A Bull for the Moment
06/04/2009 6:55 am EST
Foodstuffs and emerging markets have more room to run despite the rising risks, says Gregory Weldon, publisher of Weldon's Money Monitor, The Metal Monitor, and The ETF Playbook.
Q. You've obviously had a profitable couple of months advocating the reflation trade: commodities and emerging markets. Is it getting to be too much of a consensus call?
A. Yes and no. In the short term, these markets still technically look very well positioned. If we take a step back, particularly on the commodity side, and look at the depth of decline that we've seen previous to this bottom, you haven't even hit the 38% Fibonacci retracement, and that would take [prices] significantly higher.
That applies also in equity land. I don't think it's overloaded yet: I don't see the kind of one-sided sentiment that you might equate with some kind of an interim peak. But that's not to say there's no risk to this trade; there's definitely risk. I look at this as a counter-trend trade and it's tradeable because of the depths of decline. That makes this a tradeable bounce.
The risk emanates from the US, and the risk is the US consumer. [Recent] bank lending data showed another big decline in consumer loans and credit-card lending. Banks are becoming a little more pragmatic in their approach to the deterioration in loan quality, the rise in non-performing loans, and their need to raise more reserves. They are reducing specifically consumer lending, and this is a problem because rising job losses are still the dominant labor-market dynamic and even those working are seeing intensifying disinflation in their income.
And we do see this rise in commodities. Some of these food commodities are very hot. The US Department of Agriculture (USDA) report that came out just recently shows pretty positive supply/demand fundamentals in a number of food commodities. At the same time, supplies of finished gasoline in the US are at virtually record lows. So, there's some justification for the move in energy.
So, if you get a push in energy and food prices this summer [while] the labor market is still in distress and even those people working are earning less, that could be a problem, particularly if credit is not available. I think this is the biggest risk to this entire theme: You need the US consumer, and the US consumer needs credit, and without it the global economy will be captive to that risk.
Q. So, are you predicting lower stock-market lows?
A. I'm not going to say we're going to see new lows. I think the risk is that the consumer fails and the Federal Reserve is unable or unwilling to address that. Throw in the fact that bond yields and interest rates are breaking out to the up side—I think that's problematic. It flies in the face of what the Fed is trying to do. They are buying $300 billion in Treasury bonds and everyone got all excited about that in March, but they sold more than that in 2007 and 2008, so they're not even replenishing what they held prior to this crisis.
The Fed's balance sheet reached its high in January and has contracted pretty rapidly. But given my outlook for the US consumer, I think they're going to be facing some more work down the road. You need growth in consumption. If you want to avoid pain, you're probably going to have to do more down the road for the US consumer, who's just so not out of the woods yet.
Q. Can you be bearish on the US and UK consumer and still like commodities?
A. It's not that I'm bearish there; if you want to be bearish, you're going to be bearish on those places when it's time to be bearish again. I'm bullish on the commodity-exporting countries and the emerging markets. We've been involved in China, Eastern Europe, Russia, Brazil, Taiwan. The US and the UK have clearly lagged—and these are the places where the risk is the biggest at the first level.
Q. What will tell you when the getting's been too good in commodities and emerging markets?
A. Getting out of profitable positions is by far the toughest thing to do. I'll let the technicals dictate that, and right now I don't see that level of participation, open interest and on-balance volume. Maybe when gold pops, that might be a sign.
Q. Which commodities and markets look good right now?
A. In the commodities sector I like the oilseed markets, soybeans, soybean meal, cotton, [and] coffee. I really like sugar. In terms of emerging markets, the [recent] data, particularly out of Asia, remain very strong, very encouraging. So, until I see that change, I'll stay bullish. But I wouldn't be putting money to work at these levels. To me, it's all about the risk/reward dynamic, and the risk was so much lower in March, when these things were [cheaper]. The risk here is much wider given the move we've had.
Q. Thank you.