No Accurate Sense Of Supply Demand Fundamentals

The big debate midday was on commodities: energy, metals, and grains were up 2%-4%. Energy, steel, coal and metal stocks rallied. Bulls were saying the commodity trade was back on, that demand destruction was yesterday's story.

That is highly unlikely; what is more likely is that this is a one or two-day opportunistic trade. Yes, House Speaker Nancy Pelosi's comments at the close yesterday made an impact on energy traders. She said she was will to schedule a vote in the House of legislation to expand offshore drilling, if the bill addressed other energy issues. I know several traders that went long energy on her comments.

Still, don't kid yourself. Commodity stocks were at their lowest levels since February yesterday. With weakness in Europe, as well as the U.S., there is nothing fundamental to change the global slowdown story, the best you can do is get a brief rally that will attract new shorts to commodities. At most, you can say that nobody has an accurate sense of what the supply demand fundamentals are.

Elsewhere, the news flow on financials continued negative. Consider the problems with the following companies:

1) AIG: what are they going to do with all the toxic collateralized debt obligations (CDOs) they have? They also have credit default swaps that are also protecting other CDOs. Bernstein had an interesting suggestion today: write down the value of more subprime CDOs (currently at $0.64 on the dollar), sell part of the subprime portfolio at a reduced price, and raise $20 b in capital. That would go a long way toward reducing uncertainty. The big hope, of course, is that the actual losses among the portfolio they keep will not be as big as the accounting losses.

2) Lehman: had its numbers cut again by Guy Moszkowsi at Merrill Lynch (he also cut Goldman and Morgan Stanley) as "conditions have deteriorated significantly from July", in Lehman's case due to deterioration in mortgage related assets. Mike Mayo at Deutsche Bank also reduced estimates on Lehman.

Moszkowski reflected much of the frustration with financials in general when he wrote, "The tremendous volatility and unpredictability of asset prices has caused pain for both longs and shorts and, we believe, has caused many market participants to just give up for the time being..."

Questions? Comments?