Investors are nervous this morning as they eye the escalating violence in Libya. Although , Tunisia, Egypt or Bahrain were first, Libya’s a major oil/gas producing nation unlike the others. This has heightened concerns about oil supplies and pushed European and Mideast benchmark prices over $110 per barrel. Luckily at home, the West Texas Intermediate benchmark price is “only” about $93. The concern here is that higher oil prices can do three things:
- Drive up worldwide inflation
- Threatens political stability in neighboring countries….and Wisconsin
- Bring another global recession which it did last time when it went to $160 a barrel
Other news was not much friendlier for the markets:
– Moody’s lowered Japan’s sovereign debt outlook from stable to negative. Moody’s said that if Japan’s public debt continues to increase and fiscal reforms are not adopted it will cut the rating. This followed the recent downgrade which lowered Japan’s rating from AA to AA-. Right now, Japan’s outstanding public debt is over 200% of GDP, which is the highest among developed nations. By comparison, US public debt is around 70% of GDP. Although this seems like Japan is much worse off than the U.S., Bernanke had better be wary of continually adding to the deficit.
– Home prices dropped again in this morning’s CaseShiller report, declining -0.41%, the sixth straight month in which the index has dropped. The index is now approaching the lows hit in early 2009, when the recession was at its worst. The year over year decline in the index (December 2009 to December 2010) was -2.38% and over the past three years, the index is off -22%. This is a big concern because it not only shows no life in the housing market which is critical for a sustained economic recovery, but that there is absolutely no asset inflation and only food inflation in our economy. This means the federal reserve actions are causing only higher costs without the benefit of increased wealth.
I suspect this will prove to be another buy the dips opportunity and not a reason to sell. However, once the Quantitative Easing program finally ends, stocks will be in for a rude awakening. The bubble continues, so ride the wave but beware of the incoming Tsunami.
Regards – Keith Springer