GM May Hit $200 Before Oil Does

I posted on July 17th that a historic reversal was at hand in Oil has Peaked, Banks have Bottomed, and that has proved prescient advice. Shorting commodities and resource stocks has been a great trade in the last few weeks, and one I have consistently recommended since late April, despite the continued hype and ludicrous price targets from many investment bank analysts, who have yet again revealed themselves to be glorified cheerleaders dancing around the latest momentum trade. The short banks/long energy trade was dangerously crowded, as evidenced by hedge funds suffering their worst month in years in July in a stampede for the exit.

I wrote back on 26 May in It's the oil price, stupid, but for how long more?, that:

Peak Oil is not at hand but peak speculation in oil may well be. Given the weight of resource stocks in key global indices (and earnings), it will be interesting to see how markets react to a looming reversal in oil; some pretty brutal sector rotation would certainly result and the dollar would resume its stalled rally.

The CRB index suffered its worst month since 1980 in July, US financials had the biggest one week move of any sector ever, and there's plenty more where that came from.

Although I believe there is a secular bull trend in commodities and indeed emerging markets, both asset classes had become a classic bubble in the face of a global demand slowdown (China still growing at 10% is about as credible as George Bush winning a Nobel Prize) and are now in the throes of a deep medium term correction that will probably see most commodities halve or more from their peaks.

The chart below nicely summarises the characteristic behavioral pattern of an investment bubble such as Nasdaq, US Housing, and now commodities (and particularly oil).

Although there will be volatile ' Bull Trap' rallies, the uptrend has been decisively broken and I'd avoid long exposure until we get to that capitulation phase a few months down the road.

All major emerging markets have now underperformed developed markets from their peaks, and are in bear territory, but not compellingly cheap yet. I've said before that investment is like a beauty contest where the least ugly contestant wins, and that's the dollar and US equities right now.

Not only is there a huge rotation of cash imminent from the commodity/emerging market reversal, but the ratio of money market funds to equities stands at an all time record high, equivalent to 27% of total US market capitalisation.

Two conditions have been required for a sustainable rally in US equities; firstly, a bursting of the oil bubble, which has evidently begun, and secondly stabilisation in the housing market, which is also tentatively becoming apparent in many regional markets, although not yet nationally.

All this is good for the US dollar (and very bad for commodity currencies like the Canadian and Austrlian dollars), and good for blue chip US equities, which will resume a tradable bear rally that should take the S&P to 1350 or so over the Summer. It's wise to ignore momentum (and headline) chasing 'star' analysts whether they're calling oil at $200 or Citibank (C) at $2, and take some sober perspective on the markets. If anything, their guru status is usually a contrary indicator.

Although we are in a structural bear market that will last well into the next decade, and we may well see a final cathartic sell off in the Autumn to test the 1100 level (marking a classic 30% peak to trough correction), it's now a good bet that on a 12m view, inflation concerns will have abated, the dollar will be in a surprisingly strong uptrend, and US equities will be materially higher from here.

Comments

[jimstam]

"Although we are in a structural bear market that will last well into the next decade" .. (I assume for US stocks?) and then you go on to say "US equities will be materially higher from here."
Seems to me like you have all the bases covered!
I guess the large US deficit is not important.
If everyone knew what the future held, we'd all be millionaires.

2008 Aug 05 08:42 AM

[investor88]

Key points: expectation that sp500 will test 1100 in Autumn; tradeable rally in sp500 to 1350 in Summer; we are in structural bear market that may well last into the next decade. Quite thought provoking, observing how events pan out.

2008 Aug 05 08:50 AM

[tom Andersen]

We have not even got to the point where the governments start crying due to the overwhelming budget shortfalls that they will be getting. This will cause another whole spin - down.

2008 Aug 05 09:12 AM

[JasonC]

The article is all on the money. The places where it departs from the conventional wisdom are all notable and sound. As for the secular bear, it began in 2000 and they typically last not 1-2 years (the immediate down you read about in the financial press) but more like 15 years, to the last passage of the previous bull peak. Examples 1929 to 1947, 1968 to 1982 (a real drop of 3/4 - nominally sideways with high inflation for an extended period). 2000 was an epic peak. It will take a decade minimum to pass it for good.

But against the opinions of the short sighted momentum cheerleaders the article rightly derides, that makes it a fine time to gradually accumulate stocks. Cost averaging works if you avoid the peaks themselves. When the average retail investor can't see a single line on his mutual fund past performance statements without a minus sign in front of it, the next bull can begin.

2008 Aug 05 09:23 AM

[fxtrader07]

'on July 17th that a historic reversal was at hand in Oil has Peaked, Banks have Bottomed, '
'I believe there is a secular bull trend in commodities and indeed emerging markets'
'Although there will be volatile ' Bull Trap' rallies, the uptrend has been decisively broken and I'd avoid long exposure '

'Although we are in a structural bear market that will last well into the next decade... it's now a good bet that on a 12m view, US equities will be materially higher from here.'

Hm, understand your reasoning , but the problem with that kind of analysis is that you will be constantly switching between all sorts of secular and non-secular trends. Also, while i can't deny the existence and growing influence of sector rotation by hedge funds and other large institutional investors, I will certainly not adopt to their approach and trade in and out of my positions whenever THEY feel like changing moods.
And finally, that 'money market funds' argument is a bit of a stretch. a lot if not most of the assets held in these 'money market funds' are higly illiquid paper that cannot be sold - and that finances to a alarge extent the big banks and keeps their house of cards intact - sort of. So you might in fact not see large outflows from there anytime soon

2008 Aug 05 09:24 AM

[cjwirth]

Peak Oil is NOW. Most independent studies and analysts conclude that crude oil is peaking now and global liquids are not far behind (crude oil peak dates given here): Matthew Simmons 2005; German based and parliament funded Energy Watch Group 2005, Kenneth Deffeyes 2005, U.S. Army Corps of Engineers 2005, David Cohen 2011, T. Boone Pickens (2005), Samsam Bakhtiari 2005, Tony Eriksen 2008, Rembrandt Kopplear 2008-2010, Fredrik Robelius 2012, Chris Skrebowski by 2011, Sadad Al Husseini, says we will pump no higher, Jeffrey Brown and Stuart Staniford (soon).

Even the cheerleaders for the oil producers/extractors (CERA, EIA, and IEA) have indicated that global oil production is peaking.

Interestingly, the U.S. Energy Information Agency and International Energy Agency still have not given the world a specific time frame for global peaking.

Sometimes I wonder what happened to my tax dollars :(

And the U.S. Federal Emergency Management Agency has said nothing about what to do when oil production is so low that the highways and power grid fail in the not too distant future :(

All of the documentation and references for this are available in a free 48 page report that can be downloaded, website posted, distributed, and emailed: www.peakoilassociates....

I used to live in NH, but moved to a sustainable place. Anyone interested in relocating to a nice, pretty, sustainable area with a good climate and good soil?

2008 Aug 05 10:25 AM

[Burt]

Seem to be quite full of yourself. Why aren't you getting paid to be a "hot shot" analyst if you're so good? I guess you make a better living posting articles on seekingalpha.com.

2008 Aug 05 10:30 AM

[Malkiel]

Agreed with cjwirth, peak oil is already passed. Some economic trends are governed by science, even for those who don't want to believe in science. If oil slips substantially from where it is it will be a big buying opportunity for stocks in a sector that's destined to see more "bubble's" in the coming decade as denial prevents alternative energy concepts from gaining faster traction in the marketplace.

2008 Aug 05 11:09 AM

[bbzz24]

by the way SemGroup seemed to have embraced your strategy and are now in bankruptcy proceedings after $3.2bn losses on short oil poistions.

2008 Aug 05 11:48 AM

[Indyphil]

I think there is some confusion about the term Peak oil here.

I think the article means oil has peaked (refering to the price of oil)

"peak oil" as cjwirth defines it means production has peaked and we are in a phase of declining availability.

2008 Aug 05 11:49 AM

[Brian Pursley]

The commodity price has gone from $147 to $118? Peak oil?

You don't reach peak oil with twice the Exxon Valdez spill seeping into the Gulf of Mexico every year: www.sciencedaily.com/r...

Ever heard of abiotic? oilismastery.blogspot..../

2008 Aug 05 12:09 PM

[JEM]

Peak oil? That is a theory, and then all of a sudden our known reserves expand, so the science surrounding the actual arrival of peak oil is as suspicious as that of global warming.

Alternative energy has been getting a free ride on subsidies throughout the world, particularly the US and western Europe. Wind cannot survive without it and now new studies suggest that due to generation fluctuation on windmills (the wind sometimes doesn't blow) the required infrastructure to back up a reliance on wind is almost as much as if you didn't use wind in the first place. Without any evidence I still like solar way long term, but we have some time to go. Nuclear power is the obvious choice for power generation, which would leave more and more oil available for transportation fuel until battery technology comes around. No way doe this all happen in 5 years. Oil will be around for awhile. And we will keep finding more of it until we find something cheaper, which eventually we will.

2008 Aug 05 12:12 PM

[steve1]

Let me tell you something about the CDN and AUS dollars. You may think that things are bad for them, but not for the USD. Look at CD for example, our country does not have a housing credit debacle, our government has been running budget surpluses for over 10 strait years and we have been paying down our national debt, which now stands at 25% of GDP. We have vast quantities of commodities regardless of a slowdown are still wanted by other countries. Compare this to the US: 1)unfunded wars in Iraq and Afghanistan, 2)debt level approaching 10 Trillion dollars, 3)all levels of government federal,state, and municipal swelling under debt, 4)household debt levels records 5)housing collapsed, 6)banking sector basically bankrupted 7) US Fed printing money out of thin air exponentially increasing money supply

Now you mean to tell me that the USD should make a strong come back based on these facts???? Not only that, why should Americans get to have everything on the cheap? The days of living the dream are done.

2008 Aug 05 01:14 PM

[CLH]

Very good post Sean. Interesting from the comments how many people think the sky has fallen and the end of the world is approaching. I guess these nut cakes have always been with us.

2008 Aug 05 01:59 PM

[jetsby10]

PCDN hit it on the money. The US trade deficit and inflationary policies points to a weaker dollar. If someone kept borrowing money from you without paying you back a single dime, you'd cut them off at some point.

2008 Aug 05 04:02 PM

[SEBASS]

Bwahaaaaaaa haaaaaaa haaaaa
200 cents maybe YES YES not dollars. You screwed up the sign buddy. GM in bankcrupt already. Liquidity will not help them since they are insolvent. Consumers are choked, so they won't be buying hammers and other p.o.s GM cars. It would be hilarious if some japanees or german manufacturer bought them out cheap. Entire auto industry is in trouble and this foo is screaming $200. Oil yes, GM f@ck no.

2008 Aug 05 05:22 PM

[704RE]

Canada- your fate is inexorably linked to the United States. Stop kidding yourselves

2008 Aug 05 05:37 PM

[Pretzel Logic]

Hearing all this crap about "peak oil is here" reminds me of the glory days of the "new economy." "Everything's changed! Buy oil (and dot coms) now!" Not even close. The USGS indicates that the US *alone* has estimated reserves of close to a TRILLION barrels. The environmental fascists in Congress are creating the *illusion* of peak oil, by blocking votes on drilling -- but peak oil on the actual planet itself is a long way off. In a hundered years or two, when peak oil starts becoming a real issue, new and viable technologies will abound.

2008 Aug 05 11:59 PM

[cynic69]

Pretzel Logic - You are confused about what "peak oil" means. It has NOTHING to do with how much oil there is on the earth. The earth will NEVER run out of oil. Peak oil only has to do with "production rate". If the rate of production can't keep up with the demand the market will force the price to skyrocket. Eventually this trend will result in shortages which will be disastrous. Twenty of the largest oil fields are experiencing production rate reduction. These rate reductions have many different causes but the reasons don't matter, the result is "peak oil". In addition to production rate reductions there is the matter of billions of Chinese and Indians who are buying subsidized gasoline for their new cars and taking a Sunday drive. This will insure that demand increases forever. The republicans are screaming drill, drill, drill. One problem is that all the worlds drill rigs are currently in use. The cost of building new rigs is skyrocketing because of the higher prices of diesel. These higher prices for rigs must be amortized by charging more for the oil that is eventually produced. And so it goes.

2008 Aug 06 12:46 AM

[SEBASS]

Pretzel Logic.

OMG dude. The only illusion is your fantasy story you're picturing in your brain. U.S peaked in 1980. That is known fact bud and also U.S would not import 60% of oil from unstable regions like middle east and spend billions of dollars and drive national deficit to 9 trillion dollars if oil would be plentyfull. Dude stop!! Please !!!

Here educate yourself. BTW he is/was advisor to G.W Bush.

uk.youtube.com/watch?v...

2008 Aug 06 12:47 AM