The Three Dominating Pieces of Market News Today
World Economies Plummet, so reads the top story in my Wall Street Journal this morning. Mexico yesterday reported a 21.5% decline in Q1 GDP, the worst since the 1995 peso crisis.
Mexico’s decline followed by a day Japan’s report that its economy contracted in the first quarter at a 15.2% clip, its worst performance since 1955. Last week, Germany said its first quarter decline in GDP, an annualized 14.4%, was the worst since 1970.
Initial jobless claims in the US were reported higher than expected at 631,000 this morning. The global economy is flat on its back with precious few signs of strength.
The hook? Oil for July delivery is trading over $60 a barrel. Let’s haircut that a generous $10 a BBL for seasonal factors (yes, gasoline prices are making that mysterious rise just before a 3 day weekend. Remember the hysteria last Memorial Day weekend?) and maybe a touch of speculation and fear about Nigeria. Oil at $50 per BBL with the world economy busted? In 2003 and 2004 oil at $50 made traders and market commentators cringe. Barely thinkable.
So, what’s going to happen to oil as the global economy recovers? How can it not go higher, much higher? Pick your buying points, but this is a sector to overweight. Follow the XLE and the USO. UNG is the ETF for natural gas the commodity, and FCG is the ETF following an index of natural gas stocks. If you can take the volatility in the portfolio, I don’t think it is out of line to overweight this sector 1.5:1 or even 2:1.
