These days, investors are bombarded by variety of stimuli about the financial crisis and the state of the U.S. economy, and not all of it is useful. In fact, some of it can be downright harmful -- leading to imprudent decisions, needless shifts in asset classes, and other financial mistakes. Hence, perhaps more than ever these days, investors need to be able to separate 'the wheat from the chaff.'
Advice from a knowledgeable source
My old UConn grad school colleague -- and one quality human being I might add -- former U.S. Congressman Rob Simmons, R-Connecticut, used to say, "You have to use the correct methodology to separate what is 'noise' from what is just 'static.' " Here's one barometer investors need to pay attention to: the price of oil.
That's correct: the price of oil. Every day, or so it seems, U.S. stock markets give the impression that all commercial activity will cease and that the U.S. and the world will revert to the barter system -- the market's mood is that somber most days.
Well, ignore the above, which often is just static, and keep your eye and ear attuned to the price of oil, which closed Thursday down $1.77 to $43.52 per barrel. If conditions, financial and economic, are deteriorating as much as some think they are, oil will drop much lower. It will certainly fall below $30 per barrel and will, relatively quickly after that, within a month or two, trend toward $20. That's noise.
More noise: An oil price below $20 suggests a deeper global recession. Further, a sustained oil price below $15 implies the worst economic conditions in the U.S. and globally since World War II, and perhaps longer.
That's because given the global economy's development, trade flows, and the number of major oil users, oil should not trade below $30 for any sustained length of time -- 3 months and longer -- if there is even a reasonable amount of commercial activity, both in the U.S. and globally.
Important point: Don't worry about a dip below $30 or a spike down to $28 etc. that is followed by a price rebound. Both can be ignored, so long as oil rebounds in a sustained way. That's static.
However, if oil drops below $30, then $25, and stays there, with additional downward pressure over 3-8 weeks, then you know that economic and/or financial market conditions have deteriorated substantially.
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Financial Editor Joseph Lazzaro is based in New York.
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Reader Comments (Page 1 of 1)
3-05-2009 @ 11:24PM
Iridium said...
Actually you couldn't be more wrong if you tried. All indicators show that oil should already be at $25. We have to store crude in tankers off the coast for crying out loud.
Oil has tested $35 a few times in the past months only to spike back to $45 because a mouse farts in India.
You cannot use a wholly controleed market to guage economic recovery or sustained drop.
The best thing for the global economy would be for oil to drop to $25. The only problem is that any indicators showing an upward trend would cause the oil thiefs to jump back into the market and drive the price back to $60, throwing us back into a major recession.
If we don't start putting bullets in the heads of oil traders we will stay in the stagnated state we are living in.
Anyone that sees oil going above $50 a barrel as a good thing is a terrorist and should be executed.
3-06-2009 @ 8:42AM
Irish said...
I agree with Iridium. The price IS at about $25.00/barrel. Keeping the price per barrel up on the market is just another tactic at fighting the losing battle over the economy. When the market comes back to reality, maybe then we'll see improvement. Until then, continue to gouge hard-working Americans until there's no money left. We're heading for a nasty time real soon.