Is it Oil’s Fault?

So, stocks certainly didn’t rally on the first day
of the month. In fact, as oil prices ramped, stocks sold off hard. The
talking heads are saying that higher oil prices might jeopardize economic
growth. That’s a very simplistic way of looking at the situation.

Of course nobody wants to pay more for gasoline.
We don’t want to see higher transportation costs passed through to
prices. Oil prices are just the tip of the iceberg.

The bigger issue is that prices are rising for
just about everything, except houses. And as much as he might want to say
otherwise, Ben Bernanke’s monetary policy is part of the problem.
Bernanke can say that any inflation will be temporary all he wants. The
fact is, emerging markets, and possibly even
Europe, are raising interest
rates to fight inflation. And the Fed is still sticking to its easy money

What happens when the Fed’s QE2 ends? What happens
when there is no choice but to raise interest rates?

In my opinion, that’s what’s behind the recent
weakness for stock prices. That, and the fact that we’ve had a steady
6-month rally.

*****The ADP
private payroll report came in much better than
expected this morning. The market was expecting 165,000 additions to
private payrolls. Private companies actually added 217,000. That’s a
great number. It will be interesting to see how Non-Farm Payrolls come

The market is looking for 190,000 total new jobs.
But we should note that this number has consistently missed expectations
for months. Part of the reason is that the Federal government is cutting
jobs. The Challenger report on announced firings says that 16,380 job
cuts were announced at the Federal and State level.

Given the newfound austerity in Congress, and
increasing indebtedness of some states, this is a trend that will
probably continue.

There’s no doubt that both state and Federal
governments have to start dealing with debt. And that’s not going to help
the economy in the short-term. Fewer jobs means less spending and slower
economic growth.


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