March, Wednesday 28, 2012

DOW – 71 = 13,126
SPX – 6 = 1405
NAS – 15 = 3104
10 YR YLD + .01 = 2.20%

OIL +.13 = 105.54
GOLD – 18.50 = 1663.10
SILV - .55 = 32.14
PLAT – 16.00 = 1640.00

Oil prices fell. The United States, France and Britain are in talks about possibly releasing strategic petroleum reserves. The problem is not a lack of supply. Not now anyway. Maybe tomorrow, maybe next week, maybe this summer; not today.

The economy faces multiple risks: the Greeks might vote the technocrats out of office and tell the ECB to go to hell; Spain might default next and it would require a firewall that is bigger than the mother of all firewalls to avoid a cascading default; the Euro-banks hold twice as much toxic waste as their American counterparts, and their American counterparts still have extremely significant exposure to the Euro-trash; Japan's debt to GDP makes the southern European countries look fiscally conservative – oh yeah the country is radioactive; China might slow down and the slowdown might be worse than expected. And then there are a few problems here in the US: unemployment at 8.3% (or is that inflation?), unemployment around 18% if you count all the invisible people that nobody wants to count, and the banks are still behaving badly and with impunity. I get the feeling that something is going to break. I don't know what, but something is just going to stop working. Maybe it will be a breakdown in the electric grid, maybe the cyber-hackers will decide they want to close the virtual world for a while, maybe a big bank will fold and there will be a run on the bank – didn't Bernanke tell us that the modern banking system was like something out of the movie It's a Wonderful Life. How about a spike in oil prices?

I'm hearing that this might be the most serious global risk of the moment, but I'm not sure I believe it. The price of Brent crude recently peaked at $125 a barrel; the nationwide average for a gallon of gas is approaching $4. The reason is fear. The last 3 global recessions – looking prior to the small “d” depression of 2008 – the recessions started with a shock in the Middle East that led to a sharp spike in oil prices. (1973 Yom Kippur War, 1979 Iranian Revolution, 1990 Iraq invasion of Kuwait). And even in the summer of 2008 we saw oil peak out at $145 a barrel.

Israel seems to be ready to bomb Iran. The US would like to hold off, at least until after the election, but there's an election in Israel, and there's an election this year in Iran. If the Strait of Hormuz is shut down for 2 days, the price of oil would likely jump by $40 to $50 dollars. Anything more than 2 days and we'll see $200 or even $250 a barrel, and it will be quick. And then everything will stop.

And that's not the worst case scenario but it's pretty close. If the drums of war grow louder this summer, prices will rise and that will impede economic progress. And for Iran, the way to compensate for sanctions is with higher prices; they can sell less be for a higher price. It turns out that saber rattling is good for the bottom line.

And the basic question you have to ask is why we are still so dependent on foreign oil? Why do we allow our economy to be based on a commodity that is largely controlled by Iranian Ayatollahs? Are we incredibly stupid? Or is someone making money off this deal at our expense?

There is way too much speculation in the oil business. The mere possibility of $200 dollar oil puts an unnatural price on the market. It distorts the market. It doesn't reflect risk, it creates risk. So, I'm not really buying into the whole idea of a risk of war pushing prices. Iran is not completely stupid, in fact they are quite a bit smarter than most Americans would care to admit. But for the oil traders, and the oil companies, and the speculators – fear means money.

You buy a gallon of gas, you burn it up and you come back the next day. It would make too much sense to go to a green economy. The problem is that you would take the oil companies, and the oil traders, and the speculators, and the Iranians, and all these other interests – you would take them out of the picture. And that's not going to happen, not anytime soon, and the reason – well just follow the money.

Yep, I keep having this feeling that something is going to break down; we never really fixed the systemic problems that sprang forth in 2008, and so there is a nagging feeling that something is just going to stop; but until then, what we've seen and continue to see is that the economy is clawing back.

I can give you a list of companies that just hit fresh highs: Apple, IBM, Fortune Brands, JB Hunt Transport, Starbucks. Looking for a good dividend; check out JNJ or Microsoft or ADP. There is money to be made, but it isn't easy. It requires you to take a chance. It requires that you buy something. There are lots of people selling fear.

- Sinclair Noe