Replies to post #4961 on The Rising Influence of Rising Affluence

[DewDiligence]

More re potential fiscal/monetary stimulation of China’s economy…

http://online.wsj.com/article/SB10001424052702304203604577397613434322778.html

The instinct for the government will be to push the stimulus button, encouraging the banks to lend more. That's always worked in the past. This time it might not be so straightforward.

China's monetary policy makers have already been working hard to ease liquidity conditions. One week repo rates have come down to 3.2% this week, from highs above 5% at the end of February—that makes it easier for banks to lend. Yet new loans in April totaled 681 billion yuan ($107 billion), down from 1,010 billion yuan in March.

This points to the depressing conclusion that despite easing credit conditions, bank customers do not want to borrow.

China's government is not out of options. The fiscal position remains conservative, with the government running a surplus year to date. Low public debt mean there is scope to turn that around, with higher government spending buoying demand.

Falling inflation—with the consumer price index edging down to 3.4% year-to-year in April from 3.6% in March—also means room to do more on the monetary front.

Given ample liquidity in the system already, a cut in the reserve requirement ratio—freeing up still more funds to lend—would be a largely symbolic show of support. If April's gloom continues further into the second quarter, a cut in the interest rate to buoy loan demand could be on the agenda.

[DewDiligence]

A Rare Speed Bump in Commodities’ Long Run

[The plateau in the bull market for commodities is undeniable, but the question is whether this is temporary or it indicates a long-term flattish or bear market. My vote is firmly on the former scenario; other viewpoints are welcome.]

http://online.wsj.com/article/SB10001424052702303505504577401901780204374.html

›May 14, 2012
By LIAM PLEVEN

Commodities fell to nearly two-year lows last week, measured by a widely used benchmark, prompting investors to ponder whether the massive rally that began in 1999 may be faltering.

China is cooling down at the same time the U.S. is struggling to heat up, clouding the outlook for the world's two biggest consumers. And producers of some raw materials have ramped up supplies enough to create at least temporary gluts, particularly if appetites falter.

After a strong start to the year, prices for crude oil and gold have slumped by double-digits in percentage terms from their 2012 highs, and copper—an often-cited barometer of economic activity—also has fallen 8% from a peak for the year in February. [Iron-ore prices are down too, but are holding up relatively well under the circumstances (#msg-75223487, #msg-75503781).]

The commodities market has become hyper-attuned to moves in the world economy [duh]. Broad worries about the global economy, especially Europe's debt woes, also often override fundamental forces of supply and demand to drive prices.

That flummoxes even experienced traders, adding risk to a market that's increasingly popular with ordinary investors, but volatile.

"Any whiff of a slowdown, and the market sells off," said John Bailey, chief executive of Spruce Private Investors LLC, a Stamford, Conn., firm that has $3 billion under advisement and invests with nine commodity-focused hedge funds.

From the outset, the rally that began in 1999 was fueled by two diverging forces: Rapid growth in emerging markets sparked fresh demand, particularly from China, which joined the World Trade Organization in 2001. [These brisk tailwinds remain in effect, IMO, which is the premise of this message board.] That move opened up hundreds of billions of dollars of trade with China. At the same time, supplies were limited as years of low prices had made producers reluctant to expand their operations.

The situation has since changed. Production has increased, largely from new methods of drilling for natural gas. Crude oil output has risen 16% since 1999, while copper is up 28% and aluminum 94%, according to U.S. figures.

The changes to the supply-and-demand picture, and the recent declines in prices, have ignited a debate over whether the so-called super-cycle in commodities is over—or, at least, is heading for the back-end of the cycle. Raw-materials markets are notorious for going through such periods of scarcity and then glut, sending prices on wild rides.

"Our feeling is that this commodity super-cycle has ended, and ended really in 2008," said Michael Shaoul, chairman of Marketfield Asset Management, in New York, which has $1.9 billion assets under management. The firm is betting that precious-metals prices will fall.

While analysts aren't predicting a prolonged decline in prices from here anytime soon, some say the commodities market may have entered a slower-growth phase, during which periods of falling prices will regularly interrupt what were once routine gains.

"It's going to be a flattish year for commodities," said Mark Keller, chief executive of Confluence Investment Management LLC, a St. Louis-based firm that manages about $1.4 billion, largely for high net-worth individuals. Mr. Keller's firm has reduced its investment in industrial commodities and increased its exposure to gold. "I think we'll hit a bottom at some point this year, and start rallying," he said.

For more than a decade, investing in commodities was practically a sure thing. Prices rose in nine of the 12 years starting in 1999. Even down years had explanations, such as the Sept. 11 attacks in 2001 and the global financial crisis in 2008.

On Friday, the Dow Jones-UBS Commodity Index, which tracks futures contracts for 20 basic goods, fell 1% to the lowest level since September 2010. U.S. crude oil, gold and cotton—all components of the index—helped lead the way down, as each hit fresh lows for 2012. The index is down 4% this year after a 13% drop last year, putting it on track for the first consecutive declines since 1997 and 1998.

To be sure, commodity prices remain high in historical terms—the Dow Jones-UBS Commodity Index has risen 73.2% since the end of 1998. And continued growth in China and other developing markets will keep them supported.

Also, prices for key goods can spike with any supply problems, such as bad weather. The cost of finding more rich veins of many metals is rising.

"The fundamentals for commodities are positive," said Mr. Bailey. "It's these macro issues that are really dominating short-term thinking."

Still, the recent swoon has had a number of casualties. Several commodity-focused funds have struggled, seen significant redemptions, or closed in the past year. Fortress Commodities Fund, down 12.6% for the year through April, is closing this month, according to a filing.

The HFRX Commodity Index of commodity hedge funds is up 0.07% this year through March, after falling 10% last year, and investors are not expecting a rapid revival.

Rising supplies can have a significant impact on prices. Natural-gas prices have slumped thanks to a ramp-up in production. Increases in mine output have weighed on gold, putting at risk the metal's streak of 11 straight years of gains.

U.S. farmers are expected to plant more acres to corn than in any year since 1937, feeding expectations that a large crop could refill a thin bin.

"The supply story has faded," said Douglas Porter, deputy chief economist at Bank of Montreal . Demand, he said, is "the only significant driver from here."

That pillar of the commodity rally also looks shakier, as China and other emerging markets try to manage a slowdown in growth.

Northern Trust, which had $716.5 billion in assets under management at the end of March, is "neutral" on commodities, absent a move by China to stimulate its economy, according to Jim McDonald, the Chicago-based firm's chief investment officer.

Europe's problems compound the concern that a quick rebound is unlikely. "I think commodities are done for this year," says Peter Rup, chief investment officer of New York-based Artemis Wealth Advisors LLC.‹

[DewDiligence]

China Won't End U.S. Lumber Party

[Long term, China’s demand for US wood and wood products is bullish for PCL (#msg-70416781), but the current slowdown in wood exports to China (relative to 2011) has hurt the share price of PCL and other timber companies. This article says not to worry. Even in the short term, because the US housing market is showing signs of renewed health (#msg-75849750, #msg-72535180).]

http://online.wsj.com/article/SB10001424052702303395604577432601348890484.html

›May 29, 2012, 5:36 p.m. ET
By JUSTIN LAHART

Two forces are pulling America's timber industry in opposite directions. One is the nascent recovery in the U.S. housing market. The other is a drop in Chinese demand.

For the moment, the drop in Chinese demand is winning. But the moment may not last.

China has, until very recently, had an insatiable appetite for American wood. A booming construction industry needed to be fed, and the combination of export tariffs Russia slapped on in 2010 and a decline in U.S. timber prices following the housing bust made American logs and lumber a bargain.

U.S. exports of timber and saw-mill products to China came to $1.8 billion last year, from $1.1 billion in 2010 and $511 million in 2009, according to the Commerce Department. But this year, that demand is getting kicked away.

In the first quarter, these wood exports fell 16%. Figures for later months aren't yet available, but it appears the situation has deteriorated. In April, the Port of Tacoma—a major departure point for U.S. timber headed to China—saw 30,452 tons of logs leave its docks.

That was a third of the 92,270 tons shipped in April 2011.

Considering what's happening in China, it is understandable that investors haven't been all that enthusiastic about timber producers, despite the uptick in housing. Shares of timber real-estate investment trusts like Plum Creek and Potlatch have seen the gains they made early in the year whittled away. Similarly, forest-products REIT Weyerhaeuser has seen its stock price round-trip.

Given the speed with which China's economic growth seems to be slowing, one can't help but worry timber-company shares could be in for a rough time in the months ahead.

Beyond trade figures, data ranging from manufacturing activity to power output suggest China's situation is deteriorating, and executives at U.S. companies that do business in the country are showing signs of alarm.

But the [U.S.] housing market, if it continues to improve, could fill any hole, and then some, that China leaves. So far this year, housing starts have been running at an annual pace of about 714,000 versus 609,000 last year. Back of the envelope, that would be enough to make up for a halving in Chinese demand.

Indeed, to judge by what is happening to lumber prices, what's going on in the U.S. housing market is taking precedence over what is happening in China.

The latest weekly reading from lumber-industry newsletter Random Lengths shows that lumber prices are up 27% so far this year. Indeed, Chinese timber demand may have fallen not just because China's economy is slowing, but because U.S. wood is no longer the bargain that it once was.

If that is right, it may be framing up to be a better year for the timber business.‹