Market Update 03/23/2009

March 23, 2009 · Posted in Weekly Posts

Tim gets it right - at least as far as the markets are concerned!

Treasury Secretary Geithner unveiled the detailed plan today and it looks like in the market’s eyes it is a winner. Stocks world wide took off helped by a number of reports coming out that spurred buying. Existing home sales rose unexpectedly giving additional credence that some form of bottom may be in-pace in housing. Blackrock, PIMCO, and others came out and stated they would be participating in the toxic asset disposal plan that was unveiled giving investors confidence that this plan will go a long way to getting the US financial system un-zombified and back into some form of functioning normalcy. Some good news appears to be coming out of China as well with regards to increasing oil demand implying economic growth picking up.

What is the likely scenario going forward? We know the following:

1) The US financial system is now on a path that should ensure that banks start functioning again. The risk of systemic collapse appears to have dissipated (hence gold’s sudden fall late in the session). That combined with massive spending and reduced interest rates will jump-start the economy. However, this is increasing debt massively to solve a debt problem so at some point this path fails and we will see an economy that is impaired longer term. Nonetheless, we assume growth will now start to pick-up. This will mean increased demand for commodities.

2) The US dollar is now in trouble and will continue to be so. The remedy is dollar bearish and so assets denominated in dollars will tend to appreciate. In addition, the massive printing press gymnastics that Ben et al are going through is inflationary unless the Fed can draw out the liquidity fast enough when any sign of inflation shows up. If the unemployment rate is still high the Fed will have trouble raising rates (not to mention timing will be difficult anyway) so it is most likely we get inflation out of this. That will drive up commodity prices.

3) It is likely that China will come out of this recession strongly having spent massively (money they have, not money they printed) on infrastructure and competitiveness improvements, expansion of their domestic consumer economy, and having taken numerous strategic stakes around the world in hard assets that their economy will need going forward. Any uptick in China means immediate big demand for commodities.

4) Foreign commodity producers are seeing their shares rise in recent days, notably companies in Australia and Brazil and their currencies are rising as well. These companies will benefit most from rising commodity prices and US holders of their shares will benefit from the combined effect of rising share price and decreasing dollar value.

5) Commodities themselves have been in a massive bear market that is historically uncharacteristic. Typically, a bear market in stocks parallels a bull market in commodities but as commodities have become more of a widely owned asset class and as large multi-national funds have increasingly linked markets together world-wide, commodities tracked with stocks this time. Now however, commodities have seen supply cut due to the economic contraction as well as the credit crisis, investment in producing fields and operations scaled back, and new developments and exploration slashed. Commodities across the board are in a worse position from a supply standpoint than they were last summer and further, the production cuts which have occurred due to mine and smelter closures are not as easy to reverse as shutting down in the first place.

Taken together then, investors need to be looking at the ETNs which cover oil, natural gas, agriculture (especially grains), industrial metals, foreign commodity producers and those companies in China and Asia that will most benefit from the upturn.

Watch the oil action this week especially Wednesday when the IEA report comes out. Look for that to either propel the market even higher or to cause a temporary retrenchment and buying opportunity.

Thursday sees the IEA Natural Gas report so watch it as well for opportunities and risks.

Agriculture is higher today but watch for the Ag Department planting report on the 31st of this month. That could send the market into a retrenchment or send it higher.

The message is we are likely entering a new and powerful commodity price upswing but choose your entry points and be prepared to wait or reports and pullbacks.

Gold sold-off late in the session in what looked to us like a fund selling. Recall that the trade came to the opinion that the run-up in gold earlier this year was due to a handful of funds stocking up on GLD (as physical buying from the standard big importers like India is lacking). That buying stopped abruptly. We then had what looked like a short covering rally after the fed announcement last week. Today’s drop could well be those funds deciding that gold is not the place to be for the next number of months. We will get a better idea of that in the next few days.

The bottom line is the US will see a period of optimism and rising markets here for a time while parts of the world actually start to recover. However, the massive debt overhang this nation now faces will cause a significant drain on our economic progress going forward. We may not have seen the lows of this bear market yet but we should have some clear sailing ahead for some time. Global markets, as discussed above, will likely have a better time of it.

The following posts are relevant:

Commodities

China: Part 2 - Bonds, Dollars, and Inflation”.

“The Fed and The Bond Market - Will Intervention be Effective?”

“The Coming Bond Debacle”

Fundamental Trends

“How a Reserve Currency Collapses”.

“Gold - Reluctantly”

“Why is the Dollar Going Up (and When Will it Stop)”

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We are entering a critical period of time in the bond and dollar markets staying plugged into what is happening and the likely ramifications is especially important now - stay informed with Murdock Global Insight.

We hold the following positions as of 03/20/2009:

Long oil through DXO

Long natural gas through UNG

Long Australian dollar through FXA