Friday, July 25, 2008

Durable Goods Orders Up More Than Expected, Congress Chops Up the Commodities Speculation Bill

This morning a report was released that showed the durable goods orders to factories for big-ticket manufactured goods such as cars, appliances and machinery rose at the fastest pace in four months in June, a much stronger showing than had been expected. Economists had been predicting a 0.4% decline, but the number came in as an increase of 0.8% last month. This was the best showing since a 1.1% rise in February and reflected strength in demand for heavy machinery, primary metals such as steel and even a slight rebound in the beleaguered auto industry. New orders for motor vehicles and parts rose by 1.8%, the best showing in 11 months.

All three major market indices were poised for a positive open on the news.

Source: AP
On Thursday, the House Agricultural Committee was looking through a bill that would control some of the speculation that has taken place in the agricultural and energy commodities markets.  Rather than trying to make sure the bill was tough, the committee chose to remove provisions that would have barred pensions funds from investing the agricultural and energy markets.

It seems the lobbyists for the pensions funds worked to stop the bill, sponsored by Congressman Collin Peterson (D-MN), in its previous form from leaving the committee.

After the revisions were made, the pension lobbyists and industry representatives were breathing a sigh of relief.  The pension industry believes they need access to the market for diversification reasons, and Congress believes they have helped to fuel speculation.

To give you some facts on the issue:
  • Congress cites the growth of index-related commodity investments by major funds to $260 billion compared with just $13 billion five years ago.  The amount of assets now involved must have generated speculation according to Congress.
  • Analysts say most institutional investors devote only 3 to 5 percent of their portfolio to commodities and alternative assets such as real estate, compared with the 40 to 50 percent typically allocated to equities and the balance to bonds.
    • This means a pension fund with $500 million in assets will usually have up to $25 million in commodities, although the California Public Employees Retirement System, with $245 billion in assets, has $1.1 billion in the asset class.
    • The strategy is intended to minimize losses from stocks as commodities move to their own fundamentals and have historically rallied during bear markets in equities.
Ultimately, if Congress disallows pension funds from investing in U.S. commodity markets, it could drive them to look for diversification opportunities outside the country.

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