High Gas Prices: In the end, rising gas prices will leave the Fed no choice but to raise rates.
By Adam Lass
In this article
The Fed will prove a fickle “best friend.”
Gas will crest $3/gallon by late spring and may hit $4 before summer's end.
Sub-prime lenders are already paying the price for oil company success.
High Gas Prices: In the end, rising gas prices will leave the Fed no choice but to raise rates
Blue-chip investors seem to have acquired a “BFF” in the August personage of the current Fed chairman. I learned the term from my middle daughter. It stands for “best friend forever,” and is usually applied to a grade school girl's current “ami de jour.”
At first, all is wonderful as they swap braided bracelets and giggle secrets about just how much they love our neighbor's rowdy new spring lambs. (If they are talking about anything else, don't tell me: I don't wish to know.)
I don't think that my daughter is any more or less fickle than most girls her age, but every time she announces her latest “BFF,” her mother and I, who share a slightly different perspective as to what “best,” “friend” and “forever” all really mean, smile, nod, and wish her the best of luck.
High Gas Prices: Not talking about it doesn't mean that it isn't true…
Then we go out and buy a case of Kleenex at Costco, and await the inevitable fallout, replete with hot tears of betrayal when her eternal chum goes to the movies with someone else a few Saturday mornings later.
So it is with investors sharing handmade small tokens and breathless instant messages with Zen Ben Bernanke? Perhaps not. (Indeed I hope not, as the image conjured is simply too perverse.) But there is definitely some kind of perverse “like-fest” going on here that any preteen would recognize. And soon enough one side or another will be in tears.
Already, “ZB” has told his best buds that he eventually will have to break investor's hearts with more restrictive rate polices. But for now, things are going so well -- with the market setting new highs and all -- and he doesn't want to risk hurting feelings by so much as mentioning such negative thoughts out loud.
High Gas Prices: Not to worry…
Just as with my daughter, when I hear such things, I know I must stop by Costco for a ready supply of tissues so as to clean up the tears that are coming.
The risk of oil-driven inflation looms dark over the market. Indeed, one can even make the argument that these recent share-price advances are illusory, and that the metric by which we measure gains -- the U.S. dollar -- has slipped enough in value to raise the number of them required to buy the same value in shares.
Not to worry, cry the usual shills: It's a closed system, so it doesn't matter.
If it feels like shares went up, then shares went up.
High Gas Prices: “Anything but dollars please!”
Don't worry about the fact that outside the United States, the foreign investors who have been propping up both the market, and perhaps more importantly, our insane willingness to acquire debt (another day's rant, perhaps), are now expressing interest in shifting from dollars to “anything but!” That's “outside the system.”
Well, inside the system the impact may be muted for the nonce, but it is there nonetheless. And the investor who doesn't see the switch in allegiances coming will be left all the sadder.
Within the system, cash is flowing like gossip at a grade school lunch table. And while it ebbs and flows on any given day, in the end, the flow is primarily in one single direction: Away from everyone else, and toward Big Oil.
High Gas Prices: The money has to come from somewhere…
You've heard me say this before, but then again, I have advised my daughters before as well. If I minded repeating myself, I wouldn't have had three of them.
So I will say it again: The money Big Oil takes has to come from somewhere, and sooner or later someone gets hurt.
Already, we have the folks at the margin coming up short, as they have to choose between paying for gas or a mortgage they could barely afford in the first place. Thus we see real estate and sub-prime lenders stumble and fall.
High Gas Prices: How high, and more importantly, how long?
Now the stakes start to climb. The longer gasoline stays above $2.50 per gallon, the more money flows from other sectors into the pockets of Big Oil. In 2005, gas stayed above that threshold for 14 weeks, while in 2006, it was some 28 weeks.
This year, prices climbed into the red zone at least five weeks early, and threatened to stay there for 36 weeks or better. Eight weeks ago, the EIA promised that $2.67/gallon would be the year's limit. Three weeks ago, it changed that capping figure to $2.87.
Both times, I warned as to just how wrong it would be, and noted that we would see $3 per gallon before midspring and risked seeing $4 before summer was over. Last week, gas prices crested $2.92, offering the Energy Department two choices: either it's a fool or a propagandist.
High Gas Prices: Demand can't quit…
Meanwhile, the oil-patch players marvel somewhat disingenuously at the whole affair: “What we are surprised at is the increased demand. Even though the price of gasoline is up, the demand is up.” - ConocoPhillips' James Mulva
“Last year we had pump prices well over $3 for the summer and gasoline demand was up. Would $4 gasoline cause demand contraction? I think it will, but I also thought $3 gasoline would.” - Pickering Energy Partners' David Pursell
Right now, demand can't quit. Americans moved too far from work. They can't quit working and they can't sell the house. So instead they must make other choices.
High Gas Prices: So investors must switch…
Simply put: it will pay off in spades to get on the right of that choice. Already, that has meant going long energy and short banking. Now that means going long energy and short a retail sector that is ripe for plucking.
Friday, we saw Wal-Mart Stores Inc. (WMT:NYSE) ride the blue chip rally to gains it did not deserve. Today we see the broader market run flat.
But as of this afternoon, WMT has lost a third of its illicit gains, while our oil company pick, Chevron (CVX:NYSE) put on gains Friday and today as well.
And this is just the beginning: Soon, the market's BFF will be unable to hold back. He will have to reveal what his best buds already know: Even if it hurts our feelings, a rate increase is coming.
“Daddy, that's just mean!” “I know dear, but don't say I didn't warn you.”
***
Adam Lass is the founder and manager of the WaveStrength Group, and is a contributing editor for Taipan Financial News. As the creator of WaveStrength's proprietary analysis system, Adam's expertise has shaped a franchise of successful investment newsletters and services, including WaveStrength Options Weekly and WaveStrength Apex.
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Related Resources
EIA: The latest on gasoline (just don't believe their future estimates).
NYMEX: The latest on oil.
Quote: And the latest on CVX.