With the market now only capable of kneejerk headline reactions which end up being immediately priced in, in the pursuit of the mythical Russell 36,000, it completely ignores the actually important news (whose interpretation has not been programmed into the algos trading the S&P) such as input costs and their derivatives, which will inevitably crush margins and lead to the same market reaction as that seen in the summer-fall 2008 transition. And since leverage on all cash flow producing assets will be at the same level as US banks circa 2008, the result will be an even worse wipe out. It has gotten so bad that US Energy Secretary Steven Chu was dragged out of his office to present his version of the "irrational exuberance" speech so pervasively ignored by the stock market until it was proven to be the only sensible thing ever uttered by the maestro. At a news conference on clean energy, Steven Chu said on Thursday high oil prices posed a threat to the global economy. "The oil producer countries and the oil consuming countries are concerned because it does have an impact on a very fragile economic recovery. There is great concern," Chu told a news conference while attending a clean energy conference. "There's ongoing discussions ... I'm not going to go into any of the details of the discussions. There is a concern about trying to stabilize prices. There is a concern about rising prices," he said." There may be a concern, but according to the president there isn't really much that can be done about said prices. The best people can do is learn to cope. Especially since there is no chance that the commodity complex will be declining any time soon: to many today's ECB decision was a potential catalyst. And instead the market took one look at the number, listen for 2 minutes to Trichet's rambling remarks and bid everything up.
Oil prices vaulted to their highest level since September 2008 this week, stoking concern among analysts and economists that the higher cost of fuel will crimp consumers' spending.
OPEC ministers, however, have said the organization cannot do anything to stop the rally as the market is already well supplied.
OPEC is not due to meet to discuss output policy until June, although Saudi Arabia has increased its own production to help compensate for the loss of Libyan oil exports amid fighting between rebels and forces loyal to leader Muammar Gaddafi.
Chu said he was aware that the Libyan rebels had been able to sell a cargo of crude oil but he did not have any details on the transaction.
"We know it has occurred. The United States is supportive of that sale and is supportive of the Libyan transitional government for that sale," he said.
Chu was in Abu Dhabi for the second Clean Energy conference along with ministers approximately two dozen other countries. Chu said the ministers made progress on international cooperation for the development of smart electricity grids, home appliance efficiency and electric vehicle deployment.
What is concerning is that according to Oil Movements, OPEC was set to ship 1.6% less oil in the 4-week period. Well, since prices have only been going up, obviously OPEC is not chasing a drop in demand. Instead, OPEC may have well reached the proverbial peak in production. Sure enough this does include the offline capacity from Libya, although that conflict is far from over. What is troubling is ongoing preponderance of free money in margin accounts: with the market topping at the 1,330 level, the only asset classes that continue to push ever higher is the energy space and of course, precious metals.
Expect to see even more buying of oil as speculators keep their mouth shut for fear of breaking the trade and end customers keep their mouth shut for fear of upsetting the status quo.