Commodity Outlook – 2009.05.15

While the stock market recently seems to have shifted into a position where it is demanding more definitive proof of a recovery, it does not appear overall anxiety levels have expanded enough to send investors away from equities again. In fact, last week the VIX fell down to the lowest level in eight months.

Compared to the anxiety and fear in the marketplace last September, it is clear that overall conditions have improved. Some might suggest that downplaying the threat of a resurgence of the financial troubles is unjustified. Our view is the stock market over the last two months has not only managed to rise impressively, but has managed the rally in the face of several potentially undermining events. Looking back, the stock market saw extremely disappointing monthly payroll readings, a major US auto maker bankruptcy, the threat of a swine flu pandemic and a potentially serious US bank stress test release. While it might sound ridiculous, we think the lack of periodic 500 point down days in the Dow is another sign that the severity of the crisis is moderating.

The bear camp will say the US budget deficit is exploding, the US consumer is tapped out and that a number of structural barriers in the economy prevent a recovery until well into 2010. We suggest that overall inventories are lean and were recently found to have declined for the seventh straight month. We would also suggest that the Chinese economy remains in a position to help sooth the global recession and perhaps most importantly, confidence levels appear to have already bottomed out. In our opinion, the February low in US Consumer Confidence should end up being a major cyclical low.

We also think that the full extent of the Fed’s quantitative easing and the eventual benefits of the stimulus package will not only save the economy, but that the economy will eventually transition into at least a quasi-inflationary posture. Contrary to popular belief, the amount of stimulus executed so far remains in single digits. The benefits of the government’s assistance has thus far been limited to special programs involving banks, foreclosure situations and a recent move to provide an incentive to get rid of cars with very poor fuel efficiency. Several months ago we suggested that getting in a position to recover meant containing the financial crisis. In our opinion, the financial crisis is contained and the most pressing problem will be to head off the trend of rising unemployment. In looking at the enclosed chart of weekly initial claims figures since the beginning of the year it would appear as if the initial claims peaked out in February.

Therefore, not seeing a marked worsening of that situation in weeks ahead should mean that economic anxiety will die down even further and that periodic bouts of macro economic optimism will be seen. While many commodity markets might be vulnerable to a mid-May correction, we would look to favorably positioned fundamental markets like copper, gasoline, corn, coffee and sugar which should be considered a buy in the event of near term weakness.