2011May9 Commodity Collapse?"Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it." - Warren Buffett COMMODITIES:
What a week in the commodities markets. If you paid almost $50.00 an ounce for silver on Monday and by Friday afternoon that same ounce could be had for less than $35.00. Oil dipped below $100.00 a barrel and gold was selling under $1500.00 an ounce. Copper, cotton and coffee were dropping in price almost faster than the prices could be posted. What gives?
The headlines cite a combination of factors behind the commodities rout, from increased margin requirements at commodities exchanges to a post Bin Laden decline in oil prices to a few tepid jobs reports and some hedge fund liquidations - not to mention a delay in eventual interest rate increases by Europe's Central Bank.
But what is really going on here? Speculators are panicking.
This week's volatility has nothing to do with a double-dip recession. It's not another global financial crisis. The fundamentals are actually strengthening in the employment market. And there is no need to start stockpiling guns and butter, yet.
The drop in commodities prices is due to a classic rush-to-liquidate that happens every so often in markets that are jam-packed with people chasing price and were late to the party.
So to the extent that you were even paying attention to it at all, what we were seeing is (1) the hurried unwinding of a ton of commodities trades by speculative late-comers who shouldn't have gotten into those positions to begin with, and (2) some major second-guessing by institutional investors who had previously bought commodities like silver and oil as a hedge against a declining dollar.
DYNAMIC ASSET ALLOCATION:
Domestic equity and commodities continue to be the top two favored asset classes. Last week's selloff in commodities did not create enough sell signals to move it from the number two spot. We will keep a close eye on this moving forward but as always the market will tell us what to do, not the other way around.
REAL ESTATE:
It does not look like it is quite time to head back into the residential real estate market. This just in from Zillow this morning:
An index maintained by listings and valuation portal Zillow.com shows U.S. home-price declines accelerating during the first three months of 2011 to post a cumulative drop of 8.2 percent from a year ago that left more than one in four homes with a mortgage underwater.
A 3 percent decline in the Zillow Home Value Index from the fourth quarter left 28.4 percent of homes with mortgages worth less than the amount of the loan they were purchased with, Zillow said, up from 27 percent during the last three months of 2010.
It was the steepest quarterly decline in the index since the fourth quarter of 2008, prompting Zillow to push back its forecast for a bottom in home prices to 2012 at the earliest.
Zillow said foreclosure sales were on the rise in the first three months of the year as loan servicers lifted moratoriums.
"Home-value declines are currently equal to those we experienced during the darkest days of the housing recession," said Zillow's chief economist, Stan Humphries, in a statement. "With accelerating declines during the first quarter, it is unreasonable to expect home values to return to stability by the end of 2011."
Of the 132 markets covered by Zillow, 97 percent saw home values decline. Only the Fort Myers, Fla., Champaign-Urbana, Ill., and Honolulu metropolitan statistical areas (MSAs) experienced quarterly increases, with home values rising 2.4 percent, 0.8 percent and 0.3 percent, respectively. Home values in the Sarasota, Fla., metro remained flat.
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