Posted on 04/05/2005 3:32:20 PM PDT by CHARLITE
One day the public is going to wake up and realize that when analysts are telling them to buy things at all-time highs, it might be time to sell.
The day after a government report showed that crude oil inventories have risen to their highest levels since July 2002, the esteemed Wall Street brokerage firm, Goldman Sachs, released an analysis forecasting a continued increase in energy prices that could result in oil hitting $105 per barrel. As reported by Reuters:
"We believe oil markets may have entered the early stages of what we have referred to as a ‘super spike’ period -- a multi-year trading band of oil prices high enough to meaningfully reduce energy consumption and recreate a spare capacity cushion only after which will lower energy prices return," Goldman's analysts wrote.
Oddly, according to Bloomberg, the Energy Department had this to say just 24 hours earlier:
“Stockpiles gained 5.4 million barrels, or 1.7 percent, to 314.7 million in the week ended March 25, the biggest increase since October, the report showed. Supplies are 9 percent higher than a year ago.”
This begs the question: Why would one of the most respected brokerage firms in the nation make such a prediction when the inventory data is suggesting the oil shortage that has been squeezing prices higher for the past twelve months seems to be waning?
Well, as the Chicago Board of Options Exchange Oil Index indicates, energy stocks have been going almost straight up since May 2003. In fact, this index has risen by more than 100% during this period. This compares to only a 33% increase in the S&P 500, and about a 45% rise in the NASDAQ 100.
What this means is that energy stocks have been the most exciting investment game on Wall Street for the past two years. Moreover, just look at what they’ve done so far this year -- up an amazing 18%. By contrast, the S&P 500 is down 2.5%, and the NASDAQ is down 8%.
Given this, if you ran a brokerage firm, would you want this party to end? Wouldn’t you do anything within your power to extend the merriment as long as possible?
To better understand just how hot energy stocks have been of late, and why securities companies across the globe have such a vested interest in keeping oil prices from falling, one only needs to look at the frenzy for oil related initial public offerings that has occurred in England recently. According to an article published by Bloomberg a few weeks ago:
On March 14, Afren Plc., a new oil and gas company, listed its shares on the London exchange at 20 pence each. By lunchtime, they had jumped to more than 56 pence, almost tripling in just a few hours.”
White Nile is an exploration company set up by the former England cricket star Phil Edmonds. Listed on the London market at the start of February, the shares increased more than 11-fold in a week before being suspended.”
Centurion Energy International Inc., which develops oil assets in Tunisia, has seen its share price rise from just 52 pence in 2003 to a high of 780 pence last month.
Sound a bit like what was happening to Internet, dot-com, and technology stocks in the first quarter of 2000? Do you remember what brokerage firms and their analysts were saying then? These stocks were all going to just keep going higher, and higher, and higher, right?
Well, ladies and gentlemen, Caveat Emptor: The time has come for Americans to be fully educated as to how the brokerage community works.
Having been employed by one of Goldman Sachs’ major competitors for eight years, I know full well that the primary modus operandi of such firms is to sell product. Period. And, the easiest product to sell is that which is already in the news.
Think back to the first quarter of 2000. Why was it so easy for brokerage firms to suck innocent and inexperienced investors into technology stocks as they were not only reaching their peaks, but trading at levels that equities never had in our nation’s history?
Well, because every day, newspapers and television stations would proudly broadcast the new high the NASDAQ had hit. And, they would talk about the new IPO that had just come to market, and how it had quadrupled on its first day of trading.
So, when a high-profile analyst from a high-profile firm came out and raised his price target for XYZ.com, the unwitting masses couldn’t get to their phones or computers fast enough to jump in headfirst.
The same thing is going on right now in energy stocks. On a daily basis, the public is being bombarded with talk of $3 gas, and pending rolling blackouts. So, when a high-profile firm like Goldman Sachs comes out with a $105 per barrel oil prediction, it shouldn’t be surprising that the CBOE Oil Index jumped by 1.3% on the announcement.
For myself, I can only hope that the public is going to one day wake up and realize that when analysts are telling them to buy things at all-time highs, it might be time to sell.
Noel Sheppard is a business owner, economist, and writer residing in Northern California.
Comments: slep@danvillebusinesscenter.com
Everybody has already been paid. Things have to happen quickly and right away in the real world. There is a four-year horizon.
The oil-gold-dollar relations are all miskewed right now. There's probably a five to ten dollar premium built into oil to compensate for misguided fear that the dollar had more to fall (following, lo, Warren Buffet's backassed prediction...). And there's probably another five to ten buck psychological premium on top of that, just for a world spooked by America standing up for itself.
Even if they do believe in $105 oil, GS is wrong.
I am hoping that somebody will mention a time horizon. I heard a casual mention of a couple years, but this is all hazy like most economy predictions.
Not even thinking of the market.
BTTT
Every time he speaks I cringe. He raised rates 6 times in 98 screaming inflation during an obvious deflationary period, thus creating the 2000 bubble, crash and recession. Then he cuts rates too far, creating the current real estate bubble. Now he's raising rates too fast, thus creating a soon to be real estate crash and probable recession again. This man is in way over his head. He should have retired years ago.
The higher oil prices rise the cheaper contracts on the reverse side become. Nothing climbs forever, although we should see far greater prices prior to collapsing oil prices partially due to reduced demand in the West.
World Oil Market and Oil Price Chronologies: 1970 - 2004 (chart)
TJ, nothing to add to your post except that the Federal Reserve is always one step behind. In March/April 1929, the Fed tried to reel in margin trades by increasing rates. Right idea, wrong time.
To my view, oil has peaked. We shall see.
The thing that I really don`t like as of late is this bizarre lack of examining the broad economic field.
I will not pretend to be an economist but I can`t understand his reasoning for raising rates based on inflation fears due to an overheating economy.
This sent the stock market into a two week tailspin combined with soaring speculative oil and gas prices which provide a real inflationary pressure and an economic affect akin to a tax hike.
It would seem that the energy price increase would be a sufficient brake to the economy as to negate interest rate hikes.The inflation that is demonstrated by this is not the result of a hot economy and I fear that indeed this double thrust to put the brakes on will lead to a recession in 12-15 months.
Goldman Sachs has been in the pocket of the Clintonoids since before 92, or vice versa. Prior to being Clinton's Treasury Secretary Robert Rubin ran GS. He also incidentally got them into some of the wildest speculations in their history. Then the Clinton administration pursued exactly the policies to make those wild speculations profitable and to cover up the risks (until the bubble burst).
GS has also been an ally of George Soros in his criminal manipulations, such as artifically attacking the British Pound (which ended with him being the "man who broke the Bank of England" to make several billion in profits and wipe out lots of little peoples life saving in the process).
Manipulating oil futures for a quick buck on the commmodities and stock markets is only layer one of a very rotten onion. Other layers have more to do with destroying the American economy and, with it, the American power in the world.
We ARE under attack. Soros, Rubin, Clinton, Chirac and most of the folks who are most vocal and vicious in attacking George Bush are literally waging war on our country, just "by other means."
I believe in '29 they changed the margin buying power from ten to one to 2 to 1, overnight creating margin calls for everyone in the country. Then the fed raised rates. The triple whammy was FDR, who created a ten year recession by implementing huge socialist big government programs and raising taxes. He should have been slashing spending and cutting taxes.
Yes, that's right.
You need to add, however, Hoover to the problem. He raised taxes, launched deficit spending, and otherwise and altogether capitulated to the Depression in price and wage supports.
I just ran across a Smith Act (1940 -- anti-sedition law) web-discussion that happily quoted some 1950s commie who, when asked what made him a communist, replied, "the great Depression." That means that FDR made him a commie.
It didn't have to happen. So much for "co-option." Fools.
Yes, but it was this 10% margin rate which was partially responsible for the huge run-up in stock prices ahead of the '29 crash. Just imagine how much worse the crash would have been if margin was still 10% instead of 50%. For instance, how much higher would the NASDAQ have gone in the first quarter of 2000 if margin rates were 10% instead of 50%? And, how much worse would that resulting crash have been?
As for the Fed raising rates in 1929 to quell the rise in equity values, wasn't this a wise move? For instance, if Greenspan would have raised rates on January 2, 2000 once it became clear that Y2K problems didn't surface, maybe the NASDAQ wouldn't have gotten anywhere near 5000. Instead, he waited until February while stock prices continued the rise that had begun in November shortly after his Y2K easing.
In retrospect, I'm sure that Mr. G wishes he had been much more aggressive with his tightening.
I'm a tad confused by your statements here. Are you suggesting that Greenspan's tightening in 1998 led to the 2000 stock bubble? Actually, the opposite is quite the case. Most economists now believe that his November easing to calm Y2K bank run fears, and his slowness in removing this liquidity at the beginning of 2000, were responsible for the final stages of the tech bubble.
Second, you're suggesting quite accurately that he cut rates too much in the early part of this decade thereby exacerbating the real estate bubble. However, you are displeased by him raising rates now. If you feel that it was errant to cut rates so much, doesn't it make sense now to raise them?
Neutral monetary policy is loosely defined as a fed funds rate equal to the rate of growth in the economy. As we are currently growing at roughly 4%, a neutral policy would be 4%. Now, many economists debate that the increase in worker productivity in the past few years might alter this equation a bit, and make neutral policy 50bps lower than the rate of growth. That would put neutral at 3.5%.
What that means is that 3 1/2 years after the economy first emerged from recession, Fed policy is AT LEAST 75bps UNDER neutral. Hence, the Fed still has its foot on the gas pedal even though the economy has been growing for 14 straight quarters. This is way too aggressive, and is a large culprit for the current expanding real estate bubble.
To me, it appears that Greenspan is making the same mistake that he has made since he was first given the position in 1987 -- leaving interest rates too low for too long resulting in either a rekindling of inflation, or an asset bubble.
An ounce of gold can buy a decent suit, just as it could in previous generations. IOW it is an excellent store of value, ie keeps up with inflation - long term, but as a vehicle for portfolio growth it leaves a lot to be desired - except for short term trading.
The yield curve is basically flat because short term rates (which have gone from 1% to 2.75%) have not pushed up long term rates (the ten year bond is at under 4.5%). How much more can he raise them with the market (the long bonds) not raising? BTW I do agree that a 3.5% FF rate would be reasonable.
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