OPEC, Rates - Bitter Cocktail for Stocks

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Saturday March 11 10:06 AM ET

OPEC, Rates - Bitter Cocktail for Stocks

By Pierre Belec

NEW YORK (Reuters) - The double whammy of soaring oil prices and interest rates is clobbering the stock market. How much higher will oil and lending rates go? No one knows, except the people at OPEC and Alan Greenspan, the chairman of the Federal Reserve.

There's fear on Wall Street that the cost of buying stuff will suddenly be a lot more. Indeed, the big surprise of the year 2000 has been the jump in the price of oil, a tripling to more than $30 in a little more than a year after the Organization of Petroleum Exporting Countries orchestrated one of the most disciplined raids on oil consumers.

Deep production cuts by the cartel at a time when global demand for energy products is growing has lifted oil prices to a nine-year high and propelled U.S. gasoline prices to a record, creating a lot of angry owners of gas-guzzling SUVs.

OPEC pulled off the magic trick by cutting production by 15 percent and creating a 150 percent leap in prices, just as Asia was recovering from economic recession and the rest of the world was in overdrive.

At the same time, the pinstriped bankers at the Federal Reserve have been on an aggressive campaign of their own. Their goal is to raise the cost of borrowing money, effectively choking some of the life from the U.S. economy to slow its incredible momentum.

A persistent Greenspan has been rattling his interest-rate saber since last summer, warning that the supercharged economy will eventually breed inflation if it doesn't pause to catch its breath.

But the stock market had been snubbing Greenspan's inflation-containment efforts, unconcerned about the impact that four interest-rate increases can have on the economy.

The central bank lifted short-term rates by a full percentage point over the last eight months, setting off a domino effect on interest rates for millions of consumer and business loans.

The Fed's jawboning did not work. But things appear to be going Greenspan's way, now that oil prices have exploded. The combination of soaring energy prices and rising interest rates has proved to be a nasty cocktail for Wall Street.

There was heightened bearishness in the stock market this week as investors found that the surge in oil prices had claimed another victim.

Almost $36 billion in Procter & Gamble's (NYSE:PG - news) stock market value evaporated Tuesday after the maker of Crest toothpaste and Pringles potato chips said the high prices of crude oil and other raw materials would cut its earnings by 10 percent in the latest quarter.

P&G's stock plunge of 31 percent, one of the steepest drops in percentage terms for a blue chip, set off a chain reaction that triggered a 375-point slump in the Dow Jones industrial average, its biggest one-day fall since 1998.

The soaring cost of energy is flattening the wallets of millions of Americans in this car-dependent country as gasoline prices climb to a record $1.50 a gallon. Oil industry experts say the fuel will reach $2 a gallon during the heavy driving summer months -- and possibly $2.50 in some areas.

An eye-popping increase in the price of a high-profile commodity such as oil is negative for Wall Street because it can fan real inflation pressures, boosting the cost of making and transporting all sorts of products.

``My experience is that the major recessions we've seen in the last 25 years have all had one thing in common: rising oil prices,'' said Tom Kloza, chief oil analyst for Oil Price Information Service in Lakewood, N.J.

``Higher oil prices are a drag on the economy,'' he said. ''Already, Wal-Mart (NYSE:WMT - news) has alluded to the damage on its earnings from the jump in oil, and airlines have been hurt because they haven't been able to pass along the increased cost of fuel.''

The United States is the world's biggest oil consumer and the surge in oil is suddenly making Americans feel less rich.

Americans are also less optimistic. The Consumer Confidence Index in February fell from a record high in January, according to the Conference Board.

Some experts said the drop in consumer confidence, which was linked to higher interest rates and oil prices, was a sign the high-powered U.S. economy is about to stall. Consumers were also downbeat about the next six months.

``When diesel fuel went up to $2.60, the average Joe -- unless he worked for UPS or owned a Mercedes diesel car -- could not care less,'' Kloza said. ``But when gasoline shot higher, it did matter, even to someone who's an investment banker making $300,000 a year. For some reason, gasoline prices are apocalyptic.''

There's another dark side of the oil story.

The oil-supply squeeze could bring U.S. layoffs, according to an employment tracking firm. Challenger, Gray & Christmas Inc. says the obvious initial impact could be felt by hotels and restaurants as people scrap their travel plans because of high prices at the pump.

``Rising gasoline prices, which many experts predict will stay high through summer, could begin to slow economic expansion and launch a new round of downsizing,'' said John Challenger, chief executive officer of CGC.

``The situation could be particularly difficult for companies in the automobile, as well as travel and leisure, industries,'' he said. ``It would not be surprising to see sales of SUVs and recreational vehicles moderate, in light of the fact that it could cost $20 to $30 to fill the tank.''

This week, the inflation-chasing Greenspan was back at the podium, committing the Fed to raising interest rates again at the Fed's next policy-setting meeting on March 21.

Some analysts are predicting a series of mind-numbing interest-rate hikes through the rest of the year.

History shows that oil and Fed action can do a lot of damage to the stock market.

Oil slammed stocks in 1980 as people sensed that fast-rising energy prices would fuel inflation. In 1987, Fed money tightening caused a crash by October of that year. In 1990, oil was back in the news with the price climbing to a record $40 a barrel at the start of the Gulf War.

Experts say OPEC may have gotten more sophisticated about controlling production but the tremendous rise in oil prices suggests that something else is also at play.

Commodity speculators on the New York Mercantile Exchange have exaggerated the upward trend in oil and gasoline.

The influence of speculators, who buy commodity futures contracts simply for the gambling effect, has always been profound on the markets.

Historically, they have made the price of a commodity move up faster because these outsiders compete with the industry for available supplies. This competition heightens the pressure and price volatility as well as the duration of any price surge.

However, there may be some good news for battered oil and gasoline users.

Downward price corrections tend to be more dramatic than price rallies. The reason: A rising market needs a constant flow of new money to push it higher. But in a declining market, the forces at play include panic selling and what is known in the industry as a ``Get me out at any cost'' mentality.

Experts say the one thing that would provoke a big drop in oil would be a decision by the Clinton administration to tap some oil from the nation's reserve.

A sale from the Strategic Petroleum Reserve of nearly 600 million barrels would have a huge psychological impact on the market because it would be the first sign that more oil is flowing into the pipeline.

After all, the jump in oil prices has been partly psychologically based and a stockpile sale would have the same psychological impact on the downside.

A break in the clouds?

Martin Pring, president of the investment research firm Intermarket Review, said there may be a turning point in the oil market saga.

``The oil price has recently gained a lot of media attention and government attention,'' he said. ``Politicians are notably a lagging indicator and typically take action right at the turning point, suggesting that a turn may be in store for the oil market.

For the week, the Dow Jones industrial average was off 438.38 points at 9,928.82. The Nasdaq Composite index gained 133.84 at 5,048.63 and the Standard & Poor's 500 index was off 14.10 at 1,395.07.


-- Carl Jenkins (Somewherepress@aol.com), March 12, 2000


...However, there may be some good news for battered oil and gasoline users.

Downward price corrections tend to be more dramatic than price rallies. The reason: A rising market needs a constant flow of new money to push it higher. But in a declining market, the forces at play include panic selling and what is known in the industry as a ``Get me out at any cost'' mentality...

Oh yeah, that's great news. I'm delighted to hear that markets tend to fall more dramatically than they rise. Let's be sure to tell all our friends this good news, then we can watch the blood drain from their faces as the implications for the stock market sink in.

-- DeeEmBee (macbeth1@pacbell.net), March 12, 2000.

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