CRUDE OIL REACHES $32 -- FALLING DOLLAR BOOSTING COMMODITIES -- ONE YEAR ANNIVERSARY OF STOCK BOTTOM
CRUDE OIL REACHES $32... A combination of low supplies this week, and the onset of colder weather, has given a strong boost to the entire energy complex. Nearby crude oil plrices jumped 96 cents today to close just shy of $32. Chart 1 shows that crude oil prices are approaching the high reached during August at $32.85. Chart 2 puts this year's trend in oil in better perspective. Oil peaked near $40 during late February/early March just as the Iraq war was ready to get started. It then plunged all the way down to $25. A move over the August high would put crude at the highest level in seven months. The biggest percentage gainer in the energy patch today was heating oil, which gained 2.78 (or 3.25%). Natural gas gained .16 (or 2.9%). Colder weather should make those two markets potential leaders in any winter energy rally. The energy rally led a CRB breakout.
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CRB INDEX HITS EIGHT-MONTH HIGH... The CRB Index gained 1.42 today to close at the highest level since February. Eleven of the seventeen commodities closed up spearheaded by energy markets. Other gainers included copper, gold, silver, and soybeans. The CRB hit a five-year high early this year, and has been consolidating those gains since then. This month's new strength suggests the strong possbility that the commodity uptrend is resuming. In case anyone doubts that commodities are in a major bull market, take a look at Chart 4. The CRB formed a major "double bottom" at the end of 2001. By the end of 2002, it had hit broken through the 2000 peak to reach a five-year high. This year's consolidation stayed over the breakout point at 230, which is a sign of strength. A close over 250 would resume the major advance. To see why a move over 250 would have even more significance, take a look at Chart 5.
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CRB INDEX TESTING 15-YEAR TRENDLINE... Chart 5 plots the CRB from its major peak in 1980 to its 2001 bottom. The rally to 250 earlier this year took it right to a trendline drawn over the 1988-1996 peaks. It backed off from that trendline at the start of the Iraq war. It looks like it's getting ready for another try. Needless to say, a decisive move over that trendline would leave little doubt that commodity prices have moved into a major uptrend. And, as I've said before, commodity prices are now outperforming bonds and stocks for the first time since the early 1980s. I continue to believe that represents a generational shift out of paper assets and back into hard assets. We haven't seen that since the 1970s.
Chart 5
FALLING DOLLAR IS PUSHING COMMODITIES HIGHER... In case you're wondering what's been driving commodity markets higher, the answer lies in Chart 6 -- the U.S. Dollar. The dollar peaked at the start of 2002 and has been dropping since then. Compare the drop in the dollar with the start of the CRB rally at the beginning of 2002. The two charts are mirror images of each other. The fall in the dollar over the past month has coincided with the recent upturn in the CRB Index. My take on the situation is that the government started to sacrifice the dollar over a year ago to stem the perceived deflationary threat. They were trying to create some inflation (called relating the economy). The recent G7 meeting calling for flexible exchange rates (meaning a higher yen and a lower dollar) left little doubt that the U.S. wants a weaker dollar. That's good for commodities markets and common stocks tied to those commodities. Industrial Metals are this year's top commodity performers (+18%);livestock is second (+14%); precious metals are third (+6%). Energy has been a laggard at 3%. This week's upturn suggests that the energy sector may start playing catch-up with the other commodities.
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ONE-YEAR ANNIVERSARY FAVORS STOCKS AND COMMODITIES... This week marks the one-year anniversary of the stock market bottom last October. It's useful to see what the four main markets did. The two gainers were stocks (S&P 500 +34%) and the CRB Index (+8%). The two losers were bonds (-6%) and the Dollar Index (-14%). To me, those trend make sense. Since 1998, the deflationary threat was the greatest since the 1930s. A devalued dollar is one of the best cures against deflation. It also helps to create some commodity inflation. Coming out of a deflation, commodities and stocks usually rise together (as they did during the early 1930s). Bonds and stocks decouple during a deflation. People buy bonds and sell stocks. When the deflation threat passes, they sell bonds and buy stocks. That's pretty much what's been happening this year. Higher commodity prices are also associated with falling bond prices. Higher commodities, and weaker bonds, are also a side-effect of a falling dollar. Take a look at John's Latest Performance Chart to see the four intermarket trends over the past year.
