Stocks Fall On Inflationary Concerns Of Higher Oil

by Richard Gorton, The Resourceful Bear Blog | April 23, 2008

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Introduction

US stocks fell today on oil's relentless march higher, raising the specter of yet even higher inflation that would lead consumers to cut back their discretionary spending, as well as the possibility that the Federal Reserve will not keep lowering interest rates.

West Texas Intermediate Crude rose to close at $118.

Sectors falling the most were airlines, -11%, on UAL's disappointing earnings report, followed by retail, XRT, -3.5%, semiconductors, SMH -2.9%, and Consumer Discretionary, RCD, and PEZ, -2.5%.

Japanese stocks, EWJ, fell -1.9%, as Nippon Steel announced a 40% increase in the price of its product; these stocks have a trading pattern that is identical to the Russell 2000, IWM.

Stocks fell across the board fell today; these included:
Airlines, UAUA, DAL, NWA, CAL, AMR,
Consumer Discretionary, NFLX, MVL, CKEC, BBBY,
Retailers, NILE, ZLC, CHRS, TIF, BIG, AZO, ANF, GYMB, TJX, ROST, SMRT, URBN, JAS, FTD, FLWS,
Credit Providers, CIT, IX, BKCC, GCA, ADVNB, NEWS,
Payday Loan Providers, QCCO, AEA, DLLR
Mortgage Insurers, PMI, MTG, RDN,
The mortgage GSEs, Freddie Mac, FRE, and Fannie Mae, FNM,
Sub prime mortgage loaded insurance company American International Group, AIG,
Homebuilders, WCI, PUH, PHM, BHS, DHI,
America's remodeling retailer, LOW,
Software Providers, CRM, CKP, FISV,
Industrials, HON, CAT, JOYG, KEX, DAR, AIRM, PHI, AME, GTLS, RS, ir
Nasdaq Leaders, AAPL, ISRG, FISV,
Vice, CEDC, WMS, AOI, UVV, WMS,
Restaurants, PFCB, CEC, YUM, CMG,
Footware, WWW,
Semiconductors, TLAB, AMD, INTC, TSM, XLNX, MCHP, ALTR, KLAC, LRCX, SLNX, ACTL, CY, ONNN
Biotechnology, CRA, IMCL, GILD, CELG,
Networking, QCOM, JNPR, JDSU, CIEN, QLGC, WBSN, CHKP,
Containers and Packaging, GEF, SEE, TUP, BLL,
Dynamic Media, LINTA, VVTV, WWE,
Data Storage, NTAP, WDC, BRCD, ISLN, LCRD, SNDK,
Global Building and Construction, FLR, TECUA, JEC,
Agricultural Equipment Manufacturers, DEE, VMI,

General commentary

The commercial lending sector collapsed today, as all of these credit providers fell like a rock: CIT, IX, BKCC, GCA, ADVNB, NEWS.

Debra Borchardt reports that CIT priced a $1.5 billion offering of common and preferred stock, with the common going for $11 a share. The stock, which closed Monday's session at $12.74 a share, dropped $1.99, or 15.6%, to $10.75. CIT has been lately selling off assets to raise capital in order to fund new business. While raising capital temporarily, these companies are now terminal, providing additional evidence that Capitalism is now dead; and is being replace by state-corporatism as is evidenced by the Federal Reserve actions of TAF, TSLF, and PDCF, as well as the buy out of JPM and BSC; yes that's right the Fed bought JP Morgan and got Bear Stearns to boot. So we now have oligarchs giving announcements, which really presents all kinds of risk to traditional investing and short selling.

A 'financial emergency', that is, 'a systemic financial failure event' of some type is imminent, for any number of reasons such as the inability of these credit providers to lend efficiently at a reasonable rate; or the emergency could come from Treasury repo rails, or incidents in the credit default swap, CDS, marketplace, or a massive sell-off of the US Dollar, or US Treasuries.

A higher Euro, FXE, and a higher Yen, FXY drove the US Dollar, $USD, down to 71. 32, its lowest level ever; gold, $GOLD, which trades inversely of the US dollar, closed up at $925.

The EUR/JPY, as seen in the FXE:FXY, rose, to 1.655, suggesting that the Yen Carry Trade is still actively on; and that for now the Yen Carry Trade is not unwinding. However, FXE:FXY may not be reliable, as an ongoing indicator of stock market Yen Carry Trade investing, due to the strong demand for the Euro, FXE, relative to the US Dollar.

Favorite interest rate differential trade investments were as follows:

BRICS, EEB, which fell 0.75%,
Basic materials, IYM, fell 1.21%,
Soybean trader Bunge, BG, fell 0.7%,
Fertilizer manufacturer, Potash Corp, POT, rose 2.89%,
Irrigation equipment manufacturer, VMI, fell 2.7%,
Brazil telecom, BTM, fell 0.9%,
Brazil telecom, BRP, fell 2.9%,
Brazilian oil producer, PBR, fell 0.9%,
Latin America telecom, AMX, fell 1.4%,
Israel cellular, CEL rose 0.4%,
SLX, fell 0.9%,
KOL, fell 1.4%,

Shooting star patterns, popped for REIT, SLG, and solar manufacturer, FSLR.

The HUI precious metal mining stocks continued to disconnect from the price of gold, as is seen the in the ratio of gold stocks relative to gold, GDX:GLD, falling lower to 0.533. American Barrick, ABX, closed at 42.71, which is near last year's high: it has basically lost all most all of this year's gains; the leverage that gold stocks have had over gold is pretty much gone. American Barrick trades at the high PE of 33.50; and is thus in danger of falling much lower; those still owning it should trade out of it for the real thing -- trade out for gold: the age of profiting from 'buying and holdng' the gold stocks is over and done.

All of the bell-weather ETFs fell lower today:
1) Biotechnology, PBE, -1.6%
2) Global Building and Construction, PKB, -2.5%
3) Consumer Staples, PSL, -1.5%
4) Retail, XRT, -3.5%
5) Financial, IYG, -0.9%
6) Steel, SLX, -0.89%
7) Semiconductors, SMH -2.9%
8) Consumer Discretionary, RCD, and PEZ, -2.5%
9) Water Infrastructure, FIW -2.1%
10) Homebuilders, ITB -2.2%
11) Transportation, IYT, -1.6%
12) Industrial, IYJ, -0.8%
13) Real Estate, RWR, -0.5%
14) Small Caps, RZV, -1.9%
15) Mortgage REITS, REM, -1,7%
16) Computer Networking, PXQ, -1.70%
17) Water Infrastructure, FIW, -2.1%
18) Vice, PUF, -2.1%
19) Emerging Cancer, HHJ, -2.1%
20) Networking, PXQ, -1.7%
21) Software, PSJ, -1.9%
22) Telecom, PTE, -1.6%
23) Basic Materials, XLB, -0.79%

All most all of the bell-weather stocks fell lower today:
1) Medical Equipment Wholesale, HSIC, -1.5%
2) Dental Equipment Wholesale, XRAY, -2.0%
3) Nasdaq Leader, FISV, -3.5%
4) Truck Manufacturing Leader, NAVZ, -0.84%
5) Aerospace And Defense Leader, HON, -1.6%
6) Semiconductor Leader, INTC, -2.9%
7) America's Remodeling Store, LOW, -2.0%
8) America's Homebuilder, DHI, -2.2%
9) Consumer Discretionary Leader, BBBY, -2.2%
10) America's Insurer, AIG, -2.7%
11) America's Bank, RF, -0.8%
12) America's Investment Banker, MER, +0.2%
13) America's Steel Manufacturer, X, -2.1%
14) America's Restaurant, YUM, -1.5%
15) Consumer Staple Leaders, PG, -0.5% and TSN -3.45
16) America's Business Credit Provider, CIT, -15.6%
17) America's Mortgage Providers, FRE, FNM -2.2%
18) America's Paper Product Manufacturer, IP, -4.2%
19) America's Metal Manufacturer, GTLS, -1.8%
20) America's Container Manufacturer, GEF, -5.7%
21) Construction Equipment Manufacturer, CAT, -1.5%
22) Agricultural Equipment Manufacturer, DE, -1.5%
23) Global Construction, FLR, 0.97%
24) Aluminum, AA, -1.52
25) Seeds, MON, -0.96
26) Fertilizer, POT, +2.93%
27) Copper, PCU, +1.66%
28) Chemicals, DOW, -1.68%
29) Chemicals, DD, -4%
30) Iron Ore Pellets, CLF, +0.27%

Chart of the US Dollar, $USD, shows that a run on the Dollar is underway.

Chart of the 30 Year Government Bond Fund, BTTRX, and its inverse RYJUX, suggest that a run on the US Treasuries is underway as well; the fall of BTTRX to the middle of its 'broadening top pattern' suggests that an sharp sell off in the US Treasuries is at hand.

Chart of West Texas Intermediate Crude, $WTIC, shows the relentless march of oil, which is also seen in the chart of the oil ETF, USO.

Investment Application

The overall stock market, VTI, has fallen to the middle of a 'broadening top pattern' going back to November 2006: a continuing fall is likely for a number of reasons:

1) The financial sector has turned lower, with today's collapse of the commercial lenders, CIT, IX, BKCC, GCA, ADVNB, NEWS. These credit providing companies are "credit poor"; they simply do not have the funds to lend out; their plight is exemplified, by CIT, which sold shares to raise some capital, but in doing so diluted the value of it's stock. A situation is developing where neither these companies, nor the banks will have lending capital, at a time when corporations in the U.S. and Europe must repay $1 trillion in debt maturing this year, the most since 2000, data compiled by New York-based Citigroup Inc. shows. Things are progressing quickly from "credit cruch" to "credit gridlock" where there credit will not be available at any price. The outcome will be "liquidation" -- companies will be shutting down literally overnight, in "Bear Stearns fashion"; declaring bankruptcy; and selling any assets for pennies on the dollar.

2) Oil is relentlessly marching higher, raising the specter of yet even higher inflation, that would lead consumers to cut back their discretionary spending, as well as the possibility that the Federal Reserve will not keep lowering interest rates. Even if the Fed does lower interest rates, it is likely that the market will be displeased, and send the financial stocks lower. Either way now, its a loosing situation for the financial sector.

And the financial sector to industrial sector differential, IYF:IYJ, stands on a yearly basis at 30%, that is the greatest differential ever. As the financial sector falls, it is going to take the DOW lower. Also the retail sector to industrial sector differential, XRT:IYJ, says much the same thing: the DOW is going to be drawn lower.

3) Student lender, STU, fell 3.14%, confirming that a crisis is at hand in providing student loans for next fall: another evidence that capitalism is dead.

Mortgage surety companies, PMI, MTG, RDN all fell lower, placing the stock value of Fannie Mae, FNM, and Freddie Mac, FRE in jeopardy.

Low volatility, $VIX, of 20.87 puts the short seller at risk, as the market erodes one's wealth if one is invested long: low volatility means the "grinding away" of investment wealth in a gristmill like fashion.

A good earnings report by Apple, AAPL, on Wednesday of this week could easily upset those who go short or who are short.

The Yahoo Finance six month chart shows that the agriculture ETF, DBA, has a wave structure similar to that of the gold ETF, GLD, suggesting that gold is going to be following agriculture, much higher as money comes out of government bonds and into commodities.

The greatest investment risk is that one may not have full access to one's brokerage account, money market fund accounts or cash accounts when the 'financial emergency' strikes, I strongly recommend that one 'dollar cost average' buys of gold at BullionVault.com even though gold could easily fall to $875 or $850 before it is driven higher by a continually falling US dollar, and by default on the Level 3 Assets of the top eight investment bankers and banks which now stands at $600 Billion.

Copyright © 2008 Richard Gorton, The Resourceful Bear Blog
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Short Bio My investment statement is simple: in a bull market be a bull; in a bear market be a bear. In a bull market, one buys on dips; in a bear market, one sells into strength. Research indicates that the stock market has transitioned from bull to bear; and that one's wealth is now best garnered and protected by investing in gold.

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Richard Gorton 360-756-5431 | Bellingham, WA USA | Email | Website

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