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Commodities Collapse: Fast, Big and Still Going: Analyst who projected $200 oil should have lopped off a zero

THE WALL STREET JOURNAL

The analyst who projected $200 oil should have lopped off a zero.

The crash in oil, copper, grain and other commodity stocks in 2008 has outpaced the crash of technology stocks at the turn of this century — with many taking only six months for the 80% wipeouts that took the tech sector two years.

Chart watchers warn that the sheer momentum of the commodities selloff will likely carry losses even further. In other words, the very fact that oil has fallen by $100 and the stock ofPotash of Saskatchewan by nearly $200 since the summer makes further declines likely.

“All of commodities are collapsing,” said Frank Lesh, futures analyst and broker at FuturePath Trading. “The oil charts are bearish. I expect commodities to [remain] under pressure in the first quarter of next year.”

For the first half of 2008, hedge funds and other institutions placed speculative bets on oil and metals futures and on commodities stocks, telling clients that the problem in the U.S. banking sector couldn’t slow the growth of China, India or other major natural-resource consumers. Brokers vied with one another for the highest oil target, just as they once did with dot-com prices.

“Half a billion people are moving into the middle class every year and they’re going to need gasoline,” the bulls said, echoing breathless promises of the past, such as “We will soon be buying our groceries online.”

In July, as the thesis floundered, the bubble burst.

“The majority of tech dot-coms and Internet names went to single digits,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research. “If we think of this as a true bubble comparable to that, there could very well be some pain to come.”

Shares of FreeportMcMoRan Copper & Gold led the sector down again Wednesday, falling 17% to $18.05 — its lowest level in more than five years and about 86% from its summer peak. The miner warned that it would have to cut back production further to reflect the plunge in copper prices.

Earlier this week, fertilizer maker Mosaic warned of similar effects on its plans from the drop in grain prices, bringing it to new lows for the year. These are likely just the beginning of production and profit cuts for these companies. And hedge funds facing requests for cash back from clients are likely still major holders.

For example, Goldman Sachs Group estimates that FreeportMoRan was among the most frequent stocks to appear in lists of top-10 holdings of major hedge funds, as of Sept. 30.

To play the continuing down trend in these stocks, Mr. Detrick recommends buying bearish put options on Potash of Saskatchewan, hedged with bullish calls on agribusiness companyMonsanto, which has held up better than other agricultural-commodities stocks. On Wednesday, Potash fell 4.3% to $52.81, testing its last line of support from 2007, according to Mr. Detrick.

“You get these big bounces,” he said. “If you look at the monthly chart of this thing, it was at $240 back in June. That’s an outright collapse.”

Write to Rob Curran at [email protected]

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