Deutsche Bank Call The Commodity Top

I love to look at indicators in the market that are not necessarily in the playbook of the professional analyst. I wrote a report that held up the humble chocolate croissant as a market indicator, I warned of recession having spoken to a French teacher and a few weeks ago I wrote an article discussing the rise of websites, dedicated to the buying and selling of gold and singing the praises of the commodity market to private investors, as an indicator of a bubble about to burst.

It would take a brave man, however, to call the top of the market but it looks like Deutsche Bank have taken the plunge calling the top of the commodity cycle and advising clients to take profits before the economic downturn casts its spell on the sector.

The bank warned that oil will slide back towards its "marginal production cost" of $60 to $80 a barrel; gold will slump to $650 an ounce as the dollar recovers against the euro; copper, lead and tin will slowly halve in price; grains will calm down as harvests in Australia and the Eurasian Steppe return to normal.

There is a wider view now that a correction in the sector is imminent, with some analysts drawing parallels with the technology boom. They fear the worst.

"The run-up over the past few years is eerily similar to the surge in the Nasdaq index in the late 1990s," says Paul Ashworth, of Capital Economics. "Back then we were told things were different because of the arrival of the internet. Traditional valuations didn’t apply anymore.

"Now the surge in energy prices is being justified by demand from emerging Asia and low interest rates, even though the reason interest rates are so low in the US is because the financial system is in a complete mess and the economy is in recession."

The boom in markets in general has been caused by the easy money of recent years but tightening by lenders is now having the reverse effect.

"Now that the latest bout of easy credit has come to an abrupt end and housing is a bust, the bubble in commodities is the next one to watch," Ashworth adds.

Graham French, of the M&G Global Basics Fund, a global equity fund, is not predicting a correction that is wild but he believes that natural resources stocks have become 'stretched'.

"The strength of global commodities demand, in particular from industrialising countries, has resulted in very pronounced rises in the share prices of many natural resources companies in recent years," he says. "While I expect this demand to remain robust in the long run, I believe this scenario has left company valuations in a number of cases looking quite stretched.

"It is important to take an increasingly selective approach to investing in commodities-related companies. I prefer cash-generative, non-speculative, attractively-valued companies with strategically important assets."

Mark Harris, portfolio manager at New Star, has already taken profits and is gradually winding down his exposure to Oceanic Australia Natural Resources and BlackRock World Mining.

Its not all doom and gloom for the commodity investor, however, as, according to Ian Henderson, the fund manager of the leading JPM Natural Resources fund, the three main tenets underpin his positive conviction regarding the attraction of the sector over the long-term: population growth, infrastructure demands and compelling valuations.

"One cannot speculate about a continuing commodities boom without acknowledging the underlying reasoning for the surge. And this demand is energised by fast-growing populations and the infrastructure needed to support their evolving needs. It’s a self-propagating cycle."

Mr Henderson cites a huge drift towards the cities, with urban populations in India and China currently standing at 29pc and 40pc respectively, compared with the US, which currently stands at 81pc.

"As this drift continues in emerging market countries, more steel is needed to build railways, more coking coal is needed to smelt the steel. More energy is needed to power the railways and the new homes," he says. "All of this has little to do with the relatively short-term effects of credit crunches, recessions and belt-tightening around the world as they are largely government mandated projects. These will continue as nations recognise the need to spend on infrastructures to further increase their wealth, irrespective of short-term blips."

Traders are, obviously, more short term in their trading than most investors in the sector, however, the strange position that the trader is in is that the long term argument for investing in commodities is actually quite compelling. According to the latest World Energy Report, the emerging nations – notably China and India – are going to continue to support and fuel energy prices for the next two decades.

The report reveals that the world’s primary energy needs are projected to grow by 55pc between 2005 and 2030, at an average annual rate of 1.8pc per year. Demand of oil equivalents will reach 17.7bn tonnes compared with 11.4bn tonnes in 2005. Fossil fuels will remain the dominant source of primary energy, accounting for 84pc of the overall increase in demand between 2005 and 2030.

Oil demand will reach 116m barrels per day in 2030 – 32 mb/d, or 37pc, up on 2006. In line with the spectacular growth of the past few years, coal sees the biggest increase in demand in absolute terms, jumping by 73pc between 2005 and 2030 and pushing up its share of total energy demand from 25pc to 28pc. Most of the increase in coal use arises in China and India.

Some $22 trillion (£11.4 trillion) of investment in supply infrastructure is needed to meet projected global demand. Anthony Eaton, from JM Finn, the boutique fund manager, recently said: "The recent spikes in energy and food prices highlight how stretched global infrastructure is in meeting just the needs of Western economies, never mind the 80pc of the world’s population living in non G7.

"This is a global phenomenon and is likely to build in relevance if current forecasts prove anywhere near accurate."

One thing we can be sure of is that the commodities market will continue to present opportunities for profit both long and short for the active trader

How To Become A Hedge Fund Manager

Becoming a hedge fund manager certainly has its perks... if you are successful. The King of the Hedgies is currently John Paulson who raked in £1bn for a years work shorting the sub prime markets and others certainly are not poor.

What do 'Hedgies' do and can you do it?

The answer to that question is a yes and no. Just like it is possible for everyone to be a sports star. If you have the right physical capacity, the mental toughness and the commitment you can get to the top of your game, and of course, there is an element of luck in everything.

The first thing to know about hedge funds is what they are. There are many resources on the web that will go into chapter and verse but the simple explanation is that, typically, a hedge fund is a set up as a company, lets call it XYZ Ltd, which is set up in a tax efficient jurisdiction such as the Caymans or BVI, for example.

The company generally has two classes of shares (it can have more) one are mangement shares (so you own the company) and the other shares are investors shares (which carry no voting rights).

This company will have various service providers such as:

Prime brokerage: Prime brokers provide a range of customised services to hedge funds. Current services include handling trade execution, clearing and settlement, providing financing and technology services, risk management and operational support facilities, securities lending, and making introductions to sources of capital.

Fund Administration: Some hedge hedge funds conduct administration internally while others choose to outsource certain functions such as their accounting, investor services, risk analysis or performance measurement functions to third party administrators. Some outsourcers offer independent pricing of a fund’s portfolio of securities.

Custody: Hedge fund assets are generally held with a custodian, including cash in the fund as well as the actual securities. Custodians may also control flow of capital to meet margin calls.

Of course there will also be a manager of the fund. Assuming you are the one looking to set the fund up, that would be you.

This all sounds a little complicated but there are plenty of administrative services that could put this set-up together for you for around $70,000.

The set up, however, is not the problem. Getting money into the fund is.

Lets say you have a fund set up, you have even managed to get yourself a fund management company properly licensed, you are ready to go as a newly fledged hedge fund manager.

Problem now is that you have to get money into the fund and this is where your problems start.

The continuing fees from your administrators above are payable on an annual basis so your overhead is there. Covering these overheads will be the fees you get from your fund. Fees are the now notorious '2 & 20' meaning that there is a 2% annual fee and 20% of the profits.

Lets say your overheads are £100,000 per annum, you will need at least £5mn into your fund for the annual fee to cover your overhead.

In anyone's language, that is a large chunk of change. To get this you will need to prove to potential investors that you know what you are doing.

Sarah Butcher, editor of eFinancialCareers.com agrees. "You can't just be someone off the street and set up a hedge fund," she says. "Investors want to put their money with someone who has a track record."

When speaking with investors you need to be able to show them your performance and the strategies you use. Gaining this experience is the key.

Going the traditional route you will either train with an investment bank or directly with a hedge fund company. Investment banks are looking for someone with a good degree, maybe in maths or physics, they want someone who is tough minded, a quick learner and someone who has the capacity to make trading decisions based around sometimes complex structures.

Finding your way directly into hedge funds can be hard, they are notoriously secretive. By far the more tradional route is through working as a trader with an investment bank.

So if you have missed the boat as far as becoming a new boy at an investment house are your dreams of becoming a hegde fund trader over?

Not quite. The thing about managing money is that people are looking for performance. If you can show a track record of performance then people will want to invest money with you. You clearly have to have the capacity for enjoying the stock market, so you probably have been buying and selling stocks but you will need to learn more about other market instrument such as futures etc.

You can do this by opening an account at a reputable trading house and downloading their trading system. HF Markets advertise on our site and are very good. They provide direct trader support from Moneycorp Markets which is essential if you want to learn about how its done.

They will provide you trade ideas and the explanations behind them and they will help you develop your portfolio operating on trades similar to what the hedge funds do. If you immerse yourself in this type of trading, making profits on your own portfolio, then you are creating a track record. If you are successful enough then you may get to the point where you believe you have the capacity to start a fund.

We are not saying it is easy, it most certainly is not, but not being a 20 year old with a first from Oxford does not necessarily limit your potential career as a fund manager. It is a long hard slog to get anyone to believe that you are credible but the rewards are there if you get to that stage.

The billionaire boys have spent years perfecting their art in most cases and now have the ear of huge amounts of money, but don't give up becuase you can't work in an investment bank.. remember 'money follows performance'.

If you are serious about becoming a trader, then the Forex markets are an easy place to start. I say 'easy'.. all trading is tough... but the forex market has so many resources online that it is a great place to start. If you are interested in FX trading then this Forex trading aid is a must...

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Yanked By The Shorts

Right now is a great time to be a pessimist about the markets. There are so many factors helping you out it is unbelievable. The oil price, instability in the middle east, jobless figures, housing markets etc etc. But the best comments I have seen from a pessimist is Albert Edwards, strategist at Societe General in London.

“America is leading the way, diving into deep recession as a collapse in consumer confidence induces the great unwind,” he said. Edwards compares the economy with a pyramid scheme that is poised to crash to earth and interest-rate changes can do nothing to avert it.

He thinks Wall Street and the other main markets have a lot further to drop, and will end up 70% below the peaks of last year. That would imply a level of just 500 for the S&P 500, which was at 1,280 on Friday, and 4,500 for the Dow, compared with Friday’s closing level of 11,346.

The FTSE 100, which closed at 5,530 on Friday, will plunge to 3,000, he predicts. The good news is that he expects the oil price, which was above $142 on Friday, to slump to $60 a barrel. The bad news is that he sees this occurring as a result of “deep” recession in the advanced economies and a sharp slowdown in emerging markets.

Crickey. Shorting just 1 contract for $10 a pop on each of these markets would be a nice $100,000 profit if he is right. But is he the only voice in the wilderness?

Not really, the gloom on Wall Street, where the stock market dropped again on Friday, is almost all-pervading. Veteran banking analyst Richard Bove of Ladenburg Thalmann said there was “an absolute unwillingness among clients to talk about anything other than how bad things are”. Investors wanted to know which bank would be the next to blow up or be forced to raise capital. Even though there were hopeful signs of recovery in the sector, albeit from a low base, many in the market had “lost perspective”, he said.

“The last time loan losses were at these levels was 1934,” he added. “I don’t believe we are going back to a 1930s environment with people living in tents.” Bove predicts bank losses will at least stabilise in the coming months.

However, Scott Anderson, senior economist at Wells Fargo, summed up why the markets are so gloomy. The economy is caught between the twin problems of near-recession and sharply rising inflation. “Consumer confidence levels are at their worst since the early 1980s, we have record oil prices and the Fed will have to react to that and start raising rates by the end of the year if they don’t recapitulate soon,” he said. “That would certainly drag out the housing correction and be a further drag on consumers.”

He has scaled back his forecasts for the end of this year and into 2009. “One half [of Wall Street] is worried about growth, and they are scared,” he said. “The other half are worried about inflation, and they are scared too. Sell in May and go away may have been the best strategy this year.”

A drop in the oil price would be the best remedy for jittery markets and a shaky economy, though it could also cause problems. One fear is that a sharp fall in oil and other commodity prices would bring a new wave of troubles for investment banks and hedge funds. As it is, most have been revising up their forecasts for the oil price.

A survey by Reuters shows that analysts expect the price of American crude to average $113 a barrel this year, remaining around that level next year, before increasing to $115 in 2010. Last year the average was $72.

Some analysts, though, are much more aggressive in their forecasts. Fortis, the Belgian-Dutch financial group, sees crude averaging $125.70 this year, $171.50 next year and $224.90 in 2010. In contrast, Royal Bank of Scotland sees a price average of $86 next year.

So what can you do, as an investor, sit around and wait for Armeggeddon?

I was alkig to a client the other day about the state of the markets and he said that he was staying out of the markets for 'the foreseeable future'. This, from a conservative investor, would be a predictable comment and one which could not be argued with, however, this particular client has been a massive bull ove the years, buying what he ca when he can and he has done very well. However, this bullish attitude was always based on the press he had read, or his feelings on a particular sector. He gets extremely excited about 'things moving by large amounts'.

I pointed out, that if these analysts were talking baout the markets going to the moon, he would be a buyer, he did't disagree. Now that that they are talking about a deep decline in the markets should he be a seller? I suggested.

This then became a discussion about shorting the markets using various instruments and my client is now intent on doing just that. I guess it is just a case of whaht perspective you have. In our business, if the markets are falling... short them... if they are going up, go long. A simplistic view, I know, but I was always taught that volatility is our friend. It is when the markets are going sideways that we should worry...

As a follow on to this, this was an article in the Times that showed up some shorts on the market with new rules implemented by the FSA:

THE HEDGE FUNDS THAT ARE SHORTING UK PLC

A NEW RULE came into force last Monday obliging hedge funds to disclose short positions they had taken in companies that were raising money from shareholders, writes Kate Walsh.The rule, announced by the Financial Services Authority on June 13, lifted the lid on the funds that were betting against companies such as HBOS, Bradford & Bingley, Johnston Press and UTV Media.

Going short involves borrowing shares and selling them straight away - in order to buy them back later at a lower price.

The names that came out last Monday included well-known fund managers such as Lansdowne, GLG, Fidelity Investments and Odey Asset Management alongside the not so well-known Oceanwood Global and Steadfast Capital.

These were the main positions disclosed last week and the men behind the funds. Harbinger Capital: 3.29% short on HBOS Harbinger’s Phil Falcone, the so-called Iron Man of the New York hedge-fund world, is renowned for making a fortune out of others’ misery. Early last year he had determined that the American housing market was on the brink of plunging and shorted nearly 60% of his $20 billion (£10 billion) fund on sub-prime-backed bonds. The bet paid off and he subsequently paid himself $1.7 billion for a good year’s work. This year, Falcone bought a stake in The New York Times, where he is calling for a radical shake-up.

Lansdowne Partners: 0.58% short on HBOS Lansdowne partners Peter Davies and Stuart Roden are regarded as among the best in their field. They have worked in tandem for well over a decade and left the asset-management division at Merrill Lynch in 2001 to take over what was then a $2 billion fund; it now has $19 billion under management. Lansdowne has a reputation for being cautious and is known for the thoroughness of its research - for example, it is believed to have taken a short position on Northern Rock some four years before the bank’s crisis began.

Meditor Capital Management: 0.3% short on HBOS Talal Shakerchi, born in Birmingham but of Kurdish descent, is the main force behind Meditor. Even within the hedge-fund community little is known of Shakerchi other than that he is an aggressive fund manager who does very well in bear markets. He left Old Mutual in 1998 to set up Meditor after poaching his entire former team. Last year, Meditor was one of the hedge funds, along with GLG, that was fined by France’s financial watchdog for allegedly misusing information in a convertible bond issue by Vivendi. Meditor said it didn’t breach any regulations.

GLG Partners: 4.14% short on B&B The founders of GLG - a fund with $24 billion under management - are Pierre Lagrange and Noam Gottesman. They are among the highest-paid hedge-fund managers in Britain and their lifestyles reflect it - the pair are leading lights on the London social scene. GLG made headlines this year when its star trader Greg Coffey resigned, forsaking $250m of shares. Industry sources said that Coffey was a “sizeable” trader on the short side although his main focus was emerging markets.

Odey Asset Management: 0.28% short on B&B When Crispin Odey quit Barings in 1991 to launch his own fund-management firm he admitted he did not even know what a hedge fund was. Early backing from the billionaire George Soros and Lord Rothschild quickly turned Odey into one of the first hedge-fund stars.

In 1993 he paid himself a £10m salary but the abrupt turn in the world’s bond markets in February 1994 hit the fledgling fund hard. Last year, Odey’s $4.9 billion fund made a killing on wheat, though he is always on the prowl for distressed assets or, in his words, “the company that has no chance in hell of meeting the market’s expectations”.

Funds that disclosed short positions in Johnston Press were Lone Pine Capital, Trafalgar Asset Managers, Fox Point Capital Management and Valinor Management. Old Mutual Asset Managers revealed it had taken a short position in UTV Media.

Scary stuff for the housing market...interesting opportunities for the short trader....

Oil And The 'Big Rollover'

We picked up an interesting tid bit at marketwatch.com today:

"SAN FRANCISCO (MarketWatch) -- TrimTabs Investment Research, which tracks asset flows into exchange-traded and other funds, said Thursday oil speculation risked tipping the world economy into financial ruin. TrimTabs backed up its hand-wringing by noting the potential impact of these funds in the futures markets: this year, commodity trading advisors and commodity ETF's have received $2 billion a month.

If just half those monthly assets bought oil futures, these would present long positions in 100,000 contracts a month, or about 3% of the open interest in oil futures. "The U.S. is going broke, and the rest of the world is sure to follow," said TrimTabs CEO Charles Biderman. To bring down oil prices, he recommended more disclosure of large oil futures holders. And he suggested oil users and the U.S. government short oil".

That is pretty strong language and fairly kooky suggestions. Short Oil? That would be a brave move but I guess if you want to reduce the price that is one way of going about it...suicidal...but one way. Can you imagine the scenario shoud a sovereign state intervene and try and force the markets to short? It would be like shooting ducks in a barrel as oil traders the world over piled in knowing that, at some stage, government bodies could not longer hold back the tide of millions of speculators. Couldn't happen? Remember Sterling and the ERM and Soros wandering into the sunset with billions of pounds in his pocket? Happy days..

It is far more likley, in our opinion, that some sort of regulatory situation will make speculating more difficult or uneconomical but would that be fair?

You could argue that oil is so important to the world's economy that speculation should not be allowed but how, therfore, would it be priced? You risk the possibility of the price of oil being set by governments and vested interests.. would that be a better situation? I am not so sure about that. We already have OPEC who, at the stroke of a pen could stick a few more million barrels of oil a month into the system and have speculators running for their own short positions in droves.

The real question is; What should be the price of oil? It is a finite commodity so as it become more scarce the price should naturally go up, but are we are that point yet?

I came across an interesting article written in 2000 where the author speculated that we were due for a 'big roll over'. Not actually a point where we would run out of oil, but where demand outsripped supply. Spookily the following chart has proved to be prophetic.

The chart is based around a paper and writings in 1999 by retired Professor of Geology at the University of Oregon, Dr. Walter Youngquist and Dr. R.C Duncan who set out to look at where oil production would be outstripped by demand their various statistics are most vividly presented in the charts above and below.

It is not only oil that is the target of these guys. If you would like to fry your brain have a look at their theory on food and the agri-business...

I wish these guys were on my prop desk.....

Source: http://www.hf-markets.com/

Rumors of my death have been greatly exaggerated

Regulators and doom merchants are shedding a tear today as the HF Global Hedge Fund Index is reported to have risen by 1.4% in May. Add this to the 1.2% in April and the industry is only 0.2% behind the game for 2008.

Easing of some volatility has helped the industry recover and the arb funds have benefited from buyouts moving closer to completion, such as Clear Channel Communications.

``Some people may have prematurely started writing obituaries for the hedge-fund business,'' said Stephen Oxley, managing director of Pacific Alternative Asset Management Co. in London, which has about $10 billion invested in hedge funds. ``I've been around long enough to have heard several times the cry that `this is the end of hedge funds as we know them'.''

Arbitrage funds, those that bet on a difference between prices, got a lift on May 22, when Clear Channel said banks had fully funded the debt portion of its transaction to be bought by firms including Bain Capital LLC and Thomas H. Lee Partners LP. Highfields Capital Management LP and Third Point LLC are among hedge funds that hold Clear Channel shares, according to filings with the U.S. Securities and Exchange Commission.Merger arbitrage funds in May had their best month since October.

Gains in the industry are reported to have been lead, not surprisingly, by the marco funds which can make bets across a wide range of investments from commodities to currencies and interest rates. These funds climbed 11 percent according to HFR data. The Global Hedge Fund Index is based on returns from more than 2,000 funds and is published with a two-day delay, according to HFR's Web site. H.

Clearly there has been some 'deaths in the family' with those funds that made the wrong bets on the mortgage market going the way of the Dodo and there will be, no doubt, some more to come.

``There's still a huge amount of uncertainty out there,'' said Sophia Brickell, an investment specialist at GAM in London, which runs $28 billion in funds of hedge funds, who expected 2008 to be a ``weed-out year'' for hedge funds.

It looks, however, like we are seeing a calmer environment for funds with most of the potentially big problems having already been removed.

``We're seeing a break from the big losses out there and that's a good start,'' said Cambiz Alikhani, who helps manage hedge-fund investments for Iveagh Asset Management, the investment arm of the Guinness family brewing fortune.

So the industry may not be totally strong and healthy, but it looks as if the hedge fund industry has, once again, shown that it is a long term player in the markets and is not going away in a hurry.

Market Exposure Via ETFs

Looking to trade hot markets but wondering how to do it outside of futures? More times than not the hot, and cold, markets will be indicated by exchange-traded funds (ETFs) that follow stocks from a particular country.

51 ETFs now track stock markets from specific countries giving a good indication of growth and decline in the underlying market.

So far this year, equities from Brazil (Ticker: EWZ) are ahead by a sizzling 22.4 percent, Canada is (Ticker: EWC) up by 10.0 percent and Taiwan (Ticker: EWT) has jumped 9.4 percent. Stock markets of underperforming countries include China (Ticker: GXC) which is off by 12.6 percent, South Korea (Ticker: EWY) is down 11.1 percent, and Malaysia (Ticker: EWM) has declined by 9.2 percent.

What can help you to choose the best country ETFs?

Here are a few things to keep in mind:

Country funds are often industry sector bets

With most single country ETFs, you aren’t just betting on a country’s equity market but also on a specific industry sector. For example, 57.80 percent of EWZ’s sector representation is to basic materials and energy. This fund will be acutely affected by any rise or fall in commodity prices.

Country funds carry unique risks

Many countries don’t have large, deep and diverse stock markets like that of the U.S. and other developed nations. It’s common for single country ETFs to own just a handful of stocks and to be overweighted in just the largest of those companies. Another risk factor to consider is geo-political risks that can sometimes come into play. All of this may create unwanted volatility inside your portfolio.

Country funds are more expensive than broadly diversified international funds

According to ETFguide.com, the average annual expense ratio for country ETFs is 0.58 percent compared to just 0.47 percent for broad equity international funds. Can the higher ownership costs of country ETFs be overcome with better performance? There are no definitive answers.

Equally important is a clear understanding of the different investment approaches to equity exposure.

The iShares offered by Barclays Global Investors largely follow MSCI country indexes, which may attempt to represent a certain market, but not necessarily the same exact performance of a particular country’s leading benchmark. In contrast, Northern Trust recently launched a series of single country ETFs that follow established equity benchmarks in various countries.

Where do country ETFs fit into your investment plan?

After you’ve laid the foundation of your portfolio to a diversified mix of funds that cover the major asset classes, single country ETFs can be used as a handy tool.

For example, if you feel that Canadian stocks are the place to be over the next few years, you can overlay EWC onto your current portfolio positions. In other words, you can overweight countries you believe offer the best opportunities.

If you’re too timid to invest in single country ETFs a better approach for most investors is to just go with a broadly diversified international fund. Instead of trying to guess which areas are the best, you can leave the country picks up to someone else.

More Information at www.etfguide.com