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No, I’m not talking about oil. Nor gas. Nor gold, silver, water, or any of the many natural resources I follow. I’m talking about the surging cost of money: interest rates. Until recently, it seemed the only interest rates that were rising were short term, and it was believed that the only reason was the Fed’s successive rate hikes. But starting in late August, long-term interest rates turned sharply higher as well, launching a new phase in the rate rise. Why is this happening? Simple. Inflation is also entering a new phase. Until just a few months ago, the inflation was contained primarily to the surging cost of commodities. Now, however, that cost inflation is beginning to spread throughout the economy. The problem: Bond investors hate inflation. To bond investors, inflation is the dirty, underhanded trick of governments and other borrowers who take your hard-earned, valuable money now … and then pay you back with devalued, debased and degraded currency later. Bond investors also hate waiting around while inflation starts ramping up. As soon as they get the first whiff of an inflationary storm on the horizon, they start the process of unloading their bonds.
So you shouldn’t be surprised that, over the past few weeks, a growing group of bond investors have been doing precisely that: Just since late August, long-term Treasury bond prices have fallen from over 118 to under 113 yesterday. Nor should you be surprised if this decline turns into a selling panic and a bond-price collapse. Indeed … If interest rates were already high, the room for a further surge might not be that great. But such is not the case. Long-term rates are still very near their lowest levels in a half century. If there were few debts in our economy that needed to be renewed and plenty of savings to cover them, it might also be a lesser concern. But alas, nothing could be further from the truth. The demand for money just to roll over existing debts is the greatest in history. Meanwhile, the supply of savings has been reduced to a pittance. Or … if we had reasonable assurance that energy prices were now going to move lower, there might also be some hope for lower money costs down the road. But there’s no such thing. Quite to the contrary, the rapid inflation in energy and a host of other commodities shows no sign of abating. No End to Bull Market in Oil Sure, a week ago, we saw a mini-panic in the energy sector. And yes, we may see some more of the same traders jumping out, selling short, thinking that the bull markets in oil and gas were over.
If you’re myopic, you might get that impression. But if you look at the big picture, you’ll see that oil prices continue to march higher with no change whatsoever in the long-term trend. All you see is a normal correction in oil prices. Just another, in a long series of minor, temporary pauses. Why? Because growth in energy demand is set to exceed growth in supplies for at least the next 25 years. Because 90% of the world’s oil fields have been discovered, and of those, 80% of them are rapidly being depleted. Because we are using oil faster than it can be produced. Because recovery efforts in the Gulf of Mexico are going to be a lot more time consuming than most analysts believed. Because 109 rigs have been destroyed by last year’s Ivan and this year’s Katrina and Rita … 90% of production in the Gulf is still shut down … hundreds of miles of undersea pipelines are busted up like pieces of tinker toys strewn on the Gulf’s bottom. So there you have it: A new surge in interest rates thats just beginning … plus a continuing long-term rise in energy costs thats already well under way, which leads to the next key question …
What in the Heck is All This About Rising interest rates have already clobbered banks, mortgage lenders, and other real-estate-related companies. Soon, it could hit big brokers, banks, insurers and other financial institutions. Meanwhile the damage to earnings from high energy costs is nearly everywhere: Home Depot, which you might think would be cleaning up in the aftermath of Katrina and Rita, has seen its share price slide 9.7% in a month. Wal-Mart’s shares, off 11% Proctor & Gamble, down over 5% in just the last four days! Honeywell, whose share price went nowhere for months, but has now plunged almost 8% in just three weeks! Then there’s General Motors and Ford, on a collision course with insolvency. MMM, Johnson & Johnson and other blue chip companies whose earnings are starting to get squeezed by rising energy costs and their share prices are starting to slide. And who can ignore the woes at United Airlines, Delta, Northwest, and now Delphi Corp., the largest bankruptcy in automotive U.S. history? None of this surprises me. Nor should it surprise you. Martin and I have been warning about this for several months. Most companies could not pass on the rising costs. So they had to absorb them. Profit margins collapsed. No Wonder the Dow
See that ugly plunge through the uptrend line established way back in 2003? To me, it’s an omen of much steeper declines ahead. My view: The bear market is back, and the Dow is heading much lower. First stop on the way down, near the 9,700 area … then, in the 9,050 area. Nasdaq:
The tech-heavy Nasdaq companies aren’t supposed to be sensitive to rising energy prices, or even rising interest rates. At least, that’s what Wall Street’s been saying for the last few years. Baloney! Whether it’s a computer manufacturer, a software designer, an IT services company, or whatever tech animal you want to talk about … rising interest rates and rising energy prices are a double whammy. Consider … International Rectifier, whose share price recently plunged over 15% in a single day … Skyworks, whose share price lost 21% in day, or … SigmaTel, another single-day loss of 15%! Indeed, overall, the Nasdaq is much weaker than the Dow, more vulnerable to sharper, swifter declines. Look. Even at the Nasdaq’s recent peak at 2,184 this past July, the tech-heavy index had gained back only 29% less than one-third of what it lost between its all-time monthly closing high of 4,698 in February 2000, and its low of 1,172 in September 2002. But in just two months time, since peaking in August, the Nasdaq has now given back about one-fifth of about three years of labored gains. Those are not the signs of a healthy market. Investors Getting Nervous And Rightfully So! A few months ago I wrote how investors and traders had become extremely complacent, lulled to sleep by abnormally low interest rates and a false sense of security.
You could see their complacency in the action in the Volatility Index, also known as the VIX: In July, it reached a 10-year low, the lowest since 1996. But now, the VIX is surging from that 10-year low. This denotes growing nervousness of investors and more selling ahead. Problem: Often, stock investors throw out the baby with the bath water. They sell the good with the bad. Or they sell just because everyone else is selling. That’s one of the reasons oil stocks are also going down right now. In fact, the energy exchange-traded funds Martin listed for you on Monday have all fallen below the approximate support levels he told you about …
Our recommendations: First, if you’ve been following my Real Wealth Report, you’ve been taking profits on your energy positions and you’re holding only a few core positions. Stick with them and keep your stop-loss orders in place. If you’re not getting my Real Wealth Report and you feel you’re overloaded in energy stocks, it’s time to lighten up. Another alternative: Buy some cheap put options on some of the most liquid energy ETFs such as XLE. But don’t let short-term fluctuations distract you from the long-term bull market in energy that I just showed you a moment ago. Second, if you havent done so already, get out of the stocks that are vulnerable to rising interest rates and high energy costs. Thats virtually every sector of the market. The obvious exceptions: Gold, oil and other natural resources stocks that will benefit from the rush of investment money out of most stocks and into hard assets. Third, if you own gold bullion, gold shares or gold mutual funds, stick with them! If you dont own any gold, its not too late to get started. My two favorite gold funds: Scudder Precious Metals (SGLDX) and The Tocqueville Gold Fund (TGLDX). Fourth, keep a large portion of your funds safe and liquid in a money market or Treasury-only money fund. Best wishes for your health and wealth, Larry Edelson P.S. In recent weeks, I’ve been warning you about a major, hidden explosion brewing in the financial markets. We didn’t know who or what it was, but now the news is out: It’s Refco, one of America’s largest futures brokers. They have severe liquidity problems. They have just ordered a moratorium on client withdrawals. They have many trading partners that could also get hurt. So watch out! This type of crisis could add considerable momentum to the market declines now under way. Plus it could set off a new flight to gold and other hedges. About MONEY AND MARKETS MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others. 2005 by Weiss Research, Inc. All rights reserved. |
Get ready for the surging cost of …
Not many people are talking about it yet. But I can assure you, they soon will be: The cost of one of the most essential items in the world is about to go through the roof, and you need to get ready! Urgently!
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