Ripple Effects

The S&P 500 last week entered “correction” territory when it dropped 10% from its 2010 intraday high of 1,220, which came just one month ago on April 26. In one sense, a correction is not unexpected considering the run stocks have been on since March 2009.


However, investors continue to fear potential ramifications from the financial crisis in Europe, where there is significant sovereign debt, lackluster economic growth, and some concerns over whether the euro can survive as a currency.

These fundamental questions have investors wondering if this could be bigger than a correction?

At this point, I still think the collapse of the euro would be a stunning development and that Europe’s key players will try everything they can to keep it together — despite last week’s unilateral trading curbs in Germany.

Bill Nygren, one of our elite investing pros in my Wall Street newsletter, also doesn’t think the end of the euro is a likely result. I asked him about this in the new issue. If you haven’t had a chance to read it yet, here’s what he told us:

“I think to say I’m not worried about it would be an overstatement,” he told us, “but to think that it would spiral so out of control as to destroy the euro currency and to destroy the businesses that trade in those markets, I think would be a very extreme outcome. There are some very strong economic powers inside of the euro countries, and I think they’ll be able to pull out the others from the crisis that appears to be there today.”

Opposite Directions

The European Debt Crisis - See Complete Coverage
The European Debt Crisis - See Complete Coverage

Still, the euro’s weakness and questions about its future have a ripple effect.

For example, as the euro drops, the dollar strengthens, and the dollar impacts the prices of oil and gold — which have been going in opposite directions recently.

As you probably know, gold has been trading at all-time highs around $1250. If you want a snapshot of where gold is right now, here’s one for you: there are now gold ATM machines. Have you heard about these? There is one at the Emirate Palace hotel in Abu Dhabi and another in Germany. The machine dispenses bars of gold (1, 5 or 10 grams) and gold coins. (Track Gold Here)

It may cause us to chuckle, but it’s indicative of the fact that many people are looking for hard assets right now as a currency hedge. Add in growing consumer demand for gold — especially in some of the emerging markets — and supply constraints, and you have a recipe for record-high prices.

Oil prices, however, have fallen from recent highs of $87.50 per barrel to under $70. (Track Oil Here)

Oil is priced in dollars, so as the dollar strengthens, oil becomes more expensive for other currencies, which pressures prices. Other factors include concerns over slower economic growth globally and lower demand. China, one of the biggest consumers of oil as it rapidly develops, is a part of that. It is actively trying to slow things down to prevent problems with inflation and speculative bubbles.

I think the future of oil is another fascinating question.

Investor Spring Cleaning - A CNBC Special Report
Investor Spring Cleaning - A CNBC Special Report

I was at a private conference with government officials from Russia a couple of weekends ago, and there was a lot of buzz about oil shale.

I’ve mentioned this before, but they continue to believe that there is real potential with oil shale, and that if oil can eventually be extracted easily enough, it could lead to much lower oil prices than we see right now.

I’ll be traveling to Russia in June and will let you know in Investor Brief and on CNBC what I hear during my visit.



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