Is This The Bottom?

Almost every day, I read some one calling the bottom of some commodities market; even Greenspan weight-in with his opinion and called the bottom…I wonder which bottom he spotted?

Potash, oil & many other commodities are victims of the liquidity boom, grandiose projections & hubristic managements. Artificial high prices spurred both supply & demand response; before the liquidity bubble & idiotic corn based ethanol legislation in the U.S., China had almost no potash production…today China is near self-sufficient in potash, so where are the big marginal buyers? The solution is not more supply management from the cartel, but let market be the arbiter of price to thwart new mine development in Africa that can be very profitable at sub $200 a tonne.

Unfortunately in this liquidity supper bubble world, every day we have prognosticators calling the bottom of some commodities and predicting the upswing are just around the corner. The sad truth is with so much liquidity out there courtesy of central banks around the world, there are plenty of investors willing to catch the falling knives, which enable trouble companies to refinance their debt and raise new capital. In a normal world, those trouble firms would have to go through the bankruptcy process, debt holders will control the assets…some assets will be sold to healthier firms & others will emerge from bankruptcy with low debt and new equity holders. The trouble is central banks mitigate price discovery by flooding the markets with liquidities; debts that normally would have been written down just been extended to some future dates and the mountain of debt around the world makes Himalayas looks like a molehill. This is precisely why there are not a lot of M & A in the commodities world; assets prices are just too expensive!

Potash Corporation of Saskatchewan is a great example of that grand delusion…we often confuse good fortune with brilliance & charisma with intellect. Potash Corp. for years was led by the flamboyant and charismatic Bill Doyle. Mr. Doyle became CEO in 1999 shortly before the dot.com bust & the tragic event of September 11th which ushered in the great Greenspan liquidity bubble. Along with the inflated housing prices, the Greenspan easy money policy helped turbo-charged the so-called commodities super cycle. Along with the idiotic corn based ethanol legislation in the U.S. which propelled corn prices to insane level thus elevated the potash price to eye-popping over $900 a tonne. With artificial high prices spurred both supply & demand response in the potash market. During that crazy period, many researches have helped to minimize the use of fertilizer and as a matter of fact concluded that over fertilization as a major environmental problem to coastal water. To make matter worst, high prices spurred a new gold rush to develop or expand potash mines around the world…fueled by easy money & grandiose projections, there are just too much capacity out there and there are even more coming to production in the near future. Instead of allowing price to thwart new capacity, the hubristic Mr. Doyle & his cartel cohorts chose to cut their own capacity to support price; all they are doing are supporting the development of new capacities around the world. Those new capacities serve as limiter to price going forward, as price move higher more production will cap further increases.

The same can be said about the oil market, oil price has no fundamental justification going over $70 a barrel before the financial crisis…because of the liquidity bubble which fueled a speculative frenzy which drove oil to insane level. Wall Street & Bay Street were more than happy to provide some grandiose price forecasts and fairy-tale assumptions & justifications. Today, you cannot tune-in to any business channels or visit any business sites on line without some so-called experts calling the bottom of some commodities prices. In the case of oil, it is never bullish when the term structure of the futures curve is in contango; which encourages producers to forward hedge and speculators to bid for storage and sell forward…that process if the market is balance should turn the term structure to backwardation, the fact is the futures curve has been in contango for a long time indicates that market is not balance and fundamentally bearish, (despite the low oil prices and nuclear power plants shut down, Japan had the lowest oil import last year since the late 80’s) but liquidity often trumps fundament...in the oil market, you will have nervy short and itchy long when price is near $40 and the reverse when price is near $50, you’ll have nervy long & itchy short. This is a by-product of abundant of liquidity chasing beta trade for a quick return. The same can be applied to the currency market; they are all range bound because central banks has mitigated price discovery.

I often marvel at those so called experts, whether they are the executives from mining companies or oil analysts, they have been consistently wrong for a long time in their projections, but yet they have the audacity to furnish new spin in their pronouncement of market fundamental. Imagine a beautiful girl with questionable past, she looks like one of those pin-up girl du jour just step-out from one of those magazines, with legs up to heaven, perky breasts & heart shape back side…she announces to the world she is madly in love & has finally found her soulmate and lean over to kiss the love of her life; this elderly billionaire with a walker. It is possible that she is one of those model-T kinds of girl, but logic will convince us that she is going to work him to the grave so she can inherit his money. But when it comes to investing especially in a liquidity bubble, we tend to believe in fairy-tale & forget about logic. Commodities stocks are like that pin-up girl, you rent them for a trade, but don’t buy into those grandiose spins so-called experts are saying. After the greatest commodities bubble, there are just too much capacities to work through in all commodities, and those demand growth forecasts are based on bogus assumptions.