As of this writing (07.22.2009) the stock market sits right at some of its highest levels since last October. Clearly the market has seen a further repair of the financial crisis as a historically beneficial yield curve pours profits into the banking sector. It also seems as if corporate America has managed to deflect the impact of the recession by aggressively cutting costs, and that in turn has allowed a long list of companies to post better than expected quarterly earnings.
With the US Federal Reserve Chairman recently suggesting that the economy was working toward recovery, there would also seem to be justification for the optimism in the equity markets. However, given that the Fed Chairman also indicated that unemployment might continue to rise into the end of the year, it would seem like the “real recovery” has yet to surface. In addition, with less than a quarter of the suspect stimulus program employed and a number of financial entities still showing worrisome credit charges in their quarterly earnings reports, there would still seem to be some troubling times ahead.
With the government seemingly poised to dictate fair fundamental pricing in energy and perhaps in other critical physical commodity markets, it is possible that all commodity markets might be faced with an artificial slide in prices in the coming weeks. Frankly, an aggressive effort to push speculators out of the commodity markets would probably result in a number of physical commodities pushing below their cost of production, and that in turn would discourage future production and ultimately create real shortages and much higher prices than would have been seen without the “corrective guidance” from the government.
From a short term, macroeconomic perspective, we see a correction in the stock market coming in the lead-up to the next unemployment report and also in the wake of the “much better than expected” US corporate earnings cycle. It is also possible that the most recent move to new lows in the Dollar will spark complaints from EU countries, and that in conjunction with a slight correction in the stock market could rekindle a temporary return of flight to quality buying of the Dollar.
Lastly, in looking at the fundamentals of the energy and grain markets, there are a preponderance of bearish fundamental factors and trends in place. That could mean that a wide cross-section of physical commodity markets is poised to fall in the coming weeks. In the event that concern for the economy coincides with some type of forced liquidation of a large index fund out of the corn market, one should not rule out a quasi-deflationary debacle in oil, grains, sugar, copper, silver, gold, platinum and natural gas.
