This Week's Commodity Action is a Reversal of a Reversal

The bipolar market continues its crazy action - this week, once again, commodities are out of favor, after being in favor last week, after being out of favor 2 weeks ago, after being in favor the week before. I have cut back my exposure last week on the rally in all things except fertilizer, but obviously my bets against the "early cycle, everything will be fine in 6 months" financials, and real estate is working against me this week (after working great last week, after not working the week before, after working great the week before). Again a carbon copy of 2 weeks ago, but I have a lot more cash and less exposure to everything this week. I wrote a week ago I was confused by this market but on further analysis, I'll say the market is confused, not me. When people completely change sector allocations 180 degrees on a weekly basis, that is the market being confused.

Do I really want to buy gold or silver or coal or oil even the crops here? Not really (ok maybe I'm tempted with the crops...). When a trend cannot last for more than 3-5 days it really doesn't fit my investing profile. Eventually this correction will pass and a healthy back and fill of a very long term commodity bull market will return [Alert: Commodities are Dead], but as I wrote in my weekly summary I cut back across the board in everything just for the exact reason I don't want to be standing in front of a locomotive of hedge fund locusts either (a) deleveraging or (b) changing their focus 180 degrees from commodities to financials and vice versa on a weekly basis.

Last point is the dollar - it is very oversold but what I can see the herd saying is "look the US is way ahead of the curve - our central bank responds to the whims and needs of the corporations far better than those foreign central banks who actually care about the masses and inflation. Eventually those foreign countries economies will weaken and in comparison the US is going to look great!"

I call this theory the "race to the bottom" i.e. the U.S. won't look great on it's own merits but simply our horrid situation will look relatively better once foreign (esp W Europe) economies begin to weaken. And hence our dollar can rally. And hence we can cheer. Although the bulls love to have it both ways don't they? When the dollar is weak it's GREAT! because that's great for exports. When the dollar strengthens it's GREAT! because that kills off commodities and the specter of inflation. So either way, it's GREAT! This is why in the bull case there is no way to lose - no matter what happens it can be spun as GREAT!

Anyhow technically we are right back to last week's inflection point of the 50 day moving average - if we make a move to say S&P 1360+ on good volume, I'll toss aside most of the short exposure and join everyone in believing it's GREAT!



Remember, perception is reality. As long as the crowd believes in 2nd half recovery it does NOT matter what the reality is. We saw that last September/October. Everyone said subprime is contained, this is a kitchen sink quarter, there is no slowdown coming etc etc. The market went to all time highs (ex NASDAQ). Were "they" correct? No. But it didn't matter - if you bet against the herd you lost a lot of money. Even if you were intellectually correct. This is why you cannot be dogmatic. I am very down on the US consumer and hence domestic profits through 2008. I am very worried about the earnings season coming up. But if the herd wants to take this market up, I need to erase all those thoughts and try to squeeze out some return by joining the Kool Aid party. And then trying to jump back out when the keg is empty. That's what I did in Sept-Oct 2007 and if conditions repeat, I'll attempt to do it again. But, the stocks that would rally in this line of thinking probably are not the type I own in large scale, so always a challenge. But again - we are not there yet...

But as I wrote many times, these rebate checks coming will be clung to as a reason for a consumer recovery and the market should materially rally at some point in the latter half of the year, if for nothing else liquidity avalanche of paper money will inflate every asset class, including equities (at the cost of inflation). Remember, 8% equity returns in a 10% inflation environment is not a winner for anyone, except for those who ignore inflation or who tell us its 3-4%. I think this is the path we are embarking on over the next few years.