Home  l  Broadcast  l  WrapUp  l  Storm Watch  l  Perspectives  l  Sitemap  l  About Us

Crude, Clownies and Crashes
by Mark M. Rostenko
Editor, The Sovereign Strategist
August 22, 2004

Stocks rebounded smartly last week as this year’s pattern of choppy, mostly sideways trade continued to assert itself. The dollar posted a nominal rebound while gold surged to a new 4-month high. Crude oil futures approached $50, proving that oil’s $40 price was indeed, as speculated upon by our fearless Fed chief, quite transitory.

The stock market continues to trade within a long-standing downward channel, marked by progressively lower highs and lower lows, but still primarily range-bound. The highs get a little lower, the lows get a little lower, but nothing much seems to happen overall. In fact, prices today are at about the same levels we saw in July, May, March and last December.

Unless the world has finally found a perpetual state of economic equilibrium, it’s not likely that this apparent lack of volatility can persist for too much longer. Markets like to move, and move they do. Periods like the current often look like the proverbial “calm before the storm” in retrospect.

Naturally, storms can be good or bad, depending upon preceding conditions. f you need rain, storms are good. If your territory is flooding, storms are not so very good. In bull markets the calm periods are usually followed by good storms; the market breaks out of consolidation and posts another leg higher. In bear markets, calm periods are often followed by re-assertion of the overall downtrend.

Where do we find ourselves today? For the long-term, we’re still, (I contend with great fervor), in a secular bear market. The primary, long-term major trend is downward. My evidence? Well, primarily an unshakeable confidence in my imagined genius, something that is often construed by some as arrogance, and still others as sheer stupidity. But my team of psychiatrist-observers assures me that a healthy self-esteem is a good thing, even when it borders on delusion.

Beyond my personal reasons, there is an inescapable truth about the stock market, one that has been observed over and over and over again: Secular bull markets have always been launched from below average valuations. And secular bear markets have never ended until those valuations have been reached. Have we seen valuations below the long-term average ?Sorry, no.

Perhaps this time will be different? Oh yeah, baby! With record highs in oil prices, a record trade deficit (now approaching an astronomical 6% annualized), a long-term war in the Middle East which will bleed our collective coffers for years, a reversal in the federal budget from a 2.4% (of GDP) surplus in 2000 to a new all-time record high deficit this year, we are in FINE shape to witness the birth of the next secular bull. Perhaps some time around lunch next Thursday or Friday maybe even if we’re lucky.

It’s far more likely that the eventual resolution of this year’s primarily sideways trade will occur on the downside. The progression of lower lows and lower highs after a classic 50% bear market on the S&P 500 does not bode well. That bullish sentiment once again hit peaks like those seen before the market topped out in 2000 while insiders went on a massive selling spree does not bode ebulliently bullish either.

Oh but there’s more. So much more.

Today’s environment appears eerily similar to other historical periods preceding major market declines. In the words of Morgan Stanley’s Stephen Roach (regarding the record trade deficit):

“By way of comparison, the last time the US had a ‘foreign trade problem’ was in the latter half of the 1980s; back then, the trade deficit (as measured on a national income accounts basis) peaked out at 3.2% of GDP in the second quarter of 1987.Needless to say, that was not the most tranquil of times in financial markets."

Needless to say, but I’ll say it anyway: the Crash of ’87.

Richard Russell recently remarked that this year’s stock market range is quite similar to that of 1972, which preceded the ’73-’74 bear market. Oh an uh, by the way, we were having some trouble with rising commodity prices and an oil shock back then as well. Sound familiar?

Oil’s the big news today but you’d never guess it from the endless procession of asininity from the powers that be. German Chancellor Schroeder, expert economist, oil analyst and market maven that he is stated “We don’t currently see any negative impact from the oil price...” Well my dear Shrodester, “currently” was last week and it’s getting to be about time that you open your eyes.

Meanwhile, Reuter’s reported a so-called Fed “insider” as having stated that "We're seeing this shock take place amid a fundamentally strong economy and I don't see any risk of it slipping into recession."

That, by the way, is the “fundamentally” strong economy which is generating fewer and fewer jobs month after month and, when adjusted for the Ministry of Labor Data Massage’s statistical mathamagics, more than likely resulted in a loss of tens of thousands of jobs last month.

I remind the reader yet again that every major increase in oil prices over the past few decades has been followed by recession. And oil prices have never ever ever been as high as they are today. Not even close. Eventual negative impact on the economy or not? You do the math.

It will indeed have an impact.It already has.I for one, am driving no less than ever, but am at least 43% more irritable about it.To me that suggests that the average American, far less happy-go-lucky and free-spending than I, is feeling the pinch and beginning to cut back. Retail sales figures would seem to indicate that very thing.

The market, of course, is anticipating some impact. Hence the lack of new highs in seemingly forever and the steady, albeit slow, grind lower. Corporate profits are good. Why no new highs? Because the market anticipates. And it’s clearly anticipating something not so very bullish. Undoubtedly the upsurge in oil prices will play a role.

But the folks at Reuter’s, brilliant analysts that they are, offer this smidgen of hope, in the form of a headline: "Stocks May Rally If Oil Eases. ”Indeed. And my grandmother MIGHT make a fine intergalactic space cruiser IF she suddenly sprouts rocket engines from her bum. But as always, this market game comes down to probabilities and some things, like significantly lower oil prices, are not particularly probable, at least not any time soon.

Yes, fickle and lacking in attention span as the market is, higher oil prices might be “absorbed” as investors find something else about which to worry or cheer. But oil will come back to bite the market’s bum once again, I contend, as I don’t see any signs of a major top in formation.

To be sure, $50 is a very psychologically-relevant round number. It’s likely that the market will pull back from here. But even a major 20% correction leaves us with $40 oil. That ain’t cheap, no matter how many ways the powers that be “adjust” it for inflation.

In the long run, I don’t think $50 will mark the ultimate high. For one thing, the “experts” are still prattling on about how oil is overpriced. When the market finally does top out, those same experts will be forecasting “Gazillion Dollars Per Barrel!” oil and the Kudlows, Cramers and Clownies at CNBC will insist that oil will never ever ever stop rising. Ever. THEN we’ll know the top is firmly in place.

But until that time, the stock market continues to face a host of negatives including record deficits and higher oil prices. This, in the midst of a secular bear trend, is not the backdrop for an emerging bull market. When and how quickly the hammer will fall, and whether or not it will beat the other falling shoe to the floor remains to be seen.

© 2004 Mark M. Rostenko
Bio and Editorial Archive

www.sovereignstrategist.com