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A Little Something for Everyone

06/10/2010

Generally, markets spend more time consolidating, pausing before restoring either the prevailing bearish or bullish trend. The challenge for investors is determining whether the current price is part of a normal bull market correction or a consolidation in an evolving bear market. For those of you who follow my work, that answer remains the same - a baseball season for frustration is upon us, to be followed by the resumption of the bull trend from March 2009.

This week, both bullish and bearish prognosticators "got a little something" to support their cause.

For the bearish amongst the crowd, two guests on Fast Money made headline news. First, David Threlkeld, a commodities expert, explained how the price of copper will fall to $1 on imploding China demand and extensive over supply. This is a rather ominous forecast with which I completely disagree.

Investors should use "Dr. Copper" as a barometer for whether the global economy is contracting or expanding. Within that context, the Chinese are active users of copper as they build their urban and now rural infrastructure. In fact, 60% of copper demand is from Asia, ex-Japan. The Chinese are so concerned with securing future supplies of copper that they are forming JVs with global mining companies to provide seed capital for new mining projects. It makes sense to me - global copper supplies are scarce and no major copper discovery has been made in many years. The Chinese continue to import record amounts of copper in 2010 and inventories are actually beginning to drawdown.

Global Copper Inventories

Source: Bloomberg

Next, on Wednesday June 9, an aggressive late afternoon selloff in energy equity names reversed a higher equity tape and placed the overall market on the defensive heading into the overnight Asian trade.

My interpretation of that selloff was that it was hedge funds realizing losses on legacy names like BP, Anadarko, and Transocean.  These energy companies have provided the hedgie crowd favorable returns and exposure to higher oil prices for the better part of the past decade. Clearly, the developments in the Gulf place "investing in energy" in a precarious position. It will become somewhat difficult to properly gain exposure to higher oil prices now.

I like to invest in certainty so I will say this, the "spill risk punishment," higher taxes and regulation, will limit future production from the Gulf. Over the next 3 years if somewhere north of 1.5 mbd of oil was expected from the Gulf, I expect that number, given the developments of the past two months, to fall south of 1 mbd. Exposure to energy must be found in the Canadian oil Sands, Brazil, and even our friends in Russia.

Our second headline news guest on Fast Money, Matt Simmons, told me BP is out of business by the end of the summer. Candidly, I am not sure that will occur, but unfortunately he could be correct - or not. Certainty is, as I said in late April,  that longer term, the current spill will impact oil prices significantly. 

OIH Wednesday June 9th trading

Source: Bloomberg

Finally, what little something did I get this week? The positive developments came from what I consider two of the more important contributors to the dramatic recovery from March 2009 - Federal Reserve Chairman Ben Bernanke and China.

Chairman Bernanke did a brilliant job assuring the capital markets that global coordination is front and center, in particular as it relates to the Euro debt crisis. His calming testimony to the House Budget Committee is something that should not be lost for investors. He is "all in" and will not allow developments in Europe to derail the U.S. recovery.

Recent concerns surrounding Europe center on its ability to derail the China recovery. This week's China export numbers suggest that this is not the case. China exports surged 48.5% in May from a year earlier, the biggest gain in 6 months. Asia is weathering the Euro storm.

Proper positioning remains defensive, more toward underweight.   However, the little something I got this week supports my thinking that this is not a capital market that is evolving into a much larger Bear, it's more like a normal correction.

 

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.