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Real Time Insight

Has anyone thought about the ramifications of soaring commodity prices and their role on future earnings results? 

I remember back in late 2007 - early 2008, when oil, gas, soybeans, corn and other commodities were looking strong as was the market.  We all know what followed…

The question is whether we are doing it all over again?

Let’s start with the price of oil, which is up something like 25% in the past few months.    This increase seems to be driven by a supply issue, certainly not by global demand.   Fuel prices here in the US are almost back at the record high set in 2007. (RBOB Gas futures peaked in mid 2007)

Corn, Soybeans and to a lesser extent, wheat were all screaming higher in that period and very close to all time highs as well. 

When you look back at the S&P 500, it peaked in late 2007 and by March of 2008 had dropped almost 25% at which time the forward P/E was about 14; right where it is right now…By that time most people thought the mortgage crisis was over and that banks would start lending again.  Unemployment was at 5%.

For the next couple months (April-June) the market moved higher by almost 14%, then in mid June started a nose dive, dropping 54% in a matter of months.  Oil however continued to climb for several months even while the S&P 500 was going down, perhaps exacerbating the pain that was felt in corporate profits.

It’s also important to note that gold was moving almost in tandem with the market at that time.   In the years leading up to and during the rally of 2006-2008, the dollar was getting creamed against the euro (and others), helping bolster profits in multi-national companies in the S&P.

This recent rally does not have the advantage of a weaker dollar trend to help it along.  But we still do have high commodity prices, high energy prices and relatively flat wages for American consumers.   Corporations have gotten just about as efficient as they are going to get and top line revenue growth slowed over 50% from Q3-Q4 2011.

If (or when) QE3 comes, commodities and inflationary pressures in general will most certainly get a boost, which will actually take more money out of the pockets of Americans and many corporations.  Inflation trends have yet to hit the one thing we need them to; OUR HOMES!

The FED did acknowledge inflation pressure, but says it’s temporary.  They said the same in late 2007 and then started to change their tune in 2008.

Given this earnings growth trajectory (slowing) and  the very real possibility of a hard landing in China (which could turn into a crisis/catalyst), more defaults in Europe and anemic growth here in the states;  will companies continue to get blood from stone or is the market just cheap like it was back in late March 2008? :)


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