Commodity inflation played a big part of the economic correction. I have no interest ever seeing $4 gasoline. Commodities topped out their late cycle bull rally last summer, when everything was collapsing due to the complete lack of demand for commodities. Hell, they still can't give away any nat gas, which really makes me smile as a consumer. I sold all of my MLP's today that have any exposure to nat gas, which has not seen an up week since last July. I don't know where any of those companies will be able to generate positive cash flow with nat gas prices at these levels. Some of the smart one's hedged out a couple years of production, but that does absolutely nothing for me.
I'm not going to spend a whole lot of time worrying about the inflation side of the market recovery. I have a few core positions to move around, but I do think the financial recovery is closer to the beginning of a new bull market. Default rates are now sufficiently high to get things priced properly. Returns will improve pretty dramatically once the writedowns have peaked, especially since the loan loss reserves are already so high. It certainly looks that way with WFC and GS.
I'm going with the assumption that oil and nat gas will be better buys in 2010. Too many earnings are headed into the dumps this year - integrated oil, refiners, MLP's, Canroys. But, the earnings comparisons for 2010 look much better. Alot of these companies look like potential yield traps later this year, unless nat gas makes an incredible recovery this year.
I don't think the market will cling on to the assumption that high energy prices are a precondition for an economic recovery, now that money is starting to flow back into the financials. Until the housing situation is straighten out, there won't be all that much demand for new construction which is essential for commodity demand. |
