Consumers continue to get raped at the pumps every time they fill up. We are all aware of the growing worldwide demand of oil, but prices have gotten way ahead of themselves. The EIA reported an unexpected build of crude oil and a larger than expected build up of distillates in its weekly inventory data.
Steve Forbes was recently quoted as saying that there is a $10-$15 premium in the price of crude, and that prices were unusually high due to speculation among traders. Despite all this news, consumers are continuing to get pick-pocketed at the pump. Oh, George (Bush), where are you ???
The two major concerns for the economy continue to be high energy prices and rising interest rates. Sooner or later, probably at much higher levels, both will begin to crest and eventually decline.
The Chinese Government just implemented a tax increase on domestic oil production. The tax has not been increased since 1993, and was done so to encourage energy efficiency. The International Energy Agency (IEA) said that it expects Chinese Oil demand to increase 320,000 b/d in 2005, this is about 40,000 b/d less than they predicted last month.
By time energy prices begin to decline, and interest rates do stabilize, what will be the eventual impact on the economy? Here's my take:
1) Consumer spending will begin to slow.
2) Housing prices will correct. (35-40%)
3) Housing speculators will panic, and sell stocks to help buoy their real estate purchases. If that doesn't work, they will try to get out at any price. I.E.- In February of 2005, there were 750 condo's in Panama City, FL up for re-sale. As of yesterday (8-10-05), a realtor in Panama City said there were 2,500-3,000.
4) Corporate earnings and earnings estimates for 2006 will come down.
5) The economy will be on the edge of recession, and interest rates will decline on their own.
We may be a little early, but the next group to benefit in the economic cycle will be the financials. After a horrible real estate market in 2006, the Real Estate "hot shots" will re-think their strategies and head back to the stock market. 2007 has all the markings of being the beginning of another incredible bull market
I recently added Bank of America (BAC- buy limit $43)back to the portfolio a few days ago. Two other very attractive buys are Citigroup (C) and J.P. Morgan (JPM). I may add another financial stock soon. Until then, dollar cost average in and enjoy the 4%++ dividends.
