RCM Comment: The little old men are hard at work...

It is Sunday, late afternoon, as I type these words. I have spent the day on the beach, surfing and taking in the beauty of it all. At one point I found myself resting on my board about 100 yards offshore right past the break on the ocean side of the sand bar. Much to my chagrin, I was snapped out of my Zen-like state by the appearance of angular dorsal and tail fins. Judging from the distance between tail and dorsal I figure a 6-7ft predator arrived to keep me company. While I appreciated his attempt at camaraderie I somehow felt it was time to get dry.


While lying on the beach catching my breath the events of the week unfolded for me in slow motion. There is no doubt that the little old men (Paulson, Bernanke & Cox) were hard at work behind the curtain. In fact, they have brazenly torn down the curtain and are pulling the strings ever more frantically as they try to arrest the rapid unraveling of the financial system. Will their efforts be rewarded? Will the financial system now right itself? No one knows the answers to these questions. Only time will tell, but I can offer one silver lining to last week's grotesque events: The next leg of the commodities bull market has begun.


Perhaps you do not wish to simply take my word for the impending rise in commodity prices and would feel better coming to your own conclusions. Ok, no offence taken, the following will be a brief review of some of the events that have recently occurred. You be the judge:


Paulson: Spearheading a massive government bailout of the banking system. Announced on Thursday last week, Paulson will be stiff arming Congress into creating a RTC-like receptacle to buy the hundreds of billions of dollars of bad debt on the books of US banks. In Ffinance 101 we call this monetizing the debt.

-The plan necessitates raising the ceiling for the national debt and spends as much money as the combined annual budgets of the Departments of Defense, Education and Health and Human Services. Paulson is asking for the power to hire asset managers and award contracts to private companies...

-And he wants to do all this with impunity, "Sec. 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

Bernanke: Helicopter Ben, as he is known, continued to 'drop cash out of helicopters' last week with a $50 billion repo on Thursday. Money supply, as judged by M3, continues to grow at an alarming clip. Economics 101: Increasing supply of an asset without subsequent increase in demand leads to declining value of said asset. Applied to the US$ this simple supply and demand equation will give the investing public an appetite for an asset that cannot be created out of thin air with some paper, ink and a printing press. (Am I leading the witness? Sorry.)

Cox: The SEC delivered a cease and desist order to the short sellers on Thursday. While this action does not immediately correlate to the buying of commodities I list it for two reasons. 1) The manipulation is too egregious to ignore. Cox made the announcement on the most volatile day of the month; Thursday of options expiration week and in this case triple witching (Stocks, Futures, Indices). As if that wasn't enough manipulation, Cox felt it necessary to completely disrupt the option market makers by including them in the list of short sellers denied their rights. Late Friday, after the damage had been done, Cox quietly announced he will reconsider the option short seller rule. Now we are left with only two choices to believe. Cox is either really dumb and didn't know how the option rule would effect the market, or he is manipulative in a fascist sort of way knowing full well the effect and having every intention of "reconsidering" after the shorts had been fully routed. 2) A major source of income for the hedge fund world has come from shorts this year. Left with no ability to make money in this arena now, a large source of funds will need another place to congregate. We believe it will find the commodity space.

-In a separate manipulation: The SEC is going to let companies buy back their own stock in the last 30 minutes of trading. This action has been illegal until now because of the obvious temptation for companies to "paint the tape".

Commodities withstood a severe shake out over the last 9 weeks, why?

-US$ rally of 14%+ due in part or in whole to a massive repatriation of money. $s invested in Euros, Yen, Reals, Rubles, and Yuan experienced destruction in value as the corresponding stock markets collapsed. Russia and China have seen their markets drop more than 50% while even the European averages have declined more than 30%. A lot the US money invested overseas came roaring home in a tsunami of repatriation. The US$ rally is now over. The Paulson plan, along with plans coming out of Russia and China, should stabilize markets and of course remember Econ. 101: too much supply of US$ will reduce their value.

-Fear of world wide economic depression and deflation. Those fears are over for the time being as governments all around the world are developing plans to reflate. (What investments do well in an inflationary environment?)


Technical analysis: Commodities are still in long term up trends. In fact, many have found support in recent weeks at or near their long term uptrend lines. This sector was very overbought and needed to shake out the weak holders as well as build a base to launch the next leg up. Based on our work here at RCM we feel this correction process is near its completion and the soil is ready to plant for the next bumper crop. (Too much imagery? Maybe, but I'm having fun here so indulge me.)