Not unlike Lassie, the stock market can do a pretty good job of communicating without words. In the past few weeks we have seen yet another decoupling debate emerge (have you had enough of decoupling theories yet?) and this time it pertains to prices for commodities versus those for equities. We wrote back on May 23rd (Formula for success: rise early, work hard, strike oil.) that the price of oil had seemingly entered into a mania period and that while we were positive on energy stocks longer term, we were cautious on their near term direction. Since then the price of oil has risen 9%, the price of natural gas has risen 14% and the Canadian Energy sub-Index is DOWN 4.4%. So what is the stock market trying to tell us? Are energy stocks stuck in the well behind the old barn? We would make the following observations:

• Global equity markets have turned down again. The table below offers a snapshot of global equity returns over the past six weeks, but we'll save you the eye strain and point out that it's been a fairly miserable period across the board (Japan down 5%, US down 8%, Germany down 10%, UK down 11%.. oh and emerging markets are down closer to 20%). In this sort of environment, everything gets sold. No time is spent differentiating between babies and bathwater. Investor risk aversion is increasing and they're shifting out of risky assets and heading to asset classes that are perceived to be safer (see our June 20th blog Commodities are the new T-bills for more on this topic)

• At some point energy prices will impact global economic growth (potentially significantly). While economists have been sounding the alarm on rising energy costs for a couple of years now, there is a breaking point at which economies have a hard time growing... it wasn't $50 oil, nor $70 oil, but at $145 oil we are obviously getting closer. When that happens, demand falls off (it doesn't collapse by any stretch), commodity funds start selling, traders exit their long positions and oil prices begin to decline (taking some of the froth with it). We can't yet say that demand has fallen materially, but in an environment where energy prices are rising and energy stocks are flat/falling, the market is "saying" that it doesn't believe these energy price levels are sustainable... and given the choice between equities rising to reflect current energy prices or energy prices falling to reflect current equity prices, the latter outcome is more likely.
• Taking these two points together we would contend that it's time to be trimming exposure to energy stocks, or perhaps more specifically, maintaining/trimming exposure to the equities while at the same time actively shorting the underlying commodities in order to best capture the closing of the gap between the two
• An interesting corollary to this high priced energy world is the increasingly viable environment it creates for alternative energy (see last week's Earth, Wind and Fire for our thoughts on that space)

In other news...

Former hedge fund manager Samuel Israel III turned himself in to police this week after an aborted attempt to fake his own death and elude justice after pleading guilty to defrauding investors of $400 million. The story within the story concerns his girlfriend who apparently conspired with him to avoid prison. There are numerous examples of couples working together to perpetrate fraud, but sadly, most couples appear to be motivated by money rather than love. Oh what a world we live in.