Commodities - Bull Market or Bull Crap?  December 2005

I have been an avid follower of commodities, natural resources and affiliated stocks etc. for decades
now and I find the current market consensus quite amazing and totally misleading. There is a lot of
analysts, market pundits, newsletter writers etc. that do not believe commodities are in a major
bull market. And many that admit to a bull market, are now saying it is over and we are actually in
decline.

To a short answer to my title above, 'YES' to both Bull Market and Bull Crap

Please read on and I will explain. I guarantee you will find it fascinating and a real eye opener.

Two or three months ago I began hearing a lot noise from the commodity bears, other analysts and
newsletters, that this commodity bull market was over. Many claimed that commodities peaked in
August and their prices were declining. They showed charts of the most popular Rueters Commodity CRB
index that showed the decline from August into late October and still falling.

I looked at this in disbelief, because the commodity indexes I follow were continuously showing new
highs. I knew that the energy complex was hitting new highs and most metals were making new highs.

How could this index be going down?

There was one piece of information that I was well aware of, that the computation of the CRB index
was revised about 5 months ago and actually the index was more than revised, it was replaced with a
totally different measurement. Since the index's beginning about 50 years ago, it measured
commodities in the index the same way, now this was being completely changed. I commented at the time
how disappointed I was, because we were into a major bull market, and the most popular commodity
index could no longer be used to compare long term trends and moves in the commodity market.

Previous revisions to the index were limited to removing or adding certain commodities to the index
or index sectors and each commodity had an equal weighting. This time we get most of the same
commodities that were in the old index, but a complete revision on how they are weighted and some
'black box' method of calculating the index which is referred to as 'continuously rebalancing'.

This is a very important change that all investors and in particular commodity and bond investors
need to realize. In my opinion this new index should be ignored and has zero credibility.

The change announced in a press release and you can still find it on
the Commodities Research Bureau (CRB) web site at
http://www.crbtrader.com/crbindex/

Press Release
http://www.crbtrader.com/crbindex/rjcrb_nybotpress.asp

The first 2 paragraphs read:

""The New York Board of Trade, exclusive futures and options exchange for the Reuters CRB Index,
will introduce new contracts on a revised and renamed version of this leading benchmark of the
commodity futures market beginning July 12, 2005.

The renamed Index – the Reuters/Jefferies CRB Index – is the collaborative effort of Reuters, the
global information company, and Jefferies Financial Products, LLC, a leading provider of
commodity-related products for institutional investors and a subsidiary of Jefferies Group, Inc. On
June 20, 2005 , the Index will officially become the “RJ/CRB”, undergoing the most significant
revision in its nearly fifty year history with changes in weighting, methodology and commodity
representation.""

So I began investigating all the commodity indexes and I can tell you there is lots of information
on the net and it is all spelled out for all too see. You just have go look and I am going to point
out actually where.

What I discovered, this new CRB index, and by the way, it is the index quoted most often and is the
index quoted in all the major financial papers and publication is designed to mislead investors. On
the CRB web site, Rueters/Jeffries spell  out a wonderful case study on how this index is better and
would have historically outperformed all other indexes. However the track record since its inception
is the exact opposite. I was very suspicious about their case study because it gives scads of
information about the old index for the last 50 years, but is very sketchy on the new index.

At best you could say this index is a new investment product that might give investors a better
return, but my research leads me to believe it is a SCAM or in other words it is 'BULL CRAP'

I can prove this beyond a doubt, please read on

First off, lets look at a chart of this new Rueters/Jeffries CRB index

Rueters New CRB chart http://www.crbtrader.com/data/default.asp?page=chart&sym=CRY0

In particular I want to draw your attention to the period from the end of August until late October
where the index went down from about  336 to 316, roughly a 20   point decline. I have no
quarrel with the decline from late October into November because all indexes declined with the
energy correction because of the easing of Hurricane fears in the Gulf.

You can clearly see the peak in August around 336, and since then, each rally or peak has been lower
and each move down has been lower where it bottomed around 312 in early December, until we seen
another test of the 336 high last week and a retreat. This chart does not look so bullish and in
fact looks like a top? So the vast majority of market followers think commodity prices are declining
and the peak in the bull move was in August. And now it looks like a double top

Now look at this chart. I use charts from
http://www.tfc-charts.w2d.com/menu.html

I find it quick and convenient to use. Most commodities are in a list on one page. I can just pick
the one I want and get quotes or daily, weekly and monthly charts. This internet source still uses
the old CRB index. Both old and new indexes are still available on the CRB web site but I expect the
old one will eventually be phased out

Rueters Old CRB chart  http://www.tfc-charts.w2d.com/chart/RC/X

In this weekly chart you can clearly see that the peak was in October, that coincided with the peak in
energy prices from the devastating hurricanes in the Gulf. This makes perfect sense and is what most
everyone knows that has any good experience in the commodity market.

The CRB web site also still publishes the old index and we can use their own chart that shows the
same things

So there you have, two very different pictures.

Next I checked any other commodity index I could find, for example the Canadian ScotiaBank index and
the Dow Jones commodity index and yes they also showed new highs and agreed with the old CRB Index.

ScotiaCapital index up 4.2% in Oct., new all time high
http://www.scotiacapital.com/English/bns_econ/bnscomod.pdf

Next I started investigating this new index, I already had the web site and link from when Rueters
first announced the new index. All the information is on their web site and you can easily expose
this scam from their own information.

First off, you can go to this link/page on the Rueters web site and it explains the new CRB index.

After I read this carefully, I just could not figure out how they could show this index in decline
when I knew most all commodities were going higher. There could only be one answer. The index must
be heavily weighted in a commodity sector that has been declining, perhaps it was the food groups,
grains or chemicals or something. Rueters does not tell you exactly how they calculate the index
because it can change all the time, even still I thought it would be easy to figure out. All I had
to do was look at all the Rueter sub indexes that make up the main index and see which ones were
declining. This was a challenge as well because the the new Jeffries/Rueters CRB index uses four
groupings that are mixtures from the sub indexes and there is no separate measurements or data
available for these groupings. Even so the groupings do use commodities from the sub indexes

* Group I is all energy and with a weighting at 33%
* Group II is Nat Gas, with three metals and Corn, Cattle and Soybeans at 42%
* Group III is foods, sugar, cocoa, coffee with cotton at 20%
* Group IV is wheat, hogs, orange, juice, nickel and silver at 5%

You can see that this is a strange mixture, but  energy and metals are pretty well all of group I
and II at 75% of the index. So it is even more peculiar that the index went down when these were
strong sectors. Checking the sub indexes was still a very good exercise and are all listed on their
web site and here is the links to them and charts

What I discovered next was a real eye opener

All the sub indexes were making strong new highs except one was flat with a bit of a dip in late
October, not really showing a good move up or down. Nothing was going down but the overall index.
The only thing that could be described as weak or flat was grains and oil seeds, but there is only
three of these commodities in the new CRB index

Industrial sub index
http://www.crbtrader.com/data/default.asp?page=chart&sym=QDY0

Way up from August to October

Grains and Oilseeds
http://www.crbtrader.com/data/default.asp?page=chart&sym=QBY0

Sideways from August to mid Oct. with a little weakness the end of Oct.

Livestocks
http://www.crbtrader.com/data/default.asp?page=chart&sym=QFY0

Way up from August to October

Energy
http://www.crbtrader.com/data/default.asp?page=chart&sym=QAY0

From August, new highs in September with the October correction going until end of November.
Basically it ended flat, looking at the end of August to end of October

Precious metals
http://www.crbtrader.com/data/default.asp?page=chart&sym=QEY0

Way up from August to October

Soft subs index
http://www.crbtrader.com/data/default.asp?page=chart&sym=QCY0

Way up from August to October

So if none of the sub indexes went down in the August to October period and no other index that
measures commodities was declining. Why is this new Rueters CRB index showing a decline.

The answer is simple, It is BULL CRAP.

Or in other words it is another scam by the government and powers to be to hide the truth and cover
up inflation.

Another interesting fact I discovered is the new Jeffries CRB index uses four sub indexes, they
actually refer to these as Groups I to IV and give you the commodities in each group and their
weighting, but how they measure these sub groups or the overall index is no where to be found.

It is just some 'black box' with no information about it. We get one clue from two paragraphs on the
CRB web site and news release. Pay close attention to what they say in the 2nd paragraph

""Several key features of the current Index (1995-2005) have been updated, replacing identical
component weightings with a four-tiered grouping system designed to more accurately reflect the
significance of each commodity. Also, geometric averaging has been updated to a monthly rebalancing
schedule and 6 month forward price averaging has been modified to a nearby rollover schedule.

The Reuters CRB Index incorporates a technique known as geometric averaging, through which the Index
is continuously rebalanced. Continual rebalancing means the Index constantly decreases exposure to
commodity markets gaining in value and increases exposure to those markets declining in value.""

I don't know why they bother talking about weightings for each commodity and group. This is just a pile of crap because they continuously weigh the index towards commodities that are going down in price. There is no doubt that the index is designed to severely understate the rise in commodity prices.

How they did this in the August to October period is obvious and blatant example of manipulation to
mislead the investment community. It reminds me of my corporate days of top down management.
Management at the top would give out the numbers, growth and profits etc, that had to be met for the
qtr and yearend. It was then everyone's job to make those numbers happen. I can tell you that I seen
a lot of unnatural acts to meet a number. It is obvious that who ever manages the calculation of
this new Jeffries/Rueters CRB index was told that the outcome must show no rise in commodity prices
and they made it happen.

I find it quite sad what North America has become, in particular the U.S. - Scams and corruption is
just rampant. It is all about money and making a buck at any cost. Common good faith and honesty is
being over run by this corruption. There is not a week goes by, that some major corporation has been
found cooking the books. And why not! our leaders and government are becoming more blatantly
dishonest. Remember Clinton, a recent non confidence vote in Canadian politics over a
scam/corruption. The phony Fed and government statistics that are becoming more unrealistic and full
of bull crap as each month passes. This new Reuters CRB index is just another example of lies and
corruption.