May 5, 2010

Cyclical industries have been a major driver of the market's recovery over the past year. It stands to reason, as cyclical companies will benefit the most from an increase in economic activity. Industrial companies are among the most cyclical. Manufacturing is a commodity-intensive process. It involves taking things with no practical use (such as iron ore) and making something people will buy (such as spray paint cans, computer cases, etc). In the 20th century, Asia took over as the world's primary region for manufacturing activity. As Asian economies have generally recovered much more quickly that the U.S. or the E.U., commodities such as industrial metals have rallied strongly.

Crude oil, on the other hand, has not seen a comparable rally. The reason is while Asian economies are intense users of industrial commodities, the U.S. and E.U. are intense users of energy. As the U.S. and E.U. have been recovering more slowly than Asian economies, crude oil has also rallied more slowly. However, the world's capacity to produce and refine more oil even at the relatively low levels of the past year is limited. As the U.S. and E.U. recoveries gain momentum, demand for oil will start to catch up with its industrial commodity brethren. As economics 101 teaches us, when there a limited supply and increased demand, prices will go up. A few years ago oil traded at well over $100/barrel. Don't be surprised if history repeats itself.

Brennan Redmond

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).