1. The State of Commodities
AAPTA October 9, 2004
The State of Commodities
Boom, Bubble or Bust?
Commodities historically trade counter-phase to the stock market, so even before the 2000 top in the stock market, analysts were looking to commodities as the next bull market.
It took a year, nice bull market ensued. Are the commodity markets booming, bubbling, has the bubble already burst?
Julia E. Bussie, CMT
Money Mentor
Solana Beach, CA
October 9, 2004

2. Commodity Research Bureau – CRB Index
AAPTA October 9, 2004
Is It Over?
Commodities struggled for the first year as the stock market fell. But, after the WTC disaster, the government started pumping up the money supply and commodities responded.
Nice 2 yr run. Where do we stand now?
To an Elliott waver this looks like a fifth wave up from the 2001 low is underway.
Commodity Research Bureau – CRB Index

3. Headlines “Looking for the Next Bubble” – Feb, 2004
AAPTA October 9, 2004
Headlines
“Looking for the Next Bubble” – Feb, 2004
“The Great Commodities Bull” – Feb, 2004
“It’s a Bubble” – April, 2004
“You Too Can Tap Gushing Commodities Prices” – June, 2004
“Explosion Ahead for Commodity Prices” – July, 2004
“A New Secular Bull Market” – Sept, 2004
Headlines often serve as contrary indicators and these 2004 headlines were excellent indicators of tops.

4. Bull Markets Topping in 2004
AAPTA October 9, 2004
Bull Markets Topping in 2004
June
Feeder Cattle
March
Soybean Oil
Copper
April
Corn
CRB
Gold
Platinum
Soybeans
Soybean Meal
Silver
Wheat
May
Gasoline
Lumber
Hogs
Pork Bellies
Very widespread participation. Soyoil – 20 year highs, Copper – 9 year highs (copper made new highs this past week)
Corn – 8 yr high, Gold – 15 yr high, Platinum – 24 yr high, Soybeans – 16 yr high, Soymeal – 31 yr high, Silver- 17 yr high , Wheat – 6 yr high
Lumber – 8 yr high, Hogs – 7 yr high,
Feeders, pork bellies, unleaded gasoline all made all time highs for the contract.

5. Bear Market Rally Highs 2004
AAPTA October 9, 2004
Bear Market Rally Highs 2004
March
Oats
April
Palladium
May
Dollar
Natural Gas
June
Live Cattle
August
Cocoa
These markets topped earlier and were already in bear market rallies.
Oats 6 yr high in 2002.
Palladium - all-time high Cattle - all-time high in 2003.
Cocoa - 18 yr high in 2003.
Natural gas – all time high in May that is close to being surpassed now.

6. Crude Oil and Heating Oil
AAPTA October 9, 2004
Odd Men Out
Orange Juice
Cotton
Sugar
Still Bullish
Crude Oil and Heating Oil
OJ – bear market bottom in May 2004.
Cotton – 18 yr high in 2003, solid bear since.
Sugar – choppy, sideways bear market.
Crude oil and heating oil are the energizer bunnies of the commodities markets.

7. Non-specific Fundamental Factors
AAPTA October 9, 2004
Non-specific Fundamental Factors
Fear
U.S. Dollar
Globalization
Fear - terrorism. War in Iraq created a “war premium”. No disruptions in supply have occurred so far as a result of the war, although Iraqi oil shipments have had their ups and downs. Actual level of war premium difficult to determine.
$ - After 2001 attacks, US flooded world with dollars, mostly deficit dollars. Dollar declining since. 90% of world commodities are priced in U.S. $. Cheaper dollars benefit U.S. exporters, notably U.S. agricultural exports increase when the dollar is low.
Globalization - WTO and NAFTA consequences not as anticipated. Fewer constraints on trade help poorer countries, level economic playing field. Problem - in order to level a field, something is taken off the top to fill in the low spots. The U.S. is at top. Our standard of living will be reduced as other nations compete with us for jobs and goods.
Jobs and manufacturing transferred overseas. Labor costs overseas are a fraction of U.S. U.S. prices are inelastic, reflecting labor not raw material costs.
Income from those jobs providing seed for economic booms of unprecedented proportions. A third of world’s population being fast-tracked into 21st century. In the process, they are competing with developed world for world’s supply of commodities. May be rude awakening for Americans who believe we are entitled to material lifestyle. Of primary concern is India and China, most notably China because it is progressing faster.

8. Globalization Factor - China
AAPTA October 9, 2004
Globalization Factor - China
Population
Land mass
Arable land
Fresh water
Oil
Population – 1.3 Billion, 1/5 of world, 60% rural
Land Mass – slightly larger than U.S.
Arable land – 7% of world total, U.S. has 19%
Fresh water – 7% of world, Great Lakes Basin alone holds 18%
Oil – 5% of world, U.S. 2%* A recent announcement by the China Ministry of Land and Resources stated proven reserves at 47 billion barrels,
almost double the current accepted British Petroleum estimate for China.

9. Population -Over-riding factor
AAPTA October 9, 2004
Population Over-riding factor
Density, the City of New York has 26,685 people/sq mile. The urbanized area of Shanghai has 42,415 people/sq mile.*
From China pop. doubled. BIG baby boom. After 1970, one child law established and legal age to marry raised 27.
Large segment of population of working age.
*The density numbers have been corrected from the original speech.

10. Chinese Demand Cement Steel Iron Ore Coal Aluminum Oil Copper Platinum
AAPTA October 9, 2004
Chinese Demand
Cement
Steel
Iron Ore
Coal
Aluminum
Oil
Copper
Platinum
Grains
Soybeans
Cotton
Meat
Cement - 40% of world prod., demand is 6 times U.S.
Steel – production 220 mil tons/yr, imports 40 mil, plans to add 200 mil tons production
Iron Ore – imports 14,000 tons 1990 to 148,
Coal – exports declined to 55 mil tons in 2004, were 80 mil in 1991 due to increased demand for use in domestic steel production.
Now, net importer coking coal. World thermal coal prices up 20% in 2003, up 40% more in 2004.
Aluminum – net exporter in 1998, now net importer despite 238% increase in production over the last 4 yrs.
per capita use is 1/5 U.S. (China 3.2 kg, US 16 kg, India .5 kg per capita)
Oil – Still modest importer, has displaced Japan as worlds #2 consumer.
Copper – share of world demand increased from 6% to 27% in ten yrs, per capita still < 1/3 U.S.
Platinum – imported 20,000 oz in 1990, up to 1.6 mil oz in 2003
Grains – domestic stocks drawn down over past 5 years. Imports forecast to double by 2020 by World Bank, USDA est. imports to quadruple.
Soybeans – imports exceeded production for first time in 2003.
Cotton – produces 27% of world cotton, consumes 34% (some of this is for re-export), U.S. textile manufacturing shift to China.
Meat –consumption is 35 lb/cap/yr, Taiwan lb, U.S. - > 350 lbs.
not a large importer at this time, domestic prod tripled from mostly in pork.
Avian flu a concern across Asia for poultry production.

11. Supply has a way of compensating for demand.
AAPTA October 9, 2004
Supply has a way of compensating for demand.

12. Response to Higher Prices
AAPTA October 9, 2004
Response to Higher Prices
Improved efficiency
Scientific advances
Innovations in production methods
New mineral exploration
Recycling
Better fuel efficiency, improved mileage, better home insulation.
Agriculture – better farming techniques, hybrids, GMO crops.
Mining – new methods, heap leaching for gold, cheaper roasting methods for coffee.
New production methods, smaller, electrical smelters greatly increased steel and production.
New discoveries and development of mineral resources.
Recycling playing growing role.

13. Gold Annual Production
AAPTA October 9, 2004
Gold Annual Production
Since 1970, world---
Gold production almost doubled due to heap leaching technology.
Copper production more than doubled.
Steel production up over 30% - new record highs.
World soybean production tripled.
Crude oil reserves doubled.
Current government hydroponics experiments to grow livestock forage use 1/100 the water and potentially could produce as much on 1000 acres as on 260,000 with current methods.

14. AAPTA October 9, 2004
Chart through Decline in real prices reflects increased productivity of American Century.
My opinion, the U.S. near-monopoly on use of the world’s commodities is in the process of disappearing because of the shear number of new consumers with incomes that will allow them to compete with American consumers. Expect to see real prices of commodities and raw materials increase regardless of what inflation does.
This is where the boom is. But, it is a long, slow development. Within that long uptrend will be shorter-term booms and busts in response to specific fundamental developments.
Now, more short-term view of situation.
Source: IMF Staff Papers, Paul Cashin, C. John McDermott

15. AAPTA October 9, 2004
Rally in CRB index is inverse of the dollar.
Wave 4 is only partially complete. A further rally to the 94 area is likely with an outside chance of getting to
This should be followed by a W5 decline with a major target in the low 80’s to complete the 5-wave pattern.

16. AAPTA October 9, 2004
The boom in soybeans that had everyone so excited early in the summer has been completely reversed on news of another record crop. The demoralization that accompanies such a drop will prevent a major reversal right away, although a corrective bounce is due.

17. AAPTA October 9, 2004
This is a daily chart of the November beans. The Elliott pattern counts to the range as the end of the decline. This will also coincide with the end of harvest.
The corrective rally from the low can be a substantial money maker, but in the bigger picture it will just be a bounce. Once harvest is over, farmers tend to store whatever has not already been sold until after January 1 so the income goes with the following years taxes. That strategy often encourages a post-harvest rally.

18. AAPTA October 9, 2004
Wheat actually has the most interesting chart among the grains. Tremendous support underneath.
Market approaching two long-term trend lines with potential bullish divergence in the stochastic.
It needs to hold this area. The U.S. winter wheat crop has been planted with good moisture conditions.
At this point, crop problems will have to come from some other exporting country. An example is this summer’s
crop in Canada which was damaged by weather problems graded almost entirely as feed wheat, which is not
acceptable for export.

19. AAPTA October 9, 2004
As in the beans, a bottom in March wheat is expected soon in the 305 area. Wave 5 will be equal to Wave 1 and will also be equal to 1.6 x Wave4. Another count at sets the total length of Waves 3 and 5 equal to times Wave 1.

20. AAPTA October 9, 2004
If it seems like steak is taking a larger share of your wallet, it is no illusion.
Cattle is one of the few commodities with a consistantly strong upward bias.
The low-carb diet craze caught the beef industry by surprise after years of being dietary bad-guys. This has caused a contra-cyclical rally.
The typical response to high prices of holding back breeding stock could make a decline into the cycle lows nasty as it provides more cattle to liquidate in the downward swing of the cycle. Cycle lows are due by the end of 2005 and could carry prices back to test the long-term trend line.
A close below 8536 on the Dec contract will break a head and shoulders top on the daily chart.

21. AAPTA October 9, 2004
Three Fib ratios create a target at
This should be followed by a significant wave 4 correction back to 115. As this is a monthly chart, the correction may take a year or longer, then a wave 5 rally new all-time highs is possible.

22. AAPTA October 9, 2004
Previous up moves have lasted about 3 yrs. Monthly declining trend line at 450 area.
Watch for stochastic divergence signals in the 450 area along with a failure to follow through on a breakout.

23. AAPTA October 9, 2004
Daily chart of Dec gold.
Wave c of wave 4 is imminent and has a target at the area. Wave 5 is expected to test the downtrend line at the area.

24. AAPTA October 9, 2004
Fibonacci ratios calculated from the previous two highs and lows put a target in the area.
That area may turn out to be the top of wave 3 and will be followed by a year or longer of retracement and consolidation.

25. The Big Picture AAPTA October 9, 2004 Spot cash CRB index.
Two clusters of Fibonacci projections: and
The top of wave 3 is debatable, but it does not change the outlook.
Until the markets show us differently, we will view the current move as an almost complete wave5.
It is possible the current wave is only wave 1 of wave 5. If so, we are in deep trouble.

26. AAPTA October 9, 2004
Weekly CRB futures give a target at 300 area, max move at 32.

27. AAPTA October 9, 2004
Questions?