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More Commentary on Commodities, Part 5

Here is another article from Jim Cramer expressing a point of view that I’ve not seen or heard anywhere else…

Quants and the Machines

By Jim Cramer

8/5/2008 5:04 PM EDT

Could this be the exact opposite of last year, when all of the quant funds were in the financials and destroyed, causing huge losses? That’s what happened last August. They were caught and killed.

Now it seems that all of the quant funds are caught in agriculture, coal, gold, oil and copper. They are doing exactly what they did last summer, indiscriminate selling because it is what their models tell them to do. They are not allowed to deviate from their models so they have to sell their Archer Daniels (ADM) and Potash (POT) and their Schlumberger (SLB) and their Freeport (FCX) at whatever price there is. That’s what their models say, that’s what they do.

I cannot explain it any other way than that it is what they did last year when they were caught long, then caught short, and they just sold and bought all wrong. I had thought they had enough money taken away from them that they would not be able to cause this havoc. I believe I was wrong. The more I check around, the more I hear that it is mechanics, mindless selling by quant funds caught in the wrong stocks.

I should have realized I had seen this pattern just last summer, in another thin market where you would see them come in and blast down and blast up theoretically immune to price but in actuality, there isn’t even a “they;” there is just a machine and its order is to sell FCX, period.

Everyone sees these clowns coming but can do nothing about it, and they finish with a little time left to go and you can see what happens. Everything lifts. Of course they never finish. They can’t. There are too many of them. They all have the same parameters. They can take a POT down 100 once their models say it is no good. Same with FCX. I bet their models say sell it from now until kingdom come.

For many days now, people have been puzzled about who would make such bad sales, especially those of us who actually care about basis and exit prices. The machines. And they are running amok again. Getting it wrong again. Soon we will hear of big losses in these funds again. Usual suspects. But their clients are so stupid, no one will care.

Sometimes you just have to marvel at how often Wall Street can fool people.