In keeping with the energy theme this is a possible scenario.. though I would take exception to a number of items it still looks in line with the current pop... its also an ad for their services, but look through that. La Nina has been getting a lot of attention, I crossed it with Lewis and Clarke expedition which experienced one and North America did have snow..
Global Issues
Increased Global Energy
Demand Ahead
by Tom Logie and Ken Francella, Global
Investment Research, Inc.
In the last issue of Magnum Hedge Fund Reporter, we
forecast that the first quarter backup in Treasury yields
would be followed by "a strong summer rally in bonds and
interest-sensitive equities." Indeed, as of this writing in
early July, Treasury yields have fallen 50 basis points to a
new weekly and monthly low, while the S&P 500 and many
European equity indices have rebounded to set new
record highs.
What's the outlook for the second half? We believe that
by the end of the third quarter the global economy will
reach an historic crossroads. It would appear that an
increasing number of analysts and investors expect a
further slide toward a pervasive, deflationary global
slowdown. Yield curves in major western bond markets are
flattening or inverting as investors rotate toward the
perceived safety of high quality bonds.
Yet, as we highlighted in our last update, such one-sided
sentiment overlooks the real risk of "an unexpected,
temporary drift into stagflation late this year into 1999."
What if the world is poised for a reversal toward energy
inflation? If the NYMEX price of crude oil rises toward $20
early next year as we expect, the result will be a 40 percent
year-on-year increase in energy prices. Such energy
inflation, combined with a similar sharp year-on-year
rebound in agricultural commodity prices, may add to
seasonal bond market selling pressures during the first
quarter of 1999.
But hasn't Asia's financial crisis and recession been the
primary cause of weak energy demand over the past year?
Although widely embraced, this key assumption is simply
not true. A review of energy consumption by region
indicates that mild El Nino weather conditions over the
past 12 months were a far greater drag on global oil
demand than the nascent economic contraction now
deepening in the Pacific Rim.
Yet, scientists monitoring conditions in the South Pacific
confirm that the two-year El Nino warming ended in early
May and has begun a rapid reversal toward its twin sister,
a two-year cooling known as La Nina. Record hot and dry
conditions in South Asia, Southern Europe, and the
Southern U.S. are typical of the transition from El Nino
toward La Nina.
Expect Demand to Soar
Looking forward over the next 9-12 months, we expect
global energy demand to soar, even if the overall global
economy softens. Meanwhile, we expect that oil
production cutbacks will slowly bring supply and demand
back into balance before the end of the year. Therefore,
while we were strongly bearish on oil and oil patch
equities from last fall through the first half of 1998, we
believe the mid-year washout in energy prices has created
an historic opportunity to overweight this key sector.
In short, while cautious capital continues to rotate toward
bonds, we strongly recommend that investors begin
shortening bond portfolio duration over the next 3-4
months, and significantly increase exposure to energy.
Hedge fund investors should also consider taking long
positions in agricultural commodities--the El Nino-created
conditions for bountiful harvests. As we have forecast
since last fall, the resulting surge in supply, combined with
destocking in Asia, triggered a collapse in grain prices.
Historically, the shift toward La Nina cooling shortens and
disrupts the growing seasons for soybeans, wheat, corn,
and other crops. Such a largely unexpected contraction of
supply, combined with restocking of depleted Asian food
stocks, could trigger a strong rebound for agricultural
commodity prices from September into the first half of
1999.
By early November when you receive your next issue of
Magnum Hedge Fund Reporter, Asia-driven earnings
anxiety may once again be driving capital away from
equities toward the perceived safety of bonds. At that key
crossroads, will the stage be set for a reversal of bearish
sentiment on energy? On agricultural commodities? On
Japan and the yen? These are among the questions we will
address next issue.
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