Very simply, It ALL comes back to commodities; we will know that the financial markets will stabilize when… oil prices rise again.

The economic data that the media tend to focus on are often lagging indicators. Unemployment, GDP, corporate earnings and retail sales tell us what has already happened… not what is going to happen.

The stock and credit markets most times have discounted and factored in the dire information that we are getting every day. Markets are forward looking, and higher crude oil prices are a sign that the worst is over and a recovery is under way.

A temporary no-lose situation has taken place with the oversupply of oil in the spot market. Inventories are significantly built up and storage has become nearly impossible to find. In fact, tankers are now being used just to store millions of gallons of crude — and they aren’t set to move an inch.

Nowhere for the oil to go has presented a unique situation in which traders can guarantee a profit by storing now and selling in future months. But as you know, there is no such thing as free money, and this to me is just another sign of an extreme that market forces will correct.

Technically, we are at the third attempt to push through the $50 per barrel level.

Jan. 20 marked new multiyear lows, but many indicators showed divergence and renewed strength to the upside. Since then, crude has rallied over 10% in a week as the stock market oscillated around the Dow at 8,000. Higher oil prices are the sign that consumers and the markets can handle it.

Commodity Investing in 2009…

Some commodities have actually done very — very well — in the past couple of months. Cocoa has reached the highest levels since 1985 with the decline of the pound sterling currency in which it is denominated.

The British pound made new 23-year lows against the dollar last month with the damage in the United Kingdom financial system. According to the Financial Times , a full-scale nationalization of the banking industry is “very close.” When the pound is weak, worldwide traders have more buying power for the commodity when they convert their currency to purchase cocoa.

The central banks around the world have had a contest to see which could cut rates to zero the fastest (Japan doesn’t count; it has been a mess for over a decade). The goal in times of global slowdown is to devalue your currency to aid exports and jump-start the economy with cheaper relative prices and more money to spend in the system.

The dollar is not strong!! It’s just not as weak as some other currencies of economies that are also in serious trouble. The currency fun and profits are about to begin.

Back to Commodities…

I was looking up a recipe and uncovered some interesting facts about meals from the Great Depression. Just to let you know, cooking is research for this job. “A chicken in every pot” was not just a political slogan, but what every city dweller aspired to before factory farming methods made it so cheap.

According to the U.S. Dept. of Agriculture, the average American ate 10 pounds of chicken per year, compared with over 60 pounds today. Chicken is just corn inside another package, and high grain prices have a huge impact on profitability for producers. What caught my attention was the recipe for mock chicken legs. It was cheaper to make fake chicken out of veal before giant corporate plants met consumer needs.

Enough about history; it’s time to address the present. Super Bowl Sunday had its own set of problems. A shortage of chicken wings doubled prices in some areas. It is widely disputed, but the Anchor Bar of Buffalo, N.Y., is credited with starting the delicacy in the 1960s to use the wasted wing parts that couldn’t be given away.

It’s not that there is a chicken shortage. There are plenty of breasts and legs to go around, but wing demand has reached new heights. The cause is the bankruptcy of poultry giant Pilgrim’s Pride and the entrance of KFC and Pizza Hut mass marketing the tasty boney treats.

I like to be optimistic, but I want to let my concerned friends know that this may be only the beginning of the problem. As the dollar goes down, commodities rise, pushing up corn and oil prices once again. And the savvy investor stands to benefit from this move.

Regards,
Alan Knuckman

February 5, 2009

The Economic Stimulus Plan, Commodity Investing, and Oil Prices in 2009 was originally featured in the Penny Sleuth.