Commodities, including oil, gold and the agricultural variety, have been under pressure over the last couple days.  It is, of course, anyone’s guess as to why they’ve finally pulled back, but there is no doubt that it has been swift.  As we’ve written in previous updates, we believe in the long term case for commodities given the rise of industrializing nations, but the most recent parabolic upward move in many hard assets has seemed unsustainable, speculative in nature, and inconsistent with a major slowdown in our own economy.  China has continued to raise their interest rates to curb inflation, and eventually these hikes should slow their own economy as well.  While we don’t think that commodities will break their longer term upward trend, it wouldn’t surprise us at all to see a continued pullback, especially considering the massive amount of leverage that has likely helped power the moves higher in recent weeks.   

There has been a great deal of talk about the Fed’s recent interest rate cuts driving inflation higher in the coming months.  But in our view, the lower rates won’t likely translate into an expanding money supply until banks start to lend again.  Given the recent carnage in loan land and severely tightened credit policies,  it’s hard to see this happening in a major way anytime soon.  To us, the current inflation readings are backward looking and likely driven by speculation in the commodities market.  Rather than going up in the coming months, we would be more surprised if the inflation readings didn’t fall.  

Over the last few weeks, we’ve taken a close look at the impact that falling commodity prices might have on various holdings in our portfolio.  And while few stocks have followed the parabolic move that commodity prices have had in recent months, some stocks have certainly held up better than others.  At the margin, we’ve been paring positions that might be exposed to a decline in commodities while adding to the consumer discretionary sector, a likely first beneficiary of any such reversal.  If, in fact, current inflation readings have been artificially heightened by speculation in the commodity markets, then a reversal could mean great things for the stock market from here.

On a final note, I’ve found myself timing my visits to the gas station for fill ups in recent months.  I never used to do that.  But there has been an almost uncanny delay of a day or two between changes in the price of oil and the price of gasoline at the pump.  Historically, I always used to fill up on empty, but no longer.  Perhaps I’m just poorer than I used to be or perhaps I’m succumbing to the pull of an emerging new sport where points are awarded for the lowest price fill ups.  On second thought, maybe I’m taking my job way too seriously.  

In any event, if you can hold off on filling your tank for another day or two, my instincts suggest you might be able to enjoy a bit more ham come Easter Sunday.   

Hopefully, that’s news you can use.  If not, the foul’s on me.