Every sell-side analyst and every trader is calling for oil, or for that matter any commodity, to rally from here. All the notes include higher target prices for all stocks related to these commodities with one justification: China-demand recovery after providing stimulus.
It seems that the world has gotten used to China stimulating other nations' way out of any economic hiccups and the response is often to buy commodities, especially when they are down 20% or more for the year. The same analysts who were pushing oil and other commodities last year are now giving the same rant -- even if the path to get there has changed. Supply is easy to track, but it is the demand side that is most difficult of them all. Remember, Wall Street got the commodity call wrong in 2022 and into 2023.
So, what is happening in China? We can see that the market is suffering from its property market debacle in August 2022. The People's Bank of China may have plugged the leak and it is trying very hard to "encourage" consumer spending, but people are not enticed to buy a third home or another car by the new lowered lending rates. Everyone expects China can come in and print trillions more in liquidity as the nation did in the first quarter, but the government has its own constraints. Even though the PBOC has said any measures will be targeted more toward consumers, investors and traders still rush to copper as the best way to play this, but there are other restrictions on copper demand/supply balance.
Oil is a cyclical commodity, but we have an OPEC, namely one of its leading members Saudi Arabia, bent upon supporting the price of Brent as it gets below $70 per barrel. One can argue that there is no lack of spare capacity these days when a lot of Saudi Oil is sitting on the sidelines. But from an absolute cash flow point of view, one can argue that's artificial revenue support. Yet, in a flat price environment, the big companies still have higher costs to deal with hitting margins at the same time. Investing blindly in large-cap commodities may not prove to be a futile investment, as these days yield is not an issue. That's especially true when U.S. government bonds yield about 5%. The previous adage of "there is no alternative" is now being challenged as there are indeed alternatives, so investors need to reassess the risk for the reward, as the bar is quite high nowadays.
Also, the trouble with commercial real estate and U.S. regional banks has been entirely forgotten as the market makes close to new all-time highs. During the bank woes, technology stocks were beaten down -- and then moved back up -- but today even those names are now running out of mojo. As the large cap names are running out of steam, how much can each investor allocate to just a handful of names? Today the U.S. is seeing more and more foreclosures spread from commercial real estate to retail and other parts of the housing market. Developers are just handing in their keys in some cases as refinancing rates are too punitive. Of the roughly $9 billion of fixed-rate office commercial mortgage-backed securities scheduled to mature in 2023 that hadn't already been deceased, $1.2 billion came due in the first four months of the year. And of that amount, only 30.4% were fully paid off. An additional 8.6% of the loans were modified or extended, and 61% suffered a maturity default, according to a study by Moody's Analytics.
There is no mistake that the U.S. economy is going through a severe lending crisis. Today, the issues remain, but the opportunity has changed as the market is close to all-time highs. If China is not able to recover as everyone wants it to, then we have a whole new problem on our hands. To top it all off, we also have a central bank that is still looking in the rear-view mirror. Trade wisely.
