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Election Ballyhoocares?
by Mark M. Rostenko
Editor, The Sovereign Strategist
November 1, 2004

Stocks rallied last week, rebounding sharply from multi-month lows. The dollar staged the proverbial “dead-cat bounce” as the Dollar Index popped up feebly after a test of the bear market low. Gold, consequently, flirted with its bull market high. And crude oil retreated from a record high to close lower for the week.

First off, let’s get this election ballyhoo out of the way. Like every election I can remember, this one is being heralded as “the most important election of our lifetimes.” But from the market’s perspective it’s just business as usual. Bush vs. Kerry. Are either of these clowns going to institute sweeping economic reforms that bring about some great economic/business miracle? No.

The market’s primary concern is that election comes off without a hitch and that a winner is clearly decided ASAP. The market doesn’t like uncertainty but it’s not so stupid as to think that elephant tastes any better than donkey, or vice versa. What matters most is that business-as-usual proceeds mostly uninterrupted.

That’s my general view but the folks at 4Cast Inc. apparently have the business of market prediction and future-forecasting down to an exact science. According to their “research”, the Dow could rise 1% on a Bush win and lose 1% on a Kerry win the day after the election. If there’s no clear winner at that point, expect a 2% decline. (My own research suggests that there are about 8 million other things the market could do that day, but then I’m just a newsletter hack so what do I know?)

Of course like all good forecasters, the folks at 4Cast hedge their outlook with the word “could.” The market could fall on a Kerry win and could rise on a Bush win and could fall if there’s no winner. 

Not to be outdone in the “going out on a limb” department, I’ll forecast that if Kerry wins Rosie O’Donnell COULD sprout wings and pluck small children out of schoolyards like some crazed prehistoric raptor. If Bush wins, she might just hop on the first bus to the cake shop. I don’t know. Forecasting is tricky business but the “could” option makes my job a lot easier.

But I wouldn’t expect much more than an initial knee-jerk round of market volatility, maybe up, maybe down. I mean, look at what the market’s done all year: nothing. Now here we are faced with the choice of “Bush” or “Bush Lite”. Clearly one of these men is slightly less evil and marginally more competent than the other (although I haven’t figured out which one yet), but is either one going to wake the market from its slumber of complacency (or confusion)? WHY? HOW?

My point is that if it hasn’t done jack all year, neither of our insipid election “choices” (ha ha!) is likely to inspire much either way. It’s a boring market and boring candidates aren’t going to add much spice.

Beyond that we’re still faced with Iraq, oil and marginal economic growth (that is, if you don’t believe that official growth figures are a load of hooey). As far as Iraq, all I have to say is “I told you so.” As for economic growth all I have to say is “I’m tired of repeating myself.” Oil is by far the most interesting topic of the three, albeit not in the least bit interesting.

Last week crude oil hit levels never ever ever seen. Gas prices are well over $2 a gallon in most regions. Oil, which wasn’t supposed to hold over $40, is now into the $50s where it has held for the past four weeks. Not so long ago, higher oil prices were not supposed to be a problem unless they stayed over $40. Then the powers that be upwardly revised their concerns to “over $50”. The analysts and experts are now happy to report that higher oil prices are not a problem except at $60 and $70. So please keep shopping because unless oil goes to $40,000 a barrel, there’s nothing to worry about.

Meanwhile according to Reuter’s estimates, 22% of companies reporting earnings this quarter have missed Wall Street estimates, up considerably from 15.3% this time last year. It’s a very good bet that higher fuel prices and rising costs of raw goods in general, are eating into profits. And it’s an even better bet that the data is only beginning to reflect that. There’s more to come.

But isn’t oil getting a bit crazy? Haven’t we seen the top? I don’t believe so, not for the long-term anyway. In the short run, probably. From a technical perspective, last Wednesday’s huge reversal from a very brief probe into record high territory is exceedingly bearish. New buyers were almost nowhere to be found above $55.50 (basis December futures), save for a handful of retirees who were bilked into buying the “next big thing” by some junior commodity account executive. In the absence of buyers, markets don’t tend to rise. So don’t expect new highs for some time.

But over the longer haul, I see the oil situation getting worse before it gets better. They ain’t makin’ any more of the stuff and what’s left isn’t being tapped in any meaningful way. Most of the folks who pump the stuff don’t like us all that much. Meanwhile China is guzzling up the stuff more and more every day and U.S. soccer moms are not about to give up their penchant for sport utility buses. Demand is rising, supply is not increasing by much. Not a recipe for $20 oil.

Oil is just another in a long list of uptrending commodities. With the toppling of the Great Big Bull a few years ago, the shift from paper to physical assets began. The price of stuff remains in a powerful uptrend, while the price of paper is taking a small breather within a long-term bear market. I expect these trends to remain with us for years to come, regardless of which clown comes to man the controls next January. Buy more gold, sell more stocks...

© 2004 Mark M. Rostenko
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