Although Wall Street was hoping for a full point rate cut, but only got a 3/4 point cut, looks like it was enough for the Dow Jones index to rally up 420 points for the day (closing at 12391). Better than expected earnings in the brokerage sector was a big boost, too! Overall, best UP day on the Dow since April 2001 and best day for the S&P since October 2002.
However, this Fed funds rate cut (on top of other recent rate cuts) has sent the dollar to record lows (a weaker dollar).
Well, if OPEC (Oil sheiks) get paid in dollars...how do you think they feel being paid in dollars that are becoming lower and lower in value? And they don't feel like taking a pay decrease. So look for them to figure out a way to keep the price above $100 a barrel (on the way to $110, $115, etc.) per barrel. An unexpected production disruption is always a good way to achieve this goal.
With oil at, or around $100 (plus) per barrel as it has been this year creates a major problem for many, many -- many U.S. companies who were planning on oil being $85 per barrel when they made their annual projections for investors.
Airlines for one will be hit hard. But beyond the obvious, take a company like Dow Chemical -- whose CEO said they plan on oil being $85 a barrel in '08. Any company that uses plastic will be hit with increases since oil is used for plastic. What is going to happen to these companies' profits at $100 (plus) per barrel?
And what is going to happen to food costs when farmers who grow corn and wheat when these higher fuel costs are passed on to farmers? And higher wheat and corn prices for human consumption, means higher prices to feed the cows and chickens for meat, too. Plus, the added fuel cost to deliver products. All of it will mean added inflation in the production and transportation of U.S. goods and services. (Inflation spiral up, y'all!)
Former Fed Chairman Greenspan urged the oil sheiks in Saudi Arabia to move the oil exchange off of dollars and into Euros. That would make the inflation in the Gulf region lessen substantially since Euros are now worth more than dollars. This will make matters even worse for the U.S. by de-valuating its currency by about 20% overnight if they act on his recommendation.
GOLD is down from record highs over $1000 this week (as high as $1028 this week), possibly because investors were looking for a full point rate cut; investors need to sell profitable gold positions to cover losing margin calls elsewhere; and because the Fed cut causes an initial boost of cash into the U.S. market (driving gold down) -- but the Batcomputer says with oil at $100 -- and credit spreads (derivatives market) widening -- the 3/4 point cut won't be enough to get in front of the curve.
So enjoy the rally, but this might be a good time to increase your position in gold (because the trend line says gold is only going higher in '08 as inflation worsens) -- and it'll be tough to make a buck with oil at these prices.
StrategyUpdate.com
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