Stocks For After The Commodity Collapse

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I have said for some time that the synchronous and meteoric rise in the price of commodities is unsustainable. These markets were not being driven by the interaction of supply / demand dynamics. Rather we had a situation in which speculative fervor was juiced up by the excessive leverage available through commodity futures and to a lesser extent leveraged exchange commodity traded funds. The commodity collapse was going to take part in three stages. The first stage is when stocks and commodities both begin to go down together. This is the opposite of what has occurred the past few months when both commodities and stocks have risen in unison. The next stage is a rational assessment of which stocks will benefit from a decline in commodities. Put another way, whereas we were all worried what stocks would get hurt by the rise in commodities, now we must seek out which stocks will benefit from the decline. The third stage is a panic stage. We saw some of that on Thursday May 5. During the third stage, hedge funds will be caught overleveraged in commodities or too deep in the long commodity/short US trade paired trade and will have to liquidate en masse.

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