Last week was the first in four that the stock market pulled back. The media will be quick to point at the poor economy for the market’s softness. You know the stories all too well by now: Rising foreclosures, subprime problems and falling housing prices are to blame according to most business journalists for all the stock market’s ailments.
But the real story behind the stock market’s poor week: In a nutshell, new SEC rules for investment banks, and higher oil prices.
In the aftermath of the Bear Sterns bailout by the Fed, the SEC has proposed new disclosure requirements for brokerage houses that may require them to maintain a minimum amount of cash reserves to operate. Some brokerage houses will need to raise cash to meet the new requirements. On Wall Street, the more money the brokerage houses need to raise for themselves, the softer their profits. And the market doesn’t take kindly to soft profits.
As I have written recently, it has also become apparent that the stock market does not like oil above $125.00 a barrel. There is something magical about that number and I’m not sure quite what it is. Friday, as soon as oil prices got above $125.00 a barrel again, the Dow Jones Industrial Average started losing ground. What started out as a winner of a day ended as a loser, as oil prices rose throughout the Friday past.
I’m not as worried about the SEC’s new disclosure requirements, as, in the end, they will be good for investors as a whole. The stock market will take the “hit” and move on. I am concerned about oil prices though. How high will the speculators push the price? When will the government do something about the billions of dollars that companies like Exxon are making off the higher oil prices?
My opinion of the stock market remains unchanged: What we read in today’s figures about the housing market and the economy is old news for the market. Unless oil prices put a real wrench into the economic cycle (and the stock market is definitely worried about it), the lows for the market were put in during January 2008.
The stock market has been able to ride the wall of worry quite well since January. A higher oil price at this point is the wild card. I believe that if oil prices ease, the stock market could rally quite well, forcing the record number of shorts to cover. Alternatively, the stock market has made it quite clear, on balance; the economy cannot absorb oil prices above $125.00 a barrel. I’ll keep you posted on how the story develops.