Commodity Crash Near 100% Certainty - CLSA

􀂉 Commodity Crash Near 100% Certainty – GET VERY VERY LONG CHINA + PAN-ASIA MANUFACTURING/TECH SHARES- “From Stagflation to Disinflation in a Week”
􀂉 Last Week’s Street Brawl – Jets vs Sharks
􀂉 ‘Inflate or die’ is crushing the ‘End of the Worlders’…some global stock picks & ruminations
Commodity Crash Near 100% Certainty – GET VERY VERY LONG CHINA + PAN-ASIA MANUFACTURING/TECH SHARES
􀂉 Summary: A near perfect storm of a rolling commodity market, hoarding suppliers, slowing demand, and rapacious US regulators with a slew of proposed regulation who will stop at nothing to end the commodity “speculation” which has stopped traditional hedgers in those commodities from being able to hedge their positions. In formal chart terms, the global commodity complex bubble officially popped last week. This bubble had been steadily inflating since 2002 (since the last peak in the USD) and finally popped from Tuesday to Friday with oil (CL1) attempting a last run at 132 on Thursday evening (HK time) and then coming off to close at 127. This is a monumental WATERSHED occurrence and marks a major shift in market mentality from inflationary/stagflationary to a period of disinflation at the margin for the foreseeable future. My best hunch is we get a 3-6 month period of correcting commodity markets which will be very very very bullish for global non-commodity related equities. While this occurs, global GDP #s will be upgraded by economists while much weaker commodity prices will dampen rate hike expectations until latter 2H08 or even early 2009. THE MOST IMPORTANT THING TO APPRECIATE HERE IS THAT CHINA HAS THE MOST TO GAIN IN ASIA FROM A COMMODITY CRASH. China has Asia’s biggest inflation problem (outside of Vietnam, which is also a LONG here too), is still the world’s manufacturer (albeit a bit less cost competitive than they were a few years ago) and its equity market has underperformed the region since October. HSCEI is -33% from end-Oct, HSI -22%, HSCCI -25%, and SHCOMP -43%.
􀂉 Top longs: GET VERY LONG downstream oil players including refiners (rapidly widening crack spreads) and Petrochina (857 HK), Sinopec (386 HK), Sinopec Shang Pet (338 HK), LONG SK Energy (096770 KS), S-Oil (010950 KS), (LONG AIRLINES: Cathay (293 HK), Air China (753 HK), China Eastern (670 HK), China Southern (1055 HK), HK Exchange (388 HK)….THE MOST LEVERED STOCK INTO RECOVERING CHINESE CAPITAL MARKETS + REVIVED IPO PIPELINE, IPPs WILL SEE A HUGE SHORT SQUEEZE - LONG (Datang – 991 HK, Huaneng - 902 HK, Huadian - 1071 HK), MANY SHORTS IN EXPRESSWAYS – LONG Shenzhen Expressway (548 HK), Jiangsu Expressway (177 HK), Zhejiang Expressway (576 HK), and Beijing Capital Airport (694 HK). Also get LONG CHINESE BANKS AND INSURERS (CCB-939 HK, China Life-2628 HK, Bank of China-3988 HK, ICBC-1398 HK) as falling commodities means it is much more likely that we will see austerity measures being relaxed in early 2H08. CHINESE PROPERTY NAMES (AND BANKS) THE BEST PLAY ON AUSTERITY RELAXATION: COLI (688 HK) the biggest but already +40% from lows, SHKP (16 HK) is only +16% from its lows (5% discount to NAV) and -28% from highs due to their family issues – I’m a buyer here…..and of course I am a buyer of Midland (1200 HK) which will challenge its previous HK$!5 high (+96%) in the next 12-months. Go LONG the steel and cement names: Angang New Steel (347 HK), Maanshan (323 HK), and Anhui Conch (914 HK). CCC (1800 HK) goes from being a margin squeeze concern to a LONG again. Of course, the China consumption story remains very bullish and should be accumulated: Paul McKenzie says his favorite PA pick would be Stella (1836 HK), HK$1.4bn mcap largest non-athletic footwar manufacturer in the world and said to have and excellent retail rollout planned with prospects for a massive stock-rerating. Expect consumption plays to re-rate to 30x+ P/Es again. I noticed that China Mengniu (2319 HK) did not sell off at all last week on the price fix story, LONG this stock, LONG MOST REGIONAL MANUFACTURERS (ie. all the auto stocks-esp Japanese autos, including US & European autos too) ARE LONGS, ESPECIALLY THE TECH SECTOR WHICH PARTICULARLY BENEFITS FROM A DISINFLATIONARY ENVIRONMENT.
􀂉 Top shorts: SHORT upstream oil (CNOOC- 883 HK, 135 HK, STO AU, WPL AU, BP/ LN, XON US, CVX US, COP US). SHORT ALMOST ALL UPSTREAM COMMODITY PLAYS: short Shenhua (1088 HK)…its already down -39% so not a screaming short, SHORT China Coal (1898 HK) and Yanzhou Coal (1171 HK), short Chalco (2600 HK), SHORT CPO PLAYS: Golden Agri (GGR SP) since its impossible to short Malaysia (IOI/KLK) or Indonesia. Japan, Korea, and Thailand gain from falling oil prices (they are the biggest Asian importers as % GDP) but Thailand, Malaysia, and Indo will get hit by falling soft commodities. DTAC SP is a short as they are expanding upcountry and rice prices are collapsing.
Short upstream oil, short all commodity upsteam plays, CPO, short Indo, Thailand, Malaysia
􀂉 From stagflation to disinflation in a week: As I’ve been saying since going to the US in April, it was becoming apparent that the commodity complex was turning into a bubble. In exhibit 1 below, since 4Q07 inflation expectations (the white line) has been holding steady, while the Fed Funds and USD fell. Meanwhile, the CRY index did another 20% move. The initial pullback in the CRY should be 354-370 (-12% to 16%) from current 422 where the -50-62% fib retracement support should be. HOWEVER, AND THIS IS A BIG HOWEVER I don’t think we hold there. If anything we fly straight through due to all the new regulation the US politicians are preparing (see the NY Times & Bloomberg articles on the topic from this weekend attached). So, if I am correct then the CRY retraces -50-62% of its move since 2001 and my CRY targets become 282-312 or -26% to -33%. If we get several new draconian regulations, then we could get over shoot to the 185-284 trading range of 1982-2002. I don’t think we go there because real rates are still negative in the US, China, HK, Singapore, and low everywhere else. Still very growth and asset price supportive. The USD is solid and has made its lows for this cycle. As Gartman says in his Friday note, the Fed St. Louis adjusted monetary base is barely growing 1% yoy. SO, NOT ONLY IS STAGFLATION A MODERN MYTH, BUT THE OTHER FLIPSIDE MYTH IS THAT THE US IS NOT PRINTING MONEY LIKE THERE’S NO TOMORROW. DE-LEVERAGING IS USD BULLISH (ie. reducing shorts on the USD).
􀂉 New CFTC regulations – what’s coming up (…its WAY more than you previously thought): Please see attached in this e-mail/B’berg two articles – BOTH MUST-READS!!!! One is a collection of this weekend’s stories on upcoming CFTC regulations and ongoing investigations. Also, it doesn’t appear that these are ‘witch-hunts’ but legitimate investigations into ‘exploiting loopholes’, overstepping trading limits by going overseas to London, the Consumer-First Energy Act of 2008 proposal, increasing margin requirements, the Michael Masters testimony from last week, emending the ERISA Act, imposing taxes to the commodities market, rising incidences of inquiries into trading practises (ie. price gaps between futures and spot prices for cotton and oil). Oops…basically, the US government has no interest in allowing investors hold inventory and/or participating in the price rises of finite necessary resources. Its MUCH more effective to regulate the money out of commodities and back into equities where the capital creates jobs, reduces capital costs, adds to GDP, and BRINGS IN VOTES.
Much more new CFTC regulation than many realize…
Last Week’s Street Brawl – Jets vs Sharks
􀂉 The way markets traded last week was like a full-on street brawl. The bulls were equally entrenched as the bears and an all-out scrap ensued. It got so nasty that I was getting hate-mail from both long-time friends & clients after my Sunday nite missive on Oil prices about to fall and time to get into the “short oil” trade. Guess when its your own money on the line its each man or woman to themselves. Going forward, its now time to get into the “short commodity” trade which is very equity supportive outside the upstream commodity complex.
‘Inflate or die’ is crushing the ‘End of the Worlders’ …some global stock picks & ruminations
􀂉 My internal e-mail to CLSA Friday nite: its counterintuitive. USD has been in a 5.5yr bear market so u could argue that FX started pricing in US crisis 5.5yrs in advance. also, US/China/Sing real rates negative - very asset price supportive & right now the cheaping capital available to the most people in the history of the human race (since Bric really just happend). commods in a bubble which pop when USD starts strengthening (ie. now).
􀂉 reason why equities are melting up is that they are an inflation hedge. global money has to get out of long end of curve and has been trying to hedge via commods, but commods too narrow a market so a bubble builds until Asia gov'ts threaten to take off oil subsidies (in FT last week). so much spec/investment money in commod futures that US congress is considering limiting access to just pros in that industry (still being considered). so u get the ethanol policies reversed and commod future access get done right when USD is reversing and commods crash.
􀂉 that's good cos a tidal wave of money switching out of bonds his equities over the coming months into a slowing US economy (tho US + Europe slowing slower than the mtks expect).
􀂉 read George Soros' "The Alchemy of Finance" and "Market Wizards" by Jack Schwager. also learn to read charts: John Murphy "Technical Analysis of Financial Markets" and "Intermarket Analyis: Profiting from Global Market Relationships". next week is going to be huge.
􀂉 Oil: not only is it breaking down, the whole commodity complex is rolling over. Rice, which supposedly a few weeks ago was scarce, is COLLAPSING. The whole stagflation theory is a MODERN MYTH. Quickly being discredited as are most bubbles, thru run for the door selling with extreme prejudice.
􀂉 Commodities: what I find interesting is that they are falling under their own weight. Without really much USD/DXY strength.
􀂉 Gold: since there is a lot of gold bugs at CLSA my call for gold is its breaks 850, then breaks 800, and then next stop is 650. Do I have your attention yet. Parabolic commods was largely a USD phenomenon. Its over kids, else get squashed like a bug "cos the times they are and changing....". QED. T. Possible policies: Such scenarios could include (as suggest by TGL) mandating “for liquidation only” in futures, limits to access to the derivatives markets, new laws prohibiting new derivatives usage, the reversal of the (stupid) ethanol policies, etc. Such heavy policies would force global money to seek their inflation hedges outside of the commodities futures markets (already thinly traded versus FX, bonds, and equities). So, if you are rotating your portfolio out of bond markets and can’t hold cash because inflation is rising, YOUR ONLY CHOICE IS TO ROTATE INTO EQUITIES. GUESS WHAT? THE GLOBAL EQUITY MARKET MELT-UP CONTINUES!
􀂉 Global stock picks & ruminations: I reiterate from my previous “short oil AI”: We recommend LONG downstream Japan oil names: 5019 JP, 5001 JP, short upstream 1605 JP, and 1662 JP, long airlines 9205 JP and 9202 JP, long DUG US (Ultrashort Oil & Gas ETF), regional/global airlines (293 HK, SIA SP, 670 HK, 1055 HK, 753 HK, 003490 KS – KOREAN AIR THE MOST UNHEDGED ON FUEL AND TRADES ON 0.8X PBV, THEY HAVE A LOT OF USD DEBT, OIL DOWN=KOREA DEFICIT IMPROVES, KRW UP=BETTER BALANCE SHEET, QAN AU, BAY LN, DAL US, LUV US, CAL US), regional/global auto plays – SEE THE ATTACHED FRONT PAGE BARRRON’S ARTICLE FROM JUNE 2 (TODAY) TITLED “BUY GM” - (BMW GR, MG/A CN, DAI GR, 7203 JP, 7267 JP, 7201 JP, 7261 JP, 7269 JP, 7272 JP, 000270 KS, 005380 KS…tho Korea names have run 30%+ past 3M, 1114 HK, 203 HK…China plays already benefit from subsidised oil), tire or rubber plays (ML FP, GT US, CTB US, 5105 JP, 000240 KS, 073240 KS, 5108 JP); in general go LONG futures in Japan / Korea / Thailand as they are the most energy dependent countries in Asia.
􀂉 Global Implications of commodity crash: If this happens, then the ECB will be much more will to cut interest rates (since they have remained much more hawkish than the US). Depending on how fast this chain reaction occurs, I would start taking a look at some of the more toxic large cap global brand companies in Europe: yes, I swear to god its time to start kicking the tires on UBSN VX and RBS LN. UBS already put in its low at 21.52 on March 17th, RBS is quickly approaching theirs. AUD/USD are a short here and Oz now looks to be heading for a down credit cycle and rapidly accelerating likelihood of a property/asset quality crisis (see Daniel Tabbush’ Aussie banks sector note out this weekend).