gsg_stock discussion

May 2006 Edition of Market Observations from ContraryInvestor.com

Here's the link for the May 2006 edition of Market Observations from ContraryInvestor.com: http://www.contraryinvestor.com/mo.htm

Would like you to read the extracted paragraph below, stay invested in commodities related assets for the long term:

Before leaving this subject, just a few last thoughts. It's absolutely clear in our minds that large institutional money is not heavily invested in these hard asset classes in a very meaningful manner. For now, the interest in commodity ETF's, the run up in the stocks that represent the hard asset trading exchanges such as CME and ICE, and the growing volume of hard asset derivatives, as you can clearly see above, are showing us that institutional demand for commodity oriented asset classes is growing at the margin, not diminishing. And from our perch there is still a very long way to go before broader institutional demand is sated. Just think back on the continued allocation into tech issues at the institutional level that started in the early to mid 1990's and just how long that took to fully play out over the entire cycle period of the prior decade. Will there be commodity class price corrections ahead? Sure, and some may be more than violent. But at least for now, we'd continue to view these as buying opportunities as we believe the Fed and the central bankers are trapped. They are trapped in a set of circumstances they themselves spawned. Unwilling to allow prior period misallocations of capital (stock and housing bubble) to reconcile themselves, they have implicitly committed to facilitating ever larger amounts of liquidity support to the financial markets and theoretically real economy. But it seems to us that they have worked themselves into a corner now being that the harder they push on the liquidity accelerator, the harder they will have to yet push in the future to offset the real world inflationary costs of commodity prices their hedge, prop desk and momentum trading former friends are now supporting with the very liquidity the Fed and their central banking brethren create in the first place. The veritable Catch-22? As the data above tell us, this liquidity is now squarely finding its way into the commodity complex and that process is accelerating. Can it continue on forever? Of course not. We continue to believe that US consumers will slow ahead, especially given our viewpoint that US household financial well being is inversely correlated with commodity prices, but anticipate that the Fed will ultimately panic and up the liquidity creation ante even further as they have in the past out of fear as consumers slow, again, playing right into the expectant hands of the financial sector who has been conditioned time and again to expect this very response from the FOMC. Who is the best friend of the current commodity bull, who is for now the longer term supporter of this trend, and who in public refuses to acknowledge what is plain for the entire planet to see in terms of forward inflationary pressures? The Fed and the US credit markets. Who else? Until this changes, stay long assets that benefit from inflationary trends, particularly those assets that have not already been significantly levered. Some day the Fed will change tactics. Some day they will realize the speculative financial community has played them for the fool. But we're not there yet. For now, the hedge, prop desk and momentum trading crowd are betraying their liquidity benefactors out of natural self interest as they pile into hard assets and hard asset related investments. We can only believe the Fed and their global central banking brethren are watching this in horror. Paralyzed and reverting to the only trick left in their bag - liquidity facilitation. But after all, the hedge, prop desk and momentum traders are only doing what the Fed has taught them to do for literally years now - put the Fed into a box of being forced to create and facilitate ever larger amounts of liquidity and credit. The financial sector servant of old has now firmly assumed the role of master. You better believe it's different this time.

posted by gsg @ 8:47 PM