September 2000 Commentary Oil’s Price Begins to Pinch & the Euro

The economy has been slowing and inflation, or the lack thereof, continues to be a positive in the long running economic uptrend. And to date, the political scene has not had much effect on the market psyche one way or the other as the markets have been in a tedious trading range.

It is notable that the Dow Jones Industrial Average first topped the 11000 mark back in April 1999. We have now had 17 months of this Dow trading range. The Nasdaq has had a five-month trading range since its sharp correction last spring.

While the stock market Bubble may not have burst, it certainly has been developing a slow leak. A slowing economy and continuing extreme valuations are viewed as fundamental reasons not to expect the Nasdaq to resume a sharp escalation any time soon. To the contrary, many of the big blue-chip Nasdaq stocks continue to be on their knees.

Of significant interest are 1) the low price of the Euro, and 2) the high price of oil that has reached a ten-year high of almost $35 a barrel. There is speculation that oil can reach $40 per barrel. If the price were to get there, the pundits would then see $50 oil.

On January 1, 1999 the Euro came into existence at a valuation of almost $1.18. In the last week it has traded below 86 cents. That decline represents a drop of 27% in the value of the currency of eleven European countries against the US dollar. Many currency “experts” are predicting/guessing the Euro could decline to 80 cents by the end of the year.

Neither they nor we know what the Euro will do. However, we do know that this is a decline of gargantuan proportions for the European currency.

Since oil is bought and paid for in dollars and since the price of oil is near record levels, it is understandable that the Europeans are incensed at the price of gasoline. As cold weather approaches, the cost of fuel oil in addition to the cost of gasoline will add to the financial burden imposed on Americans, Europeans and other energy consumers around the world.

There was a picture on the front page of the September 14th New York Times that showed streets in downtown London empty at midday. The article was titled “Fuel Shortages Deepen in Britain and Continent.”

Barricades by angry truckers and others protesting the high cost of fuel that is due not only to the high price of oil but also to the taxes Europeans put on fuel have caused a crisis of wartime proportions in England where 90% of the filling stations are dry. Protesting truckers have also sealed off roads in France, Germany and in Belgium. The fuel price and tax protests threaten the political life of Germany’s Chancellor Gerhard Schroeder and England’s Prime Minister Tony Blair.

Germany’s gasoline prices are around $4.00 a gallon. England reputedly has the highest prices in Europe with gasoline at about $4.37 a gallon.

In order to understand the protests one must realize, for example, that in England the tax is 76.2% on the price of gasoline – “about triple the rate in the United States” according to the Times. This means that of the $4.37 paid for a gallon of gasoline in England, $3.33 is for taxes and $1.04 is for gas. The people in England and on the Continent have figured this out and have had enough.

Now we will have to see what develops in these countries that, if not out-and-out socialist, are governments controlled by left-of-center politicians who have found a way to directly tax their constituents in order to pay for their extravagant social programs.

On this side of the Atlantic we should consider ordering our heating oil now — even on these lovely September days with temperatures in the high 70s as Americans too will feel the double barrel effect of higher gasoline and heating costs this winter.

As mentioned above: Positives are that 1) inflation as of this writing continues to be minimal and 2) with the violent shakeout of many of the high-flyers, the mania and speculation in the stock markets seem to have abated a bit. 3) It also appears that the Federal Reserve Bank will not need to raise interest rates again in the near future. This is not a prediction on our part but a comment concerning what seems to be current market sentiment with which we tend to agree.

A potentially serious negative is the high cost of oil and energy. Depending on these costs and the duration of very high levels, the viability of the economy can be threatened both here at home and internationally. Lower corporate earnings as a result of these costs will mean lower stock prices for the companies affected.

John W. Hamilton
September, 2000