 31 – a major liquidation date for investors, more hedge funds are now forced to sell securities to raise cash. It’s ballgame over for most managers.

It was a nice party while it lasted.

30-Day and 90-Day T-Bill Yields Plunge to just 0.10%

Despite signs that several segments of credit continue to improve, namely in the mortgage-backed and investment grade corporate bond market, the rest of the complex remains hostage to nervous money and the accelerated flight to safety in December.

U.S. Treasury bonds, the only asset in the world appreciating along with the dollar and the yen since mid-July, have skyrocketed in value since November 18. The yield on the benchmark 10-year Treasury now fetches just 2.54% -- the lowest yield since 1954.

Even more incredible is the yield now offered by short-term government bills. It’s possible that yields might even turn negative before the day is through. The last time T-bill yields turned negative was in the 1930s; a negative interest rate implies investors are paying the government to park cash and not the other way around.

Evidence of heightened investor fears reached a nadir this morning with 30-day and 90-day U.S. Treasury bills yielding only 0.10%, or ten basis points – the lowest such yield since the 1930s. And six-month T-bills now yield a meager 0.20% -- also in the record books.

The great paradox about the credit crisis at this stage is how investors continue to lunge after super low yielding T-bills and T-bonds when an entire gamut of fixed income markets – many with implicit government guarantees – are yielding north of 7%. Investors are indeed pricing in a serious deflation.

The U.S. 30-Year Treasury bond now yields just 3.04%, also trading at a 53-year low. Why would someone give the government money for 30 years at these rates? Short of a full-blown Depression, which I don’t think will occur, long-term bonds are the most overvalued asset in the world leading up to over $1 trillion dollars’ worth of Treasury bond issuance in 2009 and probably more in 2010. The only reason why an investor would buy this paper now is because of imminent financial Armageddon.

Meanwhile, investors are paid to take risk. And the values now in high quality investment grade corporate bonds, agency bonds, TIPs and convertible bonds are just too compelling to ignore. These markets all crashed starting in mid-September but have started to recover nicely over the last three weeks while stocks gyrate like a yo-yo. A 7% yield today seems mighty sweet.

Financial Armageddon is still a possibility. Global central banks and governments have spent trillions since August 2007 attacking clogged credit arteries, but only with limited success. At some point, however, I truly believe central banks will restart credit markets again as coordinated policy finally begins to work. Credit markets will unclog.

Tired of trying to pick a bottom in the stock market? I am. I have no idea where stocks are heading from one day to the next amid intense volatility. But I do believe high quality fixed-income securities should be purchased at these attractive levels for long-term investors. The values are too attractive to ignore. Also, assuming stronger credits have stabilized at this point, investors can buy this sector without the dizzy volatility associated with common stocks, which ultimately lead to ulcers anyway as new lows are violated following every rally since last October.

I’m heading to London on Monday on business. I’ll report from England starting on Wednesday morning, including views on the global economy and world markets according to two formidable money-managers that have earned 28% and 21%, respectively, in 2008.

See you on Monday. Have a good weekend.

Municipal Bonds Next on Credit Hit-List

As the credit markets continue to remain largely frozen to weaker credits, investors are starting to abandon the municipal bond market following several weeks of calm.

The municipal bond market in the United States is no slouch. Total outstanding supply stands at $2.7 trillion dollars with the Merrill Lynch Muni Master Index yielding 4.2% or an 8% taxable equivalent. That’s the highest yield in years for municipal bonds.

Earlier this fall, the municipal bond sector plunged as investors rushed out of weaker credit markets resulting in a short-term panic and causing a major spike in yields that ultimately drew value investors as spreads hit record levels compared to taxable Treasury bonds. But that state of relative calm has ended.

The Port Authority of New York and New Jersey failed to auction $300 million dollars’ worth of taxable bonds on Wednesday as investors balked at riskier credits in the municipal bond sector. Luckily, the bi-state agency doesn’t require immediate funds and can still delve into its existing cash-flow. That’s not the case with other states and municipalities. President-elect Obama has even offered to extend Federal government assistance to those states unable to secure credit market financing.

The growing funding concerns facing municipalities has already spread to several states, including California, which requires cash to finance a massive budget gap in 2009. California, with a long string of budget deficits is now declaring a State of Emergency in December as the state runs out of cash. California is the largest issuer of muni debt.

What’s truly alarming about the scrapped Port Authority offering was the short duration of the fixed-income term of only three years. Investors would typically embrace a short-term note that pays a tax-free yield. But these are not normal times.

Wednesday wasn’t a good day for new tax-free bonds. Most offerings were reduced and their spreads turned out to be higher than planned compared to risk-free Treasury bonds – now trading at their lowest yields since Eisenhower was president.

U.S. municipalities still must raise at least $21.2 billion this month making it the heaviest projected 30-day supply in 2008; the Port Authority’s failed auction also means other deals coming to market either won’t raise enough bids or will be scrapped altogether.

The rating agencies have also confused investors since the market has lost confidence in their ability to accurately rate and rank credit offerings.

As the U.S. economic recession deepens into 2009 it would be advisable to avoid tax-exempt municipal bonds, despite their attractive yields. The risk is too high. You’ve got to believe that many more cities, towns and states will suffer from a credit squeeze coupled by a lack of buyers as revenues continue to decline in a deteriorating economy. Avoid muni bonds.

U.S. Treasury Bonds in “Bubble” Territory

Since 2000, two important financial “bubbles” have popped. The seeds for the third such destruction are now in progress as government bonds in the United States and overseas skyrocket on deteriorating economic fundamentals. Government bonds love bad news as it suggests lower interest rates lie ahead to fuel an economic recovery thereby sending yields lower.

This decade has already witnessed the death of two asset class “bubbles,” both destroyed by either lax monetary policies or rising interest rates.

Starting in March 2000, the NASDAQ technology and telecommunications bull market came to an end; almost nine years later, the NASDAQ remains more than 70% off its high.

Then there was the Mother of all “bubbles,” U.S. residential real estate.

We all know how this train-wreck is unfolding as nationwide housing values continue to decline since mid-2006. U.S. home prices have shed almost 30% since peaking 2.5 years ago accompanied by surging foreclosures, rising defaults and, in many cases, mortgages now worth more than the underlying value of the property.

Now we face another monster “bubble” in late 2008, although this one was not directly created by central banks.

The culprits behind this round of madness are the banks and mortgage-finance companies together with the regulators and government – all to blame for making easy loans to individuals who had no business buying a home in the first place. This spectacular blowup triggered the subprime crisis and the total unraveling of credit markets since peaking more than 16 months ago.

Growing fear and widespread panic since mid-September have forced more investors to dump stocks and other assets; the only place to hide amid the worst financial storm since the 1930s remains government bonds.

U.S. Treasury bonds are now in a massive bull market. The yield on the benchmark 10-year T-bond sits at 2.72% this morning – the lowest yield since 1955. Shorter maturities yield much less, including the 2-year T-bond at just 0.92%.

But one of the most spectacular rallies over the last two weeks lies in the 30-year T-bond, now trading at just 3.21% compared to 4.37% on October 31. That’s unbelievable because over the next 12-18 months the United States and Europe will embark on massive fiscal expansions to boost growth and finance a deluge of bond issuance. This makes long-term Treasury bonds a great short -- eventually. But for now, it’s a freight-train. It’s probably too early to bet against Treasury debt until stocks finally stabilize and muster consistent rallies, which will be partially financed by Treasury bond sales.

Still, this is developing into a first-class “bubble.” The world right now wants dollars and Treasury bonds. Yet, I suspect that over the next several months we will witness a major reversal and, perhaps, a turning point for bonds as this bull market finally draws to an end. Investors will sell dollars and Treasury bonds again one day. Count on it.

U.S. Launches New Assault on Consumer Recession, Backtracks on Toxic Mortgage Assets Bailout

The United States is now waging an all-out war against clogged credit markets and attacking each troubled artery head on.

Earlier this week U.S. government officials announced a new plan to pump $800 billion dollars into the rapidly contracting economy by injecting funds into distressed credit markets where banks remain reluctant to lend and continue to hoard cash.

Unprecedented, this latest salvo has been fired by the Federal Reserve, which has clearly stretched its Constitutional authority in its attempt to stabilize U.S. capital markets over the last 16 months. This action is largely aimed at finally bringing long-term mortgage rates down – and it’s working. Benchmark 30-year fixed-rate mortgages have dropped to 5.70% from 6.41% four weeks ago.

Also, the government will inject up to $200 billion dollars to attack the deflation now underway in the consumer sector, deploying financing to investors buying securities tied to student loans, credit cards, auto loans, and small business loans.

In the absence of a broad-based policy initiative to tackle the ongoing mortgage-backed crisis clogging bank balance sheets, the U.S. Treasury is sending mixed signals to market participants.

What Happened to TARP?

Will the United States eventually create a fund or pool to stabilize toxic assets freezing inter-bank lending? Treasury now prefers to channel TARP (Troubled Asset Relief Program) funds directly to bank coffers instead of creating a pool to lump toxic assets and create a platform to trade these largely illiquid and worthless mortgage assets.

Secretary Treasury Hank Paulson’s original TARP plan has been revised since mid-November causing all sorts of market uncertainty; the government now plans to deal with the growing crisis affecting consumer credit markets while seemingly abandoning its original goal to tackle illiquid mortgage-backed securities. Instead, Paulson would rather keep his powder dry for the next blowup.

Perhaps the government is balking at collateralizing an asset class that is still declining in value. Synthetic mortgage-backed securities continue to lose value in late November following Paulson’s TARP reversal. Any hope for cleaning up this mess has now been shelved or delayed until President-elect Obama comes to power in January with his newly appointed team, including former Federal Reserve Chairman, Paul Volcker.

Diversion of Funds

Central banks continue to create sufficient liquidity to keep the banking system afloat but banks aren’t confident enough to pass on that precious liquidity. The reason why LIBOR is still elevated is the diversion of funds away from buying toxic assets to the consumer sector. This is an impediment to a sustained improvement in the interbank (LIBOR) market.

Three month LIBOR remains elevated at 2.18% compared to a 1% Federal Funds rate; prior to the subprime crash in August 2007, LIBOR stood about 15 basis points (0.15%) above LIBOR. On October 9, LIBOR peaked at 4.84% before compressing. Still, LIBOR is too high.

If the government would deal head-on with the securitized mortgage problem still plaguing bank balance sheets then, perhaps, taxpayer’s would not have to finance yet another in a series of expensive loans to consumers and small businesses.

Since September, the Federal Reserve has expanded its balance sheet by more than $1.2 trillion dollars and continues to aggressively expand credit into the financial system. Yet despite these bold efforts, most banks are hoarding TARP disbursements and refuse to lend. If these efforts fail to make headway then it’s highly probable the Fed might start lending directly to businesses and, possibly, consumers.

Obama and the 2009 New Deal

Cleaning up this humungous financial mess will take time. President-elect Obama’s plan to spend $2.5 trillion dollars in infrastructure projects in 2009 will help to unwind falling prices, but it won’t cure the disease.

I suspect this gargantuan spending initiative will help to stabilize the economy for a few quarters but ultimately won’t act as a panacea to drive long-term consumption. Consumer sentiment sits at its lowest levels since 1980 with core assets in housing, stocks and bonds purged since September forcing Americans to spend less and raise domestic savings rates.

FDR’s New Deal in 1933 was followed by a second New Deal in 1935. It didn’t end the Great Depression; WW II finally rescued the American economy as production boomed starting in 1942. The New Deals (I and II) provided a major stimulus and probably rescued the economy from its lowest depths in 1937; without a major global conflict it’s highly unlikely American industry would have recovered.

Deflation is widespread as consumer prices start collapsing worldwide led by plunging commodities, namely oil and wholesale prices. Only wage growth remains in the plus column in late 2008 but might be poised to turn slightly negative in 2009. Once wages turn negative, it’s “ballgame over” for consumption.

Treasury’s Reversal Demands Cautious Outlook

In the absence of a well defined and implemented TARP plan to purge bad assets, credit stress will remain entrenched in financial markets. Banks will remain reluctant to lend. Counterparty trust is still highly fractured and, as a result, banks are only grudgingly beginning to lend.

There is absolutely no credible case to be made for a new bull market. True, stocks are certainly much cheaper compared to 12 months ago and many pay big dividends. But equities are considered only “fair value” and historically have sold for less than book value towards the end of a bear market. That’s not the case now.

Busted credit markets, however, should be accumulated now starting with convertible bonds, investment grade corporate bonds and TIPs, or Treasury Inflation Protected Securities. These assets have crashed since September and trade at or near all-time low valuations.

A secular bull market for stocks won’t begin with consensus earnings at these levels, a busted and despondent American (and global) consumer, a total collapse of asset values impacting consumption (housing, stocks) and rising unemployment. What’s more, we’re in unchartered economic territory amid the first credit bust in 78 years; it would be unwise to underestimate the duration of this crisis and the time required to finally segregate and quash bad assets.

Finally, and most importantly, the heart of this credit crisis lies in the distressed U.S. housing industry where trillions of dollars’ worth of mortgage-backed securities tied to toxic derivatives are still declining in value.

The price of previously sold homes fell in October by the biggest amount in 40 years, down 11.3%.

The market will not favorably respond to any government efforts to end this crisis until housing values stop declining or, at least, begin to stabilize. This is perhaps one reason why Treasury Secretary Paulson balked at his original TARP plan (Troubled Asset Relief Program) two weeks ago; the government is reluctant to collateralize a falling asset.

Sweet Returns in a Commodity Crash

This year has been anything but sweet for commodities investors. Since peaking in mid-July, the Reuters-CRB Index has crashed a cumulative 48% with every constituent of the index down sharply – except sugar.

To be sure, another formidable commodity is also holding up relatively well in the Panic of 2008 -- gold. Though down 2% this year that’s far better than just about every other asset class where losses exceed 30%.

Sugar prices have rallied 11% in 2008 on the heels of growing supply shortages.

Since peaking in March at $0.15 cents per pound, world sugar prices have indeed corrected to $0.12 cents now but remain higher since January 1st.

The International Sugar Organization is forecasting that global sugar production will decline 3.8% to 162.3 million tons in the year ending September 30, 2009 while consumption is projected to rise 2.4% to 165.9 million tons. This leaves sugar supplies in net deficit and the shortfall is likely to persist for several years, according to industry experts.

The European Union and Brazil are primary factors causing the shortfall in sugar stocks.

European Union (EU) farmers recently renounced a significant amount of their quotas, resulting in lower output this year and into 2009.

In Brazil, where ethanol consumes a fairly sizable chunk of the country’s production, spare capacity is finding its way to ethanol, not edible consumption vis-à-vis exports.

Brazil is also confronting another crisis affecting global farmers – a credit crunch.

Sugar farmers in Brazil are now in the midst of serious financing problems as revolving bank credit it shut or interest rates have increased to levels that prohibit margin expansion for growers. It’s the same phenomenon occurring in the United States as farmers continue to feel the credit squeeze, canceling orders for farm equipment, delaying expansion plans and being decimated by the plunge in grain and most other agricultural prices since July.

Sugar isn’t the only commodity that’s in or approaching supply deficit. Coffee and cocoa also remain very tight, especially the latter amid unrest in the Ivory Coast – the world’s largest cocoa producer.

Once global markets finally calm down or, at least, stop gyrating violently, I expect the fundamentals to return to the commodity complex. Supplies are declining for several commodities, namely gold, silver, sugar, coffee, cocoa and rhodium. The grains, particularly wheat and corn, are also poised for another big move.

It’s definitely time to start looking at raw materials again following a 50% crash since July. I also think the sector will get help from a weaker dollar ahead of a 0% Federal Funds rate over the next 3-6 months as the United States desperately tries to conquer deflation in the economy.

My favorite commodities now include gold, silver, sugar and the grains. Supply imbalances continue to work in their favor.