The Real Reason Why Crude Rose, Stocks Fell

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. 

For 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’ duly elected representatives wrest power from the 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. Do we now believe that the rise of protests across the Middle East have 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.

Rick Ackerman

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