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JPMorgan Comes Out With First "Overweight" Call On Commodities Since September 2010
Following the drubbing in commodities in Q2 it is was only a matter of time that the pendulum swung the other way. At least that is the view of JPMorgan's commodities team led by Colin Fenton who says to "go overweight commodity indices now."
JPM's summary: "It’s our first OW call on commodities since September 2010… we turned underweight commodities as an asset class in November 2011, shortly after it became apparent that Europe and Australia had entered manufacturing recessions and commodities were likely to underperform equities and bonds over the following 6 to 12 months, likely yielding negative returns in 1H12. Over the past year, we have grown more positive on the asset class, as energy has improved, expected menaces in bulks and metals have arrived, and sentiment across commodities has belatedly soured. However, our strategies have sought to be directionally neutral. Now, we move to recommend a net long, overweight exposure for institutional investors for the first time in more than two years, based on ten fundamental factors we quantify in this note." Yes, that includes gold, although as a hedge JPM adds: "Liquidity could fall quickly in summertime. Buy 25-delta puts in oil, copper, and gold to protect a core position in commodity index total return swaps."
Why does JPM come out with this overweight reco now, when commodities are sliding? Their take.
"Like other global markets, commodity prices are buckling on rising concerns about China and the Federal Reserve. It is important to be specific about what these concerns are. The new fears are not that Chinese growth is slowing or that the US central bank will taper its QE3 asset purchases. Both are inevitable outcomes that have long been embedded in commodity forward curves. The actual concerns are: (1) the large shadow banking sector in China might soon trigger an unexpected financial crisis, like the one that emerged in Asia in July of 1997, and (2) the FOMC might simultaneously be making a policy mistake in putting its own growth and inflation forecasts ahead of the markets’ fear about Chinese finance and the evidence that disinflation in the real economy is bulldozing inflation expectations in markets. These concerns are legitimate. A sturdily low-vol commodity regime has suddenly been asked to assign probabilities to these two scenarios. Neither is a zero probability. Nor is either likely a baseline outcome in 2013."
Concerns having been dispatched, JPM's advice to institution clients is simple:
Our analysis concludes that it is in the best interests of most commodity index investors to buy immediately. For the first time in more than 2 years, we recommend an overweight allocation to commodities. In our own methodology, we define this allocation as a 5% to 7% net long exposure in an institutional portfolio, up from the 3% to 5% directionally neutral exposure we have been recommending.
Keep an eye on crude backwardation:
We anticipate that when commodity markets move higher, they will likely move more quickly than seems possible today, led by a seasonal pickup in global crude runs. One of the strongest clues lies in the current term structure of the NYM WTI forward curve.
If oil demand is so soft and oil supply so ample, why is this curve in the strongest backwardation yet observed in this business cycle? The M3-M6 and M6-M12 spreads are the most positive they have been in 6 years. The last time these structures emerged, in 2007, the curve steepened so rapidly and powerfully that the spot price moved from $65 per bbl to the all-time nominal high of $147 per bbl in less than nine months. To be clear, we do not expect as strong a move this time. But we are saying that buying the backwardation in NYM WTI (26.6% portfolio weight in the S&P GSCI) is one of the best commodity investments we have seen available in this asset class in years.
What are JPM's 10 "fundamental factors?"
- Seasonal factors drove the 2Q correction in spot crude oil, and seasonal factors will reverse it.
- Fresh demand for storable commodities, in response to the steep price corrections
- Price-driven, involuntary production cuts in crude oil, copper, and gold.
- Inflation in production cost economics.
- Spare capacity is tight and non-economic supply risks are rising.
- Lagged benefits to commodity demand from rate cuts and other stimulative measures.
- Stealth shift in US export policy already at work is further linking WTI with international prices.
- Chinese shift in policy: ‘go green’ does not mean what it means in Seattle. It means go to oil&gas.
- Stronger USD against what? The DXY does not include the CNY.
- Global growth and inflation rates will likely soon bottom. Rising values in these rates, even from low bases, provide a favorable economic environment for commodity index total returns.
Where does gold fit into all of this?
In the first week of April, we warned of a one in three risk of a 2Q2013 ‘flash crash’ in commodity markets, with oil, gas, gold, and copper being the most likely focal markets and April 15 to May 15 being the most likely timing. That this warning correctly presaged the collapse in gold was not alchemy. It was not even truly a good forecast. It was an acknowledgement of the message already blindingly evident in options prices, in particular the put skew in the Jun-13 and Aug-13 CMX gold markets (Exhibit 25). The lesson for institutional investors from this experience is to watch volume and open interest in OTM commodity options at crucial turning points for growth and inflation. What has been more surprising to us is that oil has not shuddered the way gold and copper have. We had warned that WTI could drop to $75 per bbl and Brent could drop below $90 per bbl. To the contrary, for reasons we explain above, crude differentials have been narrowing (see Exhibit 7). This compression is a bullish signal. It is completely inconsistent with the popular conception that the outlook in commodity markets has no sunshine. It also spotlights the critical importance of evaluating commodity investments in terms of structure and volatility, not just spot prices.
Given the steep selloff in gold and the impaired condition of metals, we would prefer to see a turn in technical indicators before getting too aggressive in that sector, out of respect for the high likelihood of catching a falling knife. However, metals altogether have a low weight in the S&P GSCI (9.0%) and gold’s is especially negligible (2.35%), given current prices. So, downside path risks in metals are more an issue for the risk manager more exclusively focused on a specific metal, rather than on a larger commodity basket, either in the investor world or the corporate world.
At the same time, metals prices have reached levels that are demonstrably forcing involuntary production cuts and fresh demand. Against one-sided sentiment and following 15 months of destocking, Chinese buyers are going to realize very soon this is the opportune moment to back up the truck and to restock supply channels where China is import dependent. A surge in Chinese buying of a metal at a lower price has already been observed in gold. We expect renewed vigor in imports of copper and oil. It is quite obvious what the Chinese should do here in physical markets, in pursuit of China’s long-run economic and social self-interest.
JPM's conclusion:
This conclusion represents a significant change in view. The last time we recommended moving to overweight was on September 30, 2010, or about a month ahead of the announcement of QE2 on November 3, 2010. In the nine months that followed (we turned neutral in June 2011), the S&P GSCI total return index produced a 16.5% total return against a 14.9% total return for global equities and a 2.5% total return for global bonds. At the same time, downside risks today are still scary, especially in metals. Owning 3M 25-delta puts on crude oil, copper, and gold is prudent. Conventional wisdom is clearly thinking in spot price terms; its blind spot is failure to evaluate risk through the lens of structure or volatility.
To recap, we recommend going overweight the commodities asset class through the strategic purchase of commodity index total return swaps. Recognizing that the consumers are likely already starting to act on their incentive to buy the 20%+ swoon in gold, copper, oil, and other commodity markets, we recommend immediate action. However, in acknowledgement that we are likely early in metals and possibly even oil, especially ahead of the more illiquid markets of the summer months, we also think it prudent to hedge net length by buying 25 delta puts on Aug-13, Oct-13, and Dec-13 NYM WTI and ICE Brent. That is a strike price of about $93, $89, and $87, respectively, for WTI and $100, $95, and $92, respectively, for Brent.
Of course, all of the above could well be moot, and JPM could merely be pulling a Tom Stolper/Goldman FX trade "recommendation", using this "once in three year" opportunity to dump to clients ahead of what it sees as a huge deflationary plunge, which has as much a probability of happening as does what JPM believes will happen should Bernanke proceed with a September tapering leading to wholesale liquidation. Keep in mind the last time JPM went "bullish" was just after Bernanke announced QE2 following Jackson Hole when, once again, everyone was assuming a surge in all asset classes. This time not only is Bernanke not promising more easing any time soon, but the threat of a monetary stimulus slowdown (however brief) is just around the corner.
Or they may be sincere.
Who knows: we look forward to these questions being asked of Blythe Masters when she is cross examined in court now that she is a suspect in JPM's electricity manipulation scheme as reported previously. We are confident she will respond honestly, or maybe not.
In the meantime, here are all the commodity charts from JPM that's fit to print:
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... and on the same day CS upgraded BBY to outperform ...
That sound you are hearing? Goldbug heads exploding.
Chinese buyers are going to realize very soon this is the opportune moment to back up the truck and to restock supply channels where China is import dependent. A surge in Chinese buying of a metal at a lower price has already been observed in gold.
JPM recommends to back up the truck lol
I'm definitely not one to follow the morgue's public words, but in all likelihood, that was them and others getting long on Friday. Of particular interest, silver.
and you are wise to do so. Banks are long ALL commodities. i think the idea that now is the time to go all in on the whole space is as absurd as it is "Goldman like." i would be very wary STILL of shorting the market here because there are a lot of things the authorities can implement...not the least being an outright ban of course..to keep folks from PROFITING while the market goes down.
Must....Buy Moar.....180 count....Egyptian Linen......Must buy....
phucking hilarious. i have a friend who has done just that.
Credit Suisse upgrade of BBY?
Funny.
Up 131% in 6 months and topped out, oh yeah, what a buy.
Credit Suisse must have a huge short position in the wings.
guess the manipulation at the Comex has become to visible to continue .....or they've got all the paper gold/silver now covered, and are ready to screw all the shorts on the upside.
wonder what kinda bonus the crew at the CTFC is gonna get? you know they are going to get a taste....
That is a compelling scenario. But I don't the visibility of the manipulation makes the SLIGHTEST difference to them.
i would have agreed with that point ....until the truth about the NSA spying on EVERYONE hit this weekend. Now? We don't have no friends any more, mommy. They know the US is screwing with them....and the Germans ain't never gettin' their gold back....
and neither is anyone else who ever let it be "secured and stored" in New York.
So we go from "I 'm thinking about possibly considering the concept of tapering at some future date" to a flood of holocaust inducing monetization in two weeks?
"Baffle 'em with Bullshit".
Well, ye gotta write something when you've been hired for shedloads and there's an expectation:
"LONDON -(Dow Jones)- JP Morgan Chase & Co. (JPM) has hired Colin Fenton as global head of commodities strategy, a company spokeswoman said Tuesday.
Fenton, who joined the bank Monday, was formerly a managing partner at Curium Capital Advisors. He has also held various roles at Goldman Sachs Group Inc. (GS) in commodities research, Duquesne Capital Management and Ospraie Management.
Fenton will report to Tom Schmidt, head of global commodity research and Americas equity research.
"Given J.P. Morgan's expanded global commodities offering, we are pleased to add Colin's seasoned leadership to our talented team," Schmidt said."
http://www.automatedtrader.net/real-time-dow-jones/14302/jp-morgan-hires...
On second thoughts this Fenton is full of bullshit. Give me a job that pays millions of dollars a year for being incorrect.
( how these guys aren't dismissed for spouting bullshit calls or maybe that is why they are rewarded. Care to comment colin Pee. fenton?)
COULD being the Operative word here - assholes
"Gold could surge to US$2,500 per ounce or higher by the end of 2011, according to J.P. Morgan commodity analysts Colin Fenton and Jonah Waxman." waxman...lol
http://www.financialpost.com/m/wp/investing/trading-desk/blog.html?b=bus...
"The Gold Price could reach $2000 per ounce by 2014 according to investment and retail bank J.P.Morgan.
Colin Fenton, commodity strategist at the multinational bank, said in Beijing on Thursday that the Gold Price "may reach $2,000 a troy ounce within the next two years."
Gold Price to Hit $2,000 by 2014 Says J.P.Morgan
http://goldnews.bullionvault.com/gold-price-061520126
#1 Mr. Godman Shafts says Buy, you Sell.
#2 Student Boy Jamie learns fast. He says Buy, you Sell. Lesson Over.
Translation: Phase 1 of our plan - to shake out the loose hands - worked and now it's time for Phase 2.
You don't want to know what Phase 3 is.
I am afraid to say that I agree with JPM ... this time.
Don't be a ham...
Phase 4 did you say? I think you meant Phase IV, that's a hot potato phrase for a phase.
Due to some unknown cosmic event, listed in "phases", ants have undergone rapid evolution and developed a hive mind. A scientific team begins investigating strange towers and geometrically perfect designs that ants have started building in the desert. The local human population flees the strangely acting ants. James Lesko (Murphy) and Ernest Hubbs (Davenport) set up a computerized lab in a sealed dome located in an area of significant ant activity in Arizona. The ant colony and the scientific team, along with a holdout rural family, make war against each other, with the ants being the more effective aggressors. The narrative uses the scientific team as the main protagonists, but there are also ant protagonists going about their duties in the colony. The ants immunize themselves to the humans' chemical weapons and soon infiltrate their lab. Teams of ants penetrate the computers of the lab and short them out. Kendra Eldrige, a young woman who had taken refuge with the scientists, abandons the lab.
Hubbs and Lesko begin to have different plans for dealing with the ants. While Lesko thinks he can communicate with the ants using messages written in mathematics, Hubbs plans to wipe out a hill he believes to be the ants' central hive. Delirious from an ant bite, Hubbs can barely get his boots on, but is determined to attack the hive and kill the ant queen. Instead, Hubbs literally falls into trap - a deep ditch that soon fills with ants that consume him. Helpless to save Hubbs, and concluding that the ants will soon move into desert areas where their growth will exceed man's ability to control them, Lesko chooses to follow Hubb's plan. He sets out to the hive with a canister of poison. Descending into the hive, Lesko hunts for the queen but instead finds Kendra. In the film's cryptic finale, the two embrace. Lesko realizes that far from destroying the human race, the ants' plan is to change them, making them a part of the ants' world.
Despite the lurid tone of its poster art based on one of the shocking images from the film, Phase IV approaches its subject matter naturalistically, with relatively little melodrama. The film contains relatively little dialogue, mainly relaying the storyline visually. Interestingly, the theatrical release poster was not designed by Saul Bass, even though he was a noted poster designer. [Phase 4]
I would rather pair trade the SH COMP long against the ES short than go bullish on commodity indices on JPMs rec.
Our analysis concludes that it is in the best interests of most commodity index investors to buy immediately.
That was my favourite part, just hit the big red buy now button gawddamnit!!
Can't decide if my favorite part was hearing "it is in the best interests of most commodity index investors to buy immediately" or the part about investors having a "high likelihood of catching a falling knife." Anyone who thinks there won't be a retest is smoking hopium.
this looks like this is the breakout in miners that the world has been waiting for..............feels like there is real momentum...................
And CNBS will have their talking heads jocking gold and miners like they knew it all along.
PMs / Miners/ WTI will crash overnight, no doubt, now.
Yep, that makes it official. Sell Mortimer.
if jpm was long as gold got hammered over the past month......wouldnt it make sense for jpm to now wait until the price shoots up first, take the profits, and then hammer it back down???? id say this is a case for a nice gold spurt.....................
i think they try one last jackhammer....and it blows up in their faces as the rest of the world takes the last ounce these assholes have "rehypothecated" at rock bottom prices.
But no worries, we have no regulators, so whatever. No one will go to jail. And they will all be able to go off to the islands they now own as the shit hits the fan.
this smells like goldmans $200 crude call 5 years ago.
Almost as if they're trying to sucker as many back in before the next smash which kills the paper market via a force majure.
The biggest tell? People who normally pay no attention, are starting to ask me why gold went down so much.
Meme propagation, FTMFW!
Recall their "green agenda". Commodities must become much more expensive, in real terms, to save the Earth, they say. So the long-term trend is UP just for political reasons. Short-term corrections or even "crashes" are uninteresting.
CNBS website actually has a headline "Stocks rally on economic data" like it is news. This from an organization that for years has been saying it has only ever been about the economic data.
Fuck CNBS.
That's likely their default headline, so maybe their server crashed and was rebooted?
CNBS is terrified that the $80 Billion coming out of bonds is going to be parked in cash versus stawks benefitting their advertisers.
My barber's analysis:
Stocks, Bonds and Houses = overpriced;
Silver, Gold, Copper = underpriced.
He's been right more times then mutual fund MBAs.
If anyone knows when a haircut is about to happen, its your barber!!!
Glad I got long aud yesterday.
No doubt, that was a good trade for me as well.
Baring a huge ramp into close, looks like a shooting star on QQQ. I will buy a few puts going into close.
JPM really pulled this trade rec "out of their arse" We have a dead cat on PMs and the EEM and suddenly we all need to rush into commodity indices full-out long with the hope of $150 WTI. Insanity.
you say that as if everything up till this point has been normal.
me thinks JPM is caught the wrong way on something to publish this "research"
AH! So now comes the hardcore inflation....ok got it JP Morgue!
CRIME/TERROR/WEAPONS Bank in South America...
The outfit in question is Banco Paulista and its controlled subsidiary broker/dealer SOCOPA.
This little bank, owned by a very traditional "Paulistano" family (the Vidigal family) has turned itself into the go to bank for money laundering, black market currency, corrupt politicians accounts, etc.
They are even taking deposits (turned into cash usually within 48 hours) from known terrorist groups, known drug dealers, arms dealers, pirated/contraband goods dealers, etc.
± USD 400 Million per month comes from the triple frontier of Brazil/Paraguay/Argentina and into Banco Paulista in Sao Paulo. From there, they cash this money on a weekly basis and deliver it to the owners "Casas de Cambio" to keep on moving. The bank is charging between 3% and 5% to cash out moneys and 20% to launder moneys.
The Bank also charges a 3% flat feet to accept hard cash deposits of any source.
Now the real deal is the black market currency exchange (known in Brazil as Doleiros).
The bank uses its license to purchase official US Dollars from the Brazilian Central Bank (to the tune of US$ 10 million per day) therefore at official exchange rates and than sells the same dollars in the black market (via fraudulent forex contracts). The focal point of distribution for the hard cash (both dollars and reais) is SOCOPA's main office at Rua Funchal, 129 - 5º floor in Sao Paulo, Brazil.
The person in charge of handing the cash over there is Mrs. Maria Jose
There are 7 main "culprits" in this criminal activity:
Alvaro Augusto Vidigal
Alvaro Augusto de Freitas Vidigal
Marcelo Pereira
Tarcísio Rodrigues
Nilma Kodama (previously involved in financial/criminal scandals)
Antanos Nour Eddine Nasrallah (known drug/arms dealer along with brothers link to hezbollah)
Hwu Su Chi Law
Flavio Guimaraes (ex. Socimer Bank/Andres Group)
There are several companies involved:
Industrias Mangotex Ltda.
Esclimont Participacoes S/C
SOCOPA
If one keeps an eye out on any regular day, they will see politicians, businessmen, regular people, criminals, etc., all going into SOCOPA to get their packets of cash.
The authorities in Sao Paulo don't care or at least pretend the issue does not exist and the local media is nowadays almost like in Venezuela (no reports involving politicians).
If this gets the media it deserves, it has the power to bring down some top figures in the Financial World of Brazil and also some heavyweights from the political arena as well. Let's not forget known/wanted criminals.
This little bank is a true "Atomic Bomb."
Well, at least HSBC has some competition.
who is his right mind would effing sell his gold ffs when the fundamentals say otherwise? who ffs???
I imagine JPM’s OTC derivatives traders will be happy to write the puts for you too. Then they can pocket the time premium, short the shit out of the market using as much free Fed cash as necessary to make it fall, and profit even more on their short cover when you put your position to them at a loss.
That’s what I call a Win-Win proposition, for JPM that is.
Why would anyone ever follow financial advice from a firm that can position against them? It’s just bad practice. Any institutional investor with a fiduciary responsibility should be sued on principle by their clients for doing it.
Perhaps they don’t because they can’t. Perhaps JPM knows that too. Perhaps the real intent of JPM’s note is to prevent investors from following their advice, even if they wanted to.
Oh what a tangled web we weave.
When you control the magnets under the roulette table, the Croupier and Card Game dealers work for you, you get your gambling chips for free from the FED, and get a take on each table - well then - of course you can make calls on which game or table is "hot".
Muppet faces have been already ripped off. Time to resume the parabolic ramp.
i witnessed that the muppets now look at gold with fearful eyes. they have been bitch-slapped.
#10 - Global growth and inflation rates will likely soon bottom
Growth rates are bottoming? I see them peaking about now. And what inflation rates are they talking about - doesn't the fed say there is no inflation?
-uck you JPM. Now that you've covered the bulk of your SHORTS............Assholes
Dude put me down for the deflationary plunge theory. Those fuckers over at the Morgue are about to dump and head to a place that offers no extradition.
Hands up who has been tracking JPM's much lauded Copper EFTs recently?
No-one?
Ok, good, carry on. Not like that one cratered into a mountain or anything.
The one reason JPM wants commodities up!
China is going to dump the mainland copper stores and that will crush the JPM copper etf. The only copper China needs the next few years is that for low cost housing and they will never pay the JPM cornered prices.
30 mins later, it's ok to reply to my post with agreement. No-one will think badly of you for it. I'll green you for mentioning the Chinese stocks, but you should probably also mention Aus. Miners at some point...
Not that Technicals are the end all etc., but the chart on Copper is UGLY. Copper recently breached a 5-year support line @ $350 with a target around $170.
More interesting was that every time the support line was touched in the past all hell broke loose, risk off big time. This time the support line was breached but so far, other than a brief downturn in equities, no major panic.
However following the copper break lower, other 5-year trendlines were cut (HYG etc.).
Other than buying GOLD, which reached it's $1200 target, I'm going to wait and see whether the lower targets in Copper and HY come into play. Maybe Commodities get a bounce here, but I would use $350-ish on Copper as a top flag.
When the big banks win, their people get rich. When they lose, the taxpayers pay their lossses. This is why the middle class is getting poorer.