Where from here ... the next shoe ... peak copper ... is oil cheap at $100 ... Korean unification

Carnage in the US last night as LEH, the oil price and probably hedge fund redemptions dragged down nearly everything, the SPX closing down 3.4%. On the bright side, although Asia is generally lower - the Nikkei, Hang Seng and ASX all down - Shanghai, Taiwan and Korea are all higher an better inflation numbers (arithmetically its very difficult to see anything other than a cyclical inflation peak from here). Dollar is flat overnight after ralling into equity weakness, US yields around 5bps higher with most commods down except energy which is up.

How much ammo do we have left? Bear is no longer with us, the GSEs have been nationalised and LEH is a dead man walking because it can't raise capital at economic rates ... you just can't help but wonder how many others are in the same boat?

Bill Bonner was interesting yesterday ... he said that he spoke at a conference in 2004 on the dangers posed by the GSEs. He didn't have a crystal ball, he couldn't see the future and he didn't have any great insight at all, other than at 30-40x, depending on how you measured it, they were overly levered. At that level you have no margin of error should something, er, "unexpected" arise ... which got me thinking ... if I was a financial company with a return on assets of 1.2% but a return on common equity of 32% ... leaving me levered 27x ... I'd be sitting with fingers and toes crossed right now hoping that I'd thought of absolutely EVERYTHING, right? Well, let's hope all those clever guys at Goldman Sachs are cleverer than the clever guys at LTCM, Enron ...

But, where do we go from here - cen bank cuts? They can't be far off given the improving inflation picture, but its difficult to see anything other than a short term bounce. The first discount rate cut by the Fed occurred last August with the SPX at just over 1400. Then, in January and between meetings the Fed cut again, this time with the SPX at about 1310 ... but that didn't prevent the need for Bear to be bailed out at 1280 ... after the GSE nationalisation the SPX currently sits at 1224 ... you get the picture ...

BHP chief exec Kloppers said that copper output from Chile's Escondida (which accounts for 10% of world output) would fall by 15% over the next couple of years. In a few years time, output would rise again as the current investments payoff but in the meantime, lower grade ores were hurting output. Although he can see demand falling, he thinks prices will remain resilient. As a broker was complaining yesterday though, no one is listening to the bull case, and no one wants to buy ... is that a signal?

It seems that the commodity boom has now been revealed for what it was - a bubble, which is now bursting. Except that BP is trading on 5x earnings, BG which is has grown its revenues by 35% per year is trading on 10x, Yara the Norwegian fertiliser company is trading on 7x ... silver has fallen by one half, and trades at 70% below its all time high, zinc mines are closing because prices are not economic at these levels, so too are nickel mines ... what kind of bubble is this?!!

Or are hedgies just dumping stuff to pay redemptions? Yesterday Goldman's wrote about their index of popular hedge fund trades and how they'd been underperforming ... that happened spectacularly yesterday with bread and butter equity hedge fund bets like LonMin - £33 bid but down 5.65% on no news - and Yara - down 12.5% on no news whatsoever, except that a few brokers had upgraded them to buy (being on the same side as jumped up pundit research would certainly make me question whether I should be in a trade but -12% is excessive) ... these were hammered despite an initially positive market ... redemptions, distress ... who the hell knows? But it felt very panicky to me, and those situations don't usually last long ...

OPEC's lack of enthusiasm for production cuts pummelled oil and the rest of the commodities ... and then the commodity stocks ... and then came the news that Ike looks set to miss the oil installations. So we're approaching $100 on oil and I think that will be decent support.

Why? Well, fear of what the Chinese economy is about do do is definitely seeping into the commodity market now. The problem is that anyone who says they understand what's going on there is LYING. In a plausible slowdown scenario copper and aluminium could easily go the way of zinc, nickel and lead. Chinese real estate, both commercial and residential, is now falling and banks rarely escape such stress. Banks lend to the rest of the economy, which means that real estate busts tend to be painful all round. Just ask the Japs, who suffered 15 years of stagnant growth after their real estate bubble popped, crippling their banks, or over the pond at the USA where the leader of the free world now has a nationalised and very public sector mortgage market. The French will be calling them commies now!!

That the Chinese economy will hit a large bump at sompoint is inevitable. Which economy has industrialised without several? But when? ... when will it roll over? I don't know. Goldman Sachs doesn't know. No one does. So best not get involved in anything that is vulnerable to that event ... what does that leave? ... not much when you think about it. But the Chinese haven't been as instrumental in driving oil demand growth as is generally assumed. They have accounted for about 20% of demand growth over the past five years, compared to nearly 100% in copper or aluminium. The same is true of soybeans, while net net, they still export corn ... oil at $100 is worth a nibble.

Finally, South Korea's Unification Ministry is on "high alert" after a tip off from US intelligence that Kim Jong Il may have siffered a stroke in the last month. Kim is clearly ill as he didn't attend his country's 60yr birthday party (must have been a blast) This could be quite a negative for the Korean stock market - there's a good chance that whoever follows Kim will want to either nuke South Korea or re-unify with it.