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Its official: World is ending!


Ok, Monday morning oil was at $114 /bbl.  Today it’s around $100 – all this in less than 96 hours.  The markets have been down for 3 days running (if history is any guide we are looking at the difficult quarter).  Could it be “Sell in May, go away” actually works?  Bottom line is that the market was setting for a fall over the past 30 or so days.  First, in the U.S. a great deal of the market upturn in the first quarter was driven by a 4% GDP growth target – the figure no is looking more like 2%.  Not exactly a barn burner is it?  One indicator that the market is ready for a fall is Bull/Bear index – when it goes to extreme, its time to do the opposite.

Fundamental are also tricky, honestly how can the European situation improve if the only solution to too much indebtedness is “more debt” in the form of rescue loans from the ECB.  The UK, Greece, Portugal and Spain are all looking at economic contraction this year due to a desire/need to reduce government debt levels.

America remains mired in difficulties (despite what the markets are saying).  The housing market problem has been swept under the rug by the Too Big To Fail financial institutions.  In some part of the country (Florida/California/Nevada) the foreclosure rate is more than 1/15!  Jobs are being created but at the current rate it will take a decade to absorb what was lost in 2007/08.  The U.S. federal government needs to take action on the federal deficit, of course reduction in expenses would be nice, but with Medicare, Defense, Social Security and interest expenses accounting for 77% of total expenditure new revenues are essential to the conversation – and not only on rich people or corporations.  Americans are not paying enough taxes for the government system they want.

Emerging economies (China/India & friends) are facing very serious inflation (manly because they open the credit market spigots in 2007).  Moreover, these economies are looking at the “First World” as they export nirvana.  If Europe and America are in recession where’s their prospects for additional exports looks troubled.

What drove oil prices was fear of up rise in the Middle East (maybe $30 premium), and demand supply issues – when the picture is one where anticipations are that economic growth in emerging economies VS. stagnation of demand in “First World” economies is replaced by slow down in emerging economy (and maybe recession in the first world), then the drop in demand will immediately impact is a very abrupt price fall.  Moreover, a study emerged out of China that indicates that the level of speculative purchase of hard commodities was driven by lack of access to capital (the SOE account for almost all the borrowings from the big Chinese banks).  None of these factors are new – in fact the story of China’s pig farmers copper stockpiling is at least a year old.  

It’s more interesting to think of these events as convergent issues that individually don’t change behavior but eventually, taken together, forces the market to reconsider its bullish stance.  Where do we go from here? 

Corporate earnings for Q1/2011 have been mixed but positive, with some great outliers.  On the other hand when Wall Mart’s CEO indicates that its 250,000 weekly clients “are running out of money earlier in the month” there is a problem.  The barometer of job losses that had for the past quarter been improving is now reversing its positive trend, with more jobs being terminated; last week’s print of 475k losses was bad especially after the previous week’s tally was revised from 410k to 431k losses.  The second week where job losses exceeded 400,000.

Personally, I believe that Bernake in his press conference indicated that QE3 is already here.  Since the Feds will not reduce their holding of securities – elegantly exiting the market.  Instead, the Feds will remain key players (at least until Congress tries something stupid).  By the way how stupid are members of congress that want to veto any increase in America’s borrowing limits…

Finally, what does this mean for Canada.  Strictly speaking as long as oil prices are above $80/bbl Canada's economy is fine.  The Canadian dollar will sink back towards parity with the USD, but Canada's economy is fundamentally sound (construction is "exploding" with demand for permits up 17% in April), but it remains that any drop in the prices of hard commodities is bound to affect the Canadian market.  

Maybe sell in May is a good investment strategy.

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