Market Sentiment Observer

I may post here relevant (in my opinion), and not necessarily recent, quotes. Rather than analyzing specific investments, I will attempt to focus on investors' sentiment regarding broader asset classes and/or specific securities. These will be my thoughts/reactions/questions, and they are not and should not be taken as investment advice.

About me

In particular, I am interested in investors' sentiment and valuation levels. Disclaimer: I work at an Investment Management firm. My comments on this site are not posted in that role, and no opinions of mine should be construed to be recommendations of or to reflect the views of my employer.

Wednesday, June 9, 2010

Commodity prices. Predictably irrational?

"A recent paper by economists Ke Tang at Renmin University in China and Wei Xiong at Princeton University documents how commodity prices have become increasingly correlated with one another and with stock prices. The reason, the economists argue, is that commodities have become increasingly “financialized” by the creation of exchange-traded funds that allow investors to easily trade in and out of them. So when investors get worried by things like what’s going on in Europe, commodity prices can fall sharply even though actual demand for commodities may be running higher."
WSJ

Used to be macro plays... Not anymore?
Used to be diversification vehicles... Not anymore?
Used to be the supply of oil meeting the demand and voila! the price is born... Not anymore?
I am going to read this paper. I want to know the break-down of commodity price movements: by how much (degree) and for how long (sustainability) is it driven by the ETFs? Are fundamentals still responsible for the majority of the movement?