"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey
If the stock market has taught us anything over the years, it is to expect the unexpected. This holds true for good news as well as bad.
As I see it, the subprime mess does not have enough muscle to throw a monkey wrench into the economy. Sure, it can upset the apple cart, but alone it cannot destroy the economy.
This being said, what can destroy the economy is the spillover effect which stems from defaults on prime mortgages, lines of credit, credit cards, car payments, etc...
These problems occur when sky high energy and commodity prices are eating away at the discretionary incomes of consumers. Driving down energy and commodity prices will help ease the defaults of all the things I mentioned above.
I believe the powers behind soaring energy prices have reached their goal. Now, that high energy prices have caused food shortages around the globe. Going forward however, higher oil prices are reaching a level of diminishing returns.
Consumers are switching to smaller fuel-efficient cars, and looking for alternative means of transportation such as trains, buses and carpooling. Big vehicle manufacturers like Ford and GM are shutting down production of big cars and SUV's. All of these changes, if the trend continues, will eventually mean lower profits for the "big boys".
In addition, if oil prices correct dramatically, a democratic congress will no longer being calling for a windfall profits tax on big oil. Using all of the information above, and a good dose of common sense, I don't think the oil powers want any of the above to occur.
So, just when you least expect it, oil prices may drop dramatically. If this happens, consumers (with the exception of sub-prime) will immediately have more money to spend to pay their prime mortgages, lines of credit, credit cards, and car payments. They will also have money to spend on clothing and other items which will give a lift to consumer discretionary stocks. Food prices will decline, inflation will decline, and stocks will soar.
All of these things happen "When You Least Expect It !" And, as I see it, no one is expecting it.
Yesterday morning crude prices rose to a record high near $140 per barrel, then fell back on reports that Saudi Arabia will increase production next month. In addition, the Bush administration said they would stop adding oil to the SPR in July.
This morning the Kuwait Finance Minister said oil prices are too high, and Saudi Arabia said the surging price of oil is "unjustified".
In yesterday's journal I quoted David Herro, chief investment officer for Harris Associates who said, "Supply/demand fundamentals simply don't support oil at current prices, he says, predicting crude will tumble back into the $60-$80 per barrel range in the next 24 months".
I'm not sure what all of this means, but it sure sounds like there is a consensus opinion that the fundamentals for energy are way out of whack.
Something is clearly going on behind the scenes. This may not mean anything, but this morning two of Wall Street's top oil analysts (Morgan Stanley's Douglas Terreson and Citigroup Inc.'s Doug Leggate) left their jobs for other opportunities.
Things happen when you least expect it!
