The Nvest Market Blog, our current thoughts on the Street

Bubble Forming - Weekly Market Summary

posted 05.27.2008 at 2:13 p.m. by steve

Last week concluded another chapter than can best be summarized by still higher oil prices, and a stock market that was mildly punished as a result. The S&P 500, Nasdaq and DJIA fell -3.5%, -3.3% and -3.9%, respectively (click here for details). At the sake of sounding like a broken record, it is energy prices that are primarily holding this market down. Until that situation is resolved, the financial markets are likely to remain in a state of unease. Since the market turned upward in mid-March, we have seen very light volume and index-hugging, signaling that those who have money to invest, arent sure where they want to put it. Theres not much conviction in the markets right now!

From the beginning of the year, we have seen frozen credit conditions thaw and markets beginning to look past the economic slowdown. Those two items have helped portfolios recover a majority of the decline experienced between November and mid-March. It is also interesting to note that while energy prices continue increasing, many other commodity prices have rolled over and fallen precipitously. Take note of nickel (down 28%) lead (down 50%) and others. The price curve of oil prices indeed are looking more parabolic with the passing of each day. This rocket ship lift-off price curve has been the trademark sign of a bubble. In every bubble case, prices have popped (this dates all the way back to the bubble that formed with Holland Tulips in 1637; the first recorded asset bubble). While the weakening dollar was blamed for oils ascent initially, is no longer a valid argument for why prices are at current levels - rampant speculation and greed are. Oil prices have advanced far above the level that would be required to offset the dollars decline. Consumers across the world are assuredly feeling higher oil prices; not just U.S. consumers paying with weak dollars (now, if China and other countries would just stop subsidizing oil and gasoline costs to remove the pain for their consumers, demand would really decline). As consumers here and abroad feel pain at the pump, global demand will fall. When it does, it is likely that we will see an unwinding of oil prices.

Aside from oil, we do see signs of economic conditions slowing down globally. That will assist in the containment of inflation. Bubbles have a way of going on longer than most people expect, but when they do pop, rest assured that price multiples will expand. At that time, it is important that investors already be in the game and ready to benefit from a quick upward valuation.

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Weekly Market Summary

posted 05.19.2008 at 11:14 a.m. by steve

Last week the markets managed to move higher once again, despite ongoing concerns (click here for details). So where are we now? According to economic indicators, we still have slightly positive economic growth, and unemployment claims are coming in lower than many economists have been expecting. Even inflation numbers have eased on a broad level. That last point is most intriguing because there isn’t an item in my budget that is getting any cheaper. Gasoline prices continue to rise in tandem with oil, and it is likely costing you about 40% more per fill up this year compared to last according to AAA. The housing climate continues to be marked by declining prices and high inventories. It seems logical to conclude that markets will continue to be soft, or that the recent rally is not sustainable.

What is interesting is that the recent up-market movement has been most notably led by small- and mid-cap companies. This type of action is notable because historically, small- and mid-sized company stocks have led the start of new cycles. That gives us at least some optimism that the advance started in mid-March is not just a head fake by the market, but is perhaps stronger performance is possible for a sustainable period of time. Again however, in order for that story to continue playing out, it is a common belief that energy prices must retreat, or at the very least stabilize. We inch ever closer to that psychological $4 per gallon price at the pump wherein most consumers will be seriously considering how they can reduce their consumption (if they have not already). As such, volume on the major markets remains low, indicating that investors are not convinced that we are at the beginning of a period of sustainable positive performance.

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Ongoing Oil Ascent - Weekly Market Update

posted 05.12.2008 at 2:06 p.m. by steve

Markets took back some of the gains in previous weeks as oil moved ever higher; the S&P 500, Nasdaq and Dow receded -1.8%, -1.3% and -2.4%, respectively. It seems as though news about the health of the consumer ebbs and flows almost daily. One day, we’re seeing the market move modestly higher due to slight increases in retail sales while just at the same time the closing price of oil eclipses previous highs despite a dollar that shows signs of strengthening.

Since late 2007, we have continually heard how the oil prices have been moving higher predominately due to a weaker dollar, yet when the dollar shows signs of strengthening, oil rarely recedes. It actually seems that what we have is a market that just doesn’t want to re-align itself with fundamentals. Supply is plenty, while demand continues to fall. Is economics 101 still being taught in our universities?

Whatever the case, the media continues on with their usual panic-based reporting; that is they report the bad, but ignore anything good. Additionally, speculative traders continue to flood the commodities futures markets with more and more cash (more money chasing the same barrels of oil), which does nothing to help ease the price. Year-to-date, the dollar value of daily traded contracts is approaching $140 billion; that figure compares to $86 billion last year, or $9.5 billion just 5 years ago! All that increase in the trading of oil has undoubtedly raised the price of oil substantially. Speculation is driving oil prices – not supply and demand. Like the game Jenga, the biggest and most frightful question in most people’s minds at this point is, how much higher can prices it go before something breaks? We continue to hope that this bubble pops soon.

Click here for details of last week’s markets

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