CNBC.com Video: On May 5, analyst Elaine Kub discussed a possible commodity cartel. What commodity was it?

The video in question is called Rice Cartel.

Typically, commodity cycles are driven by supply, not demand.

Gold | Economist.com

World gold production fell by 1% in 2007, according to the latest Gold Survey from GFMS. Gold prices have risen to new highs this year, but fresh supply has been held back by a global shortage of mining professionals and equipment. China, where gold output rose by 12% last year, supplanted South Africa as the world’s number-one producer—a position it had held for more than a century.

Although a recession in the US could take a bite out of demand for gold, it won’t help the supply any. Inflation is still higher than the Fed has historically been comfortable with, and that too seems unlikely to change much in a recession. There seems to me to be more inflation risk than is being priced into most assets, so I’m keeping 10% of my own assets in yellow metal.

Disclosure: Long GLD

Disclosure: Author is long STREETTRACKS GOLD (GLD) at time of publication.

April durables orders weak, jobless claims rise - Yahoo! News

New orders for U.S. durable goods rose by a weaker-than-expected 0.6 percent in April as volatile transportation orders fell, while initial claims for jobless benefits rose by 15,000 in the latest week, government reports showed on Thursday.

I frequently criticize the way economic data are reported (seasonally adjusted, month-to-month change) and the way they are often interpreted. In this case, it seems that both are painting a picture that is consistent with my own read - weakening but not too weak. Here is the chart of overall durables measured as the unadjusted year/year change as illustration:

A little spike up this month, but not enough to call an end to the recent slide.

Since everyone seems to be callint this one about right, I decided to look for the industry groups that don’t fit the mold - either clearly weakening or clearly strengthening. I found a few pockets of strength.
I start with primary metals. Orders and shipments are clearly trending up, while inventory growth is being reigned in. About the only thing to watch out for is the flat backlog.

A similar, if not stronger, story applies to electrical equipment, appliances and components:

Transportation equipment seems to be getting back on track, gaining ground or taking off (depending on the mode of transportation.)

Particularly nondefense aircraft and parts.

The stronger industries may be better poised to weather a downturn and could also be leaders into a reaccelerating economy.

Oil prices rise as demand worries fade - Yahoo! News

The U.S. government reported Wednesday that stockpiles of gasoline and distillates, which include heating oil and diesel fuel, dropped last week by a larger amount than analysts had forecast. Gasoline and distillate inventories are lower than they were at this time last year.Light, sweet crude for April delivery rose 17 cents to $61.63 a barrel in early afternoon trading on the New York Mercantile Exchange, after falling as low as $59.92 in electronic trading on the worry that U.S. and Chinese fuel demand growth could decelerate.

We’ve felt some pain with the recent decline in oil, as our position in the USO ETF is down more than 13% since we bought it.  Still, we held on, and part of the reason for the rising prices now is the change in weather that was all too predictable.

Still, what does the overall picture for supply and demand look like today? According to the EIA, total stocks have come down from record highs and are now approximately in line with the 20-year average.

However, we have never felt it made much sense to compare long-term averages in inventories to a generally rising trend in demand. Looking at the number of days the inventory will supply, the last two weeks have presented what may be a downside breakout for supplies (and thus present the possibility of an upside breakout for oil prices.) Note too that the economic slowdown fears would probably be reflected by a rising days of supply even if inventories were flat - so the declining days of supply pretty much washes out that excuse for prices to fall.

So we’re optimistic that our USO holding will recover its losses and then some.

We recently wrote that an investor’s starting point for exposure to commodities should be their relative weight compared to all possible investments.

For example, if commodities are 5% of the investable universe, the average investor has to be at 5%. If all investors shifted to 10% it would simply bid the price up artificially.

On the other hand, it is reasonable to assert that investors have had too little exposure to commodities historically, and that the weight may still be too low to reflect the fact that the investing world has to play catch-up.

Morgan Stanley’s Stephen Roach sees the trend as having reached bubble proportions:

Virtually every major institutional investor I visit around the world — from pension funds and insurance companies to mutual fund complexes and hedge funds — has a large and growing commodity department. The same is true of foreign exchange reserve managers and corporate treasury departments of multinational corporations. One major Wall Street firm is now run by a former commodity executive, and another has turned over management of its global bond division to the architect of its thriving commodity business.

(Image: Devon Corn, originally uploaded by StubbsUK)

Of course, the same could have been said in the mid-1980’s regarding equity departments, when they still had a long run ahead of them. As you know, we are not shy about drawing comparisons between today’s commodity markets and the mid-1980’s equity market. Roach, too, has picked up on this.

A recent Ibbotson Associates study recommends that commodity weightings in a multi-asset balanced portfolio could be increased, under conservative return and risk-appetite assumptions, to a high of nearly 30%. That would be more than three times current weightings and greater than seven times the estimated $2 trillion value of current annual commodity production (see T.M. Idzorek, “Strategic Asset Allocation and Commodities,” March 2006, available on www.ibottson.com). The Ibbotson analysis praises commodities for their consistent outperformance and negative correlations with other major asset classes — going so far as to praise commodities for actually providing the protection of “portfolio insurance.” It concludes by stressing “…there is little risk that commodities will dramatically underperform the other asset classes on a risk-adjusted basis over any reasonably long time period.” Laboring under the constant pressure of the asset-liability mismatch, yield-starved investors can hardly afford to ignore this enthusiastic advice. As a result, with multi-asset portfolios likely to have ever-greater representation from commodities, the financial-market dimensions of the commodity trade are likely to become increasingly important.

It was in the early- to mid-1980’s that the “equities always outperform in the long run” thesis began to take hold. As with other super-cycles, there is a kind of first wave that earns investor awareness before everyone jumps on and begins talking about and investing in the fad du jour. Is the commodity cycle played out? We don’t know, but we’ll bet you heard lots of cocktail party chatter about Internet stocks in 1999 and investment homes in 2004. When is the last time you chatted up someone’s pork belly portfolio? But Roach isn’t buying that argument.

For my money, there is far too much talk about the globalization-led commodity super-cycle. It gives the false impression of a one-way market, where every dip is buying opportunity. Yet commodities as a financial asset are as bubble-prone as any other investment. As is always the case in every bubble I have lived through, denial is deepest when asset values go to excess.

Admittedly the circles Stephen Roach hangs out in are different from ours. Perhaps the pork belly portfolio is the topic du jour at his cocktail parties. (Now that we think about it, perhaps we’re grateful we hang out in different circles!) But our bet is that this is still perhaps the third inning of the stock/commodity reversal game. As soon as there is a Jim Cramer of commodity investing we’ll consider contrary opinions. In the meantime, we think investors are still too focused on stocks and not enough on commodities. As Steve Saville puts it:

In any case, regardless of what happens over the next several months it’s important for investors to understand that the long-term bull markets in metals and the stocks of metal producers did not end earlier this year. Long-term bull markets don’t end when the major stocks in the bull-market sector have valuations that are less than half the broad market’s average valuation; they end after valuations in the bull-market sector reach huge premiums.

Whenever the Bureau of Labor Statistics releases the Producer Price Index (PPI) we like to go through the data to see which industries are experiencing better (or worse) than normal pricing power. Sometimes this can lead to insights as to which industries would make better investments.  Beginning with the headline, though - once again the core number benefitted from slowing SUV sales. Many economists exclude energy prices because they are too volatile, but now that the volatility has been in one direction so long it is affecting consumer purchasing decisions for other products shouldn’t those be stripped out as well?

But on to the nitty gritty. All charts below are reproduced from the Bureau of Labor Statistics and show the year/year percentage change. Corrugated box prices edged back to 11.1% from last month’s 11.6% but remain at the high end of historic averages, signalling strength for both box makers and the transportation companies that move the boxes.

Industrial gases are (ahem) running out of steam:

Inorganic chemical makers are passing through rising petroleum costs but not much else:

Things seem to be slowing down for pharmaceutical preparation:

We may be selling fewer cars and houses, but apparently we’re still painting them:

Steel prices look like they’re leaping tall buildings in a single bound:

Aluminum looks pretty solid too:

Why isn’t Curtiss Wright (CW - Annual Report) stock doing better when industrial valves (below) have such pricing power?

Ball bearings are once again on a roll:

Farm machinery is running out of gas:

Turbines are generating some juice:

Computer prices are declining less than normal:

Graphic evidence of the decline in car prices:

All of the consolidation in telecom is allowing wireline service providers to raise prices for the first time in years:

Last but not least, hospitals look healthy: