By Dave Kansas
- AP
- Caterpillar among today’s big losers.
While the market is broadly lower, underneath the surface the bet is clearly one against the nascent economic recovery.
The Morgan Stanley Cyclical index, which focuses on more economically sensitive stocks, is down 3.3% today. Its growth/defense counterpart, the Morgan Stanley Consumer index, is down a more modest 0.80% Meantime, the S&P 500 is off about 1%.
Logic for the trade is simple: spiking oil prices – WTI is up 4.6% and very close to $100 a barrel while Brent is up 5% to $111 a barrel – could start to curb consumer activity, if those price gains are sustained. And since consumers make up around 70% of economic activity, that is not good news for the recovery.
Given the murky situation in Libya, a significant oil exporter, concerns about persistently higher energy prices (“scary strong,” as Chesapeake Energy says) are growing. Unlike Egypt, where institutions such as the military had a relatively strong social position, Libyan society is more atomized, making a swift resolution tougher.
Among big cyclicals feeling pain are: Caterpillar (-3.2%), Deere (-4.5%), United Technologies (-1.3%), Ford (-4.1%), General Motors (-4.1%), Honeywell (-2%), General Electric (-3%), Alcoa (-2.4%), DuPont (-2.2%), Goodyear (-3.7%), and Whirlpool (-1.8%).
These sweeping bets, of course, flow directly from the rising oil story. If that market suddenly reverses itself, these stocks could get whipsawed. The big issue is duration. The longer higher oil prices persist, the greater the likely damage and the tougher it is to whipsaw cyclicals back higher.
How long before oil really starts to bite? It already is, but lasting damage would require oil prices to stick near or above current levels for several weeks.
One indirect way to measure oil’s impact is to gauge the Fed Funds futures contract. The Fed will raise the Fed Funds rate when it thinks the economy is doing well enough to keep handle a rate hike. Last week, Fed Funds futures indicated investors believed a rate cut was coming late this year. In recent days, as oil prices have spiked, that bet has pushed a potential Fed Funds rate hike into early 2012.
Status quo conditions maintaining the US’s energy subserviance to muslim dictatorship nations will ensure 1)high unemployment, 2)high energy costs and 3)support an economy drowning in deficit. Establish policies enabling technological advances in sciences the US can capitalize on and create an energy policy that will make the US the foremost top-quality energy producer and the price of freedom will come down for the entire world. Americans are still the most innovative individuals in the world; we simply need to unbridle ourselves from the stifling regulatory environment emanating from the utopia of “the beltway.”