S&P and Commodity Prices
Sally Limantour
The S&P had a small loss last week falling 0.25% with concerns over the sub prime lenders, rising inflation and geopolitical issues in the Middle East. Friday’s reading on the put to call ratio was its highest since September ’06 as investors put in place considerable downside protection against a much anticipated sell-off. My shortest term model covered shorts on Friday and is now on a short term buy signal. Perhaps we will see a near term short squeeze. Holding above the 1454 – 1456.00 (ESH mini- S&P) is supportive and recapturing the 1462 could ignite another round of fresh buying.
Today in what would be the largest private equity buy-out on record we have news that the board of TXU, the largest power producer in Texas met to approve a 45bn (IHT reports it is a $32bn deal while FT reports $45bn) takeover by Kohlberg Kravis Roberts and Texas Pacific Group. Part of the agreement is to sharply scale back TXU’s $10bn plan to build 11 new coal fired power plants that would produce noxious greenhouse gas emissions.
Everything is green – Al Gore, the Oscars and corporate America.
Commodities rose across the board lead by precious and base metals, crude oil and grains. Crude oil is now up 4.6% for the month with gold up 4.4%, corn up 6.6% and nickel up 12.3%. Even Jim Cramer is getting nervous about gold prices saying that higher prices could be “kryptonite to stocks if it goes to $710-$720.
It is a broad based rally in the commodity sector which is healthy, but it is stoking the inflationary fears. Treasury inflation-protected securities, or TIPS, have returned 1.15% so far this year, versus a loss of 0.3% last year. Investors are hedging their bets as inflation remains a “predominant concern” for the Fed. Higher commodity prices seep into everything – even beer! FT reports, “Blow for beer as biofuels clean out barley.” The demand for biofuel feedstocks such as corn, rapeseed and soybeans is encouraging farmers to plant these crops instead of grains, like barley. Heineken warned last week that the expansion of the biofuel sector was beginning to cause a “structural shift” in European and US agricultural markets.
While I have read a few articles claiming the commodity sector is running out of steam, I think it is beginning another leg up in its bull market. Billions of new people are entering the market and like all human beings, they want to move up the food chain, not down.
