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Walls of Worry
by Mark M. Rostenko
Editor, The Sovereign Strategist
August 1, 2004

Stocks made some gains last week as the Dow and S&P 500 reversed from tests of their trading range lows to close higher on the week while the Nasdaq Composite rallied from a new 10-month low set earlier in the week. The dollar rocketed higher and probed the long-term downtrend line which has thus far capped all rallies during the bear market while gold reversed most of its weekly loss to close slightly higher. And the “transitory” (Fed lingo for “don’t worry, be happy!”) upsurge in crude oil prices hit another “transitory” lifetime high last week as futures approached the “transitory” level of nearly $44 per barrel.

More than 80% of S&P 500 companies have now reported second quarter earnings and according to Thomson First Call, profit growth came in at a whopping nearly 30%. If the remaining 20% of companies reporting will do their thing to support the cause, it’ll be the first time in more than 30 years that we’ve seen three quarters in a row of 25% growth or better. On top of that, better than two thirds of companies reporting so far have beaten analysts’ estimates.

That’s bullish, right? Really bullish. Oddly enough, the stock market is in negative territory for the year. What do you have when bullish data fails to push the market higher? A warning. A major warning. As if the technical situation and extremes in bullish sentiment hadn’t already been flashing warning signals all year...

Of course, as astute market students are aware, one of the market’s functions is to discount the future. Today’s bullish data was already discounted months ago. We had the rally for the bullish second quarter months before the second quarter started. It shouldn’t be any major surprise to anyone (except for maybe the dingbats over at CNBC) that many companies have warned of a slowdown in the second half. Look at the action in the market thus far this year and it becomes quite clear that the pace of today’s bullish data is not likely to be sustained.

It’s that whole discounting thing that the “experts”, (that is, folks who get paid to talk about the market but couldn’t actually trade/invest their way out of a soggy paper bag with a bucket full of box cutters), just don’t seem to get. Crude oil futures are trading at lifetime highs and this, my friends, is not a good thing for the economy. But everyday the financial media reports on some clown talking about how prices don’t reflect the “reality” of the supply/demand situation.

Take a gander at some of last week’s quotes from Reuter’s. The names have been dropped to protect the innocent. (Actually, to protect me.)

“We're crazed about the price level, but there's no physical shortage of oil.”

“I think the market is overdoing it on Yukos.”

Here’s my favorite, from a Reuter’s “journalist” himself: “...but the fundamental supply and demand situation has been quietly improving, making record energy costs harder and harder to justify.”

Here’s a little clue for the experts: markets don’t price the CURRENT supply/demand situation. Today is old news. Markets attempt to anticipate where things are headed, to account for potential risks. $44 oil doesn’t give a rat’s fuzzy little butt about “no physical shortage of oil” or “Yukos”. $44 oil says “Something is coming up ahead that will make you number crunching pencil-pushing ‘experts’ look foolish yet again. Just like when you said oil will be trading under $25 after we kick some major fallujah in Iraq.” 

(For the record, the geniuses here at TSS officially ridiculed prognostications for $25 per barrel oil and predicted $40 oil this year. That figure was revised to $50 after crude hit $40. And we’ll be right again. Why? Because we’re NOT experts on corporate welfare and no one hands us a paycheck for being dead wrong over and over and over again.)

I remind the reader that every upsurge in oil prices in the past few decades has led to a recession some months later. Given that, what do you think the odds are that RECORD HIGHS in crude oil and gasoline are simply, as Greenspan is fond of saying, “transitory” factors that won’t pressure the so-called recovery?

Higher oil prices cut into profits. Higher oil prices cut into what the family can afford to spend at the mall. Higher oil prices are killing the airlines.

Let’s get a grip on reality, folks. There is NOTHING in this country that isn’t dependent to some extent or another on petroleum prices. Our food is grown on petroleum-based fertilizers. We get to work in petroleum-consuming vehicles. That’s also how everything you buy gets to the store where you buy it. Everything everything everything. And the economy’s going to shrug that off? Someone ought to tell the stock market because it hasn’t had any kind of reaction to this “recovery” all year.

It’s hard to envision the market moving higher any time soon. It has quite a load to contend with: lifetime high fuel prices, terrorism fears (in fact, the NYSE is now under alert for an attack), higher interest rates. Remember the old saw about how the market “climbs a wall of worry”? There are enough bricks out there right now to build a worry wall from here to the moon. So how come we’re not climbing?

© 2004 Mark M. Rostenko
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