Oil is surging $6 this morning after another strong run yesterday. It is hard to say why it is moving
up again after falling back off its highs over the last couple weeks, but again, it isn’t unusual. If I had to guess, the higher unemployment rate announced today, 5.5%, may be fueling the notion that growth is scarce in all places except the price of oil, so investors might as well pile into that trade.
While the decline in payrolls was roughly in line with expectations, the large jump in the unemployment rate to 5.5% from 5% was the largest increase since 1986 and the highest rate in roughly four years. Many are suggesting that a large portion of the increase is related to seasonal factors, particularly the large increase in teens and college students who are officially entering the workforce but are not currently employed.
Certainly, this news is disappointing, but we continue to believe that our general view of no recession, no recovery is intact. Many consumer discretionary stocks have held in remarkably well in spite of higher oil prices and unemployment figures, suggesting that a great portion of the bad news is already built into the stocks. Perhaps better said, all the excitement is elsewhere.
Oil continues to be the big swing factor to a transition in market leadership. Today, energy is the only sector that is up and even then, only modestly so. We continue to believe that the price of oil is near bubble levels and that it will eventually succumb to a massive wave of selling as Fund Flows go Wild in a new direction.
To that point, several emerging countries made the decision yesterday to lower their subsidies on oil, thereby increasing prices to their own citizens. These actions will allow market forces to impact demand more easily and should lead to demand destruction, just as it has here in the United States. Yesterday, India raised prices 10%. China may not do so today, but has hinted that they may post Olympics. In the meantime, almost all of the emerging nations know they have an inflation problem and are taking steps with monetary policy and currency pegs to try to curtail their growth/inflation spirals.
On a final note, apparently some data from the CFTC investigation of oil trading has lead a Michigan Democrat to single out Morgan Stanley and Goldman Sachs for using loopholes to manipulate the energy markets. Again, while this Democrat clearly has his own self interests to disclose, it is good to see that our regulators are taking a closer look on a proactive rather than reactive basis.
Our advice to investors is that they first and foremost understand the exposure of their portfolio to the price of oil and then take actions to make sure it is in keeping with their views of the market. When and if things crack, the overexposed all run for the exits at once.
Have a great weekend.
