New Bull Market = Commodity Crisis?

Reuters is quoting Abby Joseph Cohen, chairwoman of the investment policy committee at Goldman Sachs as saying the new bull market has begun.

At the same time, FT Alphaville pointed out that Goldman Sach's commodity research team sees a commodity supply shortage developing in 2010 that could become so bad that governments end up having to conduct coordinated policy responses. As the following graph by FT Alphaville shows, Goldman has been spot on about movements in WTI crude oil prices.



This implies new historical highs in crude oil, copper and agricultural commodities--think $147/bbl oil and what that would do to global demand.


The bull market call says we should load up on stocks, while the commodity call is more omnimous. Yes, if the commodity call is correct, investors stand to make big returns on commodities like crude and copper, but a "severe" supply shortage means prices will begin choking off demand, i.e., harming economic growth and stock prices in the process, as well as fostering ballooning inflation that central banks ostensibly would have to respond to.

The question is, at what point does the portended surge in commodity prices kill instead of cheer stock prices? Ostensibly, when there is evidence that soaring commodity prices are feeding into accelerating inflation and severely hampering consumption. That's not likely to happen until crude oil for example exceeds previous highs (over $147/bbl).

Japan's Nikkei 225 at 10-Month High of 10,466

Good news from global purchasing manager indices continues to boost Japanese stocks. The July J.P. Morgan PMI (covering PMI for the US, Japan, Germany, France, the UK, China and Russia) hit a 14-month high of 50.0 after 13 months below the 50 breakeven level. The manufacturing component of the index is at an 18-month high and new orders are at a 20-month high. According to JP Morgan, the upturn is evenly balanced between developed and emerging markets--i.e., not only China is coming back: all major developed and emerging economies are. In the US, production, new orders and backlogs are up, with the US PMI recovering from a December 2008 low of 32.9 to a July reading of 48.9, i.e., just below the boom/bust line.

Encouraged by the good news about developed economies in North America and Europe, as well as an economist consensus for 4%-plus annualized GDP growth in Q2 2009, the Nikkei 225 is at a 10-month high of 10,466 as autos and electronic stocks hit the hardest by the global crisis come roaring back, in many cases doubling from October 2008 lows.

Uber Bear Noriel Roubini Turns Bullish on Commodities

Bloomberg is reporting that New York University economist Nouriel Roubini, who won fame for predicting the financial crisis, is now bullish on commodity prices going into 2010 as the global economy pulls out of a synchronized recession, and because he believes China will meet its target of 8% in GDP this year. China’s manufacturing expanded in July as record lending and a 4 trillion yuan ($585 billion) stimulus package drove a recovery in the world’s fastest-growing major economy.

This view comes among growing jitters among China watchers like Morgan Stanley's Stephon Roach and Gloom, Boom and Doomer Marc Faber is also cautious on China because of bubble signs in stocks and property and movements by the central bank in China to reign in excess speculation with stimulus money.

If Mr. Roubini is right, recovering demand in the US, Europe and Japan will take up a significant amount of slack in what many see as "speculative" pricing in major commodities such as copper and crude oil--which also implies that these commodities should be bought on any significant sell-offs throughout the remainder of 2009.

Japan to See Annualized Growth of 4.2% in April~June?

A Nikkei survey of 13 domestic research institutes shows a growing concensus that Japan's economy rebounded in Q2 calendar 2009 by as much as 4.2% annualized.

These forecasts show exports rebounding 8.9% versus the 14.7% plunge in October-December 2008 and the 26% plunge in January-March. The other major contributor is expected to be the massive stimulus measures that went into effect in April, which should goose public works spending by 10.7% in the quarter. The biggest contributor to Japan's GDP, i.e., consumer spending, is seen to have risen 0.9% for the first rebound in three quarters.

Still depressed are capital spending, which is estimated to have fallen 5.1% as Japanese factories are plagued with severe excess capacity and a major supply-demand gap. Despite a record rebound in production in the quarter, absolute levels are still only 80% of those prevalent last fall. Housing investment is also weak, estimated to have fallen 9.5% or more than in the previous quarter.

The production recovery is expected to continue through Q3, but weak employment and wages will continue to hamper consumption, and capacity will remain excessive Summer bonuses at Japan's leading companies averaged 753,500 yen this year, down 17.15 percent from a year earlier, marking the largest year-on-year fall ever, while unemployment is at a 6-year high at 5.4%.

Aggregate Corporate Profits Back into the Black

On a pretax basis, a Nikkei survey of consolidated financials for 616 companies (accounting for 68% of market capitalization) indicates that Japan's listed companies swung back into the black to JPY978 trillion in Q2 calendar 2009, from a Q1 combined loss of JPY1.49 trillion, even though combined sales were still falling some 24% YoY. In other words, deep cost cuts and production cutbacks were responsible for the earnings recovery, not a noticeable improvement in top line sales. While shrinking only 1/9th the losses of Q1, manufacturers still had a combined pretax loss of JPY255.2 billion yen, about one-ninth the level sustained during the January-March period. On the other hand, Nonmanufacturers' pretax profit was up 38% to 1.23 trillion yen.

Consequently, the recovery back toward 10,000 on the Nikkei 225 from March lows was supported by an improvement in economic and corporate profit fundamentals. For Japanese stocks to continue rallying through Q3 and into Q4, however, continued improvement in economic and earnings fundamentals is required so that the market can again be valued on actual earnings valuations. Because of depressed earnings, the Nikkei 225 is trading on a forward P/E of 42.5X, a PBR of 1.3X and a dividend yield of 1.48%, while 10-year JGB yields have climbed back up to 1.415%.

If the consensus Q2 Japan GDP 4%+ annualized growth versus the minus 1% annualized Q2 GDP for the US is any indication, Japan's economy could rebound faster vis-a-vis the US on the upside in much the same way as it plunged faster on the downside. In terms of stock prices, however, the Nikkei 225 has been trading in line with the S&P 500 virtually tick-for-tick since the March lows.