Saturday, June 7, 2008

Was the 400 point decline of Friday the long awaited capitulation?

After the close on Friday I could not help my self in asking the question that is in the headline of this post. I think the answer to my own question is no. We want our problems to be over and if you listen to both the presidential candidates they promise that they can solve our countries problems. I don’t really believe that any president has the power to solve the problems we are facing as a nation during their terms(s).

Let’s look at two issues oil and housing. The president could sell some of the oil in the strategic reserve and hope that it may bring down the price of oil. Not. There is about 750 million barrels of oil in the Strategic Petroleum Reserve. We use about 25 million barrel of oil a day in the United States, do the math. Divide the 740 million by 26 million and you roughly get about 30 days worth of supply. So, if a serious hurricane interrupts supply of our US produced crude supply what is the president going to do next month? If we have no reserve we have to go to the open market and compete with the rest of the world for supply. You really think that eliminating our SPR will being down prices for only a few days.

We have to do something about the oil problem, but again people don’t seem to be willing to admit that we can’t solve the problem over night regardless of what the president says. My wife showed me an article in the Newark Star Ledger on the decline in imperial America. The world has changed and more and more countries are competing with the United States for oil in the world market. Sharing the oil will mean that we have less for ourselves and we have to find our own and develop alternatives. If we really want to solve the oil problem I believe we can if we as a country are committed, much like the commitment to put a man on the moon. The achievement of getting to the moon took 10 years to complete energy Independence may take longer..

The one thing that both of these very serious problems have in common is that they can’t be solved over night regardless of who is elected president. We want to believe that the new president can fix all of our problem, but no matter how much we want to believe it "aint going to happen".This week it was reported that foreclosures were the highest in history on a year to date basis and the bankruptcy fillings were higher than just before the change in the bankruptcy laws. If the amount of inventory of older home for sale in the market is in excess of 12 months supply and the inventory of new homes for sale is just over 11 months, how are we going to solve the problem of excess housing over night?

All of the major stock market indexes closed on Friday down about thee percent for the day, and down between 7% and 8% on a year to date basis. As you can see from the chart above it has been a volatile six months. Many of the credit problems we thought were fixed in the first quarter are showing up again with vengeance. The problems of oil price, credit problems and housing are showing up in the markets in a negative way. The markets are stuck in a trading range. The Dow Jones seems to be stuck in the range form 11,800 to 13,000. My concern is that we may break the range on the low side and find ourselves in a new trading rang but a lower one.

Dan Perkins

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