It's the Oil Stupid (But it's a Little More Than That)

By Ted Olshansky
Publish Date: July 7, 2008

There is no doubt that the price of oil has been an important factor in the 20% declines of the Dow Jones average from it’s high. At $145 per barrel, this is a level that not even T. Boone Pickens would have predicted.

The effects of high oil prices go to many segments of our economy. It affects the psychology of almost everyone, car manufacturers, hotels, airlines, construction, utilities and much more. People begin to pull in their horns. They cut spending and this has the snow ball effect of slowing down the economy.

Coupled with the destruction of the financials (the heart of our banking system) the market has had a very bad first half of the year.

Many people don’t know who to blame for the price of oil – The Arabs, speculators, demand from China, India, President Bush and the developing countries are some of the names mentioned.

But this writer puts the blame squarely on the backs of our politicians in Washington. We were warned 30 years ago when the price of gas suddenly went from 40 cents to 75 cents per gallon. All of a sudden we heard about the ‘oil cartel”.

And what did our country do? Did we seek alternative fuels? Did we build nuclear plants? Did we increase offshore drilling or tap the vast reserves in Alaska? NO!!!! Our politicians did nothing but line their pockets with money from the oil companies. Virtually nothing was done to reduce our dependence on oil mostly from countries that don’t like the U.S.

And what did the car companies do? They built cars with higher profit margins. SUVs, Hummers and inefficient cars that get lousy mileage despite what the sticker on the new car claims.

We can thank Democrats and Republicans alike. They’re both guilty. And to hear some politicians say that it will take ten years to yield results makes we wonder if they said the same thing thirty years ago.

And now back to a few thoughts on the market often a bit editorializing.

O.K., we entered bear market territory. Nobody has to tell you that most stocks are down. But in this issue (July 7, 2008) of Barron’s pp. 17 and 18, they give you a fairly succinct history of bear markets. Most interesting is after a market has declined 20%, 74% of the bear market is over. Market fatigue is setting in. Generally this can be defined as slow capitulation with many liquidating at or near the bottom of the market. Again, as Barron’s points out in the past 12 months over $80 billion from domestic funds and about $75 billion from overseas funds. This money will come back into the market, probably at higher prices.

Bear markets tend to go to excesses. So while we may expect some rallies, it would be prudent to lighten up a little on any questionable holdings. If you are smart enough to own quality companies and haven’t sold, please hang on as these markets end. Our country will get through these problems. Didn’t we all feel proud of our flag on July 4th?

Word from the Wise

“Keep your head on while everybody else is losing theirs.”

Market Sentiment

65%