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Commodity Bubble?

Commodity Bubble?

May 10, 2011 by Lesjak Planning

While the death of Bin Laden made the news on all levels last week, the spectacular decline in commodity prices also made headlines. Silver was down 25%, gold down 5%, and oil down 15%. All were well above their 200-day moving averages and a buying mania seemed in progress. Oil was reaching its levels last seen in 2008, at $115 per barrel, and we know that ended by sending prices down to the $40 per barrel level. Speculation still runs amok in these sectors often with no substantial reason backing their rise.

The stock market continues its historic rise and is pretty much following the normal such cycles of past bull markets. Of the past 25 bull markets since 1928, the current one ranks 11th in duration (781 days) and 9th in performance (101%). These cycles start with a profit explosion which leads to an inventory rebuild and capital expenditure cycle which we are experiencing right now. If this time follows suit, hiring will commence and consumption will improve. Inventories have quite a ways to go yet to rebuild and two-thirds of the companies reporting first quarter earnings have exceeded revenue estimates. So there is room for equity prices to move higher, especially when you consider that the Federal Reserve is determined, for now, to keep interest rates low and consumers have basically kept their money in cash thus far.

The recent completion of the Tax Season for most has brought a concern to our attention. It seems that in many cases, tax preparers have erroneously completed returns which have caused substantial tax liabilities to clients. Most errors fall into the category of gains or losses incurred by the sale of securities or mutual funds. Most are caused by the incorrect reading of the 1099 tax forms or cost basis reports.

If you incur a higher than expected tax bill or simply question the results of a sale of securities, please contact us so that we can verify the correct application of the tax data.

Since the Fed will keep this round of Quantitative Easing (QE2) going at least until June 30, and intends to keep interest rates low, possibly into the 2012 election, bonds have held up reasonably well.

In fact, recently the money flowing into bonds is almost equal to the amount going into equities. This comes after an almost ten to one gap favoring equities in February. The continued flow of monies into bonds keeps the equity markets in check and may very well help them from becoming overbought and extend the duration of the current bull market. As we know from the past, tops are formed by an overabundance of exuberance in any one sector (see commodities).

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Lesjak Planning

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