David Stockman explains why the stock and bond market could be on the verge of a collapse.» Read More
Will the crude rally derail the economic recovery? Many traders have asked themselves that question, as crude is trading $10 higher than it was just a month ago.
The answer, however, depends how long oil stays at these levels. If oil remains at these levels for the remainder of the year, then yes, it will have a negative impact. But with that being said, I don't expect us to remain this high for too much longer.
The fundamentals of this market, in my opinion, don't justify $107 oil. We are very near record supplies in Cushing, and the demand for crude, while higher than it was, is nowhere near the levels we saw just a few years ago.
And as new technology and new efficiencies are implemented, crude demand should not increase in any substantial way. We are only a few weeks from the end of driving season, which means that one of the main drivers of crude is about to be removed.
Gold bulls breathed a sign of relief on Monday, as gold enjoyed the best day in three months. After dipping below $1,180 in late June, gold recovered everything it had lost in the past month.
Gold is rising Monday, as weak shorts cover above $1,300.
After closing on Friday with its second weekly gain in a row, gold was able to begin this week with a bounce, running stops above $1,300 and trading up to the next major resistance with a high of $1,322.90. This high is against the initial April 16 low of $1,323, which is a major retracement level.
Gasoline futures have been an incredible run, rising 14 percent in three weeks. In fact, on Friday, RBOB gas futures hit a four-month high.
Traders blame the spike on supply and refinery issues. The gasoline rally has come alongside a similar move in crude oil, which hit a fresh 16-month high on Friday.
(Read more: Crude reality: Oil could crimp rally)
The rise in gasoline futures is already affecting prices at the pump. Gas prices have risen an average of 15 cents in the past week, up to a national average of $3.65 a gallon, according to the AAA Fuel Gauge Report.
Crude continues its runup, reaching for $110 in Friday's session as the impending expiration of the August contract, a short squeeze and the desire to cover shorts into the weekend are adding fuel to the fire.
The path of least resistance remains higher, as Wednesday's option expiration allowed volatility—and bullish volatility, at that—to slip back into the market. The high on Thursday was $108.43, and the market experienced a quiet overnight session.
As we head into the weekend, I would not expect to see a switch in direction, and it is more likely that we will see a run at the $110 level. With economic conditions stable, demand worries on the back burner, and crude stockpiles at the lowest level since January, traders have had no reason to sell oil this week.
(Read more: Crude reality: Oil could crimp rally)
A stronger U.S. dollar may sound like a good thing, but it's providing a serious headwind to earnings. And the situation could get worse.
"We're seeing a lot of high-level names already report the effect of a strong dollar," said Kathy Lien, BK Asset Management managing director. "We've got Coca-Cola saying that, and Johnson & Johnson. IBM said revenues were down 3 percent, but would only be down 1 percent if it weren't for currency effects."
Indeed, on Coca-Cola's Tuesday's earnings call, CFO Gary Fayard noted: "On a comparable basis, the impact of currency was a 3 percent headwind on this quarter's operating income results." And Fayard foresees that headwind growing stronger. "We expect currencies to be a 4 percent headwind on our operating income for the third quarter and full year," he said.
The Dollar Index, which tracks the value of the U.S. dollar relative to a basket of other currencies, has appreciated over 4 percent this year. This poses a problem to multinational companies because it means that the foreign currency they receive is worth less when converted back into dollars. For instance, when a dollar could buy 87 yen at the beginning of the year, someone paying 100 yen for a can of Coke is effectively paying $1.15. But with the dollar/yen trading at 100, that same person is effectively paying only $1.
It's a crude reality for the market: Oil will put an end to the rally. At least, that's what some market participants contend.
"The increase in the WTI oil price is creating too strong a headwind for growth and further equity gains," Encima Global President David Malpass wrote on Wednesday. "We think there will be a pause or retracement in equities until growth prospects improve or oil falls."
Over the course of three weeks, oil has rallied 12 percent to the highest level since March 2012, and Malpass believes that rising oil prices could pose a problem both for consumers and for businesses.
"It's an important cost of doing business, and may undercut profits and business confidence. From the standpoint of the consumer, it acts as a tax increase, reducing the income that could be spent elsewhere," he said.
One of the reasons Malpass is so concerned about the oil rally is the reason behind it.
"Expensive oil brings new negatives," Malpass said, and "this is particularly true when the increase in oil prices is caused more by supply concerns than an increase in demand."
(Read more: Here's when high oil prices could really pinch)
Gasoline is showing quite a bit of strength, in the wake of the bearish supply numbers that we've seen recently.
The API numbers showed a build of 2.6 million barrels, and the EIA number that was released on Wednesday morning showed an even bigger build of 3.1 million barrels. So if we are showing a build in supply, why the strength?
There are a few factors—and while each is small, when put together, they spell out near-term supply problems for gasoline.
Refiners have had a few snags in getting supply out, with maintenance issues, unplanned shutdowns and problems with pipelines being the most visible. That is coupled with an increase in demand, which is because of the driving season and a slowly improving economy. Put this together, and the supply and demand picture is giving us a recipe for higher prices.
(Read more: Gasoline at the pump still rising but peak in sight)
The good news is that in a few weeks, the market will realize that we will have enough supply to meet demand, just as the summer driving season is winding down. This will cool off the market, but the wild card after that will be hurricane season.
It's a big day for Big Ben, and gold should respond accordingly.
Look for gold to fish for stops above last week's $1,297 high, as it tests $1,300 upon the release of the text of Chairman Bernanke's prepared remarks to the House Financial Services Committee. These remarks helped bond prices and equities rally, in addition to gold.
Investors are eager to see gold back above $1,300, after Bernanke said just last week that a highly accommodative monetary policy will remain in place for the foreseeable future. One has to question, though, what this really means.
As Bernanke appears before the House Wednesday to present the Federal Reserve's semiannual monetary policy report, the main topic of discussion will be the Fed's potential exit of the $85 billion monthly bond-purchasing program. The other big topic on the table will be the benchmark interest rate.
Doug Kass has long been bearish on the market—and that has long been the exact wrong call. But now, Kass says the market's moment of truth is finally upon us.
"I've certainly been wrong," Kass admitted. "But being wrong doesn't keep me from warning investors."
And warn investors he did, for Kass sees this as a particularly treacherous time. "I think when the searchlights of the investor are the dimmest, when the economic and market threats are the greatest, and when market participants are the most comfortable in their inattentiveness and ignorance, the risks are surging—and that's precisely where we are now."
So what exactly is making Kass so concerned about the market right now? The president of Seabreeze Partners Management laid out his reasons on Tuesday's "Futures Now."
1. Stagnating GDP will weigh on revenue
Kass noted that "projections for second-quarter GDP—real GDP—are now under 1 percent." Indeed, Barclays cut its Q2 GDP growth forecast to 0.5 percent on Monday, and Goldman Sachs reduced its estimate from 1.3 percent to 1 percent.
Kass believes this stagnant rate of growth will be a major constraint on corporate revenue. "You've got to see a sharp acceleration in the second half for companies to have any top-line growth whatsoever," Kass said.
2. UPS lowers expectations
On Friday, UPS gave Kass one reason why this "sharp acceleration" is unlikely to come to pass. "I can't see it," Kass said, "with UPS cautioning about domestic economic growth."
UPS shares dropped by 6 percent on Friday after the company reduced earnings guidance. And one of the reasons the global shipping company gave for cutting guidance was "a slowing U.S. industrial economy." This is in line with Kass' thinking about what the rest of the year will bring.
(Read more: Cramer: Has UPS called recovery into question?)
3. Coca-Cola's weak shipments
On Tuesday, Coca-Cola gave Kass another reason to be bearish. In an earnings report that CEO Muhtar Kent said he is "not happy" with, Coca-Cola reported that soda volume in North America fell 4 percent.
That said, Kent pointed to factors that were more meteorological than economic: "We experience an extremely wet and cold second quarter," he said on Tuesday's earnings call, and "this weather clearly impacted our industry's volume growth."
(Read more: Coca-Cola's earnings meet, but CEO's 'not happy')
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