Tuesday, May 13, 2008

TSX hits a new high but vulnerable

I mentioned last month that the TSX was just a good day away from a new high. It took a little bit longer than a day but we finally got there on Monday. Oil and a select group of commodities hit new highs. Most commodities still remain below their Feb/March highs. The TSX also leveraged a strong bear market rally in the US (or a new bull market rally, only time will tell).

Gold has had a nice selloff here, but oil seems to me to be in either a huge speculative blow off phase or in a "peak oil" new paradigm. Once again, only time will tell.

I will repeat what I said last month:

"bubbles can persist for a long time, and perhaps I am way too early on this one.

What will be the catalyst?

One thing that can hurt commodities in the short run is a strong US dollar. The US dollar has become universally despised. If it can put a short/intermediate term bottom here versus the Euro and rally to 1.50-1.52, it could put a top in oil, gold and other commodities..."

Since I wrote that on April 21, the USD has rallied versus the Euro to 1.54 and a short/intermediate top has been put in for gold, silver and many other commodities. Oil has remained immune.

It bears repeating again: Just recognize that the TSX is not a very diversified index. 75% of the TSX in 3 groups (mining, oils and financials). There are 3 mega cap stocks in Toronto
(Encana, Potash and Research in Motion). We all remember what happened to the TSX (TSE back then) in the Nortel crash. This could be similar...

I believe that US financials are going to get uglier in 2008, and commodities are in some type of bubblish top here. Doing some back of the envelope calculations (assuming that the US is in recession and still in a bear market):

  • Say we get a 20% correction from record levels in energy and material stocks and a 10% hit to financials (near the March lows) and we keep everything else (including RIM) flat, that would translate into a 12,800 TSX (about 13% off current levels).

  • Say we get a 30% hit to energy/materials and 20% hit to the financials everything else, that would be an 11,000 TSX (25% off)

These are not outlandish scenarios in my book. If we get a typical 30% bear in the US and the commodity bubble bursts, I would expect the TSX to at least test the 11,000 level.

Keep these things in mind as we hit a new record...

Long SKF, HXD, QID

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