FYI | Nov 24 2007
By Chris Jacob
INDEX PERCENTAGE MOVE CLOSE
Dow Jones Industrial Average + 1.42% 12,980.88
NASDAQ + 1.34% 2,596.60
S&P 500 + 1.69% 1,440.70
VIX - 4.58% 25.61
STOCK PERCENTAGE MOVE CLOSE
Exxon Mobil + 1.44% $88.29
Wal-Mart + 1.94% $45.73
General Motors + 2.92% $27.16
Well I guess you could say Americans enjoyed their Turkeys and stuffing yesterday because despite Crude Oil closing at record high prices the Dow was up 181.84 (1.42%) to 12,980.80. The NASDAQ was also up 1.34% to 2596.60 and S&P 500 up 1.69% to 1,440.70.
Traditionally this is one of the quietest trading days of the year as many people are away for the long weekend and the New York Stock Exchange is only open for a half day so this proved to be no exception. As such prices can be more volatile particularly in the commodity sector. However with Crude Oil at a record high closing of US$98.18 (up 4.4% this week) and the ongoing sub-prime finance issues throughout the week, it could be seen to be puzzling that the overall market had such a large gain today.
One of the major drivers of the oil price increase is the ever weakening US dollar which reached a historic low of $1.4966 relative to the Euro today before recovering slightly. This weak dollar is making oil cheaper around the world pushing up demand. Consultancy firm Oil Movements estimates OPEC will again increase exports making it the 14th consecutive increase for the year.
In terms of the Equity markets, E-Trade surged 25% to close at US$5.33 with heavy volume. It was reported on Cable Finance channel CNBC that the company has hired investment banks to help it consider selling itself. Other online bidders like Ameritrade and Charles Schwab are seen as potential suitors (both Ameritrade and Schwab rose 4.5% and 3.3% respectively today).
E-Trade itself was hit hard by the subprime mortgage crisis as it both offered mortgages and invested in mortgage backed securities. It was a gamble taken a few years ago to enter the market and it seems to have backfired as E-Trade lost half its market value earlier this month.
Today is one of the biggest retail trading days in the US (could be seen as equivalent to Boxing Day sales in Australia) but there is general pessimism regarding the retail sector for the holiday season this year due to high crude oil prices meaning less disposable income for consumers this year. Not only are Americans hit by higher gas prices for their vehicles but heating oil costs which is a necessity particularly in the North East (New York, Boston, etc.) at this time of year according to some estimates could be double this year compared to last.
Also United Airlines has already announced that fare increases are to be expected due to oil prices. Other airlines will no doubt follow meaning families around the country will have to fork out more for this expense. Finally retailer’s transportation costs have increased meaning smaller margins on many items. However despite all this doom and gloom, albeit with smaller than average trading volume, mega retailers Wal-Mart and Amazon were up 1.94% (to US$45.73) and 2.09% (to US$81.43) respectively.
In the US the average income is up US$20 year on year compared with a US$10-$15 rise in gasoline expenditure which has meant things like retail spending has continued to be strong through 2007. However many experts in 2008 don’t think income will continue to outpace or even keep up with increased energy costs and this is where industries like retail and tourism may suffer domestically.
The companies that may benefit from these higher prices include the alternative fuel companies as well as Defense companies which traditionally have no correlation with commodity prices. Airlines are also increasing purchases of fuel efficient aircrafts meaning part makers will also benefit.
Biofuel company Monsanto is 84% this year alone and hit an all time high two weeks ago of US$99.98 subsiding a little since then. Investors may have missed the major increases in this sector but like in the dotcom era of the nineties only few of the many companies are expected to survive so wise decisions are recommended.
In the Defense sector Lockheed Martin’s shares are up 24% in the past three months despite the turbulence and Raytheon 17% over the same timeframe.
OPEC’s share of world oil production is now at 41% which is down from highs of 52% in 1973 when the Arab Oil embargo created a global energy crisis. One of the offshoots of this high priced market was increased exploration in more hostile areas as well as alternative fuel investment and this translated into the smaller share of the overall market for OPEC countries. Brazil’s state oil company Petrobras exploration may have yielded an area which could contain 8 billion barrels of oil. This would further diminish OPEC influence of the overall market.
So you could say despite this being a shorter and less active day than normal, many interesting issues were raised that require pondering going forward into next week and beyond. Oil touching the magical $100 mark will surely be a psychological landmark when it is breached and once the market is fully active again on Monday it will be interesting to see if today’s large gains were warranted or just holiday cheer!
