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The Fed is Guaranteeing Higher Oil Prices

By Jeff Clark
Thursday, December 23, 2010

This can't be good...
In a season filled with dancing sugar plums, halls decked with holly, and forever rising stock prices, rising oil prices play the role of the Grinch.
Oil popped above $90 per barrel yesterday – its highest price in over two years (as you can see from the chart above). As a result, an average gallon of unleaded gasoline topped $3 nationally. If you're buying the premium stuff in my neck of the woods, you're paying $3.90 per gallon – a 20% increase since September.
It's not the highest price ever. But it's enough to push the cost of filling up an SUV into triple-digits.
Forget about tax cuts and quantitative easing (QE). When it comes to the economy, $100 fill-ups trump everything.
Someone far smarter than I am figured out every $0.01 increase in gasoline prices extracts $600 million from U.S. consumer disposable income. The $0.30 rise in gas prices over the past few weeks pretty much wiped out whatever economic benefit was hoped for with the Fed's QE2 program in December.
Here's something else to keep in mind...
The following is a chart of the Baltic Dry Index. It tracks the cost of worldwide shipping prices of various dry cargos… So it's a measure of economic demand.
It's interesting that while oil prices are climbing to their highest point in two years, economic demand is slipping toward its lowest point.
Clearly, the rise in oil prices isn't the result of a rise in economic activity. It's the result of an increase in inflationary pressures… Pressures that are caused, in part, by the Fed's policy of printing money in the name of quantitative easing.
Whatever benefit the Fed is trying to create by printing money to buy bonds to keep interest rates low (a failing effort, by the way) is negated by the rapid rise in oil and gasoline prices – not to mention the rise in wheat, sugar, and corn, too.
There's still six months left in the Fed's QE2 program. Yet they're already floating trial balloons about the possibility of QE3.
At this rate, we'll see $140 oil by July.
Best regards and good trading,
Jeff Cark

Further Reading:

Jeff has one suggestion to fix the mess Fed Chairman Ben Bernanke is causing: "If you want to lower long-term interest rates, you need to raise short-term rates." It may sound backwards, but it just might work. Learn how here: Bernanke Doesn't Have the Guts to Do This.
Matt Badiali shares four small oil and gas companies that could net you triple-digit gains over the next five years. Investors "should focus on companies with high growth history but small market values, like these," he writes. Read more here: The Secret to Making 20-Fold Gains in Oil and Gas.

In The Daily Crux
Market Notes
Coal stocks continue to lead the market… new 52-week highs for coal giants Peabody Energy and Arch Coal.
Infrastructure rally is on… new highs for engineering and construction firms Foster Wheeler and Chicago Bridge.
Major consumer spending names Starbucks, Target, Dillard's, and Abercrombie & Fitch surge to new 52-week highs on economic growth.

Big Oil powers higher… new highs for ConocoPhillips and ExxonMobil.
Market Watch
Symbol Price
S&P 500 1258.84 +0.3% +12.6%
Oil (USO) 38.64 +0.9% +5.7%
Gold (GLD) 135.05 -0.2% +27.2%
Silver (SLV) 28.57 -0.2% +71.7%
U.S. Dollar 80.68 +0.1% +3.1%
Euro 1.31 +0.0% -8.1%
Volatility (^VIX) 15.45 -6.3% -20.9%
Gold Stocks (^HUI) 555.25 -1.1% +31.3%
10-Year Yield 3.35 +0.6% -10.4%

World ETFs
Symbol Price
USA (SPY) 125.78 +0.3% +12.6%
Canada (EWC) 30.34 +0.4% +17.0%
Russia (TRF) 22.55 +0.5% +22.8%
India (IFN) 38.90 +1.0% +33.6%
Israel (ISL) 17.23 -0.9% +13.7%
Japan (EWJ) 10.76 +0.4% +9.5%
Singapore (EWS) 13.30 +0.2% +17.6%
Taiwan (EWT) 15.01 +0.1% +21.0%
S. Korea (EWY) 58.80 +0.3% +27.3%
S. Africa (EZA) 72.01 +0.1% +32.9%
China (FXI) 43.15 -0.3% +4.4%
Lat.America (ILF) 52.80 +0.7% +13.5%

Sector ETFs
Symbol Price
Oil Service (OIH) 138.52 +0.2% +16.9%
Big Pharma (PPH) 65.21 +0.1% -2.5%
Internet (HHH) 73.68 +0.3% +28.3%
Semis (PSI) 16.39 -0.2% +21.9%
Utilities (XLU) 31.34 +0.5% +0.5%
Defense (PPA) 18.72 +0.2% +9.4%
Nanotech (PXN) 10.08 +0.5% -2.4%
Alt. Energy (PBW) 10.44 +0.7% -6.0%
Water (PHO) 19.24 -0.4% +13.5%
Insurance (PIC) 16.45 +0.6% +21.0%
Biotech (PBE) 22.18 +0.4% +33.2%
Retail (PMR) 19.40 -0.1% +21.9%
Software (PSJ) 25.33 -0.3% +23.0%
Big Tech (QQQQ) 54.88 0.0% +21.3%
Construction (PKB) 13.03 +0.8% +7.7%
Media (PBS) 14.01 +0.4% +21.2%
Consumer Svcs (IYC) 68.01 0.0% +21.5%
Financials (IYF) 57.48 +0.7% +10.1%
Health Care (IYH) 65.79 -0.3% +1.7%
Industrials (IYJ) 65.51 -0.1% +22.1%
Basic Mat (IYM) 76.44 -0.5% +28.3%
Real Estate (IYR) 55.22 -0.4% +18.4%
Transportation (IYT) 92.05 -0.2% +22.5%
Telecom (IYZ) 23.22 -0.9% +14.3%