Trader Dan Comments On Soaring Commodity Prices and Plunging Bond Prices

Posted at 2:03 PM (CST) by & filed under Trader Dan Norcini.

Dear Friends,

Thanks to our diligent internet news sleuth, JB Slear, the following story is brought your way.

Tie this story about the fall in US home prices together with what is happening in the commodity sector and the long bond to see where this is headed.

Home prices are falling for one reason – lack of demand coupled with a growing supply due to the wave of foreclosure properties which are adding additional supply to the market.

The market interpreted today’s data release as evidence that the Fed’s $600 billion + QE policy would not be ending anytime soon. That brought another surge of fund related buying into the commodity sector with the result that the CCI (Continuous Commodity Index) has now kissed its former all time high made back in the summer of 2008 long goodbye. It shot above 622 and appears to be accelerating, even at the end of the year when we would normally expect to see profit taking in the sector by longs who have profited immensely in 2010.

I find it astonishing that fresh money is being committed to the sector as the calendar year winds down. This is highly unusual as this time of year is historically known as the time for book squaring. What it is telling us is that fund managers have no intention at this point of abandoning a strategy that has paid handsome dividends to them and will undoubtedly be looking to up their ante at the beginning of the New Year. Look for fresh highs early next year in the sector based on what is occurring in some of the various commodities. Sugar, after putting in a 30+ year high, has shot to yet another fresh high in today’s session. Soybeans registered a 26 month high. Ditto for corn. Copper is now trading at $4.30 a pound! Crude oil continues to hold above $90.

The bond market, after being fiddled with by the monetary authorities in the hopes of hoodwinking the public into believing that inflation pressures are subdued, promptly fell apart plunging a full point as participants are watching with great alarm the surge in the CCI.

This combination, soaring commodity prices which are certain to erode consumer disposable income, and plunging bond prices which are a prelude to higher long term interest rates, are certain to make it even more difficult for would-be home buyers to enter a real estate market already being plagued by a lack of demand. Throw in a good dose of higher gasoline prices at the pump and it becomes all too obvious what we can look forward to in the coming year. I guess we have all been naughty over the past year because it appears that Santa Ben and his band of elves at the Fed have brought us all a gigantic lump of coal.

Trader Dan

Dollar Weakens for 4th Day as U.S. Home Prices Declined More Than Forecast
By Catarina Saraiva and Paul Dobson – Dec 28, 2010 7:30 AM MT

The dollar weakened for a fourth consecutive day against the euro as U.S. home prices declined more than forecast, bolstering the case for the Federal Reserve to maintain its program of debt purchases.

The dollar fell versus most of its 16 most-traded peers as the S&P/Case-Shiller Index of property values showed its first year-over-year drop since January. The franc rallied to a record against the U.S. currency amid optimism Switzerland’s growth will encourage its central bank to raise rates. The Canadian dollar strengthened to parity with its U.S. counterpart for the first time since Nov. 11.

“Housing is still obviously a concern,” said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. “We’re still seeing a slight push up in risk.”

The dollar dropped 0.4 percent to $1.3213 per euro at 9:08 a.m. in New York, after earlier touching $1.3275, the weakest level since Dec. 17. The U.S. currency declined as much as 1.2 percent to 81.82 yen, its lowest level since Nov. 12.

The euro pared its gains against the dollar after the European Central Bank said it failed to fully neutralize the extra liquidity created by its bond purchases for a second time since the program began in May.