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What everybody knows isn't worth knowing, according to the old market adage.
You don't have to be a dyed-in-the-wool efficient-market adherent to realize that if some phenomenon is widely understood, the last bull likely already has bought. That late buyer either has been slow to realize what's happening or has been in denial about a market move.
The clever ones who bought early will sell to those who jump on the bandwagon later. Savvy gamblers want to play with the house's money; that is, gamble with their winnings while holding onto their original stake. So, they cash in chips equal the dough they had when they came to the casino and play with the rest.
That, to me, best explains Tuesday's sharp sell-off in commodities, which took down everything from crude oil to copper to cocoa. The news backdrop of increasing global growth and supply disruptions such as Australia's flood continued to be supportive of higher prices. Yet they settled sharply lower across the board.
Crude oil, which hit $92 a barrel Monday, was back down to $89 Tuesday. Copper fell 2.7% after trading at a record. Grains also were down sharply, with wheat and corn down more than 1%. But taken in the context of their advances, some retrenchment is to be expected.
Indeed, some of the most stalwart commodity bulls were calling for a correction. Market Semiotics' Woody Dorsey, who has been trumpeting a "Repricing of the Planet" for years, advised clients, "The greatest rally in history is not over but wants to take a rest."
His charts show multi-month corrections have taken place all along the advance in commodities going back to 2002. Dorsey looks for some "churning and disappointment" for bulls into the spring. But, "another leg up this summer may be scary."
That would be consistent with the alternate scenario described here Tuesday, in which a spike in oil pushes retail gasoline prices back over $4 a gallon; that as the death knell for the economy in 2008. Indeed, the current jump in fuel prices will likely shave 0.5%-0.75% from consumers' recently hearty discretionary spending, as noted last month.
Three years ago, the Federal Reserve already was easing aggressively -- well before the Lehman debacle in September 2008. This time around, the Fed will likely be winding up its $600 billion QE2 purchase program by midyear, as planned.
Minutes from the December Federal Open Market Committee meeting, released Tuesday, implied the central bank would be loath to stop short of the completion of the $600 billion of Treasury securities purchases by June. Then, however, means the bond market will be on its own to fund the federal deficit after that.
Of course, the markets fully anticipated QE2's effect by the time it was launched in November. The December FOMC minutes suggested the backup in yields since then reflected the smaller size of the purchases than some forecasts. That shows the members of the committee haven't descended from their ivory tower to a trading desk, where they routinely buy on the expectation and sell on the news. The market brought yields down in anticipation of Fed buying; later, they rose. It could happen in reverse once the market looks to the end of the Fed buying in June.
And so it was with Tuesday's commodities action, selling after buying ahead of actual fundamentals. Prices such as $90 crude oil or $4-plus copper may largely reflect the positive economic influences that lifted them to such lofty heights. And even if they're ultimately destined to head higher, a pause was in order.
Comments: E-mail: randall.forsyth@barrons.com
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