From just a quick visual examination, it is very cyclical. It looks like we will see the action continue to the south side to complete the cycle. Of course, that is if the past cyclical nature continues.
I doubt we'll see a full recovery of the oil industry in this country anytime soon. It will take some time to rebuild the refineries and get the drills floating in the Gulf back up. I think we'll see quite a fall in oil on Tuesday given the post-market SPR news. I really think we're at an intermediate top in oil. However, I also don't see oil dropping a whole lot. Though I feel there is excess fear built into prices now, there are still plenty of reasons to fear supplies. Oil will remain high, and this almost has to impact US industry. One thing I don't see people discussing much right now is the extreme possibility of a "stagflation" environment. Most economists in this country are obsessed with the core CPI. I think this is royally stupid. The real prices paid by consumers is increasing rapidly. Perhaps many goods, such as electronics, are relatively stable. But Joe Consumer is going to buy far fewer of these items when it costs hime $10 more this month than last to drive his SUV to Best Buy to get it. I told my wife to stop driving to the suburbs for groceries last week because the cost of buying the gas to get there and back will negate the price savings. People are really forgetting the impact transportation has on pricing and consumption. Think of the similarities to the 1970's. Oil and gas are very expensive. Perhaps we are not at 1970-levels, but I've seen the lines at the pump growing. The economy is slowing down. Prices are increasing, but typical wages are not increasing as fast. I see most people falling into the trap of wage-based inflation, when what we are seeing is cost-push inflation (just as in the 1970's; the reason why recovery was tough in that period is because economic policy-makers did not recognize the cost-push inflation). Input inflation takes time to translate to CPI inflation. As the prices of transportation and produciton of goods increases. If a good is costing 10% more to produce today, the consumer may not see that product increase in price for another couple of months, as the product still needs to reach the end retailer and consumer. Economics changes usually require a catalyst event. I think Katrina may be that event. The shocks to the insurance industry, as well as the surge in oil prices, could create a 1970's style recession. As for the markets, I don't think we're necessarily going to test the lows from a couple of years ago. But I would expect to see a sizeable dip over the next few months. The oil surge could be felt around the Christmas season, and that would hurt the sales numbers that the Street expects to see during that season. The housing market could get hurt pretty bad in many areas if we do see some sizable inflation, as rates would increase for those with ARMs (it has already increased sizeably for many people). But of course this is only my opinion. I'm no prophet. I just see this as the path of least resistence over the next few months, and the parellels to the previous stagflation era are quite startling. Lets see what the next consumer numbers look like. If this shock hasn't impacted things much then I guess we'll know I'm wrong.
One last point to add to the novel I just posted......... The PPI has been increasing more rapidly than CPI. This means that profit margins are being squeezed because the higher costs are not being passed to the consumer. I think this is because we may have a very high sensitivity to price changes in most goods at the present time (this price elasticity is likely due to the lack of wage increases). Think of it like a pimple; we have a layer of resistance (consumer prices) and building pressure underneath (producer prices). When the pressure underneath continues to build without an avenue of release, eventually it will BURST through the resistance. Lets just pray this pop isn't too messy......
Actually, Katrina is expected to have positive impact on GDP. Any relief in gas prices will just had to an already VERY GOOD economy. Employment has never been higher, rates are low, household wealth has never been higher. Corporate profits continue to increase. Where is all that money gonna go? I pray we get a drop in Sept/Oct, so I can pick up some bargains. I thnk we will see the DOW over 11,000 by year end.
Last Update: Sunday, September 4, 2005. 0:31am (AEST) Shortage: The IEA is warning against the US buying too much fuel from Europe. (ABC) IEA boss warns of global energy crisis The head of the International Energy Agency (IEA) says Hurricane Katrina could spark a worldwide energy crisis if damage to US refineries leads to a big increase in US purchases of European petrol. "If the crisis affects oil products then it's a worldwide crisis. No one should think this will be limited to the United States," Claude Mandil, head of the Paris-based energy watchdog told German daily Die Welt. "They are already buying gasoline in Europe. If the refineries are damaged, that will only increase. Then this will become a worldwide crisis very quickly." Mr Mandil told the paper that high oil prices represented a risk for global economic growth and urged consumers to alter their behaviour to save more energy and limit the fallout. Poor countries were bound to suffer most from a recent surge in energy prices, which has been aggravated by the hurricane's devastation of the US Gulf states, and the shortages it has caused, he said. On Friday, the IEA launched a rescue plan to ease those shortages, saying its 26 members would release two million barrels per day of oil over a 30-day period. US gasoline prices have spiked by nearly a fifth over the past week, pushing up fuel prices around the world.
Recovery from Katrina will have a positive influence on GDP. But the damage to energy infrastructure will likely have a negative impact on spending, and will therefore have a negative impact on GDP. The positives from the rebuilding will be localized. The economy of Portland will not be helped by rebuilding New Orleans. The economy is slowing now, and if spending takes a dive due to high energy prices (which I fully expect to happen looking at the trends in PPI) then the economy will NOT be "very good". Employment is high, but I'd be willing to bet it is due mostly to discouraged workers dropping from the pool. It's funny how unemployment keeps dropping with meager employment growth. Household wealth is not high. It is widely accepted that we have a savings rate of 0, and some speculate the savings rate is actually negative. We spend more than we make in this country, and house appreciation is the only source of wealth growth, which is in my opinion inflated and could correct severely in some areas. Corporate profits may be decent, but profit margins are decreasing as evidenced by the divergence in the PPI vs CPI. I think we have a high liklihood of seeing stagflation for a while, and I really doubt we'll see Dow 11k; we're going to be lucky to tread water at these levels by the end of the year. Note: This does not mean there are not long stock opportunities. Construction companies, among other sectors in the southeast, will strengthen. But a slowdown in China coupled with the risk of inflation and higher interest rates here will hamper consumer spending, and I expect most US companies will struggle.
I can see a lot of reasons for the markets to decline, but if I were very short, I guess I'd be pretty worried that they didn't already break with everything that has happened.
Some good points, but past evidence shows these events add .1 to .2% to GDP. So again, I am expecting a net positive gain in GDP. Although the damage may be regional it will have an overall positive impact on GDP. But you make some good comments regarding energy that could change that in this particular case. I just don't think the impact on energy is as great as people think. Your comments on household wealth focus only on housing and the savings rate. The way the savings rate is calculated is widely critisied. They actually do not measure changes to savings accounts. The savings rate widely quoted is just the net defierence between spending and income. Consider retirement accounts. Consider that we are on the cusp of the greatest generational transfer of wealth ever seen. I can not recall more negative sentiment and we all know the market climbs a wall of worry. Good trading to you.
Sentiment is wildly bullish and it is global. Even Greenspan acknowledged this fact in his recent speech at Jackson Hole. Sentiment should not be gauged by put call ratios, newletter sentiment, polls of money managers, etc.; sentiment should be gauged by risk premiums and they are perilously low right now. There is nearly a zero margin for error. Even the slightest hiccup will send asset values lower. That hiccup has arrived and it isn't slight-- it is a energy supply shock in the face of an already overextended American consumer, the same consumer that represents over 2/3rds of GDP.