Uh-Oh: Economist Cover on Oil
Painful though it is, this oil shock will eventually spur huge change. Beware the hunt for scapegoats
Cover art courtesy of The Economist, May 29th 2008 issue
For those of us who believe in such things as contrary indicators, this suggests a short term top in Oil to me. I would bet we don't see new highs in Oil for the next 6 months, and perhaps even 12 months.
Excerpt:
Thirty-five years on, oil prices have quadrupled again, briefly soaring to a peak of just over $135 a barrel. But, so far, this has been a slow-motion oil shock. If the Arab oil-weapon felt like a hammer-blow, this time stagnant oil output and growing emerging-market demand have squeezed the oil market like a vice. For almost five years a growing world shrugged it off. Only now is it recoiling in pain.
Before engaging in a knee jerk dismissal of the magazine cover indicator, please read page 9, #4 of this report: Contrary Indicators 2000 – 2003 Bear.
>
UPDATE: June 4, 2008 10:26am
My friend Paul Kedrosky references the Senate debate as the crude oil top tick . . .
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Source:
Recoil
The Economist, May 29th 2008
http://www.economist.com/opinion/displayStory.cfm?Story_ID=11454989
Tuesday, June 03, 2008 | 07:15 PM | Permalink
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Comments
Since I am one of those who don't quite see the value of magazine cover indicators, I am fine with the bet.
If we see a price above 135 in the next 12 months, will you lay rest to the magazine indicator stuff on this blog?
Posted by: Mich(^IXIC1881) | Jun 3, 2008 7:23:36 PM
Haha, agreed. Top in crude! If it's going to be on USA Today or Time Magazine also, that would be like a 100% indicator ;-)
Posted by: haileris | Jun 3, 2008 7:42:53 PM
Mitch: The indicator is because after it hits the masses, there's no one else left to be buyers, all the buyers are already in and the hype is done for -- all there's left are the buyers to start selling, that's the value.
Posted by: haileris | Jun 3, 2008 7:44:33 PM
So many factors affect the price of oil, unrest in Nigeria, strikes in Norway, hurricanes in the Gulf, Bush attacking Iran, etc. that the magazine cover indicator is of no value in predicting oil prices.
Posted by: larster | Jun 3, 2008 7:47:18 PM
I'm with you. The price of oil is now changing behavior. The use of Mass transmit where I live is up big time. They are adding routes, frequency of routes and more buses. Personally, my vehicles don't move unless it is absolutely necessary and I do my running around in parallel with others trips in the same area.
I am betting everyone else is just as pissed as I am and is also conserving every chance they get. Oil has plateaued for the time being. I also suspect we will be stuck with a sluggish economy for months, if not years to come.
Posted by: BG | Jun 3, 2008 7:48:43 PM
The Economist is a better publication than most, so I am neutral on this one (though a subscriber to it for the past 20 years).
That said, in the fall of 1998, they had the "Awash in Oil" cover, while oil was at $10/barrel, and they forecast that the price would drop to $5/barrel. That was within a week of the low price for crude. Been up ever since.
Posted by: David Merkel | Jun 3, 2008 7:50:56 PM
also worth noting
Bloomberg - 1 hour ago
Billionaire investor George Soros said the record oil prices weighing on the economy are the result of a ``bubble'' caused by speculation from index funds ...
http://www.bloomberg.com/apps/news?pid=20601101&sid=af4nshvRRNjE&refer=japan
Posted by: Bob A | Jun 3, 2008 8:03:36 PM
haileris,
I hear what you're saying but, and it's huge but, I believe Economics or another magazine would have another cover if oil hits 150, and Barry would then pick that one to prove the value of magazine cover indicator, ignoring all the previous covers with the same theme.
I am not saying there isn't a truth in "once everybody is talks about it, it is time to bail out" but who knows how many more oil covers is Economics gonna have if it were to keep going up...Eventually one of them will be close enough to the top of course.
I am actually happy that BR put this cover, now we have a record of the "cover indicator", and if oil should go pass 135, I will reference this thread each time BR adds a new topic on this subject.
Can't wait.. (disclaimer: no oil positions long or short)
Oh and it's Mich (from "Mich"igan not from Mitchell)
Posted by: Mich(^IXIC1881) | Jun 3, 2008 8:04:02 PM
I saw someone on CNBC this afternoon said he thinks oil be back below $100/barrel by election day. He also said he believes oil might be back under $80/barrel with in a year.
Posted by: Joe Klein's conscience | Jun 3, 2008 8:21:10 PM
Yeah Mich, but BR did qualify his call as a "short term" top... not actually that hard of a call really, as it's been an incredible run to date so it's rather easy to imagine crude trading sideways for the rest of the year... and eventually this so-called recession has to have some dampening effect on demand, right?
Posted by: MarkC | Jun 3, 2008 8:25:21 PM
Here's some more anecdotal evidence from what some consider hocus-pocus--T.A.
1) Take a chart of crude, back to Jan. '07, and draw a few trendlines connecting each low. The lines get increasingly steeper, meaning unsustainable.
2) Look at the inordinate # of E. & P. stocks that just since this January are up 40 to 100%.
I am with BR that a 6 month correction is in order.
Posted by: P. K. | Jun 3, 2008 8:52:06 PM
The first Cat 3 hurricane that forms in the Gulf of Mexico will be good for at least $10 of upside in this market.
Posted by: Bobby_P | Jun 3, 2008 8:58:31 PM
I don't think there's quiet enough hype yet to call it a peak. Normally we should see many stories of the same type.
Gold was more obvious as Bloomberg radio commercials were going all day long about buying spot gold and local shops wanting to buy gold.
I'm out of all oil and energy trades myself. I'm buying the retail and home retailers. The back half of this year I'll buy REITs.
When energy starts to cool down (when the green energy stocks die a tragic death due to lack of actual profit /profit growth). That's when I'll buy my local energy stocks.
People buying green stocks have made a tragic mistake. Things like solar cells or wind turbines are only sold once in many years but the energy company gets to charge for their free energy forever. Who's going to have the bigger profit margins?
Posted by: John Borchers | Jun 3, 2008 8:59:08 PM
Well he said 6 to 12 months..we'll see.
As per BR's advice I read the page 9, #4 on the link. All I saw was that if I were to trade on the two mag covers from July 29 '02, I would have stopped out twice with 8% or 10% losses on my purchase price (closing price as of July 29, 2002).
Further, section 5 of the same document talks about the "consumer sentiment" well it is awful now, how come that is not a contrary indicator? Well, because most believe consumers will get even more pessimistic, and at that time the markets will improve, sentiment will rise and we will look back and say "what a great time it was to buy"... Well...it is at 28 yr low now, why aren't you buying with both hands now???
That is the point I've been trying to make, all these indicators are easy to spot in hindsight, but while going through it (e.g. consumer sentiment at 28yr low), you base your investment decisions on more solid analysis, rather than these anecdotal indicators.
Last thing, when I see "China the new super power" cover on one of these mags, would that mean it is the beginning of the end for China? Well it should be, following this logic.
In summary, any indicator to trade on, depends on our point of view. Luskin is saying now "when everybody is selling you should be buying"....You know what, I will say the exact same thing when the time for me comes, every one of us will say the same thing,but everybody has their own timing on these indicators...To Luskin, people are selling now and the time is now, to me I don't think the time is now..
Same thing with mag indicators, Barry sees that cover and says it is time to get out... if it goes up further, some magazine will put it on the cover again and somebody will say "wow look at the indicator, it is time to get out now", and one of those will be correct and we will all look back and say "mag indicators work"
Posted by: Mich(^IXIC1881) | Jun 3, 2008 9:06:31 PM
Anybody here ever actually work inside a magazine? Cover art, headlines, etc., have a single focus. Sales. (And due to deadlines, the it's usually easiest to simply sensationalize the obvious.) On the whole, the people behind the covers are about as impressive as cold pizza, cheap beer, and a hairy armpit. (They've got dogs to walk, dinners to eat, porn to watch too.) As a contrary indicator? Sure, along with a trillion-billion other equally obvious & timely events (water-cooler talk, TV, blogs [my indicator is TBP touting indicators]) that together form the human collective. I think the draw of the cover here is that it seems less anecdotal. But it's not. It's just a paper curtain behind which you'll find the usual human folly.
Posted by: dukeb | Jun 3, 2008 9:06:51 PM
An important factor to keep in mind regarding oil price is that, because the price has risen so far, so fast, and because many consumers are protected from the market price by subsidies or price ceilings, the effective price of oil being felt by consumers is far, far below the current spot price.
We already have demand destruction occurring. When today's prices work through the system (both for direct energy products and for products/services with a high energy input), demand destruction will be even greater.
Unfortunately, I have no clue how demand destruction will balance out against new demand from China, etc.
My gut feeling, though, is that the global economy can't really afford 80+ million bbl a day at $130/bbl - the economic uses of $130/bbl oil don't add up to 80+ million bbl.
Posted by: ottnott | Jun 3, 2008 9:22:21 PM
Economist Covers
Aug 21, 2001:
2001 Things to do in a recession
----: Nope, it wasn't the end of recession, it lasted till Nov 2001
June 22, 2002
An economy singed
The markets' mood reflects a poor outlook for America's economy
---- Nope, there is still 8 months to THE low point
skipping to current issues....
Apr 12th 2008
The Great American slowdown
---- It is a great contrary indicator title, but I don't believe it is the reversal point for the economy or the markets..
May 31st, 2008
Recoil
---- Who knows, if it goes up, they will make another cover
Posted by: Mich(^IXIC1881) | Jun 3, 2008 9:36:19 PM
Certainly, we're overdue for a short term shakeout in oil.
But with Fed funds at 2%, there's no way that this is the top for oil.
Posted by: DL | Jun 3, 2008 9:44:29 PM
If a writer--or his editor--doesn't know the difference bewteen 'vice' and 'vise' why should I believe anything else they might say. Sheesh...clowns to the left of me, jokers to the right....
Posted by: Bob Markman | Jun 3, 2008 9:47:38 PM
Mitch: The indicator is because after it hits the masses, there's no one else left to be buyers, all the buyers are already in and the hype is done for -- all there's left are the buyers to start selling, that's the value.
Posted by: haileris | Jun 3, 2008 7:44:33 PM
?????????????????????????????????????
what an idiotic statement ....
oil contains energy that is converted into
kinetic energy by internal combustion.
So your statement is stupid, in the end, theoil is refined, then
consumed in the production of kinetic energy.
It is not the USD which can be created at will.
Posted by: rickrude | Jun 3, 2008 9:49:10 PM
I love how CNBC has called the (at least short term) top in oil and the (at least short term) bottom after the collapse of Bear Stearns.
I am going to be watching for any specials that they have, they are the best counter-trend indicator I have seen.
First in being last to the party, worldwide.
Posted by: Aiden | Jun 3, 2008 9:52:19 PM
Oil might go down, but I think the prices will be sticky (like real estate) and it won't be because of speculation.
The prices will be sticky because the world needs to buy oil more than those who possess it need to sell it (think DeBeers, or a farm owned outright). There's also the fact the a new high has been established, and while the masses kvelled, they didn't stop buying.
What will drive any reduction in price will be the lessened demand due to smaller vehicles and less driving.
Posted by: Marcus Aurelius | Jun 3, 2008 10:02:24 PM
Hey Barry
Time to bring back your "current US dollar position versus the Euro" graphic.
I pasted it into my FX work the last week in April when EUR/USD was 159+
Posted by: RW | Jun 3, 2008 10:13:03 PM
you buy a house
You use a house
You sale a house(make a profit)
You buy oil/diesel/gasoline
You use oil/diesel/gasoline
You sale ??????????? (nothing)
Posted by: Ed | Jun 3, 2008 10:13:48 PM
My vote goes to the temporary top in crude. Its a good call. I like Jim Kingslies Energy Investments Stratergy Blog analysis. Oil tops now and goes sideways for 6 - 18 months. But the next time oil goes exponential it will be the real real crunch.
Posted by: simon | Jun 3, 2008 10:34:49 PM
