On Thursday the major U.S. stock exchanges shot up over 2.50%. This was based upon news that China’s exports and imports both rose in May, which is a sign that Europe’s financial problems have not halted the global recovery. Also, the U.S. Labor Department reported that unemployment claims fell by 255,000 in May, which is the largest decline in almost a year. I should note that some of the drop off in claims is due to individuals whose benefits have run out, but the drop in claims provides some hope that laid-off workers are starting to find jobs.
This morning stocks started off on a down note due to lower retail sales, which is a major component of the U.S. economy. However, they reversed course once the Reuters/University of Michigan consumer sentiment numbers were released and showed that consumer confidence grew to its highest level since January 2008. However, they are on course to end somewhat down today.
It is my opinion that the stock market is vacillating hourly based upon each nugget of economic or political news released. As I have mentioned in past commentaries, this is like the weather here in Kansas City. The morning starts out sunny, it is pouring rain by noon and you have clear skies by the end of the day. Believe me, you can be rolling dice when you plan a picnic or outdoor event. However, we know that there are four seasons and what the normal weather patterns are during those seasons.
Along these lines, I believe the huge swings in the stock market are the result of some large institutional and hedge fund traders, and not long-term investors. These short-term swings for the most part either induce fear or greed, but have no true meaning as to the actual long-term trends for the stock market or economy. As such, I am including some items that may have long-term implications for the stock market and economy in the following paragraphs.
Where are oil prices headed long-term?
Earlier this week, former Shell Oil President John Hofmeister appeared on Yahoo’s Tech Ticker and the following are some of his thoughts as it relates to future oil prices.
“If global demand is going to rise and we’re not going to see any increase in conventional oil (easy to obtain), and the unconventional oil (tougher to extract) which will come along behind it to supply world demand, it’s only going to be more costly.”
Mr. Hofmeister predicted that, if the world economy recovers at all, oil will surpass $100 a barrel either by the end of this year or during the first half of 2011. Also, he foresees oil prices staying above $100 a barrel and possibly climbing until an alternative source of energy begins to replace liquid fuel.
He believes that the production of easily obtainable or conventional oil may peak in the next 5 to 10 years, but there is plenty of hard to obtain and much more costly unconventional oil to offset this loss. However, we must be prepared for much higher costs in obtaining this unconventional oil.
Since his retirement, Hofmeister wrote a book titled “Why We Hate the Oil Companies: Straight Talk from an Energy Insider.” In the book, he points the finger at the energy industry, special interest groups and the federal government regarding who’s to blame for high energy prices and the nation’s unsustainable reliance on oil.
Oil is a necessity for the U.S. and all nations around the globe and prices almost assuredly will go higher in the years to come. This is why I have added natural resource mutual funds to client accounts and many managers of diversified stock funds are or will be considering oil companies for their portfolios.
Things to consider
Bob Doll, chief equity strategist for Blackrock and manages over $350 billion, stated this week that he believes that the stock market could rebound nicely from its current level by year-end. This belief is based upon the following:
- Stock valuations are cheap, and investors are very underweighted in stocks.
- Investor sentiment is very negative, which is often a great contrarian indicator (i.e., a positive for bullish investors).
- Interest rates are at historic lows and there is a lot of money on the sidelines.
- The global economy is recovering and corporate earnings will continue to trend higher.
If you would like to hear more of his comments, please click on the following link:
In addition to Mr. Doll’s comments, the Kansas City Star reported today that a recent survey by KPMG, LLP (an international CPA firm) noted that KC area leaders expect profits to rise this year compared to 2009. Overall the business leaders interviewed believe 2010 is an economic turning point and profits will improve.
Also, yesterday I spoke with an area bank professional who noted that he recently met with private equity investors from the east coast looking for businesses / companies to purchase. Based upon his interaction with them and local private equity investors, he believes there is a huge amount of money in private equity funds looking for investment opportunities. Similarly, the Wall Street Journal reported today that U.S. corporations have a record amount of cash on hand, which is something I have noted in a prior commentary. There is still a tremendous amount of cash waiting to be put to work, which can fuel long-term economic growth, jobs, profits, etc. Unfortunately, much of this money will not be invested until these investors / managers have a much better read on what the political and economic lay of the land will be in the U.S. and Europe.
As soon as we see some clarity of what lies ahead, especially as it relates to regulatory and tax policies, then these investors / managers can take what they consider strategic long-term investments. As the ole saying goes, “waiting is the hardest part.”
Quotes
“The best preparation for work is not thinking about work, talking about work, or studying for work: It is work.”
William Weld, statesman and attorney
“As one goes through life one learns that if you don’t paddle your own canoe, you don’t move.
Katharine Hepburn, actress
“It doesn’t matter what you are trying to accomplish. It’s all a matter of discipline.”
Wilma Rudolph, Olympic gold medalist
“A person should be like a watch – open-faced, busy hands, well-regulated, and full of good works.”
Roy B. Zuck, religious author
“Whenever you make a choice, ask yourself two questions: ‘What are the consequences of this choice?’ and ‘Will this choice bring happiness to me and to those who are affected by this choice?’”
Deepak Chopra, author
Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
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