Interview: Oil futures
>> time to take a look at this week coming up, where economic data will include durable goods orders which will be released on wednesday. it will be first revision of first quarter g.d.p. that comes out on thursday. personal income and spending, they get released on friday. also, there are two r.p.o.’s on tap―mastercard and vonage. of course, deliberations continue in the enron fraud trial. so these are some of the things that we’re keeping an eye throughout the week. as for today, we have got crude that’s moving lower because of speculation that higher rates will reduce economic growth, and therefore, eventually demand for fuel. the oil futures are trading down .6% this morning. we want to get more from su keenan.
>> it is a spirited trading session, suzy. certainly after last week’s decline in crude, and one of the biggest we have seen in two months. we are, however, off the lows of session. crude oil, the current contract trading above $68. what is six-week low, but looking ahead to the july contract which becomes the current contract as of tomorrow and that’s trading in the $68 to $80 range. take a look at the one-month charge for crude and you will see how we have come down from the highs that we saw a couple weeks ago. on the rally in gasoline and geopolitical concerns. take a look at gasoline. we’re now at $2.02 wholesale, whereas a month ago we were trading 20 cents a gallon higher. incidentally, the latest lundberg survey says it’s passed through the retail levels and we have seen a decline in gasoline to the average of $2.92. that again, as a result of the decline we have seen in gasoline. the only rebound we’re seeing, take a look at natural gas. this is trading apart from the rest of the energy complex. look back to december where we were at a record number of $15, and we have come down to the $6 level. because of that, we are seeing a rebound. bigger picture, what is going on? well, this is part of the bigger commodity sell-off. one believes it’s the bursting of the bubble. with copper and gold and silver down, he says that oil has also been down. we should point out that we are seeing the metals rebound, and some of the traders on the floor are saying they’re not seeing the liquidation they saw last week. they saw―we’re seeing a stabilization in the sell-off.
>> is stagflation in ben bernanke’s future? that story when we return.
>> some economists see a troubling pattern developing. higher inflation and slower economic growth. which of course could be spelling trouble for fed chairman ben bernanke and for consumers alike. lindsey arent has more details on it.
>> thanks, suzy. the s-word is creeping back into economic discussions these days. stagflation, of course a phenomenon, last seen in the 1970’s. the question is what does it mean for today’s economy? ben bernanke did fear may face the central banker’s worst nightmare.
>> the nightmare is that the economy starts to slow well below 3%, at the same time that inflation rises well above 3%. and that looks like it’s real risk at what point.
>> some call it stagflation. that is slowing economic growth coupled with rising inflation. soaring energy and commodity prices and a falling dollar all point to the possibility of faster inflation. a recent report showed inflation rising at an annual rate in 2006. the worst start to a year since 1990. it’s led richmond fed chairman lacker to say unfavorable inflation numbers and adverse effects are going to require a higher path for real interest rate and are going to make a pause less likely. the economy will suffer if they have to raise another percentage point to 6%.
>> that will cause a relatively serious slow down in interest-sensitive sectors. things like housing especially. and that individual salaries
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Listen On the market--Suzy (fast)
Barings Asset Management---Miller, Hayes---Portfolio Manager-Global Equities
>> welcome back, everybody. emerging markets are now down for a 10th day. that makes it the longest losing streak in eight years for this group. joining us to talk more about this is hayes miller, a portfolio manager over at bearing asset management. they have $37 billion under their management. first off, what is―what has sparked this round of selling?
>> well, suzy, i think what’s happening as you’re getting a standard consolidation period. if you look at the history of emerging markets relative to develop markets , you have somewhere on the order of four to seven-year runs of 20% per annum plus, or underperformance. since 2004, we have been in a solid uptrend and we think that’s more to it. but you have these periods of consolidation where the market , particularly the most risk diverse investors get shaken out. there are big issues with inflation scares, so i think that’s been what’s really driving the selling, and a normal consolidation period might look at something like a 10% relative fall against developed markets . that’s what we’d expect out of this.
>> but you’re calling it a normal consolidation? is that really the case or is this a change going on? is this some serious cash that is being moved into less risky assets? we have seen a selling of risks over the last several days.
>> you know, what’s getting sold off are the materials-related companies in particular and of course the emerging markets are very well supported by materials companies. those seem to be the ones getting hit the hardest. so the question you’re asking, it seems as one, are we looking at a structural change in the commodities cycle? we don’t believe so. we think we’re snil a long super cycle, and that if commodity prices are about to fall off to any significant degree, then we have bigger issues than what we are seeing going on today with, you know, with whether the fed has to go another half a percent or so.
>> have you been then in taking advantage of this sell-off?
>> well, what we have now is emerging markets . probably going to finish out this run at something like 20% valuation discount to develop markets . 20% discount right now seems unjustified to us. we would have expected that valuations should be running at about par. so, yeah, we’re looking to pick up some bargains we think at the end of this sell-off.
>> where do you think you’re going to find those bargains? what areas are you looking at specifically?
>> well, looking like asia. certainly looking like, you know, india. our guess would be that there’s some tech names that are being sold off in asia, along―just because of the issue that i mentioned earlier about redemptions in large caps needing sold that may be able to be picked up at a bit of a bargain at the end of this. and i think the materials companies are still going to be making quite a lot of return for their shareholders, at even -- even at raw materials prices that are maybe 5% to 10% lower than we had recently. so, you know, we have to give this―i think we’ll find some nice deals.
>> nonetheless, we have one trader telling us the reason they’re seeing bonds rally is because people are more concerned about growth than they are about inflation. and i know we have been talking about the possibility of stagflation. how does all of that fit into this sell-off that we are seeing?
>> yeah, well, you know, that changes by the week, i guess. we certainly saw bonds behaving horribly last week. so i think that’s going to be a day by day issue. we’re going to have to watch the data as it comes out. stagflation is a real potential in this situation. and i personally see a lot of similarities to what we were looking at in the ‘70’s when we had the last real spike in materials and energy prices. so i would expect that that’s going to be the scare for some time. slower growth, slower earnings growth from compression of input prices rising faster than output prices, as well as potentially higher interest rates to keep inflation at bay.
>> are you going in and then buying the commodities? is this an attractive level to get in at something that you haven’t on the last run-up? >> yeah, possibly. the question is how you get the commodities. we don’t particularly subscribe to the idea that commodities aren’t a good investment. commodities have every reason to go up and down in value for fundamentals, and we think that’s a lot of demand right now for commodity―continued demand for commodities. but we like the leverage that you get from buying in commodities-producing companies and we found that in brazil and australia and parts of asia that are being sold off pretty dramatically. i would think it’s a case of finding good companies in the sector are preferred.
>> thanks very much for your time this morning.
>> thank you, suzy.
>> hayes miller from global equities over at barring asset management. please stay with us. we’ll talk more about commodities again.
