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Oil prices are hovering at $120 overnight and odds are increasing that support level is about to break. The implosion in the commodity sector today took everything even remotely related to a commodity and crushed it. Dozens of reasons were given but none were credible.

Oil supposedly fell because Iran made a conciliatory statement and tropical storm Edouard turned into a strong rain rather than a hurricane. The news about Iran was just smoke and represents no change in the situation. Some of the P5 members found themselves in a corner after two weeks of tough talk about the Saturday deadline and now that Iran ignored it they had to say something calming to sneak out of their word trap. They have no option. Two of the P5 nations backtracked and said they did not want to vote on new sanctions. That effectively kills the deal for weeks if not months. Talk is cheap and that is all the committee can do now.

Actually Iran made hostile statements on Monday. They announced a new weapon capable of sinking ships nearly 200 miles away. Tehran also reiterated threats to close the Straits of Hormuz if they are attacked over their nuclear program. 40% of the world's oil flows through the Strait every day. Doesn't seem like a conciliatory attitude to me.

Tropical Storm Edouard is almost at landfall in Texas and is currently only packing winds of 60 mph. It is still expected to strengthen just before it makes landfall and could possibly make it to hurricane force but the impact point is not a critical oil area. There are some facilities but no damage to production is expected. Most facilities toughened up after Katrina so they are better prepared today.

Others were saying the drop in oil prices was due to the drop in consumer spending as reported by the Commerce Dept on Monday morning. After adjusting for inflation spending fell -0.2% in June and the biggest drop since February. Consumers claimed higher food and gasoline prices were crimping their budgets despite the tax rebate checks. This is just more smoke by analysts trying to find something to write about.

Commodities don't implode because of a 0.2% drop in consumer spending. Mosaic (MOS) a major global fertilizer supplier with supplies presold at every rising prices lost $14 on Monday. They had blowout earnings last week, raised guidance and said they were raising prices because all their future production would not be enough to supply global demand. So why did a 0.2% drop in U.S. spending cause a $14 drop in their stock and similar drops in others in the sector? Monday was an asset allocation day. They happen all the time. When a sector has been on a run for months it just gets tired and investors have to take profits to turn those gains into cash. Every hedge fund worth its fee has been heavily invested in commodities for the last year. When the herd starts to exit they sometimes create a mini panic. Stops get hit and the sector crashes. There was also a rumor all day that a major fund was liquidating positions to cover losses in energy futures. When you have to sell to cover margin you have to sell whatever you have with value. Personally I think that was just another dose of analyst smoke because they had no clue why commodities were crashing. It must be a hedge fund in trouble! Get a life.

Jim Brown

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