Hello,
So I suppose when we first mentioned that we wanted to clarify what was going on in the stock market for as long as we and the internet were around, we probably should have added the line "and we verify all legal issues regarding a website".
Well, they are all verified now, so we can continue.
Of course, since the last post, quite a bit has changed. Carl Icahn has stepped into the fray (read:lunacy) of the Microsoft-Yahoo merger. The federal reserve is more worried about inflation than the interbank loan rate. I've been on so many flights that I actually am starting to think those cheese crackers they hand out for the in-flight snack actually taste good.
(Hasn't helped my opinion of airline stocks. )
But of course, one cannot make a bad joke about airline food on a financial blog without discussing oil prices. With $4 gasoline, airline stocks have been taking a hit and the Dow dipped below 11,000 yesterday. My current evaluation of oil price is that they will peak between 141-171. Of course I realize that oil has already gone up into this range ($147 intra-day yesterday), but I made this prediction a few months ago, and I'm sticking to it.
Now, every analyst (and conspiracy theorist) has some prediction. There were some nutjobs expecting $200 a barrel oil by the end of this year.
There are two problems with this assessment. First, misunderstanding the connection between the dollar and oil and secondly understanding the influence of speculation. There are other factors, including Iran's hoarding of oil, but those are going to increase the rate of a crash, not actually cause it.
By increasing the interest rate, you increase the value of the dollar - if there are less dollars, each individual dollar is more rare, and therefore more valuble. Money follows similar supply and demand pressures that goods do. The beauty of the re-valuation of the dollar is that this decreases demand for oil as oil will no longer serve as an inflation hedge. Decreases in volume of oil futures trading will make a major impact on oil prices.
Now, there are many that say, because oil contracts are eventually closed, that means any upward pressure when buying contracts will be counteracted by downward pressure when closing the contracts later on. In theory this is true, but in practice oil futures trading determines long-term, non-open market contracts between companies. In other words, if your a oil supplier, you are going to make long term contracts based on publically visibile, current open market prices, not at some arbitrary premium on your production costs. So, if you see that you can sell your oil on the open market for $140 a barrel, you are going to go to a company and guaruntee oil for $135 a barrel outside the market, even if that oil cost you $10 a barrel to pump. This way, you get a guarunteed rate and the company gets a small discount. Considering a small fraction of all the oil in the world is bought and sold on the open market and most is done via non-open market private contracts, any increase in oil speculation on such a small percentage is going to create upward pressure on private contracts which will then create upward pressure on free-market contracts. By eliminating free-market speculaton on oil (and not private contract speculation) you can allow business which actually consume oil to hedge against oil price increases while ensuring consumers pay a price somewhat related to the cost of production.
Oh, and for the traders which want a hedge against inflation....SHORT THE DOLLAR.
-Mansij Hans, E.I.T.
Member, Intigril Capital Management
Disclosure: Intigril Capital Managment is long Microsoft at the time of publication of the "Short the dollar" article.
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