Until the beginning of January, the US and world equity markets seemed to be signaling ongoing growth for 2007. However, concerns toward the US housing sector, the US auto sector and global manufacturing have apparently prompted some caution and perhaps a bit of concern that current stock market valuations are too rich. In fact, the majority of the breakdown in equity prices in early 2007 seemed to take place without macroeconomic anxiety, and that leads us to conclude that the slide is merely a correction within an ongoing bull trend. In fact, given the potential stimulative benefit of the nearly $8 per barrel slide in oil prices from the January highs and the fact that crude oil prices have now declined by $26.24 per barrel from the 2006 highs, it is possible that the stock market has already become too negative toward 2007 prospects. From a commodity market perspective, the early January weakness in oil prices, base metals and grain prices has certainly rekindled ideas that the commodities boom is in question. However, as in our equity market analysis, we think that the sharp slide in oil prices and perhaps significantly fewer global interest rate hikes in 2007 will end up restarting the world economic engine, and that in turn will restart physical and investment demand for commodities. While the winter of 2007 has started off in an extremely mild pattern (in the eastern half of the US), a number of agencies are predicting 2007 to be the warmest year on record, and that could end up stimulating intense energy (cooling) consumption later this year, and it could also make it difficult to produce the record grain crops that the markets are now demanding! In our opinion, the current action in the commodity market is best described as an "intermission" and that Act II and Act III still lay ahead. It is also our opinion that soaring commodity prices in 2006 resulted in inventory building and in some cases hoarding and that the weakness of the last couple months has merely cleaned up the supply situation for what we think will be a repeat of 2006. If there were some disastrous geopolitical events hanging over the market or some other reason to fear sustained slowing, we would certainly temper our bullishness, but as it stands we would rather bet on progressively stronger growth in India, resurgent Chinese growth and gradually improving economic activity in the US and Euro zones in 2007. After some significant volatility in 2006, we would expect more of the same in 2007, with a number of exchange trading volume records shattered and some of the laggards of 2006 potentially becoming leaders in 2007.
