Saturday, July 7, 2007

The Oil Factor

Over the last 20 years, author Stephen Leeb has created quite the reputation for himself, as an innovating predecessor of changing economic paradigms. His previous books include a 1986 (Getting in on the Ground Floor) novel foretelling the great technology bull market of the 1990s as well as a staunch warning of the impending technology collapse in his 1999 book, Defying the Market.

In his 2004 book, The Oil Factor, Leeb returned to the limelight with an unprecedented prediction of soring energy prices. Three years later we now appreciate the full maturation of his predictions. While these projections were not all that startling, the true gravity of the situation is. At the time, a simple analysis of demand side economics would have revealed the pressures on energy prices as wealthy Americans adopted the use of sports utility vehicles and the emerging economies of China, India and Russia required a greater energy intensity. Given the low prices at the time, simple deduction would conclude an increase in energy prices.

While the issues of rising energy prices seems rudimentary from the vantage point of a neophyte, the ramifications are not so basic. The book does an astounding job of factually revealing current supply and demand dynamics, while demonstrating the future consequences for investors.

Of the various chapters in the book, chapter 2 "Our Amazing Oil Indicator," remains one of the most intriguing and useful. Since all economies demand energy for economic output, Leeb and his associates devised a method for comparing and contrasting rising oil prices with S&P performance. First, they evaluated oil prices from 1973 to 2003. Finally, they notated S&P 500 index performance during the same time frame. In Leeb's words, "The results were staggering. When oil rose by 100 percent or more over a twelve-month period, stocks during the next eighteen months experienced an average maximum monthly decline of 27 percent." The basic premise here is, as oil moves higher the market moves lower.

The question is, with oil prices up significantly, how come the market is reaching new highs? I have my speculations such as strength in the energy, and natural resource sector as well as the resilience of the American consumer. While more though needs to be put into this, one word does come to mind, unsustainable.

In conclusion, The Oil Factor is a must read for every investor wanting to protect their investments in the emerging world of scarce and expensive energy.

1 comment:

keith said...

The author above might consider some of his own research, lest he seem as ill informed as the CNBC commentators with their incessant and errant blather regarding the correlation between stock prices and the price of oil.

The truth is that between, for instance, 1982 and 2006 the correlation coefficient between oil and the S&P 500 was -0.11. Longer term, between 1970 and 2006 the one year monthly correlation coefficient for oil versus the S&P 500 was at maximum of +0.7 and a minimum of -0.8 WITH AN AVERAGE OF APPROXIMATELY ZERO.

Suggest you read Ken Fisher's latest book. No, I retract that. I want someone on the other side of my winning trades.

Keith Williams