"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey
This morning the Energy Department said that oil supplies fell 1.98 million barrels in the week ended June 27, but Gasoline inventories rose 2.1 million barrels.
Despite this mornings report, we have plenty of oil, that's not the problem. The immediate problem is speculation by investment banks who created investments vehicles that buy oil futures, and convinced pension funds and hedge funds to invest heavily in these products as well.
The futures market has always been a place for speculation, but not to the massive scale we are seeing today. Originally, the futures market for any commodity was originally designed to help suppliers and users hedge their businesses from any upside or downside risks. That's okay with me.
The problem, which can be resolved rather quickly, is speculators with no interest in hedging a position, are buying oil contracts (with no intentions of taking physical delivery of the product), or shorting and are being forced to cover. As a result, oil prices continue to spike.
Eventually, speculators- like in real estate- will go running for the exits, and hedge funds and pension funds will lose millions.
Oil is not the only problem we have to deal with. As I stated in my December 4, 2006 "Journal" post, "It's the 1970's all over again". Many have tried to dispel this theory, but who cares what they think, we know what we see.
As was the case on the 1973-74 bear market;
1) Supply-side shocks (OPEC's two oil embargoes of the 1970's) caused energy prices to soar. Today demand for energy resources are high (China & developing nations) creating another supply-side shock. Add speculation and geopolitical tensions to the mix and we have essentially the same scenario.
2) In the 1970's, high gas prices crippled companies like GM, Ford and Chrysler and caused people to switch to smaller cars. Today's high gas prices are having the same effect. The "Little Three" have announced several plant closings, and thousands of workers will lose their jobs.
3) From 2000-present we entered the beginning of a new phase of commodity and price inflation. The last time this occurred was during the growth and low inflation period of the 1950's and 1960's which was followed by the commodity/price inflation and recession phase of the 1970's.
The CPI is no longer an accurate measure of inflation, and has undergone six revisions or adjustments since 1921. So, the next time you listen to the financial channels and get excited about the inflation rate, remember it has been within a 4% range for 15 years and everything inflationary has been removed.
The Housing Bill
Frankly, I'm a bit surprised that the executive and legislative branches of our government haven't come to the rescue of the housing crisis yet. I think they will come up with something before the election which will help the financial sector immensely.
Conventional thinking is convinced the financial sector is dead, and will be for many years. Frankly, I'm not buying it. If it sounds like I'm the lone man in the room, I happen to like it that way.
During market extremes, (bullish & bearish) it is wildly unpopular and uncomfortable to take a contrarian view. Oh, well, I was criticized as an oil bull in 2004, and criticized as real estate bear in 2005, I guess I might as well be criticized on my stance in the financial's as well.
With tomorrow being the last trading day before the July 4th holiday, I am convinced the latest oil peak was no coincidence-"Rape Them Over the July 4th Holiday!"
My current position for investors remains- Bearish on oil, bullish on financials.
