2011 to be 'Year of the USA'

Jim O’Neill, chairman of asset management at Goldman Sachs Group Inc., predicted the Standard & Poor’s 500 index will continue its vigorous growth, climbing as much as 20% in 2011.

Sam Fletcher
OGJ Senior Writer

Jim O’Neill, chairman of asset management at Goldman Sachs Group Inc., predicted the Standard & Poor’s 500 index will continue its vigorous growth, climbing as much as 20% in 2011. He claimed in a report cited by CNBC the new year will be the “Year of the USA,” with the US economy growing 3.4% in 2011 and 3.8% in 2012.

The new front-month February contract increased 1.1% Dec. 21 in the New York market as the S&P 500 rose 0.6% to close at its highest level since the collapse of Lehman Bros. Holdings Inc. in September 2008. “Taking the cue from crude, energy stocks outperformed,” said analysts in the Houston office of Raymond James & Associates Inc.

The current correlation between the S&P 500 performance and the price of West Texas Intermediate “would imply a WTI price between $110-120/bbl [in 2011], and we have therefore to expect some of those $100/bbl calls being revised upwards,” said Olivier Jakob at Petromatrix, Zug, Switzerland. Goldman Sachs said in mid-December overproduction will reduce the Organization of Petroleum Exporting Countries’ spare capacity and push crude above $100/bbl in the second half of 2011.

Jakob reported in late December, “The correlation between the flat price of WTI and the S&P continues to be at an extremely high level. The WTI correlation to the dollar remains inexistent; that correlation is only valid when the dollar becomes a trading input for the S&P. The primary correlation is between WTI and the S&P.”

He added, “The fact that WTI has such a strong correlation to the S&P 500 and that the S&P 500 is artificially supported by the US Federal Reserve then provides an opportunity for producers to hedge some of their production. This is because the price of oil is currently pricing financial dynamics that have not necessarily anything to do with the cost of producing oil and which can in turn start to impact demand. The same dynamics were at play in 2008.”

However, Jakob said, “The euro is under a little bit of stress and quite weaker than in 2008. At the current euro-dollar rate, Brent at $115/bbl would be on a euro/barrel basis at the same level as in July 2008 when WTI was above $140/bbl.”

He noted, “Domestic prices in China are already at an all-time high. Crude oil remains in this dilemma of having to price at higher levels to support the S&P but risking at the same time to accelerate some demand destruction. Meanwhile, the latest Commodity Futures Trading Commission monthly data on bank participation in WTI futures (for the month to Dec. 7) show that they are increasing their net short positions in WTI futures to what is probably an all-time record net short.”

With Canada maximizing production, the WTI market remains well supplied. “This in turn is maintaining a contango structure on WTI, which on an annualized basis is currently at $9.50/bbl; hence the passive long investor in WTI will not be break even unless WTI reaches $99/bbl at the end of 2011,” Jakob predicted.

Guv'nor, it’s cold outside
The UK's National Weather Service, also known as the Met Office, and the UK transport secretary were roasted in the British press for leaving hundreds of thousands of Christmas travelers stuck as freezing weather and large snowfalls covered much of the country.

Thousands of stranded passengers spent days sleeping in their clothes at Heathrow airport where hundreds of flights were canceled. Eurostar train services were delayed by speed restrictions in England and France. Roads were gridlocked in the UK and northern Europe. And the National Grid forecast a record demand for gas.

Met officials deny they had earlier predicted a mild winter, but critics—including the mayor of London—claim otherwise. Critics claim the UK wasn’t prepared for the intense cold in November and December because the Met Office’s £33 million supercomputer is loaded with global warming data.

(Online Dec. 27, 2010; author’s e-mail: samf@ogjonline.com)

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