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ETF Periscope: Markets Slip and Slide on an Oily Sheen

Posted on the 11 April 2011 by Phil's Stock World @philstockworld

by Daniel Sckolnik of ETF Periscope

“If all the economists were laid end to end, they’d never reach a conclusion.” — George Bernard Shaw

ETF Periscope:  Markets Slip and Slide on an Oily Sheen
The equity markets are poised for the next leg up of their recent bull run.

Oh, wait.

The markets are about to be slammed down back to the Stone Age.

Can’t be both, least not at the same time. So which is it?

Depending on what noise your ear happens to be attuned to, you might hear a convincing argument made on behalf of either of these positions. True, in regards to the markets, you can usually find data to support either side of the manger, whether Bull or Bear. But right now, the polarization appears to be even more extreme than is normally the case.

Perhaps it’s because of the sense that, despite both the Dow Jones Industrial Average (DJIA) and the benchmark S&P 500 Index (SPX) remaining within flirting distance of their two-year highs, the economic underpinnings of the economy just doesn’t seem to warrant such high stock price levels.

What underpinnings? On the national level, the U.S. still has near-double digit unemployment, with many economists saying that, factoring in the under-employed and those who have simply quit looking for work, the actual number is significantly higher. Also, the Fed’s continuous pronouncements that inflation is not really an issue only leads one to wonder if any of the members of that esteemed institution have bothered to go out food shopping or gas-pumping any time in the last several months. As for the housing market, which has always been a central component of U.S. economic health, it remains solidly in the doldrums, with even the strongest cheerleaders of that sector having a hard time producing statistics to support their optimism. 

What about on the macro-economic level? How’s that working out? It is a bit surprising that the equity markets seem to be so forgiving of the current crop of world events that are playing out around the globe.

For instance, is it really possible that the impact on Japan has already been fully factored into the equation? That seems a bit myopic, especially with enough radioactive-water seeping into the ocean to spawn a small family of Godzillas.

How about Egypt, Syria, Libya and Saudi Arabia? Does anyone who is paying attention seriously think that the pro-democracy movement that recently washed across the Middle East and North Africa has permanently calmed down? Agitation in Syria, in particular, seems to be gaining traction. And do even the Saudis have enough “stimulus” to spread to their countrymen to balm their concerns?

Of course, there is always Europe. It may seem understandable, relatively speaking, that what appears to be a small gaggle of countries queuing up to the window, asking for a little more debt-forgiveness, is not creating much of a wave either in the economic press or the world markets. After all, this has been going on for quite awhile now, hasn’t it? Still, it gives one pause to wonder why the potential of default on a rather large scale doesn’t grab a few more headlines than it has. Business as usual, maybe, and this might be one case of a high degree of systemic problems that have actually been factored into the current markets.

Back at the ranch, what about that rather thorny problem of inflation? If the average Joe or Jill are increasingly using up a heck of a large portion of their “discretionary” income on basics, how will they remain customers of so many of the non-essential products that the S&P 500 companies sell?

There may be a basic disconnect here that might not be priced into the markets right now. And while it is obviously possible that the disconnect may take a while to impact the markets in terms of affecting corporate bottom lines, it is also distinctly possible that a sudden epiphany among consumers that their dollar is shrinking will lead to a fast reversal in perception that the economy is improving, and therefore effect their current levels of non-essential consumption. After all, how many times can the average wage-earner stand to read how the top 10% of families in America control over 70% of the nation’s wealth, especially if their own budget is being stretched out like a medieval body upon an Inquisitioner’s rack?

The retail investor remains, though on a continually decreasing scale, a participant in the stock market. If they have to start selling their stocks to pay for gas, that might not bode well for the national economy. Why would it?

Of course, everyone can simply take all their money and put it in oil and gold. That kind of foresight would have made a lot of people happy and rich. But is it a bit late to catch that train? Is gold’s bubble about to pop? Has oil played out its current run?

True, gold keeps hitting new highs. Spot price for gold on Comex landed at the rather lofty height of $1,476 as of last Friday. But if the word “inflation” begins to appear with increasing frequency in conversations and the mainstream media, then gold will retain its glitter. It serves, as well, as a classic “flight-to-safety” vehicle, so that makes the metal a double threat, and it might be why gold could keep pushing into the land of new highs. Until, of course, it doesn’t. Every investment has the potential to bubble and pop. With gold, however, at least you are left holding something of value in your hand. Which is, of course, what makes gold as an investment something unique.

If you want to incorporate gold into your portfolio, the ETF of choice, at least based on market capitalization, is GLD (SPDR Gold Trust), which tracks the Gold Bullion Index. It is designed to track the spot price of gold bullion.

What about oil? Strong stuff. Crude appreciated over 4% last week, with front month contracts ending close to $113 per barrel. As mentioned above, the underlying factors that are boosting oil prices, or at least the excuse the speculators are using, lies in the continued uncertainty in the events unfolding in the Middle East. These conditions will remain for at least the near future, unless a sudden wave of peace and reasonableness simultaneously breaks out. So, there may be no reason for oil prices to tumble any time soon, particularly since the seasonal demand for gasoline, based on increased summer driving, is about to hit the U.S.

Now, if you decide you must get in on the oil action, and want to play it in ETF style, USO is the preferred vehicle, again based on market capitalization. USO (United States Oil Fund) tracks changes in the price of light, sweet crude oil, as measured by the changes in price of the futures contract traded on the New York Mercantile Exchange.

We are now about to move into Q1 2011 earnings season. If the general positive performance of last quarter is repeated, the Bulls may continue to power their way up the charts. However, if the point of disconnect has reached the corporate bottom line, and that becomes evident in earnings reports, then all bets are off, and the markets may find themselves doing some serious navel-gazing of a Bearish variety.

ETF Periscope


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