Gas Prices Need to Fall Further

Posted by Patrick O'Connor on 8/11/08 10:42 am

Gasoline prices are down only 7% from their highs, and nine states are still paying more than $4 per gallon for regular.  They need to come down a lot more if consumers are going to get some immediate relief.  Oil is down about 23% from its high, so gasoline should continue to fall if crude does not rebound.

Oil demand in China dropped significantly in July year/year.

Conflict in Georgia threatens oil supplies.

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McDonald’s Dollar Menu Could Soon Be Gone

Posted by Patrick O'Connor on 8/7/08 10:03 am

Not long after posting second-quarter profits that exceeded expectations, McDonald’s announced it is considering raising prices and eliminating its highly popular Dollar Menu.

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Economic Recession Looms

Posted by Louis Navellier on 8/7/08 9:43 am

Now that the government’s stimulus checks have been exhausted, retailers are getting a dose of reality. Of the 36 retailers that have reported July sales figures, 22 announced disappointing results. Even Wal-Mart missed its target. Costco had a good month, but it had to sacrifice operating margins. The bottom line is a recession is looming now that consumers are cutting back.

See July Retail Results.

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Consumers are an Unhappy Bunch

Posted by Patrick O'Connor on 6/24/08 1:36 pm

The Consumer Confidence Index sank 7.7 points in June to 50.4, a 16-year low, and well below the 56.0 consensus.  The details were gruesome: current conditions index fell to 64.5 from 74.2 and expectations index dropped to 41.0 from 47.3.  The latter is the lowest reading since the survey began in 1967, and is “consistent with consumption falling at a 3% y/y rate,” said Ian Shepherdson at High Frequency Economics.  The worst quarter ever was -1.5% in Q4 1974.

The bottom line is the tax rebate checks are getting spent, but they’re failing to cheer up consumers as food and gas prices go through the roof, and home prices continue to fall rapidly.  The recent declines in the stock market are not helping either.

The Fed will not raise interest rates anytime soon.

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Analysts Say Gasoline Prices Would Fall to $2 if Congress Acted

Posted by Patrick O'Connor on 6/23/08 1:33 pm

Election-year hyperbole may have hit higher highs today when four analysts told Congress that retail gasoline prices would drop to $2 and oil to $65-$70 if Congress would pass new laws aimed at speculators in the energy markets.

MarketWatch

The price of retail gasoline would fall by half, to around $2 a gallon, within 30 days of passage of a law to limit speculation in energy markets, four energy analysts told Congress on Monday. Testifying to a House Energy and Commerce Committee subcommittee, Michael Masters of Masters Capital Management said the price of crude oil would drop closer to its marginal cost of around $65 to $75 a barrel, about half the current $135. Fadel Gheit of Oppenheimer & Co., Edward Krapels of Energy Security Analysis and Roger Diwan of PFC Energy agreed with Masters' assessment at the hearing. Other witnesses say speculators aren't a major factor in oil prices, however.

Tell us your opinion. Do you think limiting speculators in the energy markets would drive prices down by 50%?

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Rising Oil Prices Series: Part VI

Posted by Patrick O'Connor on 6/19/08 1:51 pm

This post contains Navellier top-ten energy stock holdings.

This article is the sixth and final installment of a multi-part series about rising oil prices. In this column, we’ll review the issue and discuss the outlook for oil prices. Read parts I, II, III, IV, and V.

Oil, oil, toil and trouble

When oil prices skyrocket as they have—from $60 a barrel in 2007 to more than $130 a barrel today, recording highs on nine of the 22 trading days in May 2008—it’s natural to assume that something or someone must have caused it, and to look for a culprit.

As a result, consumers and industry watchdogs have started taking names. Some say the world is simply running out of crude oil. Some blame developing countries such as China for increasing demand. Others say the big oil companies are taking advantage of high demand to manipulate prices. For a while, the weak U.S. dollar was targeted. Most recently, speculators have been on the hot seat.

All of these factors are likely playing a part in rising oil prices. Demand is clearly growing. It’s no surprise that oil companies want to increase their profits; they are, after all, in the business of making money. And, as the value of the dollar has fallen and inflation has risen, speculators have certainly flooded the market with buy and sell orders.

We may not know exactly why oil prices are rising, but we know they are, and they will probably continue to do so. You’d think that for $130 a barrel, oil companies would want to explore and produce more, but their caution is understandable. Oil prices can swing wildly—just a decade ago they were less than $10 a barrel—and no one wants to make an investment that won’t pay off. After all, the capital costs of getting oil out of the ground have increased drastically in recent years, partly because of rising steel prices. In February 2007, ExxonMobil and Qatar Petroleum cancelled plans for a $7 billion plant that would convert methane into synthetic diesel in Qatar—in part because of rising steel and aggregate rock prices and cement shortages.

So, what will happen to the stock market if oil prices continue to rise? Oil prices have increased more than 450% in the past five years, rising from around $25 a barrel in 2003 to a high of $139.89 recently. If they increase by the same amount in the next five years, they’d exceed $700 a barrel in 2013. That would make oil unavailable to much of the world, and as a result, significantly decrease economic activity. And that would almost certainly lead to extreme stagflation—an inflationary period accompanied by rising unemployment and lack of growth in consumer demand and business activity. Almost certainly, the markets would not perform well at such a time.

But much could happen to change things. Higher crude oil prices could dampen demand or drive increased supply, which could stabilize or reduce the price of oil. For example, the profligate use of oil in the U.S. automobile sector could be reduced by the production and use of more energy-efficient cars. But many industry experts consider this unlikely, at least on the demand side. The benefits of converting to energy-efficient cars may be overstated: while some hybrid cars reportedly get up to 50 miles per gallon, others get as low as 20. And even if hybrid cars could change the world’s dependence on oil, it would take 17 years to completely refresh the U.S. automotive fleet, according to the Hirsch Report.

Additionally, we have to consider the possibility that oil prices just aren’t affecting the global economy the way we’d expect them to. An old rule of thumb says that every 10 percent rise in crude oil prices will lead to a 1 percent drop in global growth—but that’s not happening today. The National Institute of Economic and Social Research—an independent economic research organization in the United Kingdom—says U.S. economic growth is only 0.7 percent less than it would have been without the past year’s rise in oil prices. Growth in Europe and Japan is only 0.5 percent less, and growth in the United Kingdom is only 0.25 percent less. Why? Because economies are less sensitive to oil prices than they used to be, according to the Institute. The amount of oil, coal, and gas needed to produce an increase in gross domestic product has halved since the 1970s, thanks to greater energy efficiency and the shift away from heavy manufacturing. Plus, labor markets have become more flexible, with workers accepting temporary reductions in real wages when energy prices rise instead of demanding increased compensation.

So, how high will crude oil prices go? No one knows for sure, but in a February 2008 report, Deutsche Bank predicted that they may peak at around $150 a barrel. Daniel Yergin, president of Cambridge Energy Research Associates, also thinks $150 is likely. That, suggested Deutsche Bank, may be the “magic” price that destroys demand to the point that we could live with a world supply of 100 million barrels per day, which, as noted earlier in this series, is what many industry executives view as the maximum supply available.

In any case, we’re bullish on oil stocks in the near-to-medium term. We don’t think the oil bubble will burst until there’s more evidence that both demand and supply are responding to higher prices. That becomes more likely as prices rise, but it will almost certainly take time, partly because much of the world’s oil is purchased on long-term contracts, and thus does not reflect current market prices.

Moreover, there are a number of other industries that could be positively impacted by today’s rising oil prices as well. For example, new models of hybrid cars use lithium-ion batteries that are lighter and more powerful than the old batteries. We read one estimate that a Toyota Prius with a lithium-ion battery can get 80 miles per gallon of gasoline. So, one might consider investing in companies that make lithium or lithium-ion batteries.

Navellier Top-Ten Energy Stock Holdings

Vantage Portfolio
Petroleo Brasileiro (PBR); 1-yr Chart; Profile
Sasol Ltd. (SSL); 1-yr Chart; Profile
Encana Corp. (ECA); 1-yr Chart; Profile
Cameron Intl (CAM); 1-yr Chart; Profile

Power Dividend Portfolio
Noble Energy Inc. (NBL); 1-yr Chart; Profile
Devon Energy Corp. (DVN); 1-yr Chart; Profile
XTO Energy Inc. (XTO); 1-yr Chart; Profile

All Cap Core Portfolio
Occidental Petroleum Corp. (OXY); 1-yr Chart; Profile

We want to hear your thoughts!  Comment to this post by clicking the ‘comments’ link below.

Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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Rising Oil Prices Series: Part V

Posted by Patrick O'Connor on 6/18/08 8:58 am

This post contains Navellier top-ten energy stock holdings.

This article is the fifth installment of a multi-part series about rising oil prices. In this column, we’ll discuss how a weak U.S. dollar and speculation may be contributing to rising oil prices.  Read parts I, II, III, and IV.

Are speculators artificially manipulating oil prices?

Many industry experts believe the traditional forces of supply and demand cannot fully explain recent oil prices increases—and point the finger at a relatively new phenomenon, the impact of the speculator on the global commodities markets.

Global demand for oil has clearly been increasing, as we explained in Part III of this series. And the world’s crude oil supply is certainly limited, as we explained in Part IV.

That said, there are still considerable global inventories of crude oil. According to an April 2008 report from the Energy Information Agency (EIA), Organization for Economic Cooperation and Development (OECD) countries had 2.54 billion barrels at the end of the first quarter of 2008—22 million barrels more than the previous five-year average. And, the EIA projects that inventories likely will remain near average levels for the rest of the year.

Thus, say critics of the supply and demand theory of rising global oil prices, other factors must be examined—and one of those factors is speculation by institutional investors such as large financial institutions, pension funds, hedge funds, and sovereign wealth funds.

Speculation is investment in a commodity by an entity that does not “produce or use the commodity, but risks his or her own capital trading futures in that commodity in hopes of making a profit on price changes,” according to the Commodity Futures Trading Commission (CFTC). In other words, speculators don’t buy oil; they buy futures contracts on oil, and as the delivery date approaches, they sell the contract to someone who actually uses the oil.

What’s driving speculation? First, many institutional investors are awash in cash due to lower interest rates and the virtual shutdown of the U.S. asset-backed commercial paper market, and they have to park that cash somewhere. In addition to letting speculators profit on rising prices and hedge against inflation, speculation on oil has a unique advantage over speculation on some other commodities: it hedges against the weak U.S. dollar. Crude oil is priced in dollars, meaning that the more the dollar slumps, the more attractive dollar-denominated oil contracts are to foreign investors. As a result, speculators have been pouring billions of dollars into futures contracts on crude oil.

How much? The Energy Hedge Fund Center says 600 hedge funds were trading oil in late 2007, up from just 180 in 2004. And oil futures contracts on London’s Intercontinental Exchange rose from $1.7 trillion in 2005 to $8 trillion in 2007, according to the U.S. Securities & Exchange Commission. (Data from the New York Mercantile Exchange, NYMEX, was not available).

So, how much is speculation driving up oil prices? It’s virtually impossible to say. But, in June 2006, when oil traded in futures markets at around $60 a barrel, a U.S. Senate investigation reportedly estimated that $25 of that $60 was the result of speculation—putting the “real” price of oil at around $35 a barrel, about 58% of the trading price. Extrapolating that to today’s market, where oil is trading at around $130 a barrel, it should be closer to $75.

So why not ban speculation? First, it serves a purpose: it reduces the risk to the producer. To understand how, it may be easier to consider an agricultural commodity, such as wheat. Without speculation, farmers might have a hard time finding someone to buy their crop in advance—what if there’s a drought or a flood? With speculation, they can transfer the risk to another party, the speculator. Sometimes the speculator makes money—but sometimes s/he doesn’t. The point is the risk is transferred to a party who is able to accept it, and that makes the markets more efficient.

Additionally, banning or limiting speculation would be difficult given that the oil market is global. If you ban trading on the NYMEX, speculators could still trade on the London exchange, or the newer Dubai exchange. If you shut down all exchanges, traders would create an ad hoc market. And that would make the situation even worse, because with a unified market like the one we have today, everyone can see what oil is trading for. On a closed market, there would be little transparency and major price swings would likely result.  Go to Part VI.

Navellier Top-Ten Energy Stock Holdings

Vantage Portfolio
Petroleo Brasileiro (PBR); 1-yr Chart; Profile
Sasol Ltd. (SSL); 1-yr Chart; Profile
Encana Corp. (ECA); 1-yr Chart; Profile
Cameron Intl (CAM); 1-yr Chart; Profile

Power Dividend Portfolio
Noble Energy Inc. (NBL); 1-yr Chart; Profile
Devon Energy Corp. (DVN); 1-yr Chart; Profile
XTO Energy Inc. (XTO); 1-yr Chart; Profile

All Cap Core Portfolio
Occidental Petroleum Corp. (OXY); 1-yr Chart; Profile

We want to hear your thoughts!  Comment to this post by clicking the ‘comments’ link below.

Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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Rising Oil Prices Series: Part III

Posted by Patrick O'Connor on 6/12/08 11:08 am

This post contains Navellier top-ten energy stock holdings.

This article is the third installment of a multi-part series about rising oil prices. In this column, we’ll review how increasing demand is helping drive up prices. Read parts I and II.

Increasing demand drives crude oil prices higher

Traditionally, in a free market, the law of supply and demand has kept the price of any good at a state of “equilibrium,” where producers are selling everything they make and buyers are getting everything they want. Why then, in the case of crude oil, have prices been rising so consistently—for so long?

First, let’s review how the law of supply and demand works. When there’s a state of disequilibrium, the market tends to correct itself. When supply exceeds demand, producers try to sell their excess supply, often by reducing prices. But when demand exceeds supply, consumers compete with each other for limited resources, bidding up the price of the goods and encouraging producers to create more. Eventually, this takes prices back to equilibrium.

Today, we are clearly experiencing a state of disequilibrium, with demand exceeding supply and prices increasing in response. At root, however, could be rising demand or declining supply. Which is it?

Many experts argue that the problem is clearly continuously rising demand. We’re an oil-dependent world. According to the Energy Information Administration (EIA), if current energy laws and policies remain unchanged, from 2004 to 2030 total world energy consumption will grow by 57 percent. And most of that energy will come from oil. World oil consumption is projected to grow by 1.2 million barrels per day in 2008, from around 86 million barrels per day today to more than 87 million barrels per day by the end of the year. Moreover, that pattern should continue, taking us to 97 million barrels per day in 2015 and 118 million barrels per day in 2030.

So, who’s using all that crude oil? It’s not whom you might think. In its April 2008 outlook, the EIA estimated that U.S. crude oil consumption will decline in 2008 by about 190,000 barrels per day as a result of the economic slowdown and high prices. After accounting for increased ethanol use, the agency says U.S. crude oil consumption will fall even more, by 330,000 barrels per day. While that’s a small decline—around 1% of the 20.7 million barrels per day the country used in 2007—it’s not causing world demand to increase.

What many industry experts believe is causing world demand to increase is usage in emerging markets, such as China and India. In mid-2007, China and India were the world’s most populous countries, with 1.318 billion and 1.132 billion people, respectively, according to the non-profit Population Reference Bureau. By 2050, they’re expected to have 1.437 billion and 1.747 billion people, respectively. In order to support these skyrocketing populations, the countries are becoming more industrialized, meaning they’re using more technology and thus more crude oil. China is also said to be stockpiling crude oil and oil-based products in anticipation of additional transportation and power needs during the 2008 Summer Olympics.

As a result, almost all of the projected world oil consumption growth in 2008 is expected to come from countries that are not part of the Organization for Economic Cooperation and Development (OECD), primarily China, the Middle Eastern oil-producing countries, and Russia, as well as Brazil and India. And that’s a trend that should continue: As noted in Part II of this series, the EIA has said that total energy demand from 2004 to 2030 is expected to increase by 24 percent in OECD countries—but 95 percent for non-OECD countries.

So, if crude oil prices are rising because demand is increasing, why aren’t producers increasing supplies—which, as explained earlier, would take the market back to equilibrium? Partly because the law of supply and demand doesn’t work flawlessly in a market that isn’t totally free—which you could argue is the case today due to the influence of the Organization of Petroleum Exporting Countries (OPEC), a group of 12 countries formed to maintain the price of oil at a level that is beneficial to its members.

In 2006, OPEC—which produced 35.6% of the world’s oil as of March 2008—started to reduce production to stem a fall in prices. Less OPEC oil in the market helped fuel a rally in prices. But today, despite the clear rise in demand, OPEC is declining to increase production, at least not enough to bring down prices. While many nations led by the International Energy Agency have urged the group to pump more oil, it says there is enough in the market, and has declined to do so. Indeed, recent statements by OPEC suggest the group has no plans to review its output until its next scheduled meeting in September 2008.

So, is OPEC right, in which case other factors—perhaps a weak U.S. dollar and speculation—must be driving up prices? Or, is OPEC guilty of price-gouging? In the next installment of this series, we’ll discuss this issue in more detail by examining how limited supply is influencing oil prices.

Navellier Top-Ten Energy Stock Holdings

Vantage Portfolio
Petroleo Brasileiro (PBR); 1-yr Chart; Profile
Sasol Ltd. (SSL); 1-yr Chart; Profile

Power Dividend Portfolio
Noble Energy Inc. (NBL); 1-yr Chart; Profile
Devon Energy Corp. (DVN); 1-yr Chart; Profile
XTO Energy Inc. (XTO); 1-yr Chart; Profile

All Cap Core Portfolio
Occidental Petroleum Corp. (OXY); 1-yr Chart; Profile

We want to hear your thoughts!  Comment to this post by clicking the ‘comments’ link below.

Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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Rising Oil Prices Series: Part IV

Posted by Patrick O'Connor on 6/12/08 10:58 am

This post contains Navellier top-ten energy stock holdings.

This article is the fourth installment of a multi-part series about rising oil prices. In this column, we’ll discuss why supplies might be dwindling. Read parts I, II, and III.

Are crude oil supplies dwindling—and why?

Many industry experts believe that today’s rising oil prices are the result of sharply rising demand—but others argue that demand is not increasing enough to drive prices to the levels we’re currently seeing, meaning that supply must be the issue.

Is it demand—or supply?

As we explained in Part III of this series, we’re currently experiencing a state of disequilibrium in oil prices—and the problem could be supply or demand. But which is it?

In Part III, we talked about demand, however many industry experts argue that supply limitations are the problem. If demand were the problem, they say, higher prices would encourage oil companies to produce more crude oil. In the past few years, global output of crude oil has hovered around 85 million barrels per day despite skyrocketing prices. Something is clearly different—and the most likely culprit is supply.

There are a number of reasons that crude oil supplies could be limited, some geological and some economic. In this column, we’ll examine them.

Crude oil may be peaking, geologically speaking

For decades, geologists have speculated that when half of the world’s original crude oil has been extracted, getting the other half out of the ground will become increasingly difficult or even impossible—a state often referred to as “peak oil.”

In the past, industry experts have argued that the turning point is decades away, since much of the world’s conventional crude oil supplies are untapped; unconventional supplies, such as tar-sand pits, have yet to be fully explored; and constantly improving technologies are allowing us to dig deeper and extract more than ever before.

But now, many of these once-optimistic experts are seeing the glass as half empty. As noted in Part I of this series, in 2000, Sadad I. Al Husseini, former head of exploration and production for Saudi Aramco, the Saudi Arabian state-owned oil company, tallied up some numbers he’d been gathering since the mid-1990s and determined that crude oil output would level off around 2004, plateau for a maximum of 15 years, then begin a gradual but irreversible decline.

We may already be in this period of decline. According to National Geographic, world output from existing fields is falling by as much as 8% a year. That means oil companies must add seven million barrels a day of capacity just to keep pace with current demand—and even more if they’re going to meet growing demand.

Whether you believe we’ve reached peak oil or not, it’s clear that some geological limitations are emerging. The volume of new deposits has fallen each year since the 1960s despite technological advances, such as seismic imaging, which allows an oil company to see deposits deep below the Earth’s surface.

That may be because the world’s largest crude oil fields have already been discovered. Until the 1970s, eight fields producing between 500,000 and one million barrels a day were discovered, according to Matthew Simmons, a veteran oil industry banker. During the 1970s and 1980s, only two were found. Since then, only one has been found: the Kashagan field in Kazakhstan.

At the same time, crude oil output from the world’s largest deposits is declining. Two decades ago, around 12 fields produced more than one million barrels a day. Now only four fields do, including Saudi Arabia’s Gharwa deposit, Mexico’s Cantarell deposit, and Kuwait’s Burgan deposit. And the latter two are already showing signs of declining production. In November 2005, Kuwait Oil Company lowered its estimate of Burgan production from 1.9 million barrels a day to 1.7 million. And from January 2006 though February 2007, Cantarell—the second largest deposit in the world, which reportedly produces one of every 50 barrels of crude oil on the world market—lost one-fifth of its production, with daily output falling from two million barrels to 1.6 million.

That’s a problem, because nearly a quarter of the world’s daily crude oil output comes from the world’s 20 largest fields, according to Wood Mackenzie, a Scotland-based consulting firm. As a result, oil companies are being forced to seek out smaller deposits. But, smaller fields are, well, smaller—and it’s harder to extract crude oil from them. To illustrate, last year’s celebrated discovery of the Tupi deposit—located in the Santos Basin off of Brazil—was called the biggest find in seven years. At an estimated five to eight billion barrels of crude oil, it’s about twice the size of the Roncador deposit, previously Brazil’s largest. But, to put that in perspective, it’s about one-fifteenth of the original estimated size of the Ghawar deposit, which was reported to hold about 120 billion barrels at its discovery in 1948.

As a result, James Mulva, CEO of ConocoPhilips, has said that by 2010 nearly 40 percent of the world’s oil supply will have to come from fields that have not yet been tapped—which are likely to be small. As a result, he and Christophe de Marger, head of French oil giant Total, have predicted that crude oil production will stall at 100 million barrels a day.

Political tensions limit access

Edward Morse, an oil expert who was formerly with the U.S. Department of State and now analyzes the industry for Lehman Brothers, says political obstacles may be more significant than geological issues in dwindling oil supplies. That’s because many of the world’s largest crude oil reserves are located in countries which do not allow foreign investors to find and develop deposits.

For example, Iran, Iraq, and Saudi Arabia are off limits to foreign oil firms. Other countries, such as Mexico, Russia, and Venezuela, will not allow foreign investors access to new fields or the freedom to further develop existing ones. In many cases, that’s hurting their production. According to the International Energy Agency, in the first quarter of 2008 Russian output fell for the first time in a decade. Production averaged about 10 million barrels a day, a 1 percent drop from the first quarter of 2007.

In other cases, political unrest temporarily disrupts supply. For example, crude oil from Nigeria, the world’s tenth largest reserve holder and producer, according to the 2006 Oil and Gas Journal, has declined since February 2006 because of rebel attacks on the country’s oil industry.

OPEC manipulates supply

The Organization of the Petroleum Exporting Countries (OPEC) was founded in 1960 to maintain the price of oil at a level that is beneficial to its members. Today, it consists of 12 countries (plus Indonesia, which is only scheduled to be a member through 2008).

Although OPEC’s ability to control the price of oil has diminished somewhat as oil reserves have been discovered in other countries, OPEC nations still account for around two-thirds of the world’s oil reserves, and 35.6% of the world’s oil production as of March 2008. Moreover, the group reportedly monitors production from other countries, and when these countries increase output, OPEC decreases output accordingly. This undoubtedly gives the organization considerable control over the global oil market—and global economy. During the 1973 oil crisis, for example, the group’s use of oil embargoes allegedly triggered high inflation across the world.

In 2006, OPEC started to reduce crude oil production to stem a fall in oil prices. Less OPEC oil in the market helped fuel a rally in prices, which, according to the law of supply and demand, should have encouraged more production. But it didn’t—in part, say OPEC critics, because the organization is intentionally limiting production to keep prices artificially elevated.

Today, despite a clear rise in demand, as noted in Part III of this series, OPEC has repeatedly refused to increase production. While many nations led by the International Energy Agency have urged the group to pump more oil, it says there is enough in the market, and has declined to do so. Indeed, recent statements by OPEC suggest the group has no plans to review its output until its next scheduled meeting in September 2008.

OPEC claims it is not guilty of price-gouging, and other factors—including a weak U.S. dollar and speculation—are driving up prices. In the next installment of this series, we’ll discuss these issues in more detail.

Navellier Top-Ten Energy Stock Holdings

Vantage Portfolio
Petroleo Brasileiro (PBR); 1-yr Chart; Profile
Sasol Ltd. (SSL); 1-yr Chart; Profile

Power Dividend Portfolio
Noble Energy Inc. (NBL); 1-yr Chart; Profile
Devon Energy Corp. (DVN); 1-yr Chart; Profile
XTO Energy Inc. (XTO); 1-yr Chart; Profile

All Cap Core Portfolio
Occidental Petroleum Corp. (OXY); 1-yr Chart; Profile

We want to hear your thoughts!  Comment to this post by clicking the ‘comments’ link below.

Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

To receive email updates from Navellier All Cap Blog, click here.

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Market’s Rebound on Retail Sales Report Could be Temporary

Posted by Patrick O'Connor on 6/12/08 8:22 am

The main stock indexes regained some ground today after the May retail sales report came in stronger than expected.  Sales were up 1.0% for the month, double the consensus estimate, and March and April’s results were revised higher by 0.3% and 0.6%, respectively.

The problem with this report is it will fan rhetoric for higher interest rates now that central banks around the world appear to be working together to put a lid on inflation.  The potential for higher rates is not going to help the overall stock market.  Moreover, the retail sales result wasn’t all that impressive when you consider the enormity of the tax-rebate checks.

“I’ve noted for weeks that with retail sales running at a pace of $385 billion per month, it takes an increase of just $3.85 billion to push retail sales up a percentage point.  That’s a small sum in comparison to the $120 billion in tax rebate checks that the government has issued,” said Tony Crescenzi of Miller Tabak & Co, in an article in The Wall Street Journal.

When you ponder a retail sales increase of just 1% after the government pumped that much money into the system, you have to wonder if a lot of the stimulus was used to pay down debt, like gasoline credit. 

The retail result is not reflective of the true state of the consumer, in my opinion.  Consumer confidence is down to levels not seen in 16 years, and the unemployment rate bounced 0.5% in May, the biggest one-month jump in more than two decades.  Meanwhile, food and gasoline costs are soaring.

Today’s weekly jobless claims jumped 25K to 384K, much more than the 370K consensus.  Although these numbers can be volatile week to week, they could get much worse when the annual auto-retooling shutdown begins.

“With auto sales in freefall this likely will be a much bigger event than implied by the seasonals, so you should expect to see a couple of very high [jobless claims] readings,” said economist Ian Shepherdson in a note to clients.

I don’t think the stock market will respond all that favorably to a big spike in jobless claims and heightened inflation fears coming from several central banks.

With that said, investors should stay focused on sectors that are benefitting from inflation, such as energy, steel, agriculture, etc.  This is not the time to jump back into beaten down sectors, like financials and consumer discretionary. 

Keep in mind that tomorrow’s CPI report could be ugly.

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