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Squeeze On Global Economy Right OnSchedule.
Oil: Supply Wednesday Arrives.
Stocks: Steady Erosion Continues.
by Dr. Joe Duarte,
Dallas, TX, August 17, 2005, 08:00EST * excerpts from daily reports
Inflation data and oil supply numbers will take center stage. Bonds and currencies couldmove in a big way along with crude.
Today’s Analysis: Oil’s Bite Starts To Squeeze Global Economy
A well connected fellow we had lunch with was at a luncheon recently. A Congressman wasspeaking at the luncheon, and passed the following tidbit of information to the crowd.Citing two separate experts, touted by the Congressman as being highly reliable, he toldthe hushed crowd that oil was heading to $100, according to one expert, and $200 accordingto the other.
It seems interesting that as gasoline prices in our neighborhood are now going up tencents per day whether oil prices rise or not, that Wal-Mart’s earnings are nowreportedly being hurt because its customers, described as “middle American workingclass” folks, can’t afford to drive to the stores.
Just two days ago, before oil prices started getting just a little wobbly, we noted, inthis space: “The oil market has yet to factor in the effects that higher oil priceswill have on the global economy. The bond market, which dropped rates like a rock as newrecord prices hit oil, and a recently weak dollar, as well as wobbly stocks suggest thatsome people with some money are starting to consider that oil prices are hitting thedanger zone.”
In other words, higher oil prices are starting to bite, everywhere, but most importantly,in China and the U.S., two of the world’s economic engines.
According to the Wall Street Journal, fuel shortages in China are creating scenesreminiscent of the 1970s embargo in the U.S.: “Drivers in southern China have beenqueuing for as long as three hours for a tank of gasoline this week, only to face limitson spending and prohibitions against filling spare containers. In Guangzhou city, protestserupted briefly at the Luoxi Gas Station yesterday after attendants provided dwindlingsupplies to police who jumped to the front of the queue. After a busy morning, Luoxitapped out. ["People were in a panic. Many were shouting," says Huang Peixian,head of the Luoxi station, which is affiliated with Chinese oil giant China Petroleum& Chemical Corp., known as Sinopec. "We just told them it would be worse if thepolice had no cars to drive."]
It’s Not Just Wal-Mart
Indeed, the situation is increasingly tense, and creates the potential for social unrest,the spark that we have noted as the potential start to the unraveling, of at least, thecurrent wave of Chinese prosperity. According to the Journal “Today, China'svoracious demand for oil is beginning to pinch consumers, creating yet another test for agovernment struggling to manage the stresses of a surging economy and an increasinglydemanding middle class. Chinese officials are blaming a recent typhoon for delaying oilshipments to the country's ports. But the shortfalls are expected to worsen regardless ofthe weather, industry executives say.”
Aside from the fact that China’s economy is much less fuel efficient than the U.S.economy, the Middle Kingdom does share one major characteristic with the United States,“China lacks sufficient capacity at its refineries.”
And of course, there is the usual profit motive an the ever present conflict with thestill present central economic model, which is involved as well. “In addition, ownersof the expanding fleets of private cars and taxis in some of China's biggest cities havebeen caught in a government juggling act that has sought to keep domestic fuel prices loweven as global crude-oil benchmarks head to new highs. Chinese refineries, as a result,often opt to sell their products overseas, where they command higher prices than at home,says K.F. Yan, an analyst in Beijing for Cambridge Energy Research Associates, aconsulting firm.
Up Against The Wall And A Major Reality Check
With oil near $66 per barrel, there is rising pressure, and a visible “impact on thebroader economy in China,” which had been cruising on cheap foreign money, whoseinflows, due to rising interest rates in the U.S. have dwindled significantly.
Just as Delta Airlines is on the verge of bankruptcy in the U.S., the Journal reports that“Chinese airlines have been lacerated by high fuel prices and executives are bracingfor tougher times. ["Our profit margin has been crushed,"] says Zhang Huiling,public-relations manager for Xiamen Airlines. ["We have to save costs as much as wecan right now."]
More important, “The impact of higher fuel prices extends beyond the economy. Thefrictions are the latest sign of an increasingly assertive middle class, which hasmobilized with growing frequency to protest unfair seizure of properties, stock-marketlosses and dirty air and water. This month, taxi drivers in Shanghai, the country'sprosperous financial center, threatened to go on strike, partly because rising fuel priceswere squeezing their margins. In response, the Shanghai government promised to extendemergency subsidies to taxi drivers, fending off both a strike and an increase in cabfares that could anger consumers.”
Energy Sector
Oil Market Summary And Outlook: Supply Wednesday
Crude hovered near $66 per barrel as the markets wait for supply data to be released midmorning. Expectations are for a buildup in crude and distillates, with yet anotherdrawdown in gasoline. As usual, we won’t predict the numbers, since we can’t getthem any more correct than anyone else. Besides, the market will do whatever it wants toanyway, twisting the data to suit its own purpose.
But, here’s how it’s all stacking up. High oil prices are starting to squeezethe global economy, which means that any surprise is now going to have to be placed withinthat context by the markets. That means that the response could be even less predictablethan usual, and that the market’s response also has the potential of being moreviolent.
The big talk now is not if, but when oil will hit $70, or $75. The charts are telling usthat the $61-64 area on the December contract is crucial intermediate term support. Abreak below that band could lead to a test of the $52 area.
From a trading standpoint, this market remains purely a technical affair, with exchangetraded funds, such as the Oil Service HOLDRS trust offering a good way to participate inthe overall trend, but still offering liquidity and allowing for the consolidation of thetrade into one position that can be liquidated and sold short when the market turns.
Our very long term opinion on oil has not changed. We are still in a very long term bullmarket in oil, until proven otherwise. The long term line in the sand, for us, remains $40per barrel. That means that prices can correct to $40 and we could still be in a longterm, secular bull market. If prices were to fall below $40, then the very long term trendwill have likely reversed.
Chart Courtesy of StockCharts.com
Technical Summary
Chart Courtesy of StockCharts.com
One Bad Day From Intermediate Term Break
Stocks look ready to tumble. Of course that could easily change. But as things closed on8-16, with the Dow Industrials below their 20, 50, and 200 day moving averages, thingsdon’t look particularly encouraging.
Energy stocks have started to weaken, although we’ve seen this periodically, with nolong term damage. Biotech is still holding up, but the chip stocks look weak, while thefinancial stocks have yet to show any real muscle in the rally that started in July.
The advance decline ratio has been worsening, and the number of new stocks making 52 weekhighs has been shrinking, suggesting that market momentum is continuing to weaken.
So we’re still in no man’s land,but are getting closer to the brink. We’ll see if Wall Street can deliver somethingconvincing to the up side in the next couple of days. If this kind of action continues,though, this rally might have seen its best days.
What To Do Now
Remain patient. Hold on to some cash. Buy only exceptional strength, and be ready to sellquickly. Take this market one day at a time.
Consider some short sales, if you’re aggressive. See our health, technology, andbiotech areas for short selling ideas.
Check all our sections daily. See tech, biotech, Fallen Angels, and timing systems forthe latest adjustments. Our ETF trading systems for energy, Spyders, Small Caps, andtechnology have also been updated.
Chart Courtesy of StockCharts.com
About Dr. Joe Duarte
