Losing Energy?
02/15/06
The jobs report for the month of January showed the unemployment rate had dipped to 4.7% , its lowest level since July 2001. Average hourly earnings rose 0.4% in the month, bringing their year-on-year increase to 3.3%, its highest level since 2003. While this is somewhat mediocre news for fixed income instruments, it is definitely good news for the average American family. Consumer spending is extremely important for the outlook of the economy and the stock market pays keen attention to these numbers. Therefore, rising hourly earnings are good news for workers and stockholders.
The chart below shows the nearby Light Sweet Crude Oil contract. You can clearly see the double top that was formed over the last 6 months. I think that oil has seen its high for the next 6 - 12 months.
Wall Street remains very much enamored with the energy sector. Oil service stocks enjoy a collective buy rating of 73% and oil stocks as a whole are being recommended as a buy 61% of the time. There is therefore precious little upgrade fuel in the tank to keep these stocks rallying. In fact, the price of petroleum products have been falling faster than the price of crude, which means that the profitability refiners can draw from selling their product has turned negative this year. Since the profitability of refining gasoline is technically negative, refiners are likely to reduce production. This should sap crude oil demand, making crude oil prices fall further. The decline could be stemmed if the Organization of Petroleum Exporting Countries (OPEC) cuts production in March and/or if geopolitical tensions resurface. Without an OPEC production cut or major geopolitical disruption event, however, crude oil prices could test $50 per barrel this spring. Stay away from all oil or oil-service stocks. The bullish case is known to everybody. The bearish case, however, is not and might surprise even Wall Street.
Gaining Gold!
Ben Bernanke, the new Federal Reserve Chairman, delivered his first congressional testimony today. While many headlines (including our past newsletter) seemed to fear his supposed hawkishness, his appearance today gave the impression that he was not too worried about inflation at the moment. Bernanke said that the central bank will keep inflation in check because "stable prices promote long-term economic growth," but he also said that the policy response to inflation need not be as great as in the 1970s, despite the rise in energy prices.
The chart above represents the price of gold over the past 12 months. Like crude oil, the price of gold is due for a correction but in this case, I would use it as a buying opportunity.
When gold broke $500 an ounce that month, the press treated us to a constant stream of stories about gold hitting an 18-year high. Each day that the metal nudged higher, the next day's headline hammered away at the fact that we'd just hit another 18-year high. The thrust of these stories was that gold was expensive and that investors might be looking at the end stages of the boom. I know from personal experience, that the yellow metal is fickle and has broken more investors (and traders) hearts than almost any other investment vehicle. Just when it seemed that a sustainable trend was underway, it turned and left its admirers broken-hearted. This happened again, just when the gold bulls came out of the woodwork predicting $800- or even $1,000-an-ounce gold. Yes, gold was near 20-year highs in nominal dollars, but if you corrected for inflation, the historical high was closer to $1,500 an ounce. So the breakout above $500.-/oz got everybody excited and that excitement turned everybody into a believer. Once everybody was converted to the bull case, no buyers were left and the price had to correct. This process is underway and might take another couple of weeks or even months. However, I do not believe that the gold market is anywhere close to a top. I am going to wait for prices to approach the $500.- to $525.- mark before committing capital. But that price level should prove to be a buying opportunity.
Hermann Vohs
Hermann Vohs is president of Cales Investments, Inc., a registered Broker-Dealer. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. Hermann Vohs and/or the staff at Cales Investments, inc. may or may not have investments in any of the markets cited above. Hermann Vohs can be reached at 303-765-5600.
This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities.
