China, Commodities, Oil – buy when bad is bad and good is bad!

From Bloomberg: “A Chinese leading indicator climbed for the third straight month, adding to evidence that the world’s second-biggest economy is withstanding Europe’s debt crisis and faltering growth in the U.S.”

As crazy as it seems, lately no matter what news comes from China, it’s bad news. Growth is way more than consensus (despite the miserable pessimists) which normally should bode well for the global economy. In the old days, it was the fortunes of the U.S. economy that pulled us into an economic recovery but now there’s no dispute – China leads the way. Why isn’t this good news? Because the Chinese government (it is argued) will now have to impose measures to slow down the economy and combat inflation – bad news. What if instead the announcement had indicated that China’s growth rate had slowed measurably? Well that would be bad news too of course!

In reality, we should all consider it good news and bullish. Although I warned about resources being vulnerable just prior to the Japanese earthquakes (just lucky I guess), I’ve also emphasized that seasonally the summer is a good time to top up the sector. The price of copper is a prime example. Like many commodities (almost every summer) it got walloped as you can see from the chart – but more than usual because of the global pause caused (in my opinion, as I’ve blabbed about in older commentaries) by Japan. The debt crisis in Europe certainly didn’t help matters either.

To quote a brilliant strategist (okay, it’s me so perhaps not so brilliant): “But it’s when we can clearly see from deep in the valley that the only way forward is uphill, it will be time to buy.”

I suggest we’ve passed ‘deep in the valley’, and the wild card (China) is providing concrete evidence of this. U.S. exports of coal are at record highs (according to the U.S. Dept. of Energy) suggesting that steel production and even electricity generation is ramping up somewhere…..can you guess where?

In my previous blogs (dating back many months) I also pointed out that the U.S. economy is on an admittedly slow but upward trajectory. Bottom line? If North America and China are BOTH humming then headlines like: “It’s Official: Mutual Funds are Dead – 10 Years of Horrifying Data” may imply (remember from my book that headlines are an awesome contrarian indicator) a rather lengthy bull market is in the offing. The longer the debt crisis dampens investor enthusiasm, the more gradual and longer the good times for stock markets.

Another stumbling block has been energy prices. I’m coming to the conlusion that although the price of oil may decline modestly from current levels – based on my ‘friggin-ridiculous-expense-to-fill-the-bloody-tank-on-my-Harley’ proprietary indicator; for the most part I don’t see a major collapse in oil pricing given these emerging big picture fundamentals.

Even the experts were surprised when the IEA (International Energy Agency) member countries decided to begin releasing strategic oil reserves to bolster supply.

This is from U.S. Department of Energy:

The release responds to the ongoing disruption of oil supplies from Libya in the context of expected demand growth this summer. The U.S. Energy Information Administration’s (EIA) Short-Term Energy Outlook (STEO), released July 12, reported the unrest in Libya had removed about 1.5 million barrels per day of light, sweet crude oil from the market since late February,

By demonstrating the willingness of IEA member countries to draw on strategic reserves, the June 23 announcement might also have changed the market’s assessment of the probability that oil prices might rise to much higher levels in the future.”

But SURPRISE – the market didn’t care a heck of alot. Prices declined only marginally in the shorter term but expectations for later on didn’t budge one iota:

“The announced reserves release, which will inject new supply over the next few months, does appear to have lowered near-term prices relative to longer-term prices in the futures market.”

The conundrum is that there’s no meaningul shortage of oil (see chart of oil stocks), but oil prices remain high serving to keep demand in check. The tug of war between the U.S. (who needs lower prices so it’s population can both spend to spur the economy but also have some money left over to save – to help the debt situation) and OPEC (who wants high prices to remedy the debt problem of its member countries) is most likely to keep the price of oil range-bound – ideally between $65 to $85 if I had to pick numbers. Stabililty (compared to recent history) will help global growth and still encourage the energy industry to keep up its capital spending.

Own oil companies, but use this market to top up your copper, coal, nickel (if you can find any stocks in this space anymore) iron ore and other resource plays – for the fall rebound.

If you’re interested in history and the oil industry, I recently toured Pennsylvania (see page called “American bikers are BEST!” and was reminded how dramatically things have changed over the years.

from Wikipedia: Oil City is a city in Pennsylvania, United States that is noted especially in the instrumental exploration and development of the petroleum industry. After the first oil wells were drilled nearby in the 1850s, Oil City became central in the petroleum industry while hosting headquarters for the Pennzoil, Quaker State, and Wolf’s Head motor oil companies. Barges were used to transport the oil down Oil Creek and into Oil City, where it was transported to steamboats or bulk barges to continue on to Pittsburgh and other locations. Pennzoil was acquired by Oil City, Pennsylvania company South Penn Oil, a former branch of Rockefeller’s Standard Oil.

You might enjoy this clip which did NOT make it into the final cut of the film There Will be Blood. Amazing how much things have changed, and then again how some things haven’t.

About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He recently authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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