Stock ETFs: Oil Price Increase Causes June Gloom
The double whammy positively obliterated stock assets on this "first Friday" of June. Unemployment vaulted from a respectable 5% to a less desirable 5.5% in a single month. It had been 22 years since we had seen a move in employment data this discomforting.
Yet it was the second piece of news that really sent stocks into the "blood red." Specifically, oil jumped $5.49 on Thursday alone, a record for the NYMEX, only to be followed Friday by a $10 leap in crude. $16 in 48 hours?
Yet the fear and loathing over oil's inevitable costs does not take history or economics into account. Those who think that oil is heading permanently higher, in fact, have already forgotten the lessons of the current declines in real estate. They've even forgotten how dot-com mania turned to dot-com disaster.
Let's take a look at booms and busts.
In the late 90s, new experts proclaimed that the ""world of stocks had changed." Apparently, one was not supposed to value tech stocks on traditional metrics. The future "was" now... until it wasn't. The bear of 2000-2002 eroded 80% of the NASDAQ 100 (QQQQ). And 8 years later, QQQQ holders are still down 50% from the top.
In the mid-2000s, newfangled gurus explained that the "world of real estate had changed." Unique loans were making the American dream more affordable (i.e., more demand). And we were "running out" of construction-worthy land (i.e., less supply). Once again, the laws of economic cycles prevailed, as the housing boom went bust.
Now we are hearing the call that the "world of natural resources has changed." Emerging markets need oil, and there's very little to go around. We're running out of everything, and there's too much demand for too little supply.
However, "oil-can-only-go-up" thinkers are neglecting to consider the most recent cyclical evidence. For instance, super-cheap loan deals fostered an increasing demand by home-buyers, a demand that was said to be permanently on the upswing. Builders mistakenly overbuilt, believing that meeting the new demand with more and more supply would lead to permanent profit windfalls.
But the newfangled loans weren't permanent, and neither were the number of buyers. What's more, the supply went from "there's no more land" to a year's worth of inventory.
Granted, demand has most definitely soared worldwide. And supply has had difficulty keeping pace. That explains $60-$70 oil. Yet the weakening dollar and rampant speculation accounts for the rest. (Read my "take" on the dollar here.)
Nevertheless, the world won't continue to pay inflated prices. Oil-rich countries will pump out oil like the homebuilders were building homes, eventually creating too much supply. And if you doubt the supply exists, you doubt human ingenuity.
What's more, demand decreases when the pain gets too great. Big cars are disappearing, airlines are cutting flights, conservation is gaining in popularity, and alternative energy as well as transitional energy is being fast tracked.
Oil will drop dramatically, it's only a question of time. Even the loopholes in commodity speculation may come under increasing regulation, making it less likely that speculators will drive prices higher.
But for now, investors are scared. The economy is weak, and oil at $136+ is making it weaker.
However, one pattern that stock investors need to keep focused on is the resilience of mid-cap ETFs. As I noted in a previous post, mid-caps are falling less on down days and rising more on up days.
The net result? As horrific as the ticker tape has been throughout 2008, the "middle path" is proving profitable. I am particularly partial to the iShares Mid Cap Growth Fund (IJK).
Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.
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This article has 3 comments:
- icandoitdon
- 363 Comments
Jun 08 02:29 PM- Xyrus
- 75 Comments
Jun 08 10:08 PMI don't necessarily agree that speculation is a major factor. I'm sure it plays a part, but I think the larger market is responsible.
I also don't agree that the price will have any appreciable effect on demand unless it gets really high, at least in the US. Unlike Europe, we're built on sprawl. Our public transportation system is stigmatized (and incredibly inadequate). And still a large number of homes use oil heat in the northern states. Companies still need to get goods from point A to point B. I think it will take higher prices before we see any appreciable drop in demand (more than fractions of a percentage point on a holiday weekend at any rate).
Here's the scenario I see playing out right now. Oil is an essential commodity for a number of nations. A lot of companies sell petroleum based products, from plastics to gasoline. Their profit margins depend on the price of oil. Now they've been seeing oil climb higher for the past few years due to unrest and increased demand. Since these companies have competitors, it would be in their best interests to secure oil at lower prices in order to undercut the competition. So, in the face of advancing oil, they begin buying larger stocks of oil at what they hope will be lower prices than what they will be in the future, a.k.a hoarding. But this hoarding, in turn, creates upward pressure on prices. Wash, rinse, repeat. A bit later in the game, the speculators hop on for the ride, also having an effect (driving prices up a little higher). More companies become paranoid as oil continues to increase, which increases hoarding, which increases speculators to ride the "unstoppable"... oil bull.
And it is unstoppable, until someone stops the music. The question will be who is the one left without a seat? The speculators? The companies? The producers? That all depends on how the music stops. :)
There will be a correction, that much is certain. Just when that correction occurs, how much it will be, and who will take the brunt of it will be an interesting scenario to play out. Ideally it would be a slow gentle correction, but it is looking like it may be a sudden plunge.
~X~
- sdemster
- 1 Comment
Jun 10 10:00 AM