Market Insider

Oil Putting Pressure On Markets


How much oil pressure can the stock market take before it blows a gasket? Oil continues to surge into record territory, closing in on $88 per barrel and ready to pump right through $90. Stocks are floundering this morning after weakness in Europe and a down day in Asia. China, though, continues to be the exception with Shanghai stocks once more in record territory.

So far, stocks are taking the run up of oil into record territory in relative stride. But CNBC's Larry Kudlow says as oil nears $100, the price could start to matter. "Every couple of bucks towards $100 weighs on the market," he said, noting the big round $100 target could have a big impact. "...$100 marks the old high in 1980."

But can the economy handle higher oil prices? CNBC's Maria Bartiromo asked former Fed Chairman Alan Greenspan about the impact of super high oil prices on the economy on "Closing Bell" Monday. His comments were reassuring:

"So far, $80 oil has not had any really significant impact and the reason of course is we are very gradually but persistently phasing out oil in the world's gross domestic product," said the former Fed chairman. "The ratio of consumption of oil or energy relative to world GDP in both developing and the developed world...has been declining and that's one of the reasons why we have been able to maintain fairly strong and buoyant economies in the face of very high crude oil prices."

Where Else?
From the Communist Party Congress, we got the answer today to a question that many have been speculating about on Wall Street. China Bank Regulatory Commission Vice Chairman Jiang Dingzhi confirmed that China's Citic Bank Corp is indeed interested in buying a stake in Bear Stearns.

Dialing Disaster
Must have been a bad connection just a month ago when Ericsson executives told investors the company was ready to grab even more market share. Today, its shares are streaking lower, losing a whopping 29%, after the company issued a dramatic reduction in its profit outlook. It said earnings would be impacted by a shortfall in sales in mobile network upgrades and expansions. Its negative comments are dragging on European stocks.

Earnings Central
In earnings news, Johnson and Johnson beat analysts estimates and reports profits of $2.5 billion. Today is a big day for tech earnings. CNBC's Jim Goldman will be following reports from IBM , Intel and Yahoo , all reporting after the bell.

Riding the Rails
Warren Buffett's jumping off the trains. Buffett's Berkshire Hathaway is trimming its investments in Union Pacific and Norfolk Southern . We'll watch those stocks today, and we'll also be watching the shares of railroad CSX , one that Buffett did not invest in.

CNBC's David Faber, in a scoop on "Squawk Box" this morning . reported that the Children's Investment Fund, a hedge fund, took aim at CSX management this morning, saying it does not understand the economics of its business and that it is cavalier about potential risks and undisciplined about spending. CSX stock immediately jumped on the news.

Bubbling Oil
Traders are watching oil's rise with some skepticism. Tensions between Turkey and Kurds in Northern Iraq are adding to the price rise as are supply concerns. Crude rose 2.9% yesterday to $86.13. Ok, but is it inflationary?

Alan Greenspan, interestingly, said perhaps we need to reconsider how we measure inflation. At least, that's how I read it. "Well, remember the notion of looking at a core price. it requires that you presume that energy and food have no long term trend and that they're fluctuations are essentially random," Greenspan said. "That is now becoming an increasingly questioned premise with agricultural supply not keeping up with rapidly rising demand especially from developing nations."

He noted agricultural commodities--such as corn and wheat--have risen dramatically. "There's a major question as to whether or not the notion that it is a random fluctuation and will return to its average over the long run, there's a very serious question if that' s correct and its certainly not correct with the issue of energy."

Mixed Reviews
The reviews of the ambitious plan by Treasury and three major banks to create a pool for some of the most troubled debt from structured investment vehicles are rather mixed. Some market players say the fund will help relieve a backlog of problems that are still hampering credit markets, but critics call it a scam.

"I also think Goldilocks is worried about the next shoe to drop in the credit markets," said Kudlow. He said the Treasury-fostered plan to have major banks create a fund for troubled assets is not being well received by the market. The asset-backed commercial paper being put into the fund is just the type of security that still cannot find buyers in the market place.

Citigroup was one of three banks taking the lead in the SUV fund plan. Today, the Wall Street Journal wrote an analysis of Citi's earnings report and noted that Citi is so weighed down by problems that it may lag its competitors while it cleans up its house. The paper points out its capital ratio is the lowest level in years.

Questions?  Comments?