For the past five months, I've grown increasingly concerned
about the steady surge in oil prices.
Back in November
,I noted that several sectors could be affected if oil moved past
$100 a barrel. With oil now approaching $110 a barrel, you can
forget that qualified statement. Oil will affect various swaths in
Some market watchers suggest oil has only temporarily moved onto
a higher plane and that prices will eventually come back down. Then
again, they've been saying that for the past six months. It's
increasingly hard to see why oil prices will suddenly pull back.
"The turmoil in the Middle East is unlikely to be resolved quickly
or easily, meaning that oil market volatility is likely to remain
high," analysts at Merrill Lynch say. At this point, the only major
to bring oil prices back down (besides a sudden resolution to all
of the Middle East's troubles) would be a slump in demand. And
demand would only fall because oil prices rose so high that they
choked off economic activity.
When I looked at
surging oil prices
again in February, I suggested that airlines, restaurant chains and
auto makers would be the first to feel the impact. Recent auto
sales trends imply that consumers are quickly switching to smaller
new cars. This means the auto industry may be able to make up some
of the effect from falling pick-up truck sales. Yet other sectors
classes won't be so lucky -- these groups are sure to start feeling
After a powerful multi-year rally, I fear emerging markets will
take it on the chin in 2011. Many of these countries are grappling
, which is leading their central banks to start raising interest
rates. Oil plays such a big role in many of these economies that
these central bankers will be forced to raise rates even more than
they would like. This leads to a strong possibility that these
economies will cool or even flatten out.
Which countries are vulnerable? Let's start with Korea. The
iShares MSCI South Korea
has recently surged on expectations that lost economic activity in
Japan will be picked up in Korea. The index has doubled in the past
two years. Yet South Korea's
just announced that inflation has risen to 4.7%, a 29-month high --
and that's before the impact of the further recent spike in oil
prices. From shipbuilding to consumer electronics, Korea is highly
dependent on freight traffic and freight costs. Yet unless oil
prices fall back below $100 a barrel this year, orders for new
Korean ships are bound to slow sharply as trans-oceanic freight
starts to drop.
If you own any emerging-market investments, take a close look at
whether that country or region is a
or importer of oil. Oil exporters such as Brazil will at least
generate rising income from oil, even as their central banks
continue to try to tame inflation.
Gasoline prices are approaching $4 a gallon in many places, right
at a time when many consumers are starting to plan summer
vacations. In the most recent monthly survey of consumers by the
University of Michigan, expectations of future inflation rose from
2.9% to 3.2%, the highest since early 2008, with most citing gas
prices as their concern. All of the sudden, a 400-mile road trip
becomes that much more expensive. So an increasing number of
consumers may look to take local vacations and save on fueling
expenses. The same logic applies to business travel, as expense
receipts start to show sticker shock.
This may well spell trouble for the lodging industry, which needs
high occupancy rates and full prices to make a
. If occupancy rates fall, price wars ensue and industry profits
can take a deep hit. That's what happened a few years ago, the last
time oil spiked above $100. If consumer and business travel starts
to slow, then lodging stocks such as
would start to feel the pain. For that matter, cruise ship
operators such as
Royal Caribbean (NYSE:
, both of which count fuel as their largest expense, would surely
take a hit to profits.
Fuel is also a major cost component in agriculture, whether it's
the gas or diesel powering a tractor, or the expense of delivering
produce or livestock to market. Farmers tend to sort out their
expenses according to need. They can't easily cut down fuel
consumption, but they can easily defer any non-essential spending
In recent years, high farm prices have enabled farmers to upgrade
everything from irrigation equipment (made by firms such as
Lindsay Manufacturing (NYSE:
to large combines made by
and others. A few years ago, when oil was also in triple-digit
territory, demand for these types of equipment fell sharply. The
current spike in oil holds a similar threat.
Action to Take -->
With every $10 rise in oil, the stock market has still managed to
power even higher. All along the way, economists have been
suggesting that the U.S. economy can withstand the
's upward move. Yet certain sectors are so dependent on oil that
it's impossible to see how they aren't feeling the pain. Share
prices may not yet be reflecting the oil spike, but we may finally
be at a tipping point. Keep an ear open on first-quarter conference
calls. Discussion about rising oil prices is bound to dampen profit
outlooks at an increasing number of companies.
-- David Sterman
P.S. -- Few investors realize that a 20-year energy agreement
between the United States and Russia is about to expire. This deal
supplies 10% of America's electricity. As broke as our government
is, the situation is so serious that President Obama is asking for
$36 billion to avert this crisis. And Republicans support him.
Here's what's going on…
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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