Wall Street's games about to hit gas prices

After enjoying months of cheaper fuel, Americans will soon experience more pain at the pump because of oil speculation and market manipulation.

By Anthony Mirhaydari Jan 6, 2012 5:19PM

Image: Gas station © Purestock/Purestock/Getty ImagesThere have been a lot of "funny" things happening in the market over the past two months. I chalk it up to a combination of end-of-year seasonality and a desire by the powers that be to keep the market together long enough to exit ahead of the fall. Something similar happened in 2008 before the most acute phase of the bear market got started.

 

Wall Street has apparently been using large-cap energy stocks Exxon Mobil (XOM) and Chevron (CVX) to hold the Dow Jones industrial Average aloft, ostensibly to keep retail investors placated so the heavy hitters can create the little upward flurries they need to exit their position. (This has to do with the fact the Dow is a price-weighted index that can be pushed around by the most expensive stocks.)

 

It cannot last. And the games are about to hit vulnerable consumers at the gas pump and threaten the economy at a time of danger.

 

 

Sound crazy? Well, consider this: Chevron is trading at all-time highs, and the number of bears responding to the AAII survey has dropped to its second-lowest level in six years. Yet measures of internal market strength, such as the percentage of NYSE stocks above their 50-Day moving averages, remain well off their highs and are arguably in bear market territory.

 

The buoyancy of crude oil -- despite the recent strength of the U.S. dollar, the collapse of other industrial commodities like copper, and the decaying economic outlook in Europe and Asia -- has been instrumental in this enabled by a recent pullback in the U.S. dollar (which is ending now) as well as Iranian saber rattling.

 

You see, the U.S. economy is supposedly "decoupling" from a weakening Asia and Europe. Stocks and crude have been floating higher as economic data, based mainly on sentiment surveys, has been surprising to the upside. Yet the real, hard activity-based economic data haven't really moved. Again, this is behavior that was last seen the middle of 2008 before the market fell apart.

 

Here's the thing: This decoupling is being driven by two temporary tailwinds.

 

 

The first is a drawdown of the savings rate from 5% to 3.5% as consumers, tired of denying themselves, splurged this holiday shopping season. The bills will come due. And with wages stagnant and the economy shedding high-quality high-wage jobs for low-quality, low-wage retail, temp, and accommodation positions, it will be hard to repay them.

 

That, according to Gluskin Sheff economist David Rosenberg, translated into a $150 billion boost to consumer spending power at an annual rate in inflation-adjusted terms.

 

The second was the drop in crude oil prices from the highs reached last spring as the Arab Spring heated up and took down Gaddafi in Libya. Between May 2 (the commodity price peak created by the U.S. dollar spike after Osama Bin Laden taken out) and Aug. 9, crude oil lost 34%.

 

That primed the pump, so to speak, for a slower but sustained fall in gasoline prices. Between May 2 and the end of November, gasoline futures dropped a whopping 40%. That, according to Gluskin Sheff economist David Rosenberg, translated into a $80 billion boost to spending.

 

So the economy has been drugged by $230 billion in temporary support. No wonder it's decoupling.

 

This is ending now.

 

For one, crude oil bottomed in August and has been rising ever since. It built up a big head of steam in October and November as hedge fund types piled into one of the few trades that worked consistently well. As a result, crude oil started a decoupling of its own outpacing industrial metals, copper, and even gasoline prices because, well, those other assets just didn't look as attractive to speculators.

 

In fact, the performance gap between gasoline futures and crude oil reached levels not seen since the 2008 commodities bubble. Again, similarities with 2008.

 

So it was the best of both worlds. The speculators profited from higher oil prices, while consumers benefited from cheaper gasoline. Viva decoupling!

 

 

Naturally, petroleum refiners weren't about to tolerate a prolonged compression of their profit margins. And sure enough, as crude oil stagnates near its November highs gasoline prices are surging higher. As gas prices start rising at the pumps, and those holiday bills come due, high-flying consumer sentiment is going to get blown out of the sky just as hedge fund types feel pressure on their long crude positions. And that'll push the savings rate back up too as consumers respond to higher energy costs.

 

Suddenly, Wall Street's obsession with its latest plaything -- crude oil -- isn't be so benign anymore. The U.S. economy will "recouple" with the rest of the world as the recent swing in oil prices works its way through the energy supply chain like a cancer, pushing up gas prices. And the start of Q4 earnings season next week will remind everyone that corporate profits are set to fall for the first time since the recession ended two and a half years ago.

 

Consider yourself warned.



Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.

 

The author can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


 

167Comments
Jan 8, 2012 10:09AM
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Maybe, just maybe, the citizens of the USA should drive fewer low mileage, designer pickup trucks!
Everyone says these type of things like there is a shortage in oil and there is a high demand and it is obvious both are false. We are using less and paying more, it is called BIG OIL PROFIT MARGIN. They are going to get theirs along with speculators to help them even more.
Jan 9, 2012 2:12PM
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Uncontrolled, crooked Wallstreet simply cares about the rich getting richer and don't give a damn about average America. They're simply following John D. Rockefellers crooked means to control everything and everybody. Hell is packed and will soon overflow with these rich, greedy misers.
Jan 9, 2012 5:24PM
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The oil companies and Wall Street need to get their heads out of their asses before they destroy my country with their insatiable greed. If they drive us into another recession like they did in 2008, we need to burn Wall Street to the ground and let God sort it out. Washington, quit setting on your worthless asses and do something beneficial for the common man. We are getting fed up with taking it in the **** from you and the wealthy. Remember the French Revolution, the American Revolution, if you idiots can't learn from the past, you are doomed to repeat it!!!!
Jan 6, 2012 7:11PM
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you better be careful what you write and how u write it along with the rest of the high ups in energy and wall street you all may have a dark day coming when this country really starts to have, riots against the government and the media in this country that other countries have had in the past , look for it its coming at some point
Jan 9, 2012 1:27PM
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When is the greed and insatiable pursuit of profits going to be  recognized as the cancerous parasite on society for which it is?  
Jan 9, 2012 4:06PM
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WE  should demand they take PHYSICAL POSSESSION of everything they bid on...and  not allowed to re-sell until they have accepted COMPLETE  DELIVERY of any item bid on.  Not only that - GAS should also have regulations such as electric companies do since so many people now depend on gas & diesel.   Speaking of diesel - why is it so much higher than gas - it cost less to manufacture?? 
Jan 9, 2012 3:19PM
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You can write all the letters you want to your so called representatives & it won't  stand a chance in hell to make a difference because they are all in this crap together. I don't think they even would personally read them to start with.
Jan 9, 2012 3:05PM
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We need to totally clear out the White House of every one of  them & start over by putting people in there that care about the people of this country. (The only trouble is, Who the hell can we trust these days?)
Jan 6, 2012 8:20PM
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this is such a bunch of crap, there is no reason for price increases, other than greed and greasing your favorite politicans, someday tax payers and hard workers are gonna get really fed up and maybe all hell will break loose and wake these theives up,where is our leadership at to allow this greed to continue
Jan 9, 2012 4:39PM
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What was the largest export from the US in 2011? It was gasloine, diesel and jet fuel, combining for $88 billion in profits! That of course drained what should be huge reserves and we are going to be bent over again at the pumps. Why does this administration alow this to happen? He can take over GM and hand it back to the unions while screwing the original stockholders, so why can't he/they dictate that X amount of fuel be held in reserve? Or better yet, start drilling off shore again, and start extracting crude from the monstrous Bakken deposit under Montana/Alberta that would keep us independent from foreign oil for the next 2 or 300 hundred years?

Why do we continue to cater to OPEC and specifially the Saudis? We should be paying less than 2 bucks for fuel, but by this summer it will be at least 5! With these idiotic issues at hand this recession will never end, and we'll be in the same boat as the EU very soon. With nothing but lawyers in DC it is not suprsing, but that needs to change this year before it's too late for this nation to recover.

Jan 9, 2012 4:28PM
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Would someone please tell all the economists and economic journalists this:  THE RECESSION NEVER ENDED!!  Not where I live and work and not for most of the people I know.  And once again we're going to get screwed because Congress is more interested in lining their pockets than protecting the pocketbooks of their constituents.  Until we have true campaign finance reform nothing will change.
Jan 9, 2012 2:21PM
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td49.

Our leadership is getting filthy rich off of the greed you are talking about...

Jan 9, 2012 2:53PM
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Someone needs toa analyze this thing and expose those who are and continue to fleece the Amercan Taxpayer-Those who  are consipiring to raze gas prices need to be exposed.  It has to be given more press until these pigs come clean.
Jan 7, 2012 8:04AM
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Blah, Blah,  Blah!!  Take your charts and stick 'em where the sun don't shine, will ya'? 

 

And people complain about the Occupiers.  The whole damn country should be parked on the steps of Wall Street, not just a handful of people.  That entire organization should be outlawed, except our outlaw politicians are in bed with them and laughing all the way to the bank.

 

Anyone that thinks the economy is getting better just because the retail markets did ok during the holidays isn't fully conscious. 

Jan 7, 2012 7:33AM
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So just because their MIGHT be problems in the Straight with Iran, the Speculators once again drive up the prices, all in the name of greed.  Once again Wall Street has their way with the people, and you wonder why we need regulations???

Jan 8, 2012 7:45AM
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Maybe, just maybe, the citizens of the USA should drive fewer low mileage, designer pickup trucks!

 

Libyan and Iraqi oil is growing in availability, as is US oil production. At the same time, global economies are trending downward... chemical production is decreasing...so how does all of this translate in to HIGHER oil prices?

Jan 7, 2012 8:16AM
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There's a lot of truth in this gentleman's article.  In our area, big corporations are either buying out or laying off employees, but then offering to bring them back at half the salary and no benefits.  To buy a starter home in our area, at least one person in the household needs to be earning a minimum of $20 per hour.  Now let's start naming names:  Nissan Motor Corporation has been conducting buy-outs and then hiring temps to replace workers.  Temps making approx. $12 per hour with no benefits or insurance.  Great for Nissan, a disaster for the local economy.  Next offender:  Bridgestone/Firestone Tire.  This company has basically broken the union with the closing of union plants and transferring work to Mexico and non-union plants that pay just over minimum wage.  They also play the game of lay off and terminate because of cut backs.  However, they offer to bring those same employees back at $13 per hour w/ no benefits.  That's $12 per hour less than what they were making when they were laid off or terminated because of cut backs.  Now you have people who were living in a decent home driving a decent vehicle, just trying to survive and live paycheck to paycheck.  They walk away from the home they can no longer afford, thus adding to the long list of home foreclosures.  Some even start dealing with illegal activities (drug sales) to feed their family.  This country will not survive with big corporations using these tactics.  The working class sustains this country through their purchases of new homes and new cars.  We're at a time now when the poor and getting poorer, and the rich are getting filthy rich.  I'm afraid this pattern will never change, because the laws have been set up for the corporations by the politicians.  Think about this:  Unemployment check is $300 per week.  $10 Per hour job is $400 a week before taxes, oops minus taxes and you have approx. $280 per week.  Why would you want to work, when you can draw more for sitting on your rear?
Jan 7, 2012 12:52AM
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speculation and market manipulation <<< these are fancy words that mean "get ready to get f--ked"
Jan 7, 2012 12:15PM
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The only way to change any of these mentioned issues is to act in mass. We can talk about taxes, fuel costs and corrupt Government 'til we're all blue in the face, but if we all got together and boycotted gas purchases for one day, or drove through toll booths without paying for one day, watch how soon things would change. (we would either be locked-up, or hailed as heroes)!!!! How do we get a large boycott started?? Any input would be more constructive than attacking one another on line!                               Enjoy your day!
Jan 6, 2012 10:19PM
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Shoot the speculators. Drop an A-Bomb on Iran. Fire the market manipulators and end this BS once and for all. Oh wait a minute. The politicians don't pay for gas. They all have expense accounts so despite being multi millionaires they force us to pay for it. Let us not forget these folks continue to get richer and only because of insider trading knowledge. I hope they are all on a plane someday and it crashes. Talk about a cleansing that the free world would benefit by if this happened.

 

I got my fingers crossed. Harsh but I am sick and tired of all the BS these folks create.

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