Oil Still Calling Stocks' Tune - TheStreet

The ebb and flow of crude continued to set the direction for stocks Monday. While the major indices closed in positive territory, the stock market clearly remains nervous over the possibility of energy inflation seeping into the broader economy.

Crude oil for April delivery again briefly traded above $55 per barrel on the New York Mercantile Exchange before closing slightly below that level at $54.95, still up 52 cents on the session. Meanwhile, the

Dow Jones Industrial Average

gained 30.15 points, or 0.28%, to 10,804.51, while the

Nasdaq Composite

added 9.44 points, or 0.46%, at 2,051.04 and the

S&P 500

gained 6.76 points, or 0.56%, to 1,2051.04.

Throughout the session, crude rose and fell along with stocks as members of the Organization of Petroleum Exporting Countries took different stances on whether to boost production to help ease surging oil prices. Saudi Arabia indicated it supported boosting oil production by 500,000 barrels at this week's OPEC meeting. But other OPEC members expressed different views on the matter.

Stocks were supported by a modest bounce in bonds. Treasuries posted their biggest price losses in 10 months last week, leading some to conclude that yields might finally be high enough to counter existing inflationary pressures. The yield of the benchmark 10-year Treasury bond, which reached an eight-month high of 4.56% last week and again Monday, fell slightly to close at 4.52%.

"We're seeing a short-term bounce. There is still some good potential for money to come in this market," says Josh Stiles, senior bond strategist at IdeaGlobal. The 10-year Treasury yield could come back down to 4.40%, he says, adding that the longer-term trend is still higher for yields.

The bond market also found solace in remarks by San Francisco Fed President Janet Yellen, who votes on the interest-rate-setting Federal Open Market Committee. Yellen said she saw little inflationary risks in the U.S. economy, suggesting to most observers that the

Fed

will likely keep raising rates at a moderate pace. The market fully expects the Fed to raise the fed funds target by another quarter point to 2.75% at its March 22 meeting.

But fears of inflation and of faster interest-rate hikes may be rekindled as the week unfolds, bringing new clues on economic growth trends and another scheduled appearance by Federal Reserve Chairman Alan Greenspan.

Greenspan recently spelled out the Fed's view that the economy is growing "at a reasonably good pace." But the Fed chairman and other Fed officials also conceded that inflationary pressures may be building up at the production level. This could lead the Fed to abandon its path of "steady-as-she-goes" quarter-point rate hikes and put the brakes on liquidity more firmly.

Tomorrow's release of February retail sales is expected to show evidence of a still-robust consumer. "There's been more hiring, tax rebates, home prices have continued to go higher, and all this has helped boost consumer spending," says IdeaGlobal's Stiles.

Meanwhile, expectations for stronger U.S. economic growth also helped boost the dollar. Against the yen, the greenback had an early advantage amid new evidence that Japanese economic growth remains tepid. The euro, meanwhile, fell against the dollar after European Central Bank president Jean-Claude Trichet said he saw little evidence of Euro-zone inflation, backing away from his hawkish stance of last week.

Commodity prices will also be on the radar this week. Increasingly, analysts believe that higher oil prices will lead to inflation in consumer prices. "A better supply-demand balance and a still-accommodative monetary policy are enabling companies to pass such price increases through the pipeline to the finished and retail levels," writes Richard Berner, economist with Morgan Stanley.

Sector Moves

With all the hoopla about oil, one might wonder what oil stocks are doing. In Monday's session, the oil majors traded slightly higher, in line with crude prices.

ExxonMobil

(XOM) - Get Report

rose 23 cents to $61.28,

ChevronTexaco

(CVX) - Get Report

gained 64 cents to $58.94, and

ConocoPhillips

(COP) - Get Report

was up 71 cents to $106.30.

All three are at or near their historic highs, with conditions in place for more growth to come. After 20 years of under-investment in new capacity, and Asia's voracious appetite for oil, there is "a case for sustained earnings growth and re-rating of the commodity and energy sectors," writes Vadim Zlotnikov, chief investment strategist with Sanford Bernstein.

Still, Zlotnikov says, investors should consider that energy stocks are not trading as cyclicals anymore, but as growth stocks. That means that if the price of crude oil remains near current highs, and stunts U.S. and emerging-markets growth, energy stocks would be hit along with everybody else. "On the flip side, a drop in oil prices below $42-$45 could bring negative earnings revisions," Zlotnikov says.

In keeping with TSC's editorial policy, Godt 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

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