06/08/06 Pre-Market

...Pre-market futures down sharply. Overnight, world markets took another whacking. India's Sensex markets dropped 4.7% overnight, and are down 11% in the past week, and 26% since May 10. There was some talk about mutual funds redemptions forcing some of the selling. Stocks in most Asian markets are at their lowest levels in months, so the damage has not been just here in the U.S. markets.
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Commodities...
...Commodities have been getting slaughtered. I know most other things have been too, over the past month, but commodities in particular have just been getting hammered unmercifully. I have been down to my core positions, no trades for a couple of weeks, and even those small positions are being slaughtered relentlessly. It has been one of the most vicious selloffs I have experienced. It is not unusual to have sharp volatility in commodity related stocks, but this still has an extraordinary feel to it. I still maintain (see previous blogs if interested) that if the markets and the economy are to hold up, then commodities will as well. That makes the way they are acting now even more worrisome.
...Yesterday, I linked the interview with Jim Rogers, a legendary investor who is heavily into commodities and thinks that we are in the midst of a bull market in commodities that will last for several more years. Today, a couple of more things.
...Alan Greenspan, the former Maestro of the Fed, was on Capitol Hill yesterday. Unfortunately, Mr. Greenspan's testimony doesn't seem to be nearly has difficult to decipher now that he is no longer in the main chair. But his comments on oil were enlightening to say the least. Apparently the ex-Maestro believes the peak oil folks. He is skeptical as to whether there will be enough crude pumped to meet future demand. And in a striking contradiction to the folks who tell us about demand destruction and how the oil markets are only high as a result of fear and speculation, get this comment from Mr. Greenspan:
..."The balance of world oil supply and demand has become so precarious that even small acts of sabotage or local insurrection have a significant impact on oil prices." It's a good thing everything is so peaceful geo-politically on the world scene today, eh?
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A Behind the scenes explanation for the commodities selloff? Fascinating article on TheStreet.com website yesterday. The article says that the public warnings on high commodity prices by the Fedspeak folks have aided in the commodities selloff, but that behind the scenes there has been something else going on that had big implications and was only staved off by the cooperation of the IRS, of all things. Apparently there was a deadline approaching for commodity mutual funds to adjust their portfolios to come into line with new regulations. Many of the funds had been using types of derivative deals in the management of their funds. Unwinding all those deals could have been disastrous to those funds and the broader markets as well. I don't understand much about deriviatives at all, but this article is well worth the read and may explain some of the relentless onslaught of selling that has been going on in the commodities markets. And unless this is the 'big one', is it setting up another good buying op? Only time will tell.
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...About all I know regarding derivatives is that they are very complicated and allow for tremendous leverage on deals. Warren Buffett has referred to them as weapons of financial mass destruction. An insurance company his group purchased had a lot of derivative transactions going, and Mr. Buffett has spent millions of dollars over recent years trying to unwind those deals.
...I also remember a couple of years ago some of the gold bugs were stating that some of the major investment banks had derivative deals going that exceeded the GDP of the U.S. economy. I don't know about that, but this selling has been relentless. Bounces are tepid and don't last long. Doesn't seem like anybody wants to step up to the plate right now, whether the markets are oversold or not.
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