Monday Market Madness – Last One in Q2!

What a nice, quiet weekend.

There was very little news of note and, despite a nervous sell-off in early Asian trading, the markets are back to their usual pre-market positions of UP.  The Dow is up 100 points since 2:30 am, the Nas is up 2.5% as is the S&P and the Russell.  Oil has been jammed all the way back to $70 after falling below $68.50 in early morning trading and the dollar has been pressed back down to 95 Yen while it once again costs more than $1.405 to buy a Euro and $1.66 to buy a pound.  It's no wonder we have such success playing the middle – "THEY" don't allow the market to go anywhere else!

I really thought this morning they'd have trouble holding oil up as the IEA cut its 5-yer oil forecast for EVERY year through 2012 by 3 Million barrels a day (3.5%).  In fact, according to the IEA, oil will not return to 2008's consumption level of 85.6Mbd UNTIL 2012.  “The deep economic recession that has spread worldwide in the past year has taken a severe toll on oil demand,” the IEA said in the report, updating estimates made in December. “This marks a break after several years of strong oil demand growth.”  In its “lower GDP scenario,” which assumes that a rebound in the global economy will be 3 percent a year, the IEA said global oil demand could fail to reach last year’s levels by 2014, standing at 84.92 million barrels a day, 6.34 million barrels less than predicted in December.

Bloomberg led off this morning with the headline "Commodity Rally May End as Supply Rises, Speculators Sell Bets" but not all speculators seem to have gotten the message as speculation proceeds apace.  “Commodities have gotten a little ahead of themselves,” said Walter “Bucky” Hellwig, who helps oversee $30 billion at Morgan Asset Management in Birmingham, Alabama. “As long as there’s uncertainty about growth, that’s going to be headwind commodities won’t be able to overcome.”  The World Bank forecast for this year’s economic contraction to be 2.9 percent, rather than the 1.7 percent decline previously anticipated, may curb sales just as producers expand output in anticipation that the worst is over.

Hedge funds and other large speculators are holding a net 653,915 contracts betting on higher prices, according to an index of combined positions in 20 commodities tracked by the U.S. Commodity Futures Trading Commission. Their net long position reached 854,743 contracts earlier this month, from as few as 86,220 in December.  “Some of the run-up was money that had been laying on the sidelines and poured into the market without looking at the fundamentals and that’s the froth that’s got to come out,” said Peter Sorrentino, who helps manage $13.8 billion at Huntington Asset Management in Cincinnati. “We could see the commodities lose about a third of the gain they’ve had in this run up.”       

Also hitting commodity prices was what one may think was definitive word on the dollar from China's Central Bank Governor Zhou Xiaochuan, who said China's currency policy remains "quite stable," easing concerns that emerging nations may abandon the dollar.  “People are nervous about what China could do, but there is still no alternative to the dollar,” said Stuart Thomson, a currency and fixed-income manager who helps oversee about $107 billion at Ignis Asset Management in Glasgow, Scotland. “It takes decades to lose reserve-currency status.”

It would be nice to see a dollar rebound help take oil prices down but we're not holding our breath.  Perhaps they are waiting for the end of the month, perhaps it's the July 4th driving weekend – but this oil "rally" has already gone on a month longer than we imagined they could sustain it and so much economic damage has already been done by these speculators that I'm not sure it's going to help much even if oil does go back to $40.  Summer plans have been canceled, airlines have already cut back schedules, corporate lay-offs have increased and manufacturers are already winding down inventories, almost guaranteeing a poor Christmas for retail.  Time is very short indeed to mount that 2nd half turnaround we keep hearing about, especially with the second half starting on Wednesday!

My main concern is not enough is being done about housing.  Housing has been the engine that has turned around EVERY other recession in this country but, this time around, it's taking a back-seat and remains a drag on the economy. After each of the last seven U.S. economic slumps, growth was more than 4 percent on average in the first year of recovery, data compiled by Bloomberg show. In the three months before each recession concluded, GDP shrank at an average 2.8 percent annual rate, according to the data.  The economy contracted at a 5.5 percent annual rate in the first quarter, capping the worst six-month performance in half a century. In May, consumer spending rose by 0.3 percent, the Commerce Department said.  Home sales probably won’t be the fuel to end the recession that began in December 2007, said Global Insight’s Behravesh. “It’s going to be different this time,” he said. “The pattern this time will be the government kick-starts housing, and then consumer spending comes around to kick-start the economy.”

Asian markets were mixed this morning with the Shanghai posting a fresh high for the year but the Nikkei fell 1% and the Hang Seng gave back 0.4% in choppy trading.  Industrial Production in Japan rose 5.9% in May and was revised up 5.9% in April led by automobiles, electronics along with iron and steel production. "Government stimulus measures in Japan — with purchase incentives for environmentally friendly cars, for example — and stimulus packages overseas in countries like China and Germany are helping to support production," said Kyohei Morita, chief Japan economist at Barclays Capital.  Asian shares outside Japan have surged 32 percent in the second quarter, which would be the best quarterly gain in 16 years.

Europe is in a good mood this morning, up about a point ahead of our open (9 am).  Spain moved to set up a bailout fund for it's banks and that's helping a bit.  Iran arrested 9 British ebassy employees but no one seems to care and, of course, business and consumer confidence is improving (off record lows) and everyone loves a confident consumer. The commission also recorded a rise in industrial confidence to -32 in June from -33 a month earlier. The pick-up was driven by an increase in production expectations, although total orders and exports fell back for a second month.  So things are not at all better but, as long as people think they will get better, we can continue to point to that as "evidence" that things are getting better.  Get it?

One person who "got it" this weekend was Matt Taibbi of Rolling Stone who ripped Goldman Sachs a new one in a fantastic article that I HIGHLY recommned reading.  Taibbi flat out states that Goldman Sachs has been “engineering every major market manipulation since the Great Depression” and describes the company as: "a great vampire squid wrapped around the face of humanity."  Taibbi He calls the US “a gangster state, running on gangster economics”, and is very explicit about exactly who he thinks the gangsters are (Clue: they paid just $14 million in tax on $2 billion in 2008 profits).

It's a short holdiday week but not short on data and next week we move right into earnings.  We'll see how much dressing they can put on this windown but the real action doesn't start until next Tuesday, when Q2 earnings season really kicks off and summer gets into full swing.  They didn't go away in May and we avoided the June swoon – there is no word for July as nothing usually happens in July so set sail for uncharted waters – it'll be fun!