The Great Decoupling

Commodity prices are rampant.

Last Monday, The CRB index – an index of 17 commodities –
surged to its highest level in 24 years.

On the same day, copper reached a 16-year high.

Then on Wednesday, oil made an attempt at a 24-year high –
$55.67 a barrel is the mark, set on October 25, 2004.

For a moment it looked like oil’s record had been taken
out. We were told the board flashed $55.68 for a second but
after the market closed, they pulled "the print" down,
recording the day’s high at $55.64.

Kevin Kerr, from the floor of the NYMEX and in the center
of the confusion, explains: "What most likely happened is
that someone bid through an offer. In other words, in the
midst of all the confusion in the pit, someone sold for
more than he had to, essentially triggering stop orders – a
common mistake. The only difference is that when the market
is at a key level like this, it holds big implications."

"So this is what happened yesterday. They pulled down the
print because there were better offers in the pit. That
means the stops were never elected (triggered), and
therefore, clients were not filled. I have been doing this
a long time, and yesterday’s action confused me too. Even I
said we made a new high, and several news services had to
print corrections. The bottom line is that until the bell
rings at the end of the day, you can’t count your

The record may have survived for now, but a new high can’t
be far off. "Crude oil is on the move, and $60 is not only
likely…it’s a given," says Kevin. "I think we will see a
modification in prices first though. [Looking further out]
there are simply too many elements at work right now for
there to ever be a dramatic reduction in prices from the
level we are at now."

Gasoline was the next natural resource to be seen in the
headlines. Two days ago, the retail price of gasoline – the
average price U.S. consumers pay at the pump – was seen
within one penny of the all-time high at $2.064, set in May
2004, reported the government. The nearby chart plots this

Unfortunately, none of this information helps you make
money, dear reader. If anything, financial headlines of
this sort should make you inclined to call your broker and
dump commodities. Here in Baltimore, your contrarian editor
certainly is.

At the same time, our contrarian desires are tempered by
the belief that commodities are in the initial stages of a
huge bull market, and we should be long-term buyers, not
short-term sellers.

We collared Justice Litle, new editor of Outstanding
Investments, and commodity pro, and put him on the spot.
"With the CRB index, and several of its major components,
making all time highs in the last few days," we asked him,
"have you felt any speculative frenzy in the commodity
markets yet?"

"Yes. Plenty."

"So you wouldn’t you take a commodity position tomorrow

"I would. In terms of macro cycles, the commodities boom is
only beginning."

"Ok…for the sake of our more speculatively-inclined
readers, if you were looking to trade the commodity market
in 2005, what would you do?"

"The key question in the next 12 months, I feel, is how the
great decoupling will play out. Can we ease out of ‘Bretton
Woods II’ and all our liabilities with Asia with grace, or
will it come to a violent end? I’d still maintain an
aggressive position in general commodities at this point,
using precious metals as a backstop. Keep in mind that
commodities aren’t all similarly correlated…copper and
energy, for example, are growth plays whereas gold is more
of a neutral currency and a hedge against instability…

"A nimble player could do well if he was willing to
transition to a heavy gold bias if things started looking
really hairy."

"Cheers Justice."

The Great Canadian Double-Cross

Did You Notice…?
By Tom Dyson

New York’s Plaza Hotel is being turned into condos.

Just like the late 80s, when corporate raiders squeezed
money out of asset-rich conglomerates by breaking them up
and selling off their parts, New York’s hotel rooms are up
for sale.

"A bubble in the New York real estate market has made it
very attractive for investors to purchase hotels and turn
them into condominiums," explains a website called

On April 30, the Plaza closes its doors to the public, and
will begin its transformation into 200 luxury pads, on sale
for $1.2 million a-piece, and a 150-room hotel.

As the nearby chart shows, converting hotel rooms into real
estate is rapidly becoming a fad, with over 5% of N.Y.’s
hotel rooms already lost to developers. N.Y. has 65,000
hotel rooms in total.

Regular readers of the Rude Awakening will be familiar with
New York’s bubble in real estate. What may not be so well
known is the fact that – while supply decelerates – demand
for N.Y.’s hotel rooms remains strong.

According to the PricewaterhouseCoopers Hospitality &
Leisure practice, "Strong local economic growth combined
with an increase in business travel and international
arrivals will lead to the continuation of robust revenue
per available room (RevPAR) growth for Manhattan hotels in
2005 and 2006."

"In 2004, Manhattan hotel occupancy increased by 7.3
occupancy points to 83.2 percent and average daily room
rate (ADR) increased by 11.3 percent to $201.76, leading to
RevPAR growth of 22.0 percent, compared to prior-year
levels, according to Smith Travel Research."

The price of hotel rooms is bound to rise; what we can’t
figure out is if this is a sign of a bubble top in real
estate or a good time to buy N.Y. hotel stocks?

No Buyers


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