Archive for October, 2009

Oil Up, Sentiment Down

Posted: October 16, 2009 in Technology and Business
Geez, I wonder what could be responsible for this headline:
Maybe oil going up 10% or 20% in a month?
Yesterday the Dow crossed 10,000 for the first time in a year.  What could trump that?
Oil crossing $75 for the first time in about a year, too.
That’s my first tripwire to be cautious about the market.
The next one — a much more significant tripwire — is when oil hits $100 a barrel. 
At $100 a barrel, Americans — or should I say those folks that drive 2/3rds of the world’s largest economy — start feeling queasy about all the extra money they’re spending. 
And we know what happened to corporate earnings and unemployment acceleration the last time that happened.
I’ve said this a lot:  While lots of measures are critical — like unemployment — the price of oil trumps everything.
The relationship between oil and the stock market has certainly been quizzical at best.
For example, higher oil prices were sending the stock market lower in 2008… the thinking was higher oil prices hurt the consumer and therefore the consumer would stop spending and therefore hurt corporate earnings.*
Then the whole world crashed… and somehow oil and stock prices coupled… the thinking was higher oil prices meant there was demand again and therefore a recovery and therefore that would help corporate earnings.
With me so far?  (Good, neither am I!)
Yesterday I saw — briefly — oil and stock prices uncouple in a significant way for the first time in a very long time:  While the stock market was enjoying a 3-digit gain, the price of oil was headed in a decided southern direction.
This seemed to last only during the morning session… oil reversed course and closed with a small gain by the end of the day… but, I still think that was significant somehow… higher oil prices are bad for consumers in this economy… and the world may have actually realized that yesterday, even if just for a few hours.
* As we know, corporate earnings are actually being driven by cost cutting (which is appropriate in this market).  That obviously leads to higher unemployment — which is terrible — but, again, doesn’t trump crazy-high oil prices — since crazy-high oil prices affect absolutely everything and everybody in an economy, including the 90% of the people that have a job.  I know this sounds cruel… but why do we care more about the 90% of people that have jobs than the 10% that don’t?  Well, because we know full well what happens when that 90% pucker up:  They stop spending… and corporate profits nosedive… and unemployment accelerates like it did Q4 2008 (instead of decelerating like it is now).  Definitely the worst case scenario.
**  As we know, the value of the dollar also has a dramatic affect on the price of oil since oil is bought in dollars.  After climbing for about a year, the dollar has been on a downswing because the world doesn’t like all the liquidity we’ve pumped in the system.  But the rest of the world has pumped a lot of dolleros into their economies, too… so ultimately expect a see-saw here.