Subtle Manipulation

In today's FSO write-up, Rob Kirby writes about Fundamental Vs. Technical Analysis and More. This section of his editorial is utmost interesting.

Enjoy!

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The Subtle Side of Molding Market Sentiment

Other times, manipulations are more subtle. An example is illustrated from my correspondence with this particular financial reporter just this past Friday. I make specific mention of this because this particular piece has actually made it onto the front page of the business section of one of Canada’s major daily newspapers today, December 11, 2006:

The piece in question was reported Friday by MarketWatch:

By Steve Goldstein, MarketWatch
Last Update: 8:50 AM ET Dec 8, 2006

LONDON (MarketWatch) -- Worries about the strength of the global economy pressured the metals sector in London share trading Friday, though a solid report on U.S. payrolls growth and speculation of banking takeovers helped lift shares of other top British companies.

Merrill Lynch downgraded the entire metals sector to neutral on economic-growth fears and concerns about the manipulation of metals prices. …

So I contacted the author:

Mr. Goldstein;
Could you elaborate on Merrill's comments about manipulation of metals prices?

"Merrill Lynch downgraded the entire metals sector to neutral on economic-growth fears and concerns about the manipulation of metals prices

Here was the response I got:

I'll quote what they said:

Our view is that spot metal prices have been pushed to over-inflated levels by hedge / investor fund manipulation (eg 1 investor holding >50% LME Al stocks), and that there is a much greater risk to the downside from spot prices than to the upside. With slower global demand growth likely in 2007, particularly in the US, and a likely de-stocking of metals inventory in the G7 after a very strong demand growth in 2006, the risks are that base metals prices could correct ~30% from current spot levels, and this would negatively impact the equities. We continue to believe in the super-cycle, that metals prices will be stronger for longer; however, this means stronger than long-term average prices, not stronger than current spot prices. History shows us that no matter how much we believe that weaker commodity prices are already factored into equity prices, if the commodity prices re-trace, the equity prices of leveraged stocks follow. Whilst metals prices have outperformed the equities on a 12-month view, over the last 6 months, global mining equities have outperformed the LME index. In fact, as seen by the Bloomberg World Mining index in the margin chart, equities have been moving higher in recent weeks and have recovered much of the sector pull-back that occurred in early November. The laggard has been the AsiaPac mining index. However, we remain convinced that if the metals prices do see a correction from current elevated spot positions, equity prices will also correct. It is amazing to us that despite statements that liquidity will continue to flow, when sentiment

So I replied with this;

Steven;
I wonder if you bothered to question them about "a likely de-stocking of metals inventory in the G7 after a very strong demand growth in 2006."

The reality is that de-stocking of base metals HAS ALREADY OCCURRED!! - witness the all time critical lows of copper, aluminum, lead, zinc and nickel in LME warehouses.

Before "DE-STOCKING" can occur in the future - INVENTORIES HAVE TO FIRST BE REBUILT.

Rebuilding of critically low inventories would CONTRADICT this forecast - wouldn't it?

Regards,
Rob Kirby

And Mr. Goldstein then replied with this;

You may well be right -- we pass on the news, leave it to you to accept or reject.
Cheers, Steve

The HUGE Issues Here

First, these "allegedly professional" mega financial institutions sometimes put forth fundamentally FALSE and often CONFLICTED research for unknowing, unsuspecting consumers and - Second - the media so often takes this false and / or conflicted research, asks few questions as to its veracity, and presents it to the public as "NEWS" and then – only if pressed / questioned or cornered – it’s like we’re "all free" to accept or reject what they report as news.

Whatever happened to responsible journalism where errant reporting led to a retraction and an apology?

I bring all of this to your attention for a few reasons. First, a general understanding of the differences between technical and fundamental analysis gives investors greater clarity in deciphering the blur or hype of economic reporting in today’s market place. Second, regardless of which discipline you’re an adherent of – your results will always be dependent on the quality of inputs or soundness of your assumptions. The lesson here is ‘be careful who or what you hitch your wagon to.’

Remember; there’s no such thing as a dumb question when it comes to your investments. Knowledge provides comfort and it’s the basis of power!

Because events like the ones described above have a great influence on what happens to your investments on a day to day basis, understanding what is affecting your investments and sometimes WHY – might just lead to a greater comfort level and a better night’s sleep!