Market Themes Beginning To Emerge

Following on last post’s observation of the implications of an economic recovery taking hold, I present readers with a trio of intriguing stories from the Wall Street Journal.

First, EOG Resources (EOG) announced a change in focus as it seeks to apply new horizontal drilling techniques to search for oil. Despite the company’s assertion that natural gas production is chronically over-stated by the Energy Department (thus depressing prices), the near-record price differential between oil and natural gas has lead the company to re-calibrate their capital spending toward liquids. Of course, every company in the industry would do the same if possible but EOG’s strong position in the Bakken Shale and other oil-shale plays allows the company to make this move. Economic recovery or not, oil is not getting any easier to produce and remains the king of all commodities.

Another interesting article highlights gold’s new record in Euros. While gold and the US dollar have engaged in much see-saw action over the past few years, the negative correlation between the two has decreased recently. Even as the dollar gains strength against other currencies, gold lingers near its record US$ high while making new highs in other denominations. Once again, gold shows it is a hedge against major financial uncertainty, not just inflation or deflation.

Finally, the Journal questions the retail sector’s ability to justify its rally. As mentioned here previously, gathering economic momentum has begun to push up supply-chain costs. Another factor not mentioned in the article but still playing an important role in the retail/consumer space is the labor market and specifically, stagnant wages. “Non-core” inflation (i.e. energy and food prices) has remained fairly sticky, with oil near $90/barrel, even as the Great Recession tames “core” CPI numbers. It will be interesting to see how this dynamic of economic momentum vs. resource scarcity/wage stagnation plays out in the coming months.

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