The market loves key levels. Key levels get everyone on the Street all fired up. Like when oil surged past the unthinkable $100 a barrel in the spring
of 2008. Or when gold hurdled past $1,000/ounce later that year. Fast forward to this week and we have another very key level at hand; Dow 13,000.
It comes on the heels of what has been an incredible year for stocks and commodities, the best since 1997 in fact, fueled by another season of strong corporate earnings and the central banks of the world flooding the system with trillions of dollars of liquidity in order to avoid another apocalypse.
So with the current trend well in play, does that mean it’s time to go hog wild and get leveraged up against your favorite stocks and commodities? Hardly.
Because even though the market has been hot, there are a number of lingering threats that could throw a bucket of cold water on the recent wave of enthusiasm.
The topic dejuer in that category is oil, climbing another 5.5% this week to close just shy of $110. Higher oil prices are a huge tax on every participant in the global economy, from the consumer, to the small business owner all the way up to the multinational conglomerate. Economic growth is simply unsustainable in the face of rising energy prices.
Iran and the Middle East
The second issue, very closely related to the price of oil, is ongoing political tension in the Middle East. With Iran responding to financial sanctions by refusing to sell oil to the UK and France and then throwing a group of UN nuclear inspectors out of the country, it’s pretty clear that this once great nation is on a collision course with the global economy. Any kind of military action in the Middle East and specifically Iran will shock the hell out of stocks and send the market tumbling. Go ahead and quote me on that one.
Euro Zone Lingers
And finally, where I have to admit, it makes me want to puke my brains out to even have to discuss the absurdity of this situation, we have the Euro zone. Let’s just cut the BS and speak candidly. Greece is broke and totally broken. And so is Spain, Italy and Portugal. None of anything that is going on in the Euro zone is sustainable. None of it. So unless an alien society drops out of the sky with monetary intervention or a new technology that makes energy free, the Euro and the Euro zone will eventually implode and each country will need to go its own separate way and be allowed to print until its eyeballs roll into the back of its head.
So now that we’ve laid out what looks like a fairly bearish outlook, here is the real kicker. The worse things get, the more intervention we will see from the central banks. And that is really the ultimate conundrum of what is happening in the market right now. Everyone knows things are still messed up, nobody believes this is or that there has actually been any kind of economic recovery. The “recovery” has really been nothing more than a massive monetary intervention.
But with the central bankers printing like mad, anyone sitting on the sidelines has missed out on some serious gains. So until the whole thing comes crashing down, or if I should say, you simply have to stay long stocks and commodities, because picking up a 2% yield on a 10-yr note isn’t going to push anyone’s retirement account into the green.
Let’s get into some updates.
With the central banks of the world pumping trillions of dollars into the market over the last few months to stimulate the global economy, we’re really starting to see that inflation trade heat up.
That was been particularly evident in crude, pushing PowerShares DB Oil (DBO) to a 5.5% gain on the week as oil closes just shy of $110. That also put a bid into Cimarex Energy (XEC), which has just been on fire over the last two weeks, adding another 4.5%. Baker Hughes (BHI) was also in the mix, tacking on 4% of its own. The energy trade was basically dismal for the last 6 months of 2011, one of the worst performing sectors of the S&P500. But when that trade gets hot, it gets red hot, making up for 6 months of losses in the last two weeks. That’s pretty amazing by any standard. That long-term trend is most definitely your friend.
The inflation and liquidity trade also showed up in gold, lifting both Double Gold (DGP) and Junior Gold Miners (GDXJ) to 6% gains. The gold miners have lagged the actual price of gold over the last year, but if we see a reversal in that trend there could be some serious upside from here on out in the miners.
Beyond commodities, Apple, Inc. (AAPL) continues to surge, adding 4% on the week and closing at an all-time high of $522. Our two other tech stocks, Checkpoint Software Technology (CHKP) and VeriFone Systems (PAY) were also traded ahead of the market, adding 1.5% and 2.5% respectively.
And finally, we saw some nice movement from a top healthcare pick, AmerisourceBergen Corp (ABC), adding 3% on the week. ABC has been a bit lumpy since reporting a small Q4 miss, trading 10% off its 52-week high at $43 in spite of the recent rally. We still have some work to do here, but this is a step in the right direction.
That’s all for this week, but until next time here is some follow up on the oil conversation from above. Enjoy.
Your Investment Partner,