TMFDeej (99.47)

Today's numbers are likely to cause fireworks in the oil and stock markets

July 03, 2008 – Comments (5)

On Monday I wrote that I thought that oil had gotten ahead of itself, BUT that I would not be surprised at all if it hit $150 by the end of the week.  Well my friends, oil is sitting at $145 and change right now and we have a ton of news on tap today that could force it even higher.  Most of the rise that oil has experienced over the past several years has been about supply and demand fundamentals, but any movement in oil this week is all about the weak dollar.

I'm keeping a close eye on two things on this Thursday = Friday (thank goodness because we're all going to need a stiff drink after this week is over).  First up is the government's June jobs number.  Unless they manipulate the data, I expect the jobs picture to be a mess today, and for a number of months to come.  Anyone who was fooled by these wasteful stimulus checks into thinking that we are gong to have a nice recovery at the end of the year is way off base. 

After publishing a joke of a report last month, that wasn't even close to accurate because they massaged the data with the absurd birth / death adjustment (see blog: Get up, get, get down...A-D-P is a joke in your town), the June employment report that ADP published yesterday paints a much more realistic picture of the economy.  ADP said that non-farm private employment fell by 79,000 in June (see article: June ADP report).  If it is an indicator of what the BLS numbers are going to look like today, and you never know with ADP, the stock market will likely freak out and drop...again...and the dollar will likely fall...again...because a train wreck of an economy makes it much less likely that the Federal Reserve will be able to raise interest rates.  A falling dollar will push the prices of commodities, like oil higher.

The second big thing that I am keeping an eye on today is the European Central Bank's interest rate decision.  Judging from its President Jean-Claude Trichet's comments yesterday, "We central banks have a big responsibility.  If we're not decisive, there's a risk of inflation exploding. If we act in a decisive way, we can master the situation." I would be shocked if the ECB didn't raise interest rates today.  This is bad news for the dollar and good news for foreign stocks and commodities, like oil and even natural gas.  (see article: ECB's Trichet Sees Risk of `Exploding' Inflation)

Jean-Claude Trichet

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While I believe that the concept of peak oil is very real in the sense that absent of a global economic meltdown the supply of oil will not be able to keep up the demand because much of the low hanging fruit has already been picked and many countries have underinvested in the infrastructure to get at the oil that is left, I am usually not a big fan of peak oil writers because they tend to be a little over the top and alarmist.  That said, I read a lot of wacky, over-the-top stuff because even the most extreme theories are usually based upon a cernal of truth that can be useful it applied properly to real-world investinig.  I came across some funny and insightful lines in a peak-oil-esque newsletter called Energy and Capital this morning:

"It's not that I'm a genius investor or anything—I assure you, I'm not. All I do is read the writing on the wall, and tell you what I think. It's a surprisingly rare thing to do among Wall Street pundits, who seem to prefer the safety of historical patterns and chart analysis to actually looking around them.

So you have to look past the talk about how all those beaten down stocks in tech, retail, and luxury items are good buys.

They sure are: Good bye house, good bye car..."

and 

"Regular readers of my column know the real score: We've got a perfect storm on our hands.

As more and more of one's income is eaten up by the basic needs of food and energy, it leads to further dependency on credit, which increases the likelihood of credit and mortgage default, which further hurts the financial sector, taking down the broader markets and putting the economy in an increasingly worse position.

Oil prices are causing inflation across the board, from food to everyday goods, and by "inflation" I mean prices for everything going up, not some geeky Austrian-school definition of it.

Part of the reason oil keeps going up (apart from simple supply and demand) is that the Fed has devalued the dollar in order to stave off a financial crisis resulting from the subprime meltdown. But if the Fed tries to prop up the dollar now, and raise rates, it could bring an already-down economy to a standstill. So by averting a crisis of confidence in the banks, they brought on a crisis of stagflation for the entire economy. As the old saying goes, if the only tool you have is a hammer, the whole world looks like a nail."

I wish things weren't this bad right now, but the more data that comes out and the more stories I read about the credit crunch and companies laying off massive numbers of employees the more I believe that the U.S. economy is in real trouble.  I have a feeling that this is going to be much, much more painful than the last several recessions...oh wait, that's right, this isn't officially a "recession" yet.  Right. 

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A fellow CAPS player, Sqwii, asked me to talk about how I pick stocks this morning (hi Sqwii).  I am glad that they did because I always find writing about why I purchase companies and how I find them helpful for myself.  Here's what I wrote:

"I personally do not look for what sectors are "hot" when investing.  I try to take a macro view of the world around me and see how things like the economy, government policies, technology, the weather, etc... will impact industries.  I invest in the ones that I see having a bright future.  If they are "hot" in terms of recent performance, so be it, but that's not what I look for.

Within the sectors that I see performing well in the future, I look for good values.  That usually means a low P/E ratio, but not always.  Some cheap companies with great cash flow have wacky looking official earnings numbers, like CANROYs.  So cash flow is important as well.

I try to ignore the technical aspects of trading whenever possible.  If a company is in the right place and the right time and I feel as though it will be able to print money in the future I buy it and hold on tight.  I am not adverse to selling stocks if the original reason that I had for buying them does not play out, but if everything is working out the way I thought it would I definitely am not selling.  Ideally I want to hold companies for a number of years, but I pull the plug quickly if I think that I was wrong."

That's all for now.  Have a great 4th of July everyone.