Now Is Not The Time For Bottom Picking

Greece is the watchword for investors this week and commodities have taken a back seat – but is that the smart way to watch what unfolds in the Euro zone? Indeed, commodities can give us even greater insight into the future of the European Union and perhaps the investment palette that awaits us whether or not the Greek credit crisis is resolved or not.

I’m talking about a generalized deflationary trend that has overcome commodities precisely at the same time that the Federal Reserve is looking to begin to normalize rates and the EU monetary and credit issues that have been percolating for three years already, are looking like they are finally coming to a head.

Sometimes the clues to the future aren’t very complicated to find: I look around my table and near my grill during this holiday weekend and begin to measure the costs of everything that’s associated with my Fourth of July barbeque: Corn and wheat have experienced almost two years of nearly perfect crops and as grains have entered their deflationary cycle, they’ve taken most of the dairy products with them. Of course, there’s oil and refined gasoline, making this holiday weekend the least costly for travel in five years. I have been of the opinion that the deflationary ‘cycle’ in oil is relatively temporary – but many would claim sub-$70 a barrel prices in oil to be the ‘new normal’ – and not merely a supply disconnect. Only beef has bucked the trend of deflationary commodity prices, and there are indications that the cattle market has indeed reached a temporary top and is ready to join the others on the slow demise trail.

Deflation in hard assets bleeds into soft ones as well and the recent collapse of the Chinese stock indexes, despite the latest central government moves to prop prices, has many here in the U.S. believing that the real bubble has been where Jim Chanos and others have so long pointed in the past – over the Pacific Ocean. Our stock market has had its valuations stretched as well and we all seem to know it, and this latest drop in our own stock markets has been met with ho-hum reactions – another dip in a bull market to notice, but not fret over.

While oil continues to hover nearer to $60 than $40, the E+P’s that produce all that oil are entering their deflationary cycle as well, literally melting away in share value. Some of them, including my favorites of EOG resources (EOG), Cimarex (XEC) and Anadarko (APC) are seeing levels we only saw when oil was much lower – but still I have cautioned investors that now is not the time for bottom picking. Anyone who has read my book “Shale Boom, Shale Bust”, outlining what I believe is the trajectory of oil over the next several years knows that I believe the markets are in need of a violent restructuring in the patch, very little of which has occurred yet. Until I see reason, any reason at all, for abandoning that thesis I will continue to wait for that to happen and the concurrent ‘double-dip’ in oil prices that must accompany it. Whether that happens soon or not, the market can’t have my cash until I see signs of that restructuring taking place in earnest.

And cash may be the entirety of the takeaway from this week’s column on oil, Greece and other commodity and equity markets here and abroad. Uncertainty is the trader’s lifeblood, and a diving marketplace isn’t a scary thing to play into – but the makings or continuing of a deflationary market is something altogether different. That’s an animal that’s impossible to play against and win and we may be at the start of one right now.

The Greeks are banging on the doors of their banks to get some cash out of their local ATM. They may have the right idea, although we don’t have anywhere near that problem in access that they do.

My song remains the same this holiday weekend. Hang onto your cash – for now.