It's official: According to Bloomberg, oil mania has now surpassed the dot-com mania that ended the year before the oil rally began!
Crude oil is now up 697% since November 2001 and has reached 28 record highs this year. The last time a similar pattern was seen in equities was eight years ago, when Internet-related stocks sent the Nasdaq Composite Index up 640 percent to its highest level ever, according to data compiled by Bloomberg and Bespoke Investment Group LLC.
The Nasdaq fell 78% off it's March 2000 peak and wiped out $6Tn of market value. The energy sector has, not coincidentally gained over $6Tn in value since 2001, up over 300% on average. According to Bloomberg: "Billionaire investor George Soros and Stephen Schork, president of Schork Group Inc., say oil is ready to tumble because prices aren't justified by supply and demand."
“There's nothing different between this mania, the dot-com mania, the real estate mania, the Dow Jones mania of the 1920s, the South Sea bubble and the Dutch tulip-bulb mania,'' said Schork, whose Villanova, Pennsylvania-based firm advises the Organization of Petroleum Exporting Countries, Wall Street firms and oil companies on the outlook for energy prices. “History repeats itself over and over and over again.''
I don't know how to create a layered chart but if you pull up this chart of the Nasdaq from mid 1997-2000 and put it next to this weekly chart of crude, you can clearly see history repeating itself, right down to the "W" pattern at the bottom just before the big bull run and the little consolidation halfway to the top. Of course the oil bulls will tell us that this time it's different and that we now face a "new paradigm" in global supply and demand but even OPEC now says that is nonsense.
Just because something is ridiculously priced, doesn't mean you can't find another round of suckers, PT Barnum said "there is a sucker born every minute" and there were only about a Billion people in the World back then so the energy bubble has 6 suckers a minute to feed off these days – thaf's a lot of suckers! We knew the .com bubble was out of control when someone gave $1Bn to a sock puppet and you know the price of oil is out of control when the headline in today's UK Guardian is: "Factories close, supermarkets empty and jets run out of fuel as truckers' strike bites." Oil is now at the point where commerce is shutting down – it is no longer affordable at these prices!
Gold has fallen off it's peak but oil has stubbornly refused to get real and the US Congress is taking steps to reign in the speculators as this has clearly gone too far. Canada moves a little faster than we do and , for the first time in Canadian history,gas companies were found guilty of fixing prices in four cities east of Montreal – and the Competition Bureau says it is investigating to see if Canadians in other centers are being ripped off. "The Competition Bureau's investigation into potential price-fixing in the retail gasoline market continues in other markets in Canada," the bureau said in a statement. The agency brought criminal charges against 11 companies and 13 people tied to those Quebec companies. Three companies pleaded guilty.
The bureau alleges the gas retailers — individual operators who ran their stations under the banners of Shell, Esso, Petro-Canada and Irving oil — called each other to agree on prices. An "overwhelming majority" of businesses in the markets involved are accused of participating in the alleged scheme. "It’s difficult to estimate how much the alleged price fixing cost consumers," said bureau commissioner Sheridan Scott. The charges result from an “extensive investigation” by the bureau from 2004 to 2007 involving wiretaps, searches and informants. The probe continues, Scott said, with investigations being carried out in other parts of Canada.
In a not unrelated story, XOM is getting out of the gas distributorship business!
As I mentioned in last night's wrap-up, it's difficult to call an exact top to oil or an exact bottom to the markets and we've been about 80% cash all year but I'm willing to start moving cash off the sidelines here and start committing more capital to our overall premise that oil WILL go down and the markets WILL go up.
It can't come too soon according to today's CPI Report which showed consumer prices spiking up 0.65% in May, a 7.8% annual run rate. The good new is, ex food and energy, we are still at a normal 0.2% and, while I think the ex food and energy number is useless, it does highlight the impact commodities are having and backs up my contention that the economy is down over this single issue – which means it can reverse on this single issue as well.
Japan gained 85 points this morning as the BOJ came out with a statement that they will hold rates steady. This is no surprise to us as I said earlier in the week Japan will actively look to push the dollar back over 110 yen. China continues to free-fall however, with the Hang Seng falling yet another 431 points but as a percentage (1.8%) it was better off than the Shanghai, which fell another 3.28% (10 points) on the day. The G8 is meeting in Osaka this weekend and currency issues are critical to both Japan and China as well as India, who need a stronger dollar to sell their goods to distressed US consumers.
Euope is flat ahead of our open but the big news over there is that it looks like Ireland has rejected the "Lisbon Treaty" which, as we discussed yesterday, will throw the entire EU into total chaos so it may not take much effort by the G8 this weekend to boost the dollar as the very continued existence of the Euro is now being caled into question!
We are up in pre-markets, which is quite a relief to me but, make no mistake about it, this is no endorsement of our economy, just an indication that, given the choices (Europe in chaos, Asia going down in flames) US equities just seem a little less sucky to global investors at the moment – who'd have thought?
Have a great weekend!
– Phil
