The table at the right summarizes the percent change between January 6 and November 11 in the cash prices of 19 commodities reported in the Wall Street Journal (downloaded via Webstract). The average commodity in this list has appreciated 37% since the start of the year.

A recent paper by Ke Tang and Wei Xiong documents an increasing tendency for commodity prices to move together over the last few years. A decade ago, what happened to oil prices was largely unrelated to movements in most other commodity prices. The graphs below show how the correlations between oil prices and the prices of four representative commodities have increased significantly over time.

Correlation (using a rolling sample beginning one year before indicated date) between returns on oil and specified commodity. Source: Tang and Xiong (2009).

One explanation I often see in the popular press is that movements in commodity prices are driven by changes in the value of the dollar relative to other currencies. However, the magnitude of movements in commodity prices greatly exceeds the size of changes in the exchange rate. For example, the table above shows that since the start of this year oil prices have increased five times as much as the dollar price of a euro; see also Steve Gordon's graphs. While the depreciation of the dollar is part of the story, most of the explanation must be found elsewhere.

Another important factor is resurging real economic growth outside the United States, which produces pressures for both the dollar to depreciate and the real price of commodities to appreciate. According to this theory, the increasing correlations between commodity prices results from the fact that countries like China are so much more important for the world economy today than they were a decade ago.

A third explanation is that investors are making increasing use of commodities as an investment class. Although Treasury Inflation Protected Securities offer a hedge against an increase in the U.S. consumer price index, they don't offer protection for foreign investors against depreciation of the dollar. Insofar as increases in the prices of commodities like oil may depress real economic activity, holding commodities as an investment also offers useful diversification against risks to equities. Particularly when interest rates are low, there is an incentive to hoard physical commodities as an investment vehicle.

The paper by Tang and Xiong proposes that the increased use of commodities as a financial investment accounts for the increasing correlation among commodity price changes over time. In support of that claim, they note the growing popularity of investment strategies based on the Goldman Sachs Commodity Index or the Dow Jones Commodity Index. Tang and Xiong document that correlations among commodities included in the indexes have increased faster than those not included. For example, one of the regressions they estimate relates the return on commodity i to equity returns, bond yields, the value of the dollar, and oil prices, where the coefficients are allowed to grow with time at different rates before and after 2004, and with different trends on these coefficients estimated for commodities included in indexes as for those excluded. The figure below shows their estimated time path for the coefficient on oil prices comparing the indexed and non-indexed groups.

Coefficient relating return on average commodity to return on oil as a function of time for commodities included in the GS or DJ indexes (top curve) and those excluded (bottom curve). Source: Tang and Xiong (2009).

For any of the explanations in this third class, one of the important challenges is to reconcile the story of commodity speculation with supply and demand for the underlying physical commodity. If we propose that speculators have driven the price of the commodity up, the physical quantity demanded should decline as a result. In order to be sustained, a coherent speculation-based theory of commodity price appreciation requires increased physical storage of the commodity.

The solid black curve in the figure below plots the typical U.S. crude oil stocks (excluding those held in the Strategic Petroleum Reserve) for each week of the year, based on the average over 1990-2007. The red line gives the actual values for 2008, which were significantly below the historical average, particularly in the spring of 2008 when oil prices were rising so dramatically. Those below-normal inventories were one reason I focused on what was going on to the fundamentals of supply and demand in trying to understand the behavior of oil markets in the first half of 2008.

Weekly U.S. crude oil ending stocks, excluding SPR, in thousands of barrels, from EIA. Black line: average over 1990-2007. Red: 2008. Green: 2009.

On the other hand, inventories of crude oil this year, shown in green above, have been substantially above normal, meaning that in the absence of that oil going into storage, we would have expected to see lower oil prices than we currently have.

Moreover, much of the current stockpiling may be taking place outside the United States. For example, Yves Smith noted this story from Bloomberg last August:

Copper, nickel and other base metals stockpiled by speculative Chinese investors including pig farmers may be sold when "market sentiment turns," said Scotia Capital Inc.

A price surge and easy bank credit this year encouraged pig farmers, stock brokers and businessmen to buy copper and nickel for speculation, Liu Na, an analyst with Scotia Capital, wrote in a note dated Aug. 17, citing reports from the state-owned China Central Television....

"These stockpiles are in 'weak hands' as speculators have no real use for base metals," Liu wrote. "When the market sentiment turns, they are very likely to turn into quick sellers, especially when the bank's money is involved."

I also found this November 3 story from the Financial Times of interest:

Gold prices continued to rise on Wednesday extending the all-time highs which followed India's central bank bought 200 tonnes of the precious metal, swapping dollars for bullion as the country's finance minister warned the economies of the US and Europe had "collapsed".

India's decision to exchange $6.7bn for gold equivalent to 8 per cent of world annual mine production sent the strongest signal yet that Asian countries were moving away from the US currency.

Policy-makers in the Federal Reserve have traditionally thought of inflation as a broad movement in all wages and prices, which to some extent is under their control, and viewed changes in relative commodity prices as outside their control. I believe that this is not the correct understanding of the current situation. Concerns about inflation, particularly on the part of foreign dollar-holders, are likely to show up first in the relative prices of internationally traded commodities. Insofar as these relative price changes can be destabilizing in themselves, it cannot be wise for U.S. policy-makers to ignore them.

Revenues in the quarter declined 10% to $458 million driven by lower new vehicle sales. New vehicle sales fell 15% to $242 million while used vehicle sales remained almost flat at $136 million. Same store new vehicle sales declined 14.3% while used vehicle sales increased 3.9% on a year-over-year basis.
 
Lithia’s gross profit margin increased 190 basis points to 18.7%. New vehicle margin rose 110 basis points to 8.8%, used vehicle retail margin elevated 490 basis points to 15.3% and used vehicle wholesale margin went up 510 basis points to 0.4%.
 
Lithia had cash and cash equivalents of $4.4 million as on Sept 30, 2009. Long-term debt amounted to $214 million as on that date. The long-term debt to capitalization ratio stood at 45%. In the first nine months of 2009, the company had a net cash flow of $81 million from operating activities.

Lithia Motors is a Medford, Oregon-based automotive franchisee and retailer of 27 brands of new and all brands of used vehicles at 87 stores, which are located in 12 states. It sells new and used cars, light trucks and replacement parts. It also provides vehicle maintenance, warranty, and paint and repair services, besides offering finance, service contracts, protection products and credit insurance.

Chicago, IL – November 3, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: CIT Group Inc. (CIT), Dean Foods (DF), Frontier Communications (FTR), Verizon Communications (VZ) and Time Warner Cable (TWC).

Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=5513

Here are highlights from Monday’s AnalystBlog:

CIT Group Files Chapter 11

CIT Group Inc. (CIT) has filed for Chapter 11 protection on Sunday. The company struggled for months to avoid collapse since the recession elicited billions of dollars in loan losses, and the financial crisis made it incapable of funding itself from its main financing source.

This widely expected Chapter 11 filing is one of the largest in U.S. history, following Lehman Brothers, Washington Mutual, WorldCom and General Motors. The U.S. government will probably lose most of its $2.3 billion aid given to CIT last December through the Troubled Asset Relief Program (TARP). We think the problems at CIT will further weigh on the U.S. economy.

CIT's bankruptcy filing shows $71 billion in finance and leasing assets against total debt of $64.9 billion. The company cited that its bondholders selected a prepackaged reorganization plan which will reduce total debt by $10 billion while allowing the company to run its business.

According to management, the decision to proceed with the company’s plan of reorganization will allow it to continue to provide funding to two sectors -- small business and middle market customers -- which remain vital to the U.S. economy.

Dean Foods Beats, Ups Guidance

Dean Foods (DF) reported relatively strong third-quarter results with earnings of 34 cents per share. Quarterly earnings were up 21% year-over-year.

Quarterly net sales declined 13.2% year over year to $2.7 billion due to the pass-through of lower overall dairy commodity costs, despite positive contributions from acquisitions and lower net sales volumes in the WhiteWave-Morningstar operations, which were partially offset by acquisition-related volume growth in Fresh Dairy Direct and WhiteWave-Morningstar.

Net sales in the Fresh Dairy Direct segment declined 18.3% as the company passed some of the lower dairy costs to customers but were partially offset by continued volume growth. Raw milk prices were 45% lower compared to the prior-year.

Frontier Deal Wins Key Approvals

Frontier Communications (FTR), a leading telecom operator in rural and suburban areas in the US, has reportedly received approvals from the Public Utilities Commissions of the states of California and Neveda and Public Service Commission of South Carolina for its impending acquisition of the rural fixed-line business of Verizon Communications (VZ).

Moreover, the acquisition was recently approved by the shareholders of Frontier. The transaction is now subject to approval by the Federal Communications Commission (FCC) and other closing conditions and is expected to close during the second quarter of 2010.

Verizon is divesting its rural fixed-line business (involving approximately 4.8 million access lines) in 14 states to Frontier under an agreement valued at approximately $8.6 billion. Under the deal terms, Verizon’s shareholders will receive approximately $5.25 billion in common stock of Frontier, equating to around 68% stake in the company.

Moreover, Verizon will also receive $3.3 billion in cash and debt securities from Frontier. The transaction, if successful, will provide Verizon’s shareholders a controlling interest in Frontier.

This deal represents a major opportunity for Frontier as the company remains significantly challenged by the beleaguered economic conditions in its service territories and contends with loss of legacy landline telephony business to wireless and other competitive offerings by cable TV operators such as Time Warner Cable (TWC). Frontier continues to experience decline in revenues which is, to a great extent, attributable to consistent sequential decline in fixed access lines.

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ShariahShares FTSE USA Fund and the ShariahShares FTSE Developed ex-U.S. Fund will invest in foreign and domestic companies that meet the stringent requirements of Sharia law.

ShariaShares FTSE USA Fund will track the FTSE Sharia USA Index, which comprises 241 mid- and large-cap U.S.-traded shares.

ShariaShares FTSE Developed ex-U.S. Fund will track the FTSE Sharia Developed ex-U.S. Index, a market-cap weighted index which comprises stocks from 25 of the 48 countries in the FTSE GEIS Index Series.

The exchange-traded funds will be permitted to invest 80 percent of their assets in underlying securities, and 20 percent in futures and options contracts

In keeping with Sharia law, the funds will not be allowed to invest in non-Islamic banks, finance, insurance, alcohol, entertainment, or tobacco companies. Moreover, the funds cannot purchase shares in food producers of non-halal or pork products, or weapons manufacturers.

In order to meet the investment criteria of the funds, companies will also have to show debt, cash and interest-bearing items less than 30 percent of total assets, and accounts receivable less than 50 percent of total assets. In addition, they must meet specific revenue and dividend guidelines.

The fund’s advisor is California-based Florentez Capital Management.

Sharia-screened ETFs are popular in Europe. These would be the first in the U.S.

-- This report was filed by IndexUniverse.com's senior reporter Daniel Harrison.

[Correction: An earlier version of this article suggested that the new ShariahShares would be the first Shariah ETFs in the U.S.  The Javelin ETF (NYSE Arca: JVS) launched in June of this year and provides exposure to the global ex-U.S. markets.]

ShariahShares FTSE USA Fund and the ShariahShares FTSE Developed ex-U.S. Fund will invest in foreign and domestic companies that meet the stringent requirements of Sharia law.

ShariahShares FTSE USA Fund will track the FTSE Shariah USA Index, which comprises 241 mid- and large-cap U.S.-traded shares.

ShariahShares FTSE Developed ex-U.S. Fund will track the FTSE Shariah Developed ex-U.S. Index, a market-cap weighted index which comprises stocks from 25 of the 48 countries in the FTSE GEIS Index Series.

The exchange-traded funds will be permitted to invest 80 percent of their assets in underlying securities, and 20 percent in futures and options contracts

In keeping with Sharia law, the funds will not be allowed to invest in non-Islamic banks, finance, insurance, alcohol, entertainment, or tobacco companies. Moreover, the funds cannot purchase shares in food producers of non-halal or pork products, or weapons manufacturers.

In order to meet the investment criteria of the funds, companies will also have to show debt, cash and interest-bearing items less than 30 percent of total assets, and accounts receivable less than 50 percent of total assets. In addition, they must meet specific revenue and dividend guidelines.

The fund’s advisor is California-based Florentez Capital Management.

Sharia-screened ETFs are popular in Europe.

-- This report was filed by IndexUniverse.com's senior reporter Daniel Harrison.

The mobile app enables photo and video searching, sharing, uploading and emailing. It also allows automatic geotagging of photos and videos (depending on the model) and allows the user to add personal commentary.

The Flicker app is available in English, French and traditional Chinese languages for users in the UK, France, Singapore, Hong Kong, the U.S. and Canada.

Yahoo has modified its growth strategy this year by increasing focus on the mobile segment. The company revamped the Yahoo Mobile service as a combined application, using mobile versions of Yahoo OneSearch, OnePlace and OneConnect. It makes available search, news, e-mail, social networking, finance, weather, sports scores and other RSS feeds. The company has made the service available as a special app for the iPhone, as well as a browser-based app on more than 400 other mobile devices.

Yahoo also separated the development of mobile applications into general and special categories. The general applications, such as travel, personals or some entertainment sites are available through the browser option. Special applications can be downloaded on specific phones, such as the recently announced Flickr app. The company has also introduced Yahoo Finance and Fantasy Football apps for the iPhone and BlackBerry Bold, Tour and 8900 series.

Yahoo has chosen phones that have the largest number of interactive users, since developing special applications is an expensive affair. Sandeep Gupta, senior director of mobile applications, said that development of applications for other phones like Palm’s (PALM) Pre and Google’s (GOOG) Android-based phones was also underway.

The company has fallen behind third-party application developers that have already launched Mobile Fotos, Darkslide and Flickit. While these Flickr-based apps are likely to increase competition for the company, we expect the Yahoo mobile strategy to be ultimately more successful.

The deal would cover low-rate production engines to be built from 2012 to 2015. Without F-35, GE would be out of the large fighter-aircraft engine business. Gates recently reiterated his opposition in Fort Worth, Texas, where Lockheed Martin Corp. (LMT) builds the F-35. Lawmakers backing the program are of the view that continuing work on a second engine will stimulate competition and lower costs on the massive $300 billion fighter program in the long run.

United Technologies Corp.’s (UTX) Pratt & Whitney unit has seen the cost of developing its F135 engine soar by nearly $1.9 billion since 2002. The engine for the short-takeoff, vertical-landing version of the fighter needed redesigning after problems arose during testing several years ago.

Without a competing engine, Pratt & Whitney would essentially get a $100 billion monopoly on engines for over 3,000 airplanes expected to be sold over time. If the second engine program remains in place, current plans call for the two engine makers to compete for new engine orders every year, beginning in 2015 or 2016.

General Electric is a global infrastructure, finance and media company. With products and services ranging from aircraft engines, power generation, water processing and security technology to medical imaging, business and consumer financing, media content and industrial products, it serves customers in more than 100 countries and employs more than 300,000 people worldwide. We currently have a Neutral recommendation on GE.

The changes announced will include the setting up of an operating committee comprised of two new national positions, responsible for sales and content, as well as four other positions with responsibility for operations, finance, information technology and human resources.

• Bruce Hartmann, the President and Publisher of the News Sentinel in Knoxville, TN, will become the Vice President of Sales (print and interactive) and will be responsible for all advertising and circulation revenue across the division, and all Scripps advertising and circulation sales directors will report to him.
• Rusty Coats, the Vice President of Interactive for the newspaper division, will be responsible for all content and marketing areas, and interactive operations and strategic third-party relationships such as with Yahoo! (YHOO) and other national interactive brands.
• Frank Wolfe, the Director of Operations, will become Vice President of Operations for the newspaper division, and will have national responsibility for production and circulation operations.
• Robin Davis, the division's Vice President of Finance and Administration, will continue in her role.
• Jim York, Director of Information Technology for the newspaper division, will become the Vice President of Information Technology, and will be responsible for the standardization and rationalization of the IT function within the division.
• Mary Minser, the division's Vice President of Human Resources, will continue in her role.

E.W. Scripps, like many other publishing houses, has been finding it difficult to keep advertising sales up. This is primarily because readers are rapidly shifting to online reading and moreover, the recession has hurt advertising sales both on and off line.

Newspaper revenue in the second quarter had declined 22.1% year-over-year to $113 million. This was due to lower local and classified advertising sales, particularly weak automotive, financial services and retail category advertising. Online revenue was also down 25% to $7.3 million due to softness in print classified advertising.

During the first half of fiscal 2009, advertisement sales of the company declined 29% to $165 million. Further, earlier this year, unable to cope up with the severe recession, management had decided to divest its Denver-based daily newspaper, The Rocky Mountain News.

Micrus will manage the regulatory and clinical process and also manufacture flow diverters based on Flexible Stenting's proprietary third-generation self-expanding stent design platform. This advanced platform provides porosity and flow-diversion control based on a unique design pattern and raises flexibility during delivery and post-placement vessel conformability. It also allows post-placement coiling, if required, and its proprietary coating lowers the possibility of thrombogenicity and stenosis.

Micrus has already made an upfront payment following terms of the deal. Flexible Stenting will also receive additional finance after achieving certain development and regulatory targets. Moreover, it is entitled royalties from Micrus on net sales from the product.

Earlier this month, Micrus reported first-quarter earnings of 14 cents per share compared to a loss of 42 cents in the year-ago period. Revenue grew 16% to $21.2 million. Micrus expects total sales of $82-$86 million for fiscal 2010, excluding the sales in China. We continue to maintain our Neutral recommendation for the company.

American Capital has been significantly hurt by the financial downturn. It reported a loss of $2.52 per share in the second quarter compared with a loss of 34 cents in the year-ago period. Realized loss per share was $1.41 in the quarter compared with a gain of 95 cents a year earlier. It also defaulted on $2.3 billion of debt repayments.

On an operating basis, American Capital earned 9 cents per share in the second quarter compared to the Zacks Consensus Estimate of 20 cents.

According to S&P, American Capital’s balance sheet will take time to recover after the severe impact. During this period, the company will also face difficulties in negotiating with lenders.

However, American Capital recently disclosed in a filing with the Securities Exchange Commission that it may offer up to $1.5 billion aggregate of common stock, preferred stock and debt in one or more offerings from time to time. Net proceeds will be used for general corporate purposes that include debt repayment, acquisitions and other general corporate purposes.

American Capital provides finance to small and mid-sized businesses and competes with companies such as MCG Capital Corp. (MCGC), CapitalSource Inc. (CSE) and Allied Capital Corp. (ALD). It has been severely hurt by the draining value of company portfolios in which it invests. However, the recent capital-bolstering initiatives coupled with other cost-containment measures should provide some relief to the company.