By Benedict De Meulemeester on 13/05/2009
Last week's upbeat mood in many markets was not sufficient to convince most commentators. This weeks' Economist for example, referred to the Japanese stock exchanges in the 1990's, which saw several upticks only to see prices fall even lower afterwards. They also point at the dangers that are still looming ahead of us. With the US consumers facing a massive pile of debt, it looks like they are not going to plunge into the kind of debt-fuelled spending binge that they lived on in the past ten years. With the Americans probably consuming less in the next few years, an important motor for economic growth is missing. Moreover, for many industrial companies, the crisis is still getting worse and worse. As we hear from many of our clients, most factories are still struggling to cut costs at an equally rapid pace as the decline they see in sales volumes. The round of lay-offs is still going on and with so many people losing their jobs, the overall purchasing power is not improving.
On the other side, for the first time in many months we see positive signals. 1: as we have learned from the stress tests for US banks of last week, the risk of banks toppling because of the credit crisis is now much smaller than a few months ago. The fact that many banks report better than expected first quarter results is supporting this image of a recovering bank sector. 2: with much lower raw material prices some manufacturing companies are currently producing at much higher margins than what they saw during the commodity price boom. This might be just temporary, as the prices of their products will also come under pressure as consumer demand falls. But at this moment, many companies are doing much better than they dare admit. 3: many economic indicators such as US purchase managers' confidence have stopped falling and some are even turning positive. 4: The engines of the boom of the past years, countries like China and India seem to be doing relatively well. China, for example, claims that the production volumes are picking up again, as the excess storage of goods has been emptied.
The big difference with a few months ago is that back then every single indicator was bearish. Today we can hear the first bullish signals. Only time will tell whether these signals really marked the beginning of the turnaround or whether they were premature. What will be the consequences of massive unemployment in the Western economies? What if the credit crisis would flare up again? What if a huge company such a General Motors would really fail? But then again, such things might not happen and we might see next month that things are a bit better again, and the next month again, and again, and again. If that happens, it is highly probable that energy prices will climb along. Therefore, why take the risk? Why gamble that it is all just an uptick and therefore nothing should be done, just wait for prices that will certainly fall again?
Nevertheless, we have witnessed in the past week that many people were ill-advised regarding the risk of not doing anything. Sometimes, I am stupified by the sort of arguments that are put forward (and accepted) to support such advice. We heard from some people last week that were advised not to do anything as the stress tests would certainly show that banks were still in big trouble. One supplier told clients not to do anything before Friday, because on Friday prices always fall (Hello? Where are the statistics that support this? Why did prices rise on this Friday?)
Many people were also confused with data on fundamentals. Yes indeed, demand for energy at this moment is still lower than supply. But the trouble with such reasoning is double. First of all, data on energy demand and supply is hazy. Secondly, the price of energy futures doesn't wait for demand to rise over supply before it starts rising. This is only true for spot prices. Futures prices are based on expected future evolutions. If they rise today, it is because of the expectation that the economy will (slowly) recover in the next quarters. If you do not lock in some volume on these futures prices today (which are still just a little bit more than half their value of six months ago) you are gambling that these expectations get it wrong and that the spot prices will remain low.
The ambiguity of today's market situation is once more a strong argument in favor of contracts that allow you to lock in futures prices for parts of your volume. Anyone that says today that he is convinced that the market will either go up or down, is saying that he is capable of grasping the total status of the world's economy. And that he sees exactly where it is going in the next few months. Nobody can do that. That is why forecasting is always gambling. Don't gamble, don't speculate. Fix forward energy prices in tiny portions and you are not commiting to the market going either way, up or down. You protect yourself against another bull run and at the same time, you keep open some volume to grasp the opportunity of another bear crash. This makes it all the more surprising that in countries such as Spain, it remains difficult to convince suppliers that they should offer these type of contracts and hedging services to their clients.