China imports? Commodities in the cross-hairs…

Posted by Jack Crooks - Black Swan Capital

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“But now something beyond the incompetence of the financial elite and the big banks may be putting capitalism in peril — an unmistakable odor of amorality, sleaziness and corruption.” Pat Buchanan 

Of Interest 

Europe Accelerates Aid to Spanish Banks (Bloomberg) 

China’s Deflationary Threat (Businessweek) 


Long positions on commodity futures increased the most in two years. As it relates to the managed money category of the Commitment of Traders report, hedge funds decide to pile in during the week ending July 3. Do hedge funds know something we don’t? Or are they just positioning ahead of a third and fourth quarter they expect will be a repeat of 2011 and 2010? 

China just announced an unexpected increase in their trade surplus, a result of an unexpected decline in imports. Notable were the declines in commodity imports – especially copper, iron ore, and crude oil. Some might say this decline was seasonal sluggishness. Some might say it was only a matter of time. We think the risk is to the downside unless the Chinese government’s promised infrastructure stimulus projects create notable demand for commodities and raw materials before the year is over. Don’t bet on it – sustained demand from these projects, considering their relatively modest profile, would be quite the feat. Chinese GDP is to be reported on Friday. Expectations are for a print below 8%. Investors have been quick to predict China’s managed slowdown will bottom out in the next few months. That makes sense, considering China’s resiliency over the last two years. But when second quarter results are released Friday, we’re likely to see a sixth consecutive slowdown in China’s growth rate. Chinese officials appear somewhat desperate, considering their surprise rate cuts recently. I’m not too confident Chinese policymakers can have the influence they once had on the economy; there are too many external forces to keep the pressure on China’s economy. 


We’ve talked about our expectations for copper to continue its downturn; same goes for crude oil, as we just released a recommendation on DTO last week. But iron ore may be an area of interest – the Market Vectors Steel ETF (SLX) holds shares of key iron ore and steel industry players (though the volume is rather low). Time to sell short SLX as Chinese iron ore imports begin to dissipate? 

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