The Oil Fallacy

Oil is holding above $86 a barrel. And yet analysts still cling to the notion that oil should be driven by the U.S. economy.   

 

Here’s a quote from a report from Frankfurt’s Commerzbank:  We think that the oil price increase is only of temporary nature, since it is driven by liquidity rather than by fundamental factors…The recent increase in correlation between oil prices and equity markets, which has now reached unprecedentedly high levels underscores our view.   

 

I’m not sure how Commerzbank comes to the conclusion that oil prices are somehow not connected to fundamentals, but, instead, are connected to the stock market. But this stance is highly suspect. 

Oil Pushes Higher

Few numbers have been released with as much fanfare and anticipation as last Friday’s Nonfarm Payrolls number. Is it any wonder that the number was pretty good? Are we surprised that economists across the board are hailing the addition of 162,000 jobs in March as definitive evidence that the economic recovery is picking up steam? 

Employment increased at the fastest rate since March 2007. And it wasn’t all Census workers, either. Government hiring accounted for 39,000 workers. That means private companies hired 123,000 people. 

Employment numbers will continue to look good, as Census hiring will continue into June. But we’re going to need to see continued solid growth from private sector employment.

Oil is a Coiled Spring

Stocks were following the game plan nicely yesterday. The dollar was down against the euro, and stocks and commodities were rallying nicely.  

 

It all fell apart when European Central Bank president Jean-Claude Trichet called the inclusion of the IMF in the Greek bailout plan “very bad.”   

 

I see his point – this was a great opportunity for Europe to come together and handle the Greek debt matter in-house. Of course, we know Germany was resisting. And in the end, Germany got its way. 

Germany and the euro

The S&P 500 moved back down for retest of 1,165 support/resistance point yesterday. That important level held, but it’s interesting to see what lead to the retest.   

 

Basically, yesterday’s decline was the result of currency values. The U.S. dollar rose against the euro as more signs of dissension in the European Union add uncertainty to the future of the euro.  

 

The root cause of the dissension, the ongoing debt issues in Greece and now in Portugal, is somewhat irrelevant. Greece will get the bailout loans it needs. And whether they come cheaply from the IMF or a bit more expensive from the EU central bank, they will come.   

 

The overriding issue is that Germany is demanding IMF involvement. Other European countries see this as an internal matter for the EU to solve. From that perspective, we can see the Greek debt solution as a chance for the EU to demonstrate its cohesion.  

 

And Germany is throwing a monkey wrench into the whole thing. 

50% Off

That was quite a show Maguire Properties (NYSE:MPG) put on yesterday after it reported 4th quarter earnings. It opened down, around $2.50 a share, and then marched steadily higher for the rest of the day to close at $3.54.   

 

Maguire’s cash reserves are rising after it walked away from a few underwater properties and sold a couple others. Investors seem to be saying the stock is on more solid ground now – volume was monstrous.  

 

While I’d love for Daily Profit readers to have participated in yesterday’s gains, I stand by my recommendation to take your profits on the stock before earnings. Earnings are a big uncertainty. Maguire could just as easily have dropped yesterday. There’s always risk when investing, and perhaps more so with a stock like Maguire. It would have been irresponsible of me not to have you take profits before earnings. 

Google and China

The financial media is jumping to the conclusion that recent weakness for stock prices is related to the ongoing Greek bailout saga. But considering that Greece would prefer to have the IMF involved in its bailout plans because emergency loans would be cheaper, I’d suggest we need to look elsewhere for the real cause of the recent mini-sell-off.  

 

The Indian rate hike is certainly a more likely candidate. Not because India’s economy is driving the global economy, but because this move is another sign that central banks around the world are ending their stimulus policies.   

 

India’s move comes a full month ahead of the next scheduled central bank meeting. The timing suggests that perhaps inflation is becoming problematic. And it also raises the possibility that India will hike rates again when it meets next month.   

 

Don’t underestimate the significance of Google’s (Nasdaq:GOOG) possible exit from the Chinese market. 

Anniversary, Part II

I suppose it’s fitting that futures should be down on the morning of the one-year anniversary of the stock market bottom last year. Perhaps stocks will put in a similar reversal today, but even if they don’t, I think we can take a little selling in stride.   

 

Oil prices are down a bit today as the dollar strengthens. We should note that the dollar and oil have moved higher in tandem lately, proving that there is more to the strength in oil prices than its relationship to the U.S. dollar.   

 

Expectations for the global economic recovery and a subsequent rise in demand for oil are part of it. But I also think that investors are slowly realizing that there is very little upside for production levels in non-OPEC countries.   

 

A recent article about Mexico bears this out…