Oil Holding Stock Market Up! Oil Is Key.
Principles of the Stock Market

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Have You Seen This?

Have You Seen This?

 OIL NOW AT $130! What will be the resolution of today’s high oil prices? 

 The best, first approach in analyzing anything is to look back at any historical parallels we can find.  The two oil crises of the 1970’s pop immediately to mind.  Thus I just printed out a few online histories, including what Wikipedia, the free Internet encyclopedia, have to say about the 1973 oil crisis.  (the Internet is great!)  I’ll read these histories today and report back to you.  For now, as I lived through the 1970s and have studies the stock market and economic history of the time, let me relate what I know:

 

  • The oil crisis of October 1973 came about after OAPEC (Organization of Arab Petroleum Exporting Countries; OPEC plus Egypt and Syria), because of the Yom Kippur War, used oil as a weapon against the west.  Schwartz View:  The stock market had already topped out back on January 11th, 1973, some nine months before the oil crisis erupted.  Hm, the stock market topping out BEFORE the oil crisis really started?  Sound familiar?  Sound like today to you too?
  • The October 1973 oil embargo was the cause of sharply higher oil prices but crude prices had started to rise previously.  Schwartz View:  Again, similar to today.  Crude has soared with no actual crisis, no cutoff of oil by oil producers.  But what if something similar occurs next?
  • Oil stocks were the leaders in the stock market in 1973, the first year of the last severe Papa Bear bear market we suffered through.  Schwartz View:  As I’ve been writing for a number of Tuesdays now, and which is pretty obvious without doing much research, oil and oil service stocks are now, by far, the leaders in the stock market.  We’re now up to about half or 50% of the whole 100 stocks on the IBD 100 list of leading stocks being energy or energy related.  And that number could be even higher if I include other companies and industries doing well primarily because of high priced oil, like mining machinery.  Bottom line, strength has narrowed down considerably, basically being confined to oil and those sectors which benefit from high oil, like transports.  And those sectors which are NOT directly affected by higher oil/materials prices, like technology.
  • “Higher prices resolve higher prices.”  This old economic truism hasn’t proved true; YET!  But if the laws of economics haven’t been repealed, and they haven’t, it will prove true over time.  Schwartz View:  Today, sure,  the tipping point is higher than in the 1970s, businesses are much less dependent on oil now than back then.  But there will come a tipping point. 

 

SCHWARTZ SUMMING UP:  Today is reminding me more and more of 1973-1974.  Maybe 2008 playing out like 1973 and 2009 playing out like 1974.  My sense is that the overall stock market will hold up, hold on, UNTIL oil starts dropping.  And that when oil does goes down, it won’t be the panacea that the hosts on CNBC speculate it will be.  Because high oil prices are what’s holding UP so many stocks, those in the energy service industry, stocks in coal and solar.  And holding up the transports, Russia, the largest energy exporter and their new zillionaires, the Middle East and many emerging or developing countries like Brazil.  When oil goes down, so do the other materials stocks, the natural resource stocks and all the rest which depend on oil.  They are up because oil is indicating the world economy is still growing.  The reason for the strength in the market today.  BUT when oil goes down, it won’t mean relief for the other sectors of the economy, as one would logically think.  That’s because we’ll be too far gone.  Just meaning consumers and businesses alike will have been like a “lemon squeezed dry,” or already in such bad financial shape, the downward economic spiral will have already begun.  Please think about or reread the UPDATE ON THE STOCK MARKET section above, which implies that high oil is, even now and under the surface, rippling outward and squeezing corporate profit margins.  Sure, history doesn’t repeat itself exactly.  But human nature itself and its reactions to events change very slowly.  I see parallels from the oil crisis of 1973 and the big bear market that followed with today.  Thus I plan to study the stock market and economy surrounding 1973-9174 period and get back to you with more.

 

For now all we need to know is the key going forward is OIL.  And since the price of oil is rising so fast now, that’s an indication of a peak getting closer and closer.  Be aware and be cautious!

 





Posted 05-21-2008 9:26 AM by Richard Schwartz