A Peck of Woe
Chart from Bloomberg.comI could be bullish, but if wishes were nickels I’d have a bag full. Watching the market lately has been about as appealing watching the grass grow. Not that I have anything against grass mind you. The market foretells a particularly inclement season with higher energy prices, a housing market boil and an overvalued stock market that has all the markings of pin-hole bursting. But with all the rain, the grass should be fine.
Rudimentary Crude-Oil
Back in February, http://blog.ed.newcomb.net/blog/Energy/_archives/2005/2/23/367814.html , I reported that because of domestic and foreign demand for oil that it would reach $60.00 a barrel by the end of summer. Well, it looks as if it’s heading in that direction. Crude-oil, (Nymex Crude), went to a new high of $59.84 yesterday and on Friday June, 24th 2005 the oil futures traders were betting on $60.05 a barrel. These savvy futures people usually know which way the market goes. See http://www.bloomberg.com/energy/ .
Money manager Scott Black reported in Barron’s, http://online.barrons.com/public/main/ , recently that the market looks expensive except for some groups like energy. The overall S&P 500 is trading at near 17.8 times earnings. The message seems to be to look in the dark corners of energy for value.
What to do? And speaking of a peck of woe or a barrel for that matter. Well, you could join the futures traders. The overall market fell at the news of possible higher energy prices. The S&P 500 Index was down 25 points to 1,191 and the DJIA fell almost 300 points to 10,297 yesterday. So, the cost of doing business really does matter!
Over at Zulauf Asset Management, http://www.zuam.ch/ , there are three main reasons they see the markets at risk by the end of the summer. Oil prices in the $60’s will be bearish for the stock market and world economies, (with $60 to $65 a barrel being a given). World-wide inventories have been built up to peak levels without enough buyers in sight that will cause production slow-downs. Thirdly, the monetary environment looks like a weakening of currencies, especially in Europe, (read short the Euro).
Most are saying look for a correction after the summer run. The Financial sectors may be hit hard because derivatives are positioned for decline. Commodities may be the only safe haven long-term. I do mean long term. They will be a steal around September of this year and pay off beginning late 2006 through 2008. 2008 contracts on oil may be trading at discounts to spot prices.
Zulauf spotted another more obvious concern that is so blatant that it may slip by some investment houses. China, a big contender these days, has a drought this summer. So they’ll be needing a lot, (read a great deal), of our grain export. The message seems to be to hold on to wheat and corn. Read on to see what the guru’s are seeing for the next year.
What are the skilled practitioners saying?
Over at Bridgewater Associates, http://www.bwater.com/about.htm , as reported in Barron’s, http://online.barrons.com/public/main/ , they see inflation coming up the pike through 2006. This forecast is because they see an increase in commodity prices and a depreciation of the dollar.
China’s economy has pegged it’s currency to ours and is growing at a 9% rate while we linger at about 3%. They’ll need more money-supply and it doesn’t look like the good old U.S. dollar can give it to them, (so far Beijing still buys about $200 billion in Treasury Bills each year).
At Morningstar Pat Dorsey thinks the market will take a 30% hit, http://www.morningstar.com/ . It’s just a question of when. A market downturn by one-third is a big drop. Will it be a sudden shock or a gradual decline? We shall see and hopefully we won’t get hit that hard.
Economist Marc Faber reported recently that the financial economy has inflated values compared to the real economy and there may be a correction ahead, http://www.ameinfo.com/53698.html .
Bill Gross, director of Pimco, is often been referred to as "the Warren Buffett of the bond world". Gross manages the Pimco Total Return bond fund (ticker PTTAX), which has averaged gains of around 7.94% for the past five years and is up 2.5% YTD. Bill sees the things that have been fueling the financial markets, low interest rates, low inflation and a depreciated dollar as supports that are going away. The U.S. and world economy will have big adjustments to make as rates rise, inflation climbs and if and when China revalues their currency. See the interview in Barron’s, June 20, 2005.
Housing Boil
Some of the reasons for concern may, in part, be the inflated prices in the housing market. As reported in Forbes, interest-only mortgages accounted for 63% of home loans in the last half of 2004. These notes have low payments for a few years and then a later down the road kick up higher when principal payments are due. If the housing prices decline, as they have many times in the past, these borrowers will have less equity to lean on. See Forbes at http://www.forbes.com/ . In support of this arrangement is Marc Faber who said he’d short U.S. housing stocks in a Barron’s interview, http://online.barrons.com/public/main .
Fortune magazine, www.fortune.com/ , reported that for the 25 years between 1975 and 2000 homes sold for 2.7 – 2.9 times median U.S income. Now homes are selling for 3.4 times income and in California it’s up to 6.4 times income. Lipper says that prices must eventually fall back into line because rent values have not reflected the same trend. For the last 10 years home values have risen 25 percent faster than rents. Rent value always moves in step with home value because rents are based on real value.
Bloomberg reported that U.S. manufacturing growth probably held near a two-year low in June, a private report this week may show. Rising home prices and the risk of inflation will likely prompt Federal Reserve policy makers to raise their target rate a ninth straight time when they meet June 29 and 30. See http://quote.bloomberg.com/apps/news?pid=10000006&sid=a4qHhIkL4cEs&refer=home .
Close
In closing I could say good luck, you’ll need it. There are a few good tidbits to salvage here. Watch out and keep your liquidity out there.
In the same Bloomberg article sited above the conclusion of the Commerce Department on July 1 may show.
Bloomberg Survey
Date Time Period Indicator BN Survey Prior
06/28 10:00 June Confidence Board-Conf. 104.1 102.2
06/29 8:30 1Q F GDP 3.7% 3.5%
06/29 8:30 1Q F GDP Price Index 3.2% 3.2%
06/30 8:30 6/25 Initial Jobless Claims 325k 314k
06/30 8:30 May Personal Income 0.3% 0.7%
06/30 8:30 May Personal Spending 0.1% 0.6%
06/30 10:00 June Chicago Purchasers 54.3 54.1
07/01 10:00 June Confidence U. of MI 94.6 94.8
07/01 10:00 May Construction Spending 0.5% 0.5%
07/01 10:00 June ISM Manufacturing 51.5 51.4
07/01 10:00 June ISM Prices 55.0 58.0
posted by Ed Newcomb @ Saturday, June 25, 2005
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