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August 31, 2005

All News Is Good News

Here we are observing the aftermath of a storm that could have a serious, negative impact on the U.S. economy. Gas prices are soaring above $3 per gallon because refineries in the storm area were offline for a day and a half, causing production to lag demand. Transportation costs are therefore soaring, which will adversely affect the cost of goods in our economy. People are panicking nationwide to fill their tanks with gas before gas stations run dry. Furthermore, last quarter's GDP number was revised downward, indicating that the economy is not as strong as some people have professed. Given all the turmoil, corporate profits are likely to be negatively impacted and consumer spending curtailed. The result? Equity markets rallied strongly.

All news is good news, and the reason all this calamity is perceived as favorable for the markets is because it may induce the Fed to stop raising rates. Should the frenzy subside and turn out to be a cold case of unreasonably induced panic, then the market will surely continue their rally since profits will be returning.

It seems to me that the public mania over oil price has reached a crescendo. Barring any geopolitical turmoil, our storm-induced price spike may prove to be an interim top. The next big surprise move in oil price may be downward, and in the near future "peak oil" may be defined as $70 per barrel.

Housing was particularly strong today in the market tradition of countering Greenspan prophecies within three trading days of his utterances. In any case, the markets were sitting at an important technical juncture, so an attempt to the upside was imminent. The next few days will tell whether the bears will have their day or another round of patience testing.

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