At long last, we are having a pullback in global financial markets. Most investors would agree that it is long overdue. But now that we are in the midst of it, the Bears are out in full force. Ignore them.
“Libya Rebels Tighten Noose” read Friday’s headlines in the Wall Street Journal. The national media is devoting huge blocks of time and resources to cover unfolding developments in a country that supplies less than 2% of the world’s oil. And yet both retail investors and seasoned professionals have been dumping stocks in panic this week. Who says markets are efficient? Honestly, these events may provide the drama and justification for the sell-off, but for me I care only for the outcome.
Yesterday oil hit $103/BBL. For over a year my interim price target on oil has been $100/bbl. I promptly advised readers to take profits (see “Oil hits my price target”). If you missed it, you can read the entire story on my blog at afewdollarsmore.com.
The reasoning behind this sale is threefold: 1) contrary to the talking heads on television, I do not believe that these Middle Eastern rebellions will jeopardize global oil supplies and 2) I also expect that Saudi Arabia can and will easily make up any shortfall due to Libya’s suspension of oil exports. Right now that shortfall is roughly 700,000/bbl./day.
Finally, U.S. economic growth is moderate at best. On Friday, for example, GDP for the fourth quarter of 2010 was revised down to 2.8% following a 2.6% rate in last year’s third quarter. Those are less than half the growth rate the U.S. normally experiences in prior recoveries. Those numbers do not justify oil prices at existing levels. Today, oil is trading around $97/bbl. I expect that we will trade in a $5-6/BBl. range until there is some resolution in Libya and then prices should fall back.
Many investors were also surprised at the U.S. dollar’s behavior during this latest crisis. The dollar has historically been perceived as a “safe” investment when other securities are not. In the past, its value has risen in uncertain times–but not this time.
Instead, gold and silver spiked higher as investors worldwide preferred precious metals rather than the dollar as a place to hide until this crisis passes. Gold and silver still have room to run and neither has reached my price target.
Some market analysts argue that because this crisis is about oil, and not financials, the dollar provided little security since higher oil prices would clobber our economy. Economists claim that $100/bbl. oil will knock a full percentage point off U.S. GDP. They point out that the currencies of Canada, Switzerland and Norway did move higher, however. Two out of these three countries are oil exporters and all are more energy efficient and have higher interest rates than the U.S.
I’m not sure I buy that explanation in its entirety. I have written before that we are in a transition period in which the U.S. dollar is losing its preemptive place among the world’s currencies. In my opinion, it may still lay claim to being “first among equals” but over time the dollar will join with a basket of other currencies in providing a new global foreign exchange benchmark. This may simply be another sign that investor’s behavior is changing.
As for this pull back, we have already dropped 3% or so on the S&P 500 Index. My forecast was for a 3-5% decline, so maybe we have seen the worst of it, or we might still have a few more days next week before it is over. Either way, buy the dip.