Tags: Oil | Subdueing | Investors

Curb Your Enthusiasm? Oil, Earnings Subdue Investors

Wednesday, 23 Apr 2008 03:51 PM

Stock prices pulled back again yesterday, after oil prices rose to a new all-time high and several companies reported disappointing first-quarter earnings.

Crude oil futures for May delivery closed at a whopping $119.37. Not surprisingly, United Airlines, JetBlue Airways, and AirTran Holdings reported significant operating losses due to historically high jet fuel prices.

And the bleeding continued in the financial industry. SunTrust and Fifth-Third Bancorp reported substantial losses due to asset write-downs.

My research indicates that oil prices will continue to rise during the weeks ahead and that a growing number of U.S. companies will report a significant decline in first-quarter earnings.

Even more, I expect a significant number of companies to lower earnings guidance for both the second quarter and full year 2008. After all, it's just a matter of time before companies acknowledge that the slowdown in the U.S. economy will hurt sales while rising inflationary pressures will increase costs. Already, Texas Instruments, UnitedHealth, and Novellus, amongst others, have lowered their fiscal 2008 earnings estimates.

My research also indicates that the first-quarter earnings of most publicly traded companies will fail to meet Wall Street analyst estimates.

The major factor driving oil prices higher is the expectation for the Federal Reserve to lower the target Fed funds rate by another 25 basis points when the Federal Open Market Committee (FOMC) meets on April 30. As a result of the expectation for an interest rate cut, the exchange value of the dollar fell to another all-time low against the euro yesterday, and crude oil, which is priced in dollars, spiked higher.

Unless the U.S. Treasury and/or the Fed implements actions to halt the decline in the dollar, I expect the price of West Texas Intermediate crude oil to rise to $125 a barrel within the next couple of weeks. I also expect gasoline and natural gas prices will continue to rise over the near term. Readers may recall my article, "$4 Gasoline May be Just Around the Corner" from April 8, where I warned about further increases in the price of petroleum products.

The start of the summer-driving season and the fact that U.S. refineries are currently operating at their lowest production levels since the aftermath of Hurricane Katrina in 2005 will push gas prices higher as well. In addition, with oil prices currently rising faster than gasoline prices, I expect refineries to continue operating at low production levels and for gas prices to therefore continue rising.

Rising oil and gas prices will no doubt be accompanied by a decline in both business and leisure travel — putting pressure on the service sector industries of leisure, retail, and hospitality.

A slowdown in the service sector would, in turn, likely lead to a further deterioration in the employment market, because all of the jobs created in the U.S. during the past 14 months have been in the service sector. Other than government and healthcare sectors, the leisure and hospitality sector was the only economic sector that reported job gains during March.

If the employment situation does continue to deteriorate, consumer spending will likely continue to fall and the U.S. economy will likely enter a recession later this year. That is, if we're not already in a recession.

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DavidFrazier
Stock prices pulled back again yesterday, after oil prices rose to a new all-time high and several companies reported disappointing first-quarter earnings. Crude oil futures for May delivery closed at a whopping $119.37. Not surprisingly, United Airlines, JetBlue Airways,...
Oil,Subdueing,Investors
535
2008-51-23
Wednesday, 23 Apr 2008 03:51 PM
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