Everyone is opining on the commodity markets melt down and the coinciding slide in the equity markets. I have read and listened to all of them, and like the theme of last week, confusion reigns. I have one response – Occam’s Razor. This time-tested line of reasoning essentially says, when competing explanations for a phenomenon exist, the simplest is usually correct. In my reasoning, the simplest explanation for this “phenomenon” is the following.
The Chicago Mercantile Exchange (CME) is raising margins because speculators are over leveraged in a commodities bubble. Because margins are going up, more collateral is required. To get the collateral, traders/investors are selling equities. Done.
This is good, even if there is a little pain, as the most important commodity is oil. The lower oil prices go the less money consumers spend on gas, which helps the economic recovery. As the economic recovery goes, so goes the market. Once the oil market starts responding to supply and demand, we might see the price of oil drop much further, especially when the #1 and #2 oil consumers on the planet are reducing demand in an environment of ample supply.
The International Energy Agency cut its estimate for global demand this year by 190,000 barrels per day, noting that higher gasoline prices in the U.S. appeared to be forcing Americans to cut back on driving. Meanwhile, China said it will tighten bank lending further. The move is expected to crimp energy demand for the world’s second-largest oil consumer.
So, if it happens that oil prices fall to supply and demand levels ($80-85) and gasoline follows that, then add another brick to the economic recovery, which will help build market momentum. Here is yet another brick.
April’s $5.6 billion in net deposits marks the fourth consecutive month that new cash has come into U.S. stock funds. The year-to-date total of $42 billion is the biggest start to a year since $65 billion came in during the first four months of 2006.
Not convinced? How about a huge brick? Consumer spending in April was up again, and the government revised March upward substantially. Add to that a poll today that said Americans are growing more optimistic about the U.S. economy. Should I stop? No, here is one more …
U.S. exports hit a record $173 billion in March, up 15% from a year-ago and 37% from 2009. The good times for “Made in America” are just getting started, according to a new study from The Boston Consulting Group (BCG).
If employment improves a bit on its current trajectory, the housing market might turn around. If that happens, the foundation will be complete. The one thing that could make it all crumble? Look to the careless politicians with big mouths who don’t see the foundation forming. Now, if those knuckleheads can both hold their tongue and do the right thing … Hey! One can dream, right?
Trade in the day – Invest in your life …
