This is an excerpt from an article I originally published on Seeking Alpha on December 20, 2011. Click here to read the entire piece.)
Last week, Joy Global (JOY) reported its fourth quarter and 2011 operating results and provided some valuable details on the outlook for commodities in 2012. JOY blames inventory destocking for the current reduction in demand for commodities. Moreover, the engineered “soft landing” in China has slowed its economy as expected (the Reserve Bank of Australia made similar observations). The company claims that the resulting lower prices in commodities will (soon?) encourage increased demand to refill depleted stocks. This destocking to restocking theme was referenced in the last earnings report as well. Higher marginal cost producers are the biggest losers in this cycle; lower prices have already forced them to shut down high cost operations.
In aggregate, none of these factors have reduced the appetite for surviving producers to invest in capital equipment…
{snip}
The titles from my earlier posts are quite revealing. They demonstrate how quickly assessments of the market shifted from optimism to pessimism and then to cautious optimism…{snip}
{snip}
So, I think there is every reason to trust that JOY’s outlook is a sufficient assessment with the information currently available. If a commodity crash is coming in 2012, it will once again come as a complete surprise to JOY and its customers. {snip}
{snip}
Source: FreeStockCharts.com
The 2011 year-to-date dealer statistics from Caterpillar (CAT) confirm the general slowing trend in the sales growth for capital equipment (including construction). {snip}
Source: Caterpillar Dealer Statistics as of November, 2011
{snip}
The stabilization in copper prices is also consistent with a transition from destocking to restocking. {snip}
Source: Stockcharts.com
Finally, global monetary easing should also support commodity prices in 2012. As I pointed out last week, central banks and monetary authorities across the globe are taking aggressive and proactive steps to try to avert a more serious economic downturn in their respective countries.{snip}
Be careful out there!
This is an excerpt from an article I originally published on Seeking Alpha on December 20, 2011. Click here to read the entire piece.)
Full disclosure: long CAT puts