I hate non-stop, straight-up market moves.
They don’t give rational investors a good opportunity to add to their winning investments. They don’t give new-comers a chance to get in. And they attract too many fly-by-day speculators who can ruin the party.
Conversely, I absolutely love sharp corrections. The speculators are kicked out, reason is restored, and the groundwork is laid for a new, healthier rise.
That’s precisely what’s been happening this week in the oil market.
Indeed, recently I told you that the next stop on the oil express train would be $75 per barrel. But I also told you that, with each new phase in the energy bull market, the up-and-downswings would be getting wider and wilder. With yesterday’s oil price drop of $2.80, we got the downswing.
Now, in the days ahead, you’re likely to again hear the voices — from die-hard oil bears — saying that the “bull market in oil is over.â€
Is it? Not by a long shot!
First, because the oil market, although temporarily overextended, was — and is — showing no signs whatsoever of being a bubble.
A bubble is a straight-up, parabolic move with no interruptions. It almost invariably ends badly, with an equally straight down move.
In contrast, the pattern of a healthy, enduring, bull market looks totally different.
You get higher highs and higher lows. You get a rising zigzag formation on the chart, which, in the technical jargon, is called “right hand translation of price action.†In other words, creating a chart that’s a wide rectangle rather than a tall one.
The rise is not as steep. But it has far more endurance. Corrections come suddenly, but they go with roughly equal speed.
Which of these two patterns fits today’s oil market?
Clearly, the healthier, longer-lasting one. Oil’s ascent has followed a steady, upward zigzag, with relatively regular and healthy pullbacks along the way.
We see normal corrections that are consistently followed by renewed buying, repeatedly pushing prices higher.
In this pattern, even if the price of oil were to fall somewhat further, it would still be well within the confines of a correction.
Next question: Have the fundamentals for oil changed?
Hardly! The long-term supply-demand pressures in this market have taken many years to build. They would need many more years to unravel.
Indeed, the energy shortages we are witnessing today are rooted in a long series of decisions and events going back as far as the 1980s and 1990s.
They’re history. No one can go back and change them.
I’m talking about nearly three decades of neglected infrastructure and no new refineries built in the United States … nearly two decades of complacency about our country’s reliance on foreign oil … and almost a decade of investor euphoria with technology stocks that pulled away precious capital resources from the energy sector as a whole.
Tack on a major megatrend that virtually no one anticipated — the explosive return of capitalism to 3 billion people in Russian, China and India — and you clearly have supply-and-demand imbalances that are NOT about to be reversed in a single decade, let alone in a short week.
Bottom line: The fundamentals for higher oil and gas prices are solidly in place for years to come. The charts are bullish. The corrections? Gifts! Chances to get on board before the next big surge.
Inflation Surging,
Just as I Expected
Based on the latest data just released, producer prices in July rose 1%, twice as fast as expected. At that rate, you’re talking about 12% inflation — DOUBLE DIGITS!
Naturally, producer prices will not go straight up by 1% month after month. They, too, will zig and zag. But one thing should be abundantly evident: Inflation is rising. Period.
Don’t expect to see the full inflation story from the government, though. If you’re looking to the Consumer Price Index (CPI) as your gauge, you’re missing a big piece of the story.
Reason: The CPI is a manipulated statistic. Whether deliberate or not, the end result is that the government formulates the CPI to keep a lid on inflation-based government liabilities such as Social Security and welfare.
Tony told you this week about the obvious distortions in the housing component of the CPI.
Plus, the CPI also ignores the cost of taxation. Income tax, excise taxes, and property taxes — all big costs that the CPI conveniently ignores.
And there’s one more category that the CPI tends to mess up, related to “hedonic†adjustments.
Example: Suppose a box of cereal with a net content weight of 12 ounces costs $2.00. And suppose the manufacturers can no longer absorb rising costs of packaging and shipping … or of wheat and corn.
What do they do? Instead of raising the price, they decide to reduce the net content weight of the box to, say, 10 ounces. You now get 2 ounces less cereal for your money, or 16.6% less. That’s less QUANTITY, a clear form of inflation, and the government has tried to design adjustments to catch it.
The problem arises when the government tries to apply those adjustments to the improving QUALITY of goods. For example, let’s say you have a super-fast computer with more-than-abundant memory and storage space costing you $1,000.
And now let’s say the manufacturer introduces an upgraded model with double the memory and double the storage space, still for $1,000. Should that be measured as a price decline? Not in my book! To me, the upgraded computer gives me nothing I didn’t already have, and I’d be more than happy to buy the older model, if it were still available for sale.
But the government disagrees. Its adjustments assume that a rise in quality mandates a downward adjustment in the inflation measure. Result: More understatements in the CPI.
Ask anyone in the U.S. or Europe about China and Taiwan, and you will get a near-unanimous opinion that, someday soon, China will make a move to take back Taiwan.
Nearly a dozen business executives I talked to in Taiwan last month disagree. Each and every one is of the opinion that Taiwan and China will work out their differences peacefully, and do so in the next year or two. There will be no military conflict.
Chief reason: Way too much money at stake. China is a big investor in Taiwan, and Taiwan is a big investor in China.
Second reason: The threat of a military response from the U.S. is too great. There’s no way China would risk an outright sea-and-air conflict with the world’s largest navy and air force.
Third: Despite temporary interruptions, travel, communication and cultural ties between Taiwan and the mainland have been evolving steadily since the rebirth of capitalism in the People’s Republic.
Just today, Beijing announced it will accept applications for airlines to fly direct from Taipei to Beijing and Shanghai, through China airspace. They will be the first direct flights in nearly half a century.
To you and me, it may not sound like a big deal. But for the many thousands of business executives, diplomats and families who have been making the long detour to Hong Kong for connections, the ability to hop straight across is a landmark event.
End result: More investment in China. More growth. And more demand for scarce world commodities — such as oil and gold.
Although gold dipped over $4 yesterday in sympathy with oil’s pullback, it remains well above important support levels at the $425 to $430 level. Meanwhile, gold shares are holding firm.
My view: As long as gold holds above $425, it’s consolidating for a new move to much higher levels.
Meanwhile, gold demand is rising in virtually every country, and gold production has fallen over 10% in the last three years.
What’s next? It will be largely dictated by the next move in the greenback. That’s been the case pretty much all along, and I don’t see it changing anytime soon.
Right now, the dollar seems stuck in a trading rage. So it would be natural for gold to also trade in a sideways chop before staging its next run-up.
Gold shares, however, could rise sooner as investors anticipate the next move in bullion. So if you’re already fully positioned in gold shares, hold. If not, this could be a good time to buy.
Best wishes,
Larry Edelson, Editor
Real Wealth Report
Energy Windfall Trader
Energy Options Alert
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.
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