Oil prices hit yet an other record level on Monday but many stocks in the energy patch failed to follow suit. It seems that in the struggle between higher basic materials costs, in this case for steel, and corporate profits, profits are getting the squeeze.
Oil hit a high of $53.80 a barrel before closing at $53.64 as the government issued an analysis of the damage wreaked by Hurricane Ivan on production facilities and pipelines in the Gulf of Mexico.
The major indexes ignored the oil jump and posted modestly higher results in light Columbus Day holiday trading. The
Dow Jones Industrial Average
gained 0.3% to 10,081.97, the
rose 0.2% to 1124.39 and the
added 0.5% to 1928.76.
Technology, biotech and retailers led the advance while oil servicing companies were among the biggest losers. Morgan Stanley cut earnings estimates on a handful of leading service companies like
because of damage from the hurricane. Schlumber dropped 1.7% to $68 and Baker Hughes ended down 2.6% to $43.60. The big oil producers were less affected but
fell 0.7% to $54.91.
Still, Morgan Stanley remained bullish on the sector. Upcoming third-quarter earnings reports would contain "a flurry of data points which suggest a strengthening in fundamentals," the firm wrote.
More damaging perhaps was the market's assessment of press release issued at 6:30 p.m. on Friday by
Lone Star Technologies
( LSS). The maker of oil and gas field drilling equipment failed to bury news that higher steel prices would depress third-quarter results. Instead of making $1.35 a share, as per analysts' estimates, the company will report only 85 to 95 cents a share.
Previous columns have focused on the rising price of basic materials such as steel, concrete and copper. Those price increases could worm their way up the production chain, resulting in higher inflation for consumers of all kinds. But,
aside, most companies are finding that they can't pass on the price increases, at least not at the same rate materials prices are rising. Lone Star joins the ranks of
among firms stuck taking a hit to the bottom line instead of passing along the higher costs. To wit,
airlines are praying that their latest fuel surcharges stick.
Lone Star, which has almost doubled so far in 2004, dropped 23% on Monday to $29.25. Competitors also got smashed.
( MVK) lost 7.6% even though it said Monday morning that third-quarter earnings would "exceed the previously announced earnings range."
fell 9.6% and
Oil States International
was down 3.4%.
The bond market was closed for the holiday, giving the parsers of Greenspan-speak a well-deserved day off. The Fed chairman is on the calendar to speak Friday about oil.
To some degree, we have the winners of this year's Nobel Prize in economics (announced on Monday) to thank for all the debate over the phrasing and word choices of the Federal Reserve's Open Market Committee and Chairman Greenspan.
In a landmark 1977 paper called "Rules Rather Than Discretion," winners Finn Kydland and Edward Prescott argued that central bankers ought to make credible promises when they discuss what they were doing to stabilize the economy and combat inflation. That was a big change from earlier eras when Fed officials tried to "jawbone" down inflation.
Perhaps it is a happy coincidence that while Greenspan and other Fed officials were meeting last week in St. Louis for a conference discussing the long, slow decline in inflation since 1979, Kyland and Prescott were frequently cited.
Fed Governor Ben Bernanke, speaking on Friday, explained that as the inflation/stagflation crisis was exploding in the 1960s and 1970s, policymakers "did not fully understand or appreciate the determinants of credibility and its link to policy outcomes."
In other words, talking tough on inflation without taking steps to cool the economy created a situation in which businesses and investors doubted the Fed's resolve to stem rising prices.
Prescott, speaking on
Monday, put it in a less generous and more direct comment: "In their perverted attempts to trick people, to surprise people, they thought they'd stabilize the economy."
It had the exact opposite effect, as the Nobel winners found. Businesses raised prices more and investors demanded higher bond yields to account for the future inflation they expected coming down the pike.
Fed Chairman William Martin, for example, gave a speech in June 1965 starkly warning of inflation dangers and drawing parallels to 1929 and the start of the Depression, according to a recent paper by Carnegie Mellon professor Allan Meltzer. But behind closed doors, President Johnson urged Martin not to raise rates, which would make the government's huge deficits more expensive. Martin went along and in October urged his colleagues not to raise rates and voted against such action.
President Nixon put pressure on Arthur Burns, the next chairman, not to raise rates -- prompting Burns publicly to say the Fed didn't have the tools to stop inflation. That did little to engender confidence.
Prescott and Kyland saw the damage that the inconsistency and dishonesty had done. It was up to Fed Chairman Paul Volcker to dole out the harsh medicine by raising rates to slow the economy and stamp out inflation.
Under Greenspan, the Fed has become even more transparent if not always as consistent. In 1994, the Fed began announcing its decisions explicitly and issuing statements explaining its views in 1999. If not for Prescott and Kyland, and those who followed up their findings, maybe we wouldn't have nearly as much "measured" fodder gaining "traction" with analysts.
In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send