Where Did All the Hummers Go?
Monday, June 9th, 2008
By Michael Lombardi, MBA for Profit Confidential
Some smart “___” analyst at Morgan Stanley predicted on Friday that crude oil prices would rise to $150.00 a barrel by the July 4th weekend. Well, that’s all speculators needed on Friday to take oil up $11.00 in a single day to a new high of $139.00 a barrel. By the weekend, consumers in many parts of the U.S. were already paying $4.00 a gallon for gas.
As I have been writing in these columns, the stock market does not like oil above $125.00 a barrel. And Friday, as oil hit $139.00 a barrel, The Dow Jones Industrial Average took it on the chin, falling 395 points for the day, or 3.1%. The U.S. dollar was also weak against other world currencies on Friday.
Higher oil prices and a sagging U.S. dollar present one basic threat to the United States economy: Higher interest rates. And that’s something the market totally detests.
Ben Bernanke is in a tight spot. The U.S. economy lost 49,000 jobs in May, bringing the total loss so far this year to 324,000 American jobs. The unemployment rate jumped to 5.5% in May, its biggest monthly gain in 20 years.
Therefore, the Fed needs to keep interest rates low to stimulate the weak economy. On the other hand, consumers are suffering every time they fill their cars with gas. That means fewer dollars to spend at stores and literally fewer trips to the malls. (Wal-Mart isn’t complaining though; its same-store sales are actually climbing, as consumers go for cheaper goods.) So the Fed needs to lower the price of oil, and the only way to achieve that is by strengthening the value of the U.S. dollar via domestic interest-rate increases.
The stock market’s actions tell us that the fight for which way the Fed will go (decrease interest rates to help the economy or raise rates to bring oil prices down) is being won by the forces that are calling for higher interest rates. It’s really all that simple. The European Central Bank, worried about higher oil prices and higher inflation, has already come out and said that it may have to raise interest rates soon. This will place added pressure on the Fed to raise rates.
A not so funny thing happened on the path to higher oil prices: Oil producers got rich, and car makers almost went bankrupt. Shell earned a profit of $37.0 billion in 2007 on higher oil prices, Exxon made more. GM lost $39.0 billion in 2007, as consumers stopped buying gas guzzlers and GM wasn’t positioned to move fast enough to bring fuel-efficient cars to the market. Hummers? Rumor is they may even stop making them, as demand for these once popular trucks plummets.
This morning, en route to Europe, President Bush said that a strong U.S. dollar was in the interest of the United States and the global economy. The scene has been set for higher interest rates.
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Tags: interest rates, stock market, U.S. economy
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
