07-2-08 by dugan
I just ran across this pretty-scary rundown, by
a real live options trader, of the effect of oil prices on the U.S.
economy. Philip Davis sees oil’s price as unjustifiable, and a bigger
bubble than the dot-com boom, among other things. Yet it’s trashing the
value of U.S. markets. The whole piece is readable and worth reading.
Here’s the gist of it (with the author’s "self-portrait"):
I spent the weekend reading lots of different viewpoints on the
market and my conclusion is – nobody has a clue what’s going on so I
may as well stick to my guns. My position is: I think the markets are
oversold. I think that the woes of the world are entirely due to
commodity prices, particularly oil, which is sucking up 10% of our
Global GDP and 30% of the planet’s disposable income, taking much
needed money away from housing as well as goods and services. I think
the price of oil is greatly exaggerated due to speculation and I think
that the price is unsustainable. That is the crux of my bullish
premise so if oil keeps climbing here, I can’t be bullish.This isn’t about the dollar, the dollar was just 3% higher last November when oil was 42% lower. As I mentioned in today’s article on the dollar,
the entire S&P 500, when measured in the price of oil, is off 62%
from last June – that’s a pretty steep decline! The S&P’s value
peaked out recently against oil in Jan ‘07 at 26.88 barrels of oil to
the index (about 1,425/53) . On Friday’s close, you could get just
9.07 barrels of oil in excahnge for the index. That is a 66% decline
from the peak – isn’t that enough of a sell-off in the value of US
companies? If oil goes to $200 a barrel and the S&P falls another
20% we will achieve an exchange of just 5 barrels of oil to the index,
another 40% effective decline in the S&P and we will have cut the
value of our market by 80% to OPEC, who use oil to create their wealth.
That’s
how bad this situation is folks yet you allow it to go on every day
that you don’t do something about it, don’t make other people aware,
don’t ask your elected leaders to act. This is your country that is
being sold down the river, one barrel at a time while this
administration tells you that more drilling, not less consuming, is the
answer. This country does need to become energy independent but it is
much faster to conserve. In WWII, rationing cut our use of fuel by 25%
almost overnight. I’m not saying we need to ration, but we sure need
to start getting rational!