Opening Position
July 2008
Since my
last "Opening Position," we have not seen a turnaround in food and oil prices.
No, they keep rising and rising. The impact of these price hikes are being
felt throughout the world, and given that summer is here, the rise in oil
prices is especially hard felt. Just how high will oil prices get? It's a
question that many analysts get asked, and they all give you different answers:
One says $150, while another says $200. Given they are forecasting commodity
prices, I have to wonder how they are coming up with these numbers.
Unlike equities, commodities don't have those ratios such as price/earnings,
debt/equity, or cash flow and all those other fundamental variables. Does
that mean these analysts compare charts of past bubbles to determine how
high oil prices will go, or do they incorporate consumer behavioral aspects
such as reduction in consumption to determine where that supply and demand
equilibrium will be? Can you really have a bubble in a commodity like oil
where the price is driven by production and consumption? As long as there
are cuts in oil production and demand continues to rise, which we are seeing
especially in emerging economies such as China, I don't think we will be
seeing a bursting bubble in oil prices anytime soon.
Let's take a look at the
big picture. The current market scenario is one where you have rising oil
prices, a softening housing market -- you guessed it, the crisis there is
not over yet -- in the US, a possible decline in consumer confidence, and
looming inflationary pressures. And the bad news keeps coming, with the US
on the brink of a recession, and likely to drag the rest of the world down
with it. In such a market, it is impossible to make any forecasts of commodity
prices with any amount of certainty. Truth be told, I am surprised that the
equity market has not been hit harder than it has. That, of course, may not
be a good thing, because it's only a matter of time how much longer the equity
market can hold its ground. There's still room for the equity markets to
fall.
The booming commodity markets have presented us with opportunities,
and they're also a great way to hedge your equity positions. But if you prefer
to limit yourself to equities, now may be the time to put your shorts on.
After all (ahem), it's summer.
Jayanthi Gopalakrishnan,
Editor
Originally published in the July 2008 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2008, Technical Analysis, Inc.
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