March 2012
Toward the end of 2010, the markets were generally expecting the World economy to regain momentum and recover into 2011, as the drag of the U.S. sub-prime crisis was largely thought to be dissipating. However, by the end of 2011, most markets seemed to be expecting the worst for 2012…
We approach 2012 with the Euro zone situation stubbornly siphoning off consumer and investor confidence, the US political situation undermining sentiment, and China showing signs of slowing. Clearly the markets were presented with several major historical negatives in 2011 in the form of the Fukushima disaster, Greek default, the US debt extension debacle and the unending debate over the EFSF. It might be difficult to replicate that amount of carnage in 2012. Certainly 2012 will have some concerning events, but compared to 2011, most global central bankers are now in an easing mode. There is the potential for more “do nothing” US leaders to be forced from office in the coming elections and the world seems to be getting closer to choosing inflation over the prospect of full-blown global credit meltdown.
In retrospect, it was somewhat surprising that the US was not held more accountable for its burgeoning debt problem, particularly since the world was focused so intently on soaring sovereign debt levels and the US appeared to be not the least bit interested in making any moves to reign in its debt. Even with the US Super Committee’s failure to come up with a second round of promised spending cuts, that news was largely shrugged off and the US was given what seemed to be an undeserved “pass” in the wake of comments from Fitch that they would give the US until 2013 to make the necessary spending cuts. As of this writing, the leaders in Washington were contemplating extending payroll tax cuts and it did not appear to be overly interested in paying for that move with spending cuts. Other signs of strength in the US economy included stronger energy prices, record ethanol profit margins, predictions of record industrial demand for platinum and the highest NAHB Housing Market Index reading in over a year. For additional positive signs we look to the pattern of downside breakouts in the US ongoing claims, figures, charts and news that Chrysler saw a startling 43% jump in year-to-date Jeep sales through the end of October. In the end, the US economy continued to “bulldog” its way through the headwinds that were largely the result of a failure to lead on both sides of the Atlantic.
Fortunately, the threat of a full blown macroeconomic crisis precipitated by the potential breakup of the Euro zone seemed to provide a moment of clarity for the world’s central bankers. The negative sentiment toward the Euro zone situation may have reached it peak, and the region could be poised for a “fail or succeed” decision. The US Fed, ECB, BOJ, BOE, BOC, SNB, IMF and the PBOC all acted in concert on November 30th to orchestrate coordinated liquidity measures lowering the odds of a global recession in 2012. The US economy managed to weather the historical crisis sweep of 2011 much better than might have been expected, as strength in the US economy seemed to be a consistent and effective counterweight against the troubles in Europe. Entering 2012, the bulls have to hope that “off the charts” US holiday sales sparks some follow-through activity. The market has to hope that a leveraged EFSF program and coordinated easing will keep the Euro crisis in check.
We suggest that traders focus their attention on US Initial Claims and Consumer Confidence readings, as those two measures are likely the best leading indicators for the US economy. The chart of US Consumer Confidence shows the magnitude of the decline in 2011. We contend that even a slight tempering of that pattern could spark relief rallies, especially in undervalued physical commodities like natural gas, gold, copper and platinum. And if the recent pattern of declines in Initial Claims extends into early 2012, demand-driven markets like crude oil, cattle, hogs and corn might surprise traders with their upside capacity.
Many physical commodity markets approach 2012 well below their 2011 highs and that could make them sensitive to even modest growth, even though their fundamentals are in fairly good shape. We think the energy markets could manage significant gains in 2012, even with very modest forward movement in the global economy. Energy supplies managed to tighten in the 3rd and 4th quarters of 2011, during what is normally considered a seasonally slack period. Energy demand also held fairly strong in 2011, despite rampant fears of a slowing economy. It appears that these markets simply need to skirt a return to recession in 2012 to forge moderate gains for the year. As the accompanying table shows, broad commodity indexes could mount a 17% rally and still not be back to their 2011 highs.
Commodities with Room to Rally Percentage below 2011 Highs (as of November 30, 2011)
Natural Gas 33%
Crude Oil 14%
Copper 28%
Gold 11%
Corn 23%
