Joseph Dancy's Blog

The ongoing “Arab Spring” in the energy-rich Middle East has been fueled by rising food prices and economic stagnation – two factors that continue to play a major part in political developments in that part of the world.

Last month Atlantic writer Derek Thompson shared some interesting data on how much the American economy has prospered over the last century. Using Census Bureau data, Thompson showed how the percentage of income an average American household spends on various goods.

The 200 day moving average price for Brent crude oil set a record last month as concerns about global crude oil supply and demand continue to grow (see chart, courtesy of the Economist).

Those interested in market history have reviewed the years where the markets have performed the best and found several factors are usually present. Generally, the consistent themes are that (1) credit conditions are easing, (2) corporate profits are rebounding, and (3) excess pessimism moderates or inexplicably gives way to optimism. The very best performance occurs when stock prices are depressed and when the credit easing is sudden and unexpected. The current conditions certainly have a bullish cast, meeting most if not all of these criteria.

Measured by the percentage of large-cap stocks that have risen or fallen in sync with the S&P 500 index the correlation of individual stocks to the index itself reached record levels last month - 85 percent of the movement of stock prices was statistically explained by the movement of the S&P 500 index.

Max Gunther’s The Zurich Axioms defines twelve fundmental axioms for investors to manage risk. The goal of the Axioms is to maximize personal wealth, return on investment, and personal satisfaction. Most people don't obtain wealth from low-risk savings strategies. Those individuals who are financially successful have generated their wealth through investment in real estate, stocks, or some other type of enterprise where risk played a major element in the investment decision making process.

Bloomberg radio featured an energy expert late this week who claimed the ‘world was awash in oil’ and prices were being manipulated upward by ‘Wall Street speculators’. We are not sure what data he is looking at, but global inventories and demand/supply metrics point to a tight crude oil market in our opinion.

A brief Powerpoint presentation showing the short supply of high quality crude, burgeoning China demand, declining production capacity, and projections.

Several very positive developments have occurred in the energy sector in the last several week, many of which should be bullish for companies in the sector.

Bloomberg reported yesterday that Standard & Poor’s 500 Index companies will earn 18 percent more this year than in 2010 according to the average estimate of more than 9,000 analysts. Even assuming the companies posted no growth, the price-earnings ratios would be lower than 96% of the time during the last two decades. The point was that from a valuation standpoint stocks remain attractive.