from the toronto star today:
Rising fuels could put bull on skids
About a year ago, I speculated here that the stage was set for an oil-price shock. It seemed we in North America had long forgotten the gasoline shortages of the early 1970s and the 1981 oil-price spike that had interest rates in the high teens.
Here we are 20 years later driving to work in V-8 pickup trucks and paying record-high gasoline prices. Even higher prices may lay ahead as we enter the summer driving season.
Oil-price shocks, aside from irritating motorists, truckers, railways and airlines, can also drive up interest rates and kill bull stock markets.
The key word here is shock. A shock occurs when the price of oil rises too fast to allow industrial and private users to raise prices or gain wage increases to accommodate the price shock. A good example of this is the truckers' protest, who are reacting to being squeezed between rising costs and flat revenue.
I would say that the current run-up in crude oil prices would qualify as the beginning of an oil-price shock.
There has been several such shocks over the past 100 years, with the most memorable being the 1981 oil spike. This spike ended a great secular up-trend in oil prices that began after World War II. The 30-year secular up-trend in oil began in 1950 and prices rose gradually through the '50s and '60s.
In the late 1960s, oil prices began to rise faster in response to the U.S. involvement in the Vietnam war. In the 1970s, oil prices shot up as a result of the 1973 Arab oil embargo in retaliation for U.S. aid to Israel.
I wonder whether investors today remember how the stock markets reacted to the backdrop of rising oil prices. The Dow peaked at 1,000 in 1968 and investors had to wait until 1982 for the Dow to break above 1,000 and resume an up-trend. This flat period also contained one of the great bear markets of the 20th century.
The new technology of today has not changed our thirst for oil. We can sit in our gas-guzzling small trucks and 4x4 sport-utility vehicles on jammed toll roads, breathe bad air and use a hand-held computing device to get quotes on our hot technology stocks.
Planet to technology investors: Ignore rising oil prices at your peril!
--------------------------------------------------------------------------------
Many oil stocks aren't keeping up with rapid rise of oil prices
--------------------------------------------------------------------------------
Our chart this week is that of the weekly closes of light crude oil. The persistent up-trend is still intact. Unfortunately, many oil stocks have not responded to the rapid advance in the price of oil. The TSE oil & gas group index at around 5,900 is just above the long-term breakout level of 5,500.
If the index can advance from these levels and run above the 1987 highs of 7,500, that would confirm the end of the long-term bear market in Canadian oil stocks.
It would also confirm the presence of a new long-term, secular up-trend in the crude oil complex. Investors should then consider how this oil-market scenario could affect world stock markets. I think one of two things could happen.
We could get a soft landing (no market crash and the economy gradually slows down). We would need the current market leaders to spend several quarters digesting their recent big price gains, and we need to get some money flowing into the value-type stocks.
Or we could get a hard landing (a market crash triggered by several unforeseen events). That would result in the current market leaders getting hit by a bearish stampede as investors flee the stock market.
The unforeseen events could be a collapse of a major financial institution, collapse of the U.S. dollar, the sudden resignation of Federal Reserve Board chairman Alan Greenspan, runaway oil prices, collapsing bond prices along with rising inflation or a war.
Both scenarios imply a bear market. Take your pick.
-------------------------------------------------------------------------------- |
