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Post-Holiday Pop Does Not Last Very Long

CRB index figures suggest a slow road ahead


No earthquakes, literal or figurative, over the long Memorial Day weekend.  But the Greek government pumped 18 billion euros into the country’s four largest banks, allowing them to regain access to the European Central Bank lifeline.  (When does this crazy game end?)  Relieved, stock traders over here decided to put on a happy face.  The Dow, extending last week’s rally, popped early in the week before tumbling again on Wednesday on more bad European news.  Gold tumbled $20.20 an ounce at the Comex close.

Has anything much changed since the headline U.S. equity indexes bottomed on May 18?  Nope.  If anything, the news flow suggests even more pointedly that our domestic economy is slowing in response to the troubles overseas.

One of my favorite real-time indicators is the Commodity Research Bureau’s index of spot commodity prices.  (Believe it or not, I’ve been following this gauge for more than three decades.)  The CRB spot index consists of 23 raw materials—from burlap and hides to rubber and tallow—widely used in industrial processes.

Through the years, I’ve found that this quirky barometer has done a marvelous job of signaling important changes in the economic climate several weeks to several months in advance.  Thus, it’s worrisome that the CRB spot index  has just undercut its December 2011 low.  At the end of last week, in fact, the CRB spot had skidded to its lowest reading since September 2010.

Given the diminished role of manufacturing in the U.S. economy, I don’t want to exaggerate the predictive power of the CRB spot index.  However, the index has now dropped a hefty 18% since its April 2011 peak.  A slide of that magnitude means we should expect a flurry of anecdotes, over the summer months, about sluggish economic growth and the possibility of another recession ahead.

With that sort of background, the stock market is likely to run into stiff resistance as the headline indexes approach the vicinity of their April highs.  Accordingly, our strategy will be to narrow our buying as the market rises, focusing increasingly on low-risk, defensive names.  If the S&P 500 index climbs as far as the 1380-1410 area, I plan to recommend a number of sales, too (maybe even a few shorts for hedgers/speculators).

For now, I’m still willing to dabble selectively on the buy side.  Among our sturdy consumer-staples producers, Unilever (NYSE:UL) looks attractive with its lofty (and safe) 4% dividend.  Earnings estimates for the maker of Hellmann’s mayonnaise and Ben & Jerry’s ice cream have advanced smartly over the past 90 days.

Yet the stock, in dollar terms, has backpedaled about 8% from its 52-week high, set in late April.  Why?  Unilever maintains dual headquarters in Britain and the Netherlands, so its shares are traded primarily in pounds and euros—two currencies that have fallen sharply against the dollar in recent months.

That’s an opportunity because it allows us to buy high-quality foreign assets at temporary “fire sale” prices.  Over the long run, the undisciplined monetary policy of the Federal Reserve virtually assures that the dollar will lose ground against most major foreign currencies, including the pound and the euro.

(By the way, if some of the weaker members, such as Spain or Italy, were kicked out of the eurozone, Germany would be left to dominate the European Central Bank’s decision-making—and the euro currency would probably soar against the dollar.)

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