Jan 31, 2007

Ron Struthers: New commodities index is a lie

Ron Struthers, editor of Struthers' Resource Stock Report, reports that the new Reuters/CRB commodities price index, introduced in July 2005, shows a plunge in commodity prices even as a calculation of the index according to its former parameters shows a steady increase continuing. The new index, Struthers writes, "has only one purpose and that is to mislead the investment community. It is simply another tool in the Fed/government's chest for the management of economic data."

Read on...
(you can find Struthers' report here: http://www.playstocks.net/RSUV13_2.1Jan232007CRB.asp)


Commodity, another normal correction

I believe I am the only one following and aware of the manipulation of the commodity index. This time the divergence between the new index and the old faithful index can be described as nothing but enormous.

It appears to me that 99% of investors are like sheep being led over a commodity cliff by the media and the Manager's of economic data.

Here is the two commodity charts, it says it all

New CRB Index Weekly Chart


You can see that this new index, while it only has data from July 2005, hit it's high in May 2006 and has dropped a whopping 75 points or about -22% from the 365 point high. The index is at an all time low and looks like commodities have reversed and started a new long term down trend.


Old CRB Index Weekly Chart


The old index has consistently measured the same commodities, in the same way and this fact is the reason that any prudent analyst would only use this index to measure medium to long term trends and direction.

What a difference, how could the two indexes show two totally different pictures. The real answer is simple, this new index has only one purpose and that is to mislead the investment community. It is simply another tool in the Fed/Government's chest for the management of economic data.

These two charts prove beyond any doubt that this new CRB index has be designed to amplify any decline in commodity prices while limiting the upside.

However, it does not change the facts, but it is fooling the vast majority of investors because this new CRB index is what all the media and analysts are quoting and following. As far as I know, I am the lone voice on how the investment community is being mislead.

Commodities only in a Modest correction

The old CRB index hit a new high in late November of 2006 while the new index showed a mild rally from a 60 point decline and remained about 40 points below its peak.

Take a close look at the chart of the Old CRB index. It looks like nothing more than a normal correction from the November 2005 high. The same type of correction we have experienced numerous times since the uptrend began in 2002.


Old CRB Index Monthly Chart

Looking at the monthly chart, we can see that there were significant corrections as measured by length of time in 2003 and 2004. The corrections in 2005 and 2006 were short in duration. I believe the current correction of 2007 is going to be significant, at least like we seen in 2003 and 2004.

This might be driven by my expectation of a slower than expected U.S. economy and the correction we have seen in oil and gas prices has been the first significant correction in this bull market and if we are to go higher from here, it will at least take a significant time of base building for the energy related commodities.


How could this new measure of commodities decline so much?

It cannot be explained with facts and numbers because the calculation on the new index is a 'black box'. We do know that the index is continuously rebalanced and weighted to commodities that are falling in price. That is all that we have been told on the Reuters/CRB web site.

However, I once again went through an exercise to try to figure out how there was such a large decline.

The new index started back in July of 2005 around 310, the same price as the old index on that day. Since then it has declined to 290 or a drop of about - 6.5%, yet the commodities it is suppose to measure are no where close to reflecting this. I might add in the same time period the old index shows an increase of about 23%.

Energy is 33% weighting, the 2nd highest in the new index

Oil and heating oil are about the only commodities that are down and about -10% from July 2005. Gasoline is about the same price.

The biggest weighting in the new index at 42% is Nat Gas with metals, corn, cattle and soybeans. Nat Gas is down slightly but has been down at these levels all year so it has not really contributed to the decline.

All the metals are still up 50% or more above the July 2005 prices

Corn is up about 80% from July 2005

Soybeans are up slightly

And cattle prices are up about 18% from July 2005

Foods, sugar, cocoa, coffee with cotton have a 20% weighting in the new index

These are all up between 10% and 25% since July 2005

So how can the overall index be down -6% when its biggest weighting is up about 50% and the 2nd biggest weighting is only down about -10% if that, and the 3rd largest weighting is up about 18%.

The only way that could happen is if about 85% of the weighting switched to Oil as it started to decline or the other reason and the real truth is this index is bogus and another scam by the Government to manipulate economic data

Crude Oil Chart Weekly

In fact the new CRB index looks exactly like the oil chart since July 2006. The new CRB index plunged with oil prices from July to October of 2006 and then showed the modest rally in November of 2006 and then the move to new lows in January of this year. So in reality the new CRB index has been nothing more than a measurement of the oil price decline in that time period.

But by the chirping of the media and main stream analysts, you would think we seen a huge correction in all commodities.

I will have more on where I see commodity price action going in my 2007 Outlook issue, for now you may want to refer to my earlier issues on this new CRB Index called

Commodities, Bull Market or Bullcrap December 2005 at:

http://www.playstocks.net/RSReportCRBDec2005.asp

and

Commodities, the sleight of hand November 2006

http://www.playstocks.net/RSUV12124Nov212006CRB.asp


(c) Copyright 2007, Struther's Resource Stock Report


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