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The global economy continues to resemble the “Energizer Bunny” as it has managed to keep on ticking despite a series of anxiety issues. However, the evidence of forward motion is quite compelling with various economic readings flashing positives, corporate earnings showing an improvement in revenues and profits and ongoing evidence that China continues to be a strong engine of growth.
In addition to favorable retail sales readings and the initial positive US Non-farm payroll reading, other developments have caught our eye. Perhaps one of the more subtle ones is news that the Colonial Pipeline has recently seen a string of days where a number of requests for shipment of gasoline and distillate products were rejected because of capacity constraints. Another rather telling sign is that Chinese oil demand rose more than 12% in March, and according to PetroChina that resulted in a seventh straight month of double-digit energy demand growth. When one also notes that in March Chinese copper concentrate imports were 17% above year ago levels and up 27% from the prior month, it is clear that the Chinese economy is not hitting the skids, contrary to predicted by many Wall Street analysts last month.
Within the US we would like to point out the stellar performance at UPS, which recently managed impressive earnings and revenues. With many pundits suggesting that consumers were still wounded and that high energy costs were going to make it hard for companies to perform, the UPS results seem to suggest that the consumer is O.K. and that many companies can deal with the high oil prices. In fact, many transportation companies have implemented fuel service charges. From our own experiences we have seen fuel charges on trash pickup, lawn services, etc. have generally remained in place since the $140 crude oil days. In other words, the economy is recovering and there appears to be a bit of pricing capacity returning.
As for the valuation of equity prices, the pundits have been calling for a “correction” for a large portion of the last four months. Into the April high reversal, those calls were given added credence by the resurgence of EU debt fears and the Goldman lawsuit. However, as we have said a number of times since the beginning of 2009, the equity market gains off the 2009 lows were largely the return of a tide of investment that was forced out of the market in the darkest hours of the sub-prime crisis. Again, the bears are suggesting that the stellar gains in stocks (using the 2009 lows as a starting point) are signaling more growth than can be justified by conditions. Our view is that panic and expectations for a “depression” were factored into the S&P from September 22, 2008 through March 6, 2009 and that the most of the stock market gains have come from scared money flowing back into place.
We also see the Lehman gap area from October 3rd through October 6th, 2008 as merely the top of the total disaster zone, and until the nearby S&P rises back above the late September 2008 range of 1237 to 1250, we don’t think that the market is pricing in anything more than modest growth. From an overbought-oversold perspective, the stock index futures are not overdone, as the COT S&P spec positioning as of April 13th registered a net long of only 1,810 contracts.
From a longer-term perspective, it should be noted that a US military report recently predicted that the world oil surplus could be gone by 2012 and that the world might also see a global energy shortage by 2015. That would seem to suggest that global energy demand is likely to continue to support oil and a long list of physical commodity prices. In our mind, seeing nearby crude oil prices manage a sustained rise above the $90.00 level will begin to rekindle energy-related buying interest in markets like sugar, natural gas, corn and soybean oil. Make no mistake about it; certain physical commodities are facing negative supply side issues, but demand and investment interest are showing signs of tempering the supply side threats.
