Join The Trading Room

The Real Reasons Why Oil Rose and Stocks Fell

By Rick Ackerman Posted on February 23, 2011, 5:53 am EST Last Updated February 23, 2011, 8:00 am EST

The news media went zero-for-two yesterday trying to explain on the one hand why stocks fell, and on the other why oil prices rose.  Stocks fell not because of fears over the spread of violence in the Middle East, as the pundits asserted, but because it was time for the Mother of All Bear Rallies, now almost two years old, to keel over and die.  As for the surge in oil prices, although it was blamed on turmoil in Libya, the country exports only a paltry 1.6 million barrels a day. Moreover, our good friends the Saudis promised to make up for any Libyan shortfall by increasing their own output.  Our guess is that oil prices are headed toward $100 a barrel, and then higher, because Saudi Arabian output itself is perceived to be less than absolutely secure.  

It’s hard to imagine that the anti-government protestors who have rocked the Arab world will not eventually descend on the House of Saud. If so, what would the monarchy do if peaceful demonstrators ask them to step aside? It would be difficult enough for King Abdullah to put down a violent revolt with superior violence. But to refuse the demands of placard-waving thousands, who eventually would grow into placard-waving hundreds of thousands?  That would pose quite a dilemma, since the country’s rulers could hardly tell the crowds to go home, get a good night’s sleep and see how they felt in the morning. If and when the demonstrators’ elected representatives wrest power from their desert princes, it seems unlikely that a nominally democratic Saudi Arabia would be so favorably disposed as King Abdullah on the matter of selling practically limitless quantities of oil to the benefit of Great Satan. 

A Laughable Explanation 

Concerning the stock market’s decline on Tuesday, the biggest drop of 2011, it is laughable to attribute this drop to fears of anything.  For nearly two years, the stock market has acted like a rabid animal that feared nothing. Are we now to believe that the rise of protests across the Middle East has given investors pause?  Actually, it is not even investors who have been buying stocks, but machines programmed to buy from each other, senselessly driving the averages higher in what even the clueless twits who bring us the news each day have hesitated to call a virtuous cycle.  Our interpretation of the wave of selling goes to the fact that it commenced from within inches of major rally targets identified in Rick’s Picks months ago. As such, we are strongly inclined to believe the weakness is purely technical – albeit potentially fatal, since the stock market has been in inflate-or-die mode all along. If stocks are indeed finally going down for the count, so is the Grand Folly of an economic recovery that happened only in the minds of a few dull-witted economists and in the talking points of various White House spokespersons, cabinet-level poo-bahs and, of course, the ‘Nank. 

(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)

  • steve February 26, 2011, 5:45 pm

    “mother of all bear rallies” to keel over and die ?? ,, really ?? i guess a chart can’t even sway ya ? ,, or, from what perspective are you looking ? , and i’ve got some gold i’d love to sell ya, at $1400/oz

  • david joseph February 26, 2011, 3:05 pm

    Seems you are just re writing the news in some parts e.g. the reference to Saudis selling oil to satan.. Stick to the TA yourself Rick.

  • Martin Snell February 24, 2011, 3:54 am

    – As for oil, Brent is already at $112. WTI is increasingly irrelevant.

    – As for Libya, there are two important considerations: First Libyan crude is the very high quality stuff, not the crap that Saudi holds in reserve (if they actually have reserve). All oil is not equal.
    Second although Libyan exports are only 1.6 MMbpd, that is quite a good percentage of the oil traded internationally (although oil production is around 85 MMbpd, the amount exported is much much less – maybe only in the 40-50 range).
    Then there is Algeria right next door … Egypt, Libya, Tunisia, … four in a row???

    • Cam Fitzgerald February 25, 2011, 12:10 pm

      Four in a row? I agree 100% with that suggestion.

      There are only two major countries that I think will be exempted from the current turmoil. Saudi Arabia is one and from what I know of the people will weather the worst of all the upheavals with the least turmoil and trouble.

      I have no concerns whatsoever for that country and its government which have responded proactively and very successfully to the current challenge and are now exempt from any real danger.

      The second country that is immune is only safe because of its very deeply entrenched political structure that makes it virtually impervious to changes at this time.

      That country is Syria.

      The minors like Jordan and others will see modest changes that are acceptable to the people there along with a host of political reforms that are voluntary introduced.

      The overthrow of long standing regimes is not desirable of needed everywhere and Jordan in my opinion is one country that will acclimatize and adjust quickly. Both markets and society are already quite open there relative to other countries in the Middle East and there is no revolutionary fervor despite the fact such a large percentage of the citizens are Palestinian.

      The really big question mark going forward is Gaza and its future. I wish I had an answer to what might happen there next but I do not. Internal reform is high on the agenda though and deep unhappiness remains unresolved within the elected structure.

      Change is sure to come. Let’s hope it is peaceful.

  • A. Rand Fan February 24, 2011, 3:52 am

    Wall Street: The Speed Traders
    http://www.cbsnews.com/video/watch/?id=6945451n&tag=related;photovideo

  • dan February 24, 2011, 2:41 am

    All the liars and usefull idiots have egg on their faces.

    Their spin has been wrong and their backing of the looting and stealing from the people has just about come to and end..They will be drawn and quartered in the public square…how can so many so called smart people be so stupid as to put their faith and trust in the Bernak and politicians that cannot see the truth when it hits them in the face…they will pay the ultimate price for their crimes…..death by chocolate

  • Rich February 23, 2011, 7:05 pm

    Nice market calls Rick.
    Cam and Fran, none other than famed rogue Newsweek Journalist Arnaud de Borchgrave sees $400 oil, while CFTC Gary Gensler begged for more money to head off another Flash Crash (like they didn’t before).
    Looks like changes in the Mid East may benefit domestic energy drilling like APC, BRNC and XOM, all targeting significantly higher.
    Gold Point and Figure chart targeting $1620, oil $123.
    Fly in the cognitive ointment is SPX targeting $1590 and USB targeting 178, until we realize it’s the QE money illusion with a -36% drop in the dollar since 2000, -98.6% since 1913 when the Fed and IRS began. In terms of food, fuel and gold, the Dow fell as much as -86% since 2000 so far, profiting a few at the expense of many. This is the stuff of revolutions…

  • Agent P February 23, 2011, 6:57 pm

    When a portion of the public – large enough to create a stir or have political impact, becomes aware that there is a stock market economy and a real economy, and that the two are exclusive of each other, then you will have your crash.

    Until then – and until the marriage of fiscal politics is either seen for what it is – or dissolved, the politico-financial elite will have their way.

    And we are by the way, at the beginning of the 2012 re-election cycle. A cursory look around the world should offer pause as to just how much more ‘pain’ can be endured before any sort of real reform comes about.

    Different we are you say?

    To what extent do our politico-financial elite adhere to or obey Constitutional prescription? So then, what will in turn, protect us?

  • ricecake February 23, 2011, 6:29 pm

    Don’t worry about the stock market’s dying. QE3 will stop the dying shortly. All they need to do is press the button. More than half of the world’s economy is virtual economy. Anything about the future’s about expectation, speculation, and virtual stuffs – the people who aren’t born yet. lol

    • Rick February 23, 2011, 7:39 pm

      Call me a skeptic, but I’m not ready to believe the stock market has reached a permanently high plateau.

  • ben February 23, 2011, 6:07 pm

    Calling the top of the market here is a really bold call…and I’m not saying “bold” in a good way. There is little reason to think the Plunge Protection Team/ Bank cabal is going to throw in the towel now. The news has been truly atrocious for the past three years. Yet the media even spins radicals taking over autocratic, but stable, Muslim nations as some kind modern day American Revolution with eventual dividends for the Western World. How laughable. Yet people will buy into this ficiton as they always do.

    What I find the most likely scenario is that we never have a meaningful collapse in real dollar terms, and instead all the apparent profits will be stealthily whittled away by inflation. In a couple years they’ll start showing the DJIA and all the indices in “inflation-adjusted dollars,” and then people will realize how much money they lost when they thought their stocks were rising. We have public workers all over the country already rioting over cuts to their benefits…imagine if you add to that their pensions and retirement accounts losing half their value. The Guvmint just won’t let it happen.
    Viva Au & Ag!

    • Cam Fitzgerald February 23, 2011, 6:48 pm

      If women and children are now considered “radicals” Ben then I guess I would have to agree with you.

      Of course I would then also have to swallow all my better sense and accept that by “stable Muslim states” you mean it is ok for one-man corrupted dictatorships sustained by a combination of police, military and bureaucratic establishments be considered as normal parts of creating social and political stability.

      In other words, get a grip man. Have you even been there? I have. I have lived in Gaza, in Jordan, in Israel for over a year, Egypt for most of seven months, Ethiopia a half year etc etc.

      I will tell you without reservation that the so-called stability you recognize from the past is just a pot near the boiling point and that fundamentalist extremism is not our real worry. Not even close.

      The whole situation over there is driven more by demands for greater economic opportunity, by needs to access information, to express yourself freely without fear, to earn a better living and to engage more fully with the opportunities offered the rest of the world at large.

      It is about money and getting a fair “Sheik” in life.

    • ben February 23, 2011, 9:17 pm

      Cam…it’s hard to believe that someone could have actually lived in places like Gaza and walked away with a positive impression of the Arab populace in Gaza. And yes, women and children are radicals when 5-year olds dress up as suicide bombers for their birthdays while their mothers toss candy at them and sing with adoration.

      Israel, under American pressure, allowed free elections in Gaza. The people overwhelmingly (75%) voted for Hamas, a terrorist group determined to commit a genocide against the Jews. The other 25% voted for the PLO, a different terrorist group that calls for a more gradual approach to annihilating the Jews. Don’t you dare tell me these are some freedom loving peaceful people we are dealing with. Since Hamas has come to power they have incessantly rained rockets down on Israeli civilians. As the people who voted Hamas into power…the “civilians” are not innocent.
      They are blood-thirsty and share the guilt of Hamas’ actions. If you were treated decently, it was only a show so you would say good things about them. They’re also very good at staging propaganda events for the Western media to make them look like victims (al-Dura for instance).

      And as for Egypt we are already seeing the effects of this “Democracy” as the army invited Iranian warships to pass through the Suez canal, and invited al-Qaradawi, perhaps the pre-eminent Sunni radical cleric, back into the country after being exiled for many years. (http://www.debka.com/article/20688/)

      So please, get a clue before you get an opinion.

    • Cam Fitzgerald February 25, 2011, 3:25 am

      I do not fear “Arabs” Ben, the way I fear ignorance and inequity. Nor is it my business to change your strong contrary views.

      I will only say that even you should recognize that there are similarities between all people everywhere. Do we not all seek fairness and opportunity?

      There is no joy in poverty Ben and it is my contention that much of the conflicts in the area now in strife revolve around the most common of issues that all people share.

      That is to have fair and equal opportunities in life, to have the freedom to express ourselves without fear of repercussions, to have a shot at an education and to feel secure. To earn a decent living in other words and have a good shot at life.

      I will not engage you in a discussion around all the empty rhetoric or extremist statements that pollutes the daily press and confuse most peoples minds. We already know the political situation in the Middle East is polarized. That is not news.

      We have peacemakers and diplomats employed full time just for that reason and it is their job to sort the complex questions out. I was only referring to relative and basic human needs that we all share. To conflicts that arise as a result of enormous inequities. How can you argue with that?

      You need to separate the media spin, the loud “newsmakers” and heavy political language from day to day life Ben, to understand that nothing is really as it appears. This is about trying to keep a little perspective. You can only gain that by meeting people firsthand. If you understood me better you would know I do not support extremism of any sort.

      Neither do I worry that democracy is a threat to Middle Eastern politics or the region. It is the best thing that has happened in the last Fourty years in my opinion.

  • PhotoRadarScam February 23, 2011, 4:49 pm

    I’m not sure that stocks are ready to “die,” but they do need to take a breather.

  • Rick February 23, 2011, 9:24 am

    As I understand it, the Germans bought the NYSE for its derivatives business. Did NYSE seat holders sell out because they know, as they should, that the derivatives business will be ground zero for financial Armageddon?

    • Cam Fitzgerald February 23, 2011, 10:20 am

      Thanks Rick,.. now THAT is what I am talking about.

      Got time tomorrow to dig into it a little deeper? There is a really huge story shaping up here that is just not being adequately covered by anyone else yet.

      I see red flags all over the place

      (and not the good kind if such a thing even exists).

    • FranSix February 23, 2011, 10:44 am

      They’ll have problems merging the TSX with the LSE. But the TSX is a derivatives exchange after it merged with the Montreal Stock Exchange. During the depression, activity formerly at the Montreal Stock Exchange moved to Toronto.

      RBC and Dexia formed a partnership for their investment banking business (read: derivatives)

      They recently had their debt downgraded by Moody’s. Lots of downgrades going on:

      http://news.google.ca/news/search?pz=1&cf=all&ned=ca&hl=en&q=royal+bank+downgraded

    • FranSix February 23, 2011, 10:49 am

      Maybe this link is a better source:

      http://news.google.ca/news/search?aq=f&pz=1&cf=all&ned=ca&hl=en&q=Moody%27s+downgrade

  • Cam Fitzgerald February 23, 2011, 8:22 am

    OMG, Is this the end?

    I have to wonder, in light of the merger talks with the NYSE possibly shifting its stake to Germany, the TSX going to London and the ASX on its way to Singapore, what is really going on.

    Is NASDAQ next to be gobbled up and moved ex-continent? I think so. I believe they will sell to a rival, and not buy a competitor.

    You are a busy guy Rick but this needs some commentary and an article if you can make the time. You have worked on the exchanges and will have more insights than many others here.

    In reference to todays article and in light of the consolidations taking place in the bourses,…..is this action with all the exchanges (noted above) just about the equivalent of rats jumping off a sinking ship?

    Are we seeing the centers of financial influence move overseas because we are in fact headed into a hellish disaster and economic meltdown on this continent (along with and including our friends the Australians)?

    Have we now been given the green light to get the hell out of the dodge before it is too late and shift our money overseas and are we now therefore closing in on a countdown to our own domestic financial Armageddon?

    There are some pretty major moves afoot with the exchanges of Australia, Canada and the US all of a sudden. All at once actually. I note with both despair and displeasure that none of the consolidations appear to be attracted to majority ownership in the US and on Wall Street or Bay Street but rather, are moving majority ownership to Europe and Asia.

    I think a broad discussion is worth our consideration. Something is up and it ain’t confidence or the buck. Thoughts from those in the know are really appreciated.

    • Erin February 23, 2011, 3:17 pm

      Cam,
      You said what I have been thinking about all day yesterday in your last paragraph…”Something is up and it ain’t confidence or the buck”.

      How can it be that for the first time since the beginning of time that the dollar could not even catch a breath yesterday in this time of turmoil? Are you kidding me? Is this the end of the dollar as a safe haven? Is the world finally waking up to the fact that we will never be able to pay our debts? Would they rather buy precious metals instead of the reserve currency? Am I the only one on the planet that noticed this incredible lack of movement to a flight of perceived safety?

      I have many questions but only one answer…To me..The dollar is now a “officially” a piece of crap!

    • Euromoron February 23, 2011, 3:56 pm

      Cam, with respect to NYSE/Frankfurt-Xetra have a look, please, at share ownership: The Deutsche Börse in Frankfurt belongs mostly to US- and UK-investors!
      And remember the thwarted attempts to take over the LSE by Frankfurt!? Rothschild et al weren’t amused!

  • fallingman February 23, 2011, 7:33 am

    I guess, “Gee, it’s about time” or “Reversals happen” or “The market’s been overbought since last year…what do you expect?” don’t make for very compelling copy for the babelicious newsreaders. Plus, there’s no B Roll of people getting clubbed over the head to entertain. Even a 2 point upmove in the Dow must be explained by growing consumer confidence, a rise in building permits or whatever. It’s usually balderdash.

    That said, while the correlation between events in the world and movements in the market may be greatly exaggerated, the “story” that’s spun can and often does take on a life of its own, providing cover and a “logic” for moves that were gonna be made soon anyway. Doesn’t really matter what the excuse to act is or if it makes any sense really. When the time has come, just about any story with any degree of substance will do.

    Good stuff, as always. Thanks.


Exit From This Page Back to Trades