Oil Slicks !

As mentioned earlier, the FED appeared to underestimate the economic impact of high-energy prices on both consumers and businesses.

But, what is now coming to light is that the apparent oil shortages may have been more contrived than real. Leaving aside the California energy crisis, which could be largely self-inflicted, there are credible reports that oil shipments may have been diverted from the US in order to support higher prices.

The first is an investigation into an apparent diversion of Alaskan oil from the Pacific Northwest to Asian markets in the late 1990’s in order to create regional shortages, and thus support higher oil prices.

Then just last fall, there were very low heating oil and gasoline inventories, particularly in Northeastern US, which created an apparent crisis and rapid rise in energy prices. However, an astute oil analyst ascertained that there had been an excess volume of oil shipped last fall to Southeast Asia, which he dubbed “the China syndrome”. This analyst correctly predicted that there would be a “wall of oil” arriving on US shores in time to satisfy US needs.

Whether the oil shortages were real or illusionary, there are several lessons to be learned. For one thing, there appears to be a need for a comprehensive US or North American energy policy, which includes stronger conservation incentives and greater energy self-sufficiency.

For investors, one would do better to be more wary of the affect of high-energy prices on both consumer spending and corporate profits. If inclined, one could also take advantage and profit from the situation.

Market Over-Reactions !

Whenever markets become overvalued, as the North American equities had been for a couple of years, they rarely return to fair value in one elegant correction. They almost always become significantly oversold - creating all sorts of chaos - before returning to a more balanced level of expectation and activity.

The downward spiral in the markets is a dangerous period because it can create an extreme spending crunch at a time when companies are especially needy, because consumer spending still accounts for two-thirds of all economic activity.

Bursting Bubbles !

The collapse of a wide range of dot-com start-up operations - and the implosion of the market for their initial public offerings - provides irrefutable proof that ventures with no barriers to entry, sketchy business models, no customer base, inexperienced management, and negligible revenues or cash flow, ultimately cannot survive.

Unfortunately, many investors lost considerable money in remarkably short order as the dot-com rally fizzled.

Everything is Old Again !

For all the bombast and hype, the New Economy really isn’t that different from the Old Economy after all. Despite measurable gains in productivity and a shift of capital into high-tech industries, when the FED tightens monetary policy it obviously affects New and Old Economy businesses alike, as the balance of supply and demand applies to all.

Also, when investors become squeamish and it is no longer possible to use stock as currency, companies with good “Old Economy” cash in hand, fare the best.

The R World !

Greenspan (the FED chairman) who acknowledged recently that US economic growth was close to zero, is working aggressively to get the economy back on track. The two back-to-back, half point interest rate cuts within 30 days in January, mark the first time this has ever been done. And, the FED will likely not stop there, because nothing would be gained by having the economy go into a significant or prolonged downturn.

Greenspan even offered some support to the new President’s major tax reduction plan. There is known to be a large amount of cash on the sidelines. Much of this is sitting idle in the portfolios of equity fund managers. The probable rate and tax cuts should at some point, pull this cash off the sidelines and into stocks, when "the time is right".

Historical Rallies after Rate Cuts !

Analysts have pointed out that the S&P500 index, a broad measure of the US stock market, has gained an average of 23% over the 12 months following the first interest rate cut by the FED.

In an atmosphere of much lower interest rates and an economic outlook not worse than expectations, confidence should build that the markets have “bottomed” and that corporate growth will improve in the second half of 2001. Also, with bond yields already low and with T-Bills being offered at much lower rates, it will put pressure on individuals and money managers to do something better with their cash.

The combination of these should attract accelerating money flows into the stock markets, sooner rather than later. The individual and industry leaders will be buying selected stocks and funds at bargain prices.

Momentum will build as more people see “the light at the end of the tunnel”.

© El Residente ARCR Administración S.A. San José, Costa Rica N.B. Like all information on the internet, this article may currently be incorrect or out of date. .