Wednesday, July 23, 2008

Oil, Gold Signaling Recession

While the stock exchanges all recorded another positive session, the sudden, explosive price drops in oil, fold and silver are sending unmistakable signals of an upcoming recession.

High prices for food and energy may have been the tipping point for the US economy and certainly, those prices have already led to riots and disturbances in a handful of emerging nations.

When oil hit $145 per barrel and gas prices spiked above $4.00 per gallon in the US, even the ordinary citizen knew that level of gouging was unsustainable and the inevitable occurred - people began changing habits, buying less, conserving more and generally putting the brakes on the demand side. American consumers were already exceptionally strapped as it was, high prices just exacerbated the pain and suffering.

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What we're currently witnessing is one of the marvels of the modern free market system. Prices are coming down post haste. The market is making the adjustment without intervention.

The problem is that the forces which pushed prices higher - mostly speculation and fear - are now out of the picture, having been replaced by conservation and prudence and that's really being manifested in the metals and oil markets.

Oil dropped another $3.98, ending the day at $124.44. Gold fell by a stunning $25.70, to $922.80, and silver lost 55 cents to $17.46. The systematic unwinding of futures and hard positions has been underway for the better part of three weeks and is accelerating.

Recessions are widely defined as negative growth, but two elements that are usually in play are job losses and negative pricing pressure. In the absence of a stable, growing labor force, companies have trouble raising prices, which, in turn, puts pressure on profits and cyclically engenders even more layoffs. The cycle is beginning to churn more swiftly of late, and there's little the Fed or any governmental agency can do to slow it or stop it.

Dow 11,632.38 +29.88; NASDAQ 2,325.88 +21.92; S&P 500 1,282.18 +5.18; NYSE Composite 8,580.57 +13.92

As for stocks, advancers beat decliners, 3791-2515. New lows remained ahead of new highs, 187-133, much closer to parity than at any time over the past 2+ months. Once this reading breaks in favor of the new highs, expect it to last for some time - maybe two to three weeks - before markets begin heading lower again.

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That particular metric is going to become a more difficult read in coming weeks. Remember that the first wave of the bear market began in August of 2007, so it has been nearly a year of declining fortunes on Wall Street. Making more new lows is going to be difficult and we may see some days when the markets are sharply lower but there are more new highs than new lows.

With over 100 companies reporting earnings on the day, the major news was that $25 decline in gold. If gold price cracks, expect everything else to come tumbling down as well. All goods and services will be less expensive, but, how many people will have jobs - and money - to buy the newly-lower-priced items?

Something to ponder over the next 6-9 months.

NYSE Volume 1,725,843,000
NASDAQ Volume 2,726,705,000

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