We think that last week was one of the most important weeks of the year! Equity markets did have a positive week reaching a multi-week high on Thursday but to be honest the week’s gain wasn’t so important. It was the action of commodity markets that were very significant, perhaps not so much in terms of their percentage gain but rather the key breakouts that occurred – specifically crude oil moving above the $75 level. Up until last week at least crude and commodity markets had gone essentially no where since the start of June. Now, some four months later, we have a breakout and given the behaviour of crude ever since going through $75 we think that it is likely to trade at $100 by year end.
We are very confident in crude being materially higher by year end not only by the confirming behaviour of commodity markets but also due to the associated behaviour of commodity currencies against both the USD and JPY. During the week the Aussie, Kiwi, Norwegian Kroner, and Real all traded at multi-week highs against both the USD and Japanese Yen. We are also comforted by the initial signs of weakness in US Treasuries.
What about earnings surprises this week? We have had over 200 companies report so far (out of about 6000). This may not appear to be many but it is large enough to form a representative sample of companies still to report. The good news is that the 200 companies who have reported so far have come in ahead of analysts’ expectations. Earnings coming in above expectations suggests analysts are behind the curve with respect to their forecasts (i.e. they are too bearish). This condition equates to a cheap stock market (and we didn’t even have to refer to p/e or p/b ratios). We are expecting more of what we saw last week – positive earnings surprises and a higher stock market.
PPI comes out on Tuesday and we are expecting it to come in higher than analysts’ expectations given the behaviour of ISM and Empire surveys and also rising commodity prices. This should push commodities & commodity currencies higher and pull US Treasuries lower.
So in short – what we have seen over the last two weeks is a prelude to what we are likely to get over the coming weeks. The trends remain strong and the bullish wheels remain in motion!
A new high in the Value Line and no loss of momentum. We think that the Value Line is the single most important equity index in the US. It gives you an appreciation of the behaviour of the average stock.
The weakness last week in investment grade bonds is nothing to write home about at this stage.
The big Goldman Sachs commodity ETF broke to a multi-week high and so too did its counterparts. It looks increasingly likely that the next leg up in commodities has just got underway!
This week sees a number of economic releases on the real estate front. We are expecting to see positive surprises which sit well with our view on inflationary forces building – and a lot quicker than the average analyst expects!
It seems that the weakness of the USD is being engineered. There is slow and consistent selling with no panic dumping of greenbacks. Are they still printing money to hold up the US Treasury market? From what we are seeing in the market it certainly appears that way. Actions speak louder than words and we take what the US Treasury and Fed say with a grain of salt!
