Commodity crash - worse than 2000 tech bust

C

Cutten

If you look at the commodity and commodity stock ETFs, they are actually down more from the summer peak than the nasdaq fell from the March 2000 peak to the summer trough. Look at these figures:

Nasdaq Composite performance:

March 2000 to May 2000: -41% (3 months)

July 2000 to April 2001: - 62% (9 months)

Now check the commodity performance from Jul 08 to Nov/Dec 08 (4-5 months). I have taken the highs to the lows (not today's closing prices).

RJI Commodity ETF: -57%
GSG Commodity ETF: -61%

OIH Oil Service ETF: -71%
XLE Energy ETF: -66%
XME Metals & Mining ETF: -82%
MOO Agribusiness ETF: -70%
GDX Gold Miners ETF: -70%

So commodities themselves fell about 60% in 5 months - that is a decline almost equal to the 62% nasdaq fall from July 2000 to April 2001. Indeed, the commodity fall took place in almost half the time. Commodity producers' stocks fell even more, about 72% on average in 5 months. By comparison, the Nasdaq fell 73% from the March 2000 high to the Post September 11th 2001 lows, an 18 month period.

In other words, commodity stocks fell as much in the last 4-5 months as the nasdaq did in 1 1/2 years, and the latter began with the very top of arguably the biggest stock market bubble in human history, and ended (more or less) in the aftermath of the worst attack on US soil since Pearl Harbor. Yet the commodity stocks did it 14 months quicker!.

Thus if we compare the magnitude of the declines, commodities have fallen just as far, but about 3-4 times faster, than one of the biggest bubbles ever. Could we therefore consider the commodity stock runup to have been one of the biggest bubbles ever, even bigger than the tech bubble?

The main difference, and why I did not think it was a huge bubble, was the lack of retail participation. You didn't see taxi drivers, grandmothers, and newspaper boys speculating on margin and becoming millionaires from commodities. A second factor is that you never saw BS commodity companies at absurd valuations - there were no "holes in the ground" bubble stocks selling at 300 times revenues. Other main differences seem to be that the fundamentals got crushed this time, and valuations were simply "not cheap", rather than at bubble levels. With tech, it was also valuations that caused the crash - the multiple contraction caused at least as much trouble as faltering earnings.

However, there is no denying the facts - whatever you call the runup, the subsequent fall was nothing short of a historic crash. It is one of the biggest collapses of a major sector and asset class that has ever been seen.
 
The fact that MOS actually rallied yesterday on lowered guidance and soft sales projections and stayed stable today makes me think the ferts are ranging near their bottom. They should be solid for a nice comeback early next year.
 
Gold dropped 50% during the seventies to spike upwards several 100's of %'s afterwards as you surely know so it isn't all that unprecedented in some of the commodity classes is it?

I believe commodities crashed hard late 1920's as well to rally from 1931 to 1934 fwiw.
 
What's happened to all the ET "China/Commodities will grow forever" cheerleaders who berated anyone who suggested otherwise?.

I would have thought one would have been along by now to explain this huge peak to trough percentage in terms of supply/demand and fundamentals.

Within a matter of months we have gone from looming starvation from there not being enough rice in the world to countries unable to sell their rice stockpiles. I would really like to know how the supplydemand dynamics changed so quickly.

To me it is quite simply the institutional money being greater than supply of the must hold asset class as it was with illiquid emerging markets, low float tech stocks etc but this time it was commodities and related stocks and that new asset class hedge funds - of which a supply was manufactured to meet demand. The next stage of the playbook was the business of selling stakes in something you created out of thin air to suckers, but it got nipped in the bud by the music stopping.
 
Quote from Ivanovich:

That being the case, would you recommend going long here on a particular commodity or basket/ETF?
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Well I bought some oil calls when it reached $50, but they are underwater. I have some calls on sugar as well, also losers. Both moderate positions. I don't have much conviction on them (although I like sugar long-term).

Although the sector is off massively, I haven't seen panic selling yet (it is more like a slow grinding bear market), I can't see any bullish catalyst, and I haven't seen any bullish price action (except sugar and gold holding up better than the other commodities). I would really want at least one of those 3 factors to come along before putting any serious money at risk.

Also, because I massively underestimated how far they would go down (I thought a correction to maybe $95 or perhaps $75 oil, not $47), I don't feel much confidence in my ability to read these markets right now. I would rather sit, watch and wait until I get some kind of clarity.
 
Quote from mokwit:

What's happened to all the ET "China/Commodities will grow forever" cheerleaders who berated anyone who suggested otherwise?.

I would have thought one would have been along by now to explain this huge peak to trough percentage in terms of supply/demand and fundamentals.

Within a matter of months we have gone from looming starvation from there not being enough rice in the world to countries unable to sell their rice stockpiles. I would really like to know how the supplydemand dynamics changed so quickly.

To me it is quite simply the institutional money being greater than supply of the must hold asset class as it was with illiquid emerging markets, low float tech stocks etc but this time it was commodities and related stocks and that new asset class hedge funds - of which a supply was manufactured to meet demand. The next stage of the playbook was the business of selling stakes in something you created out of thin air to suckers, but it got nipped in the bud by the music stopping.
More...

I think the price declines can't be explained by the exit of speculators alone. That would have caused a normal 1/3 correction, a bit like stocks in 1998 or 1987, or even the nasdaq in spring/summer 2000, not a historic price bust of 70% in less than half a year. Also it has been very fast even for a speculative unwind.

IMO the size of the fall is because you had the exit of speculators immediately followed by a catastrophic liquidity crunch and real economic slump - not just in the west but the periphery (BRIC). Any one of those factors alone could have caused a typical 25-35% bull market correction/mini-bear. Having the unwind, liquidity crunch, AND worldwide recession emerging simultaneously is what IMHO turned a 25-30% fall into a historic 70-75% rout. Remember, even the CEOs of the bustout financial blue-chips had no idea how bad their firms would get - and they were the ones who wrote the CDS and other stuff.

I remember in late 2007 and early 2008 thinking the potential slowdown recession could cause some problems for commodities eventually, but as long as they kept rising I was happy to play the trend - albeit with a stop. However, despite being a bear on the western economies, I didn't anticipate anything like the carnage we got in September and October. I think even the most bearish commentators have been surprised how bad things got.

The commodity producers themselves have clearly been caught out. Not just by the slump in prices, but more importantly, the collapse of credit. You see companies like CHK and PBR - massive blue-chip players - who are now having to liquidate assets (into a huge slump - horrible timing) because the credit markets have seized up. Many such firms just assumed bank credit would always be available, and have been badly caught out and some may even default.

I think it just shows the importance of risk control, and planning for surprises and extreme scenarios. If you didn't have a stop, or some protective puts, then you got raped. No matter how much conviction you have, there must be a point at which you say "Ok, the market isn't doing what it should if my idea was right - I had better start reducing my positions."

I agree that without the major financial panic, the boom would have continued into the "bubble stock" phase. I think that caught a lot of people out, including me, they assumed the party would keep going with only normal 20-30% corrections until you got to the bubble phase - shoeshine boys, hole in the ground companies etc. That was what happened with prior bubbles like tech in the 1990s, and real estate in the 2000s, stocks in the 1920s etc. Just goes to show that even a reliable playbook doesn't work all the time - you need a plan B just in case.
 
You are right, the collapse of credit is actually the main factor - something my post omits to mention..

I tried to play this by shorting Oil companies at $100 oil based price action and the fact that MF was all of a sudden demanding 90% margin for OTC contracts - didn't foresee the Fed immediately stepping in with liquidity for the other players.

Eventually escaped at B/E and exited because I no longer had a read on where it could go next and missed the subsequent move down to $50.

For me, these have not been easy markets to make money in.
 
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