Last week I passionately expressed my concern over why the concept of a win fall profits tax, on anything, is a very bad idea. Apparently that commentary got your attention. I received some interesting comments - everything from concern over my blood pressure, to rousing applause, to how dare I use my commentary as a political platform. Of course I vehemently deny that I was doing anything more than showing my concern over a policy that I believe would lead us down a very dangerous economic path.
As for this week I'm feeling a little more subdued, but if you'll indulge me, I would like to stay on the oil topic for just another moment.
In a recent commentary, I made the statement that higher prices (of any given commodity) ultimately take care of higher prices. What essentially happens is that when the price of a commodity reaches levels that effectively causes consumers to reduce their overall spending (an economic slowdown), the demand for said commodity begins to decline, which brings the price down. While the commodity was previously soaring to record heights, production increased dramatically while the suppliers rushed to capitalize on the inflated price, thus increasing supply. We then end up in a situation where we have lots of supply, but slowing demand - causing the price of the commodity to fall. As the price declines, speculators unwind their positions, creating even more downward momentum.
This is how it works, and this is how it will continue to work as long as we allow it to - as long as the 'powers that be' continue to support the notion that markets over time, by themselves, will work to correct any and all imbalances. Imbalances that begin with fundamental phenomena - like strong global economic growth forcing the price of oil higher, which creates incentive for investors (and speculators as the case may be) to jump in, creating momentum that feeds on itself. We saw this in technology stocks in the late nineties, then real estate in the early two thousands, and now we seem to be experiencing it in energy.
Will the recent pullback in oil ultimately amount to a 'bursting of the energy bubble', driving prices further down? Or, is it simply a correction in oil's current bull market? Of course, no one, and I mean no one, knows for sure - just a few short weeks ago, when oil was sitting at $140+ per barrel, the majority of the 'experts' on CNBC were predicting $170+ by year's end. While today, pretty much all we're hearing is that the bubble has popped and, for the foreseeable future, prices will settle anywhere from $100 down to $70 per barrel.
As for stocks, at the moment it seems the declining price of oil and a strengthening U.S. dollar have resulted, near term at least, in a positive trend for the market. So have we seen the worst of this now ten month old bear market? Are we at the early stages of the next bull? Or, is it just a bear market rally? Of course no one, and I mean no one, knows for sure - just a few shorts weeks ago, when the Dow was sitting below 11,000, the majority of the 'experts' on CNBC were predicting that the worst was yet to come. While today, not all, but more than a few are telling us that indeed the worst is over, and its blue skies ahead.
Of course, yours truly is never going to make a near-term market prediction, but I will say that I'm not convinced at this point that the bear is done growling. Oh don't get me wrong, I'm sure he will lose his voice sooner or later, and then go into hibernation while the bulls take over. But it would be very normal at this stage of the game to see another "testing of the lows", as they say - particularly since we haven't experienced the "capitulation" that often spells the death of a bear market. Capitulation is what they have termed the big, high volume sell off that tends to occur at the end of a long decline in stocks. It's essentially what happens when the last group of nervous investors (the fence sitters) finally give up the ghost and take their losses - leaving just you and me holding stocks. With no one left to sell, the next orders will be a buys