Monday, February 27, 2012

$4.00 Gas Should Make the Bulls Nervous

Before I begin let me apologize for going "GALT" over the past several months.  Life has been chaotic between work and my family so I have had zero time to write as a result.  Let me just say that I have greatly missed posting my musings around the financial markets on here on a daily basis.  I have also missed the intelligent insights that many of you share in the comments section.  I am thinking things might quiet down here in a couple months so I hope to be posting on a more regular basis in the near future.

Anyways, I just wanted to hop on and share my thoughts around the massive rally in both the stock and bond markets.

My first thought is both stocks and bonds shouldn't be rallying at the same time.  Money usually moves out of bonds and into stocks or visa versa.   This is just one of the disconnects out there right now that just doesn't make sense.  That being said, the rally has been quite impressive.

In my view, the main reason both stocks and bonds are rallying at the same time is because the central bankers of the world are throwing money out of helicopters at an unprecedented rate.  In fact, I bet if you stuck your arm out the window of your house right now you could probably snag yourself a $20 spot.

Europe has joined the QE party with it's LTRO(Long-Term Refinancing Operation).  Different name same game(money printing).

As a result, the credit markets/speculators are now front running the ECB's LTRO and gobbling worthless PIIGS bonds that offer nice yields knowing that the ECB has their back.  Does this game sound familiar????  Treasuries and QE ring a bell?

This has temporarily forced the PIIGS bond yields to collapse which has for the time being taken European Financial Armageddon off the table.  

A Warning for the Bulls:

It's now "risk on" in the equity markets now that the CB's have put the pedal to the metal on the money printing parade.  Low rates in the US have further fueled the markets as investors are forced into stocks in a desperate attempt to find yield.  As a result, it's been a great time to be a bull.  However, as we saw last year and in 2008 there is a problem when you drop money out of helicopters.

The problem of course is inflation.  Oil is a perfect example and I wanted to take a look at a few charts to help explain my point.:

Lets first take a look at Oil over the last 12 months:

Now let's compare it to the S&P 500 during the same period:

My Take:
As you can see above, oil has soared as a result of the "CB double whammy" of the The Fed coming out and promising zero rates until 2014(ridiculous) combined with Europe joining the printing parade via the LTRO.   To be fair, let me also add that Iran has also helped juice the oil markets.  However, in the end does it really matter?  The cause can be debated but the result is the same.

Consider this a warning to those long equities.  We are now nearing the highs that we saw late last spring when we peaked at around $114.00.  Oil closed at around $109 yesterday.

The economy basically came to a screeching halt once oil got up to these levels.  Consumers were able to hang in there for a few months with $4.00 gas but in the end it was too much.  Stocks plunged over 20% in July and August as the consumer retrenched.

The Bottom Line

Is it different time?  I highly doubt it.  Our economic recovery is still a fallacy.  Unemployment is down but it's only because the numbers have been fudged.  You no longer "count" anymore when you run out of unemployment benefits.  You just roll out of the system and you are considered "forgotten" by our government.  How can anyone take the employment rate seriously when they are pulling these stunts?

Some people have been able to find jobs but they aren't as well paying as the ones they had before.  Wages are still down from over a decade ago.  As a result $4.00 gas HURTS and HURTS bad.

Remember folks:  Our debt ridden consumers can no longer gobble up their new I-phones when it costs $80 to fill up the tank.  High oil costs also kills corporations because their input costs go through the roof.  This will do wonders for earnings(scarcasm off).

We'll see how this plays out but you can thank the ECB and the Federal Reserve for these high oil prices.  Bernanke always thinks he can have his cake and eat it too by printing more money.  The reality is the markets always punish you when you go too far. 

There are lots of other things that I would love to discuss but I am out of time for today.  Greece is still obviously not fixed but I'll save that one for another post.  

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