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Saturday, May 14, 2011

Market Thoughts... only earnings matter

(NOTE: The time stamp for this post was Thursday May 12, not the 14th. Blogger was having issues on 05/13/2011 and their fix appears to have been a fickle one. They placed their own irregular tag on the post that allowed the post to have an original time stamp. But when I edited the irregular tag to conform with my own tags, the time stamp became 05/14.) 

Technical breakdowns galore within the commodity space. Or at least that is what you would think from the overall coverage commodities have been getting.  For instance, coal is not in a break down, nor is Gold.  On the other hand, Natural Gas has been a mess for a while. Silver is just fucked. Copper has broken down.


Oil is not in a breakdown, but its about to be.

Basically, what I am getting at is that the price discovery for all commodities is predicated on their own supply/demand issues.  Natural Gas has too much supply, so its price is and will be suppressed for a while.  Copper, known for as an economic barometer, but how well of an economic barometer is it when China has massive stock piles, and GLOBAL real-estate markets are in an utter rut? There is only so much copper needed for infra-structure builds, keeping in mind the level of appreciation is still fairly significant despite being down for the year.  Oil, imo the most transparent commodity as so much info exists for the layman to access, has been a wash for some time to not justify +$110, as I was touting since last month. (Although the rate of consumption-vs-production merits an $80-90 price.)

The supply/demand factor is playing out in these markets separately, whether investors/speculators what to believe this fact is another issue. But what exacerbates the supply/demand factor are the increased margin requirements.  Anyone trading the commodity futures got very scared about what they saw in the silver market over the past two weeks. Margin requirements increase very rapidly, and surprisingly. This is now happening within the oil market.

On top of the above two factors, we have the dollar that is about to break out. (Technically, it already broke from its multi-month negative SMA resistance.)

I was a bit early on my dollar call, but it looks to be playing out.

Adding to the commodities burst, were the reports today that the USDA indicated supplies topped forecasts. Albeit the levels were from 15yr lows, so I would argue the supply/demand aspect of agriculture is still very much intact.  However, the report, and in sympathy to the other commodity prices, along with the potential threat of increased margin requirements, are declining as well. (IMO, this is providing a nice opportunity to enter the fertilizer names. ie POT)

The current activity is making Bernanke look very good, again, with his 'transitory' thesis.

So, how does all this effect the SP500? Well, it should benefit it. Stocks are a function of earnings and earnings potential. Lower commodity price (ie input costs) mean higher profits.  But lets ignore this simple fact for this assessment, because regardless of a commodity's price, the SP500 is more associated to global GDP.  So with global GDP growing, so will the earnings of the SP500.

So with the SP500 declining in sympathy to a decline in commodity prices, is an opportunity to enter desired positions.

PS... I got some good news today. Do not think it is appropriate to share it right now, but I will over this weekend :)

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