OPEC's continuing cha-cha-cha dance ahead of its March 16 meeting brought oil prices down on Tuesday, helping bolster stocks. Major averages also got a boost from a series of analyst upgrades in semiconductors and health care.
Perhaps the oil producers have taken to issuing trial balloons the way politicians do but they may need a briefing from
Chairman Alan Greenspan on how to issue less disruptive market signals.
Over the weekend, OPEC officials were talking of possible production cuts, so on Monday oil rallied to its highest price in four months. But on Tuesday, OPEC Secretary General Adnan Shihab-Eldin reversed course and said that the current price "is not conducive to considering cuts in production." Oil futures ended down almost 1% at $51.40 a barrel, albeit recovering from an intraday low of $50.65.
With the danger of crude receding, the
Dow Jones Industrial Average
gained almost 64 points, or 0.6%, to 10,830 and the
added 0.6% to 1210.41. The
rose 1% on the back of the semiconductor upgrade to 2071.25.
J.P. Morgan upgraded chip stocks like
. Intel, which garnered the beloved overweight ranking, added 2.6% to $24.62, while Texas Instruments and National Semi, both upgraded to neutral from underweight, gained 2.6% and 3.5%, respectively.
In other sell-side developments, Dow component
Johnson & Johnson
rose 1.6% on an upgrade from Merrill Lynch.
Oil's latest rally has attracted some attention from analysts calling for prices to drop. The climb back over $50 was aided by false fears of a U.S. attack on Iran and some OPEC chatter about production cuts, Wachovia economist Jason Schenker notes. But with growth slowing in Europe and gasoline inventories in the U.S. at record levels for this time of year, the rally won't hold, he says, predicting a move back down toward $40 a barrel.
"Although this pullback is not likely to prove manifest until after the next OPEC meeting, domestic fundamentals are not supportive of current prices," he writes.
Some analysts are willing to go even further in decrying the current run-up.
Morgan Stanley analyst Andy Xie, who is based in Hong Kong, says oil is a bubble. It's a chain of logic, starting from the too-low U.S. interest rates that allow easy borrowing, feeding a consumption boom here that stimulates exports from China, he postulates. The Chinese are far less efficient in their use of oil than the most developed nations, so growth there has fueled a larger rise in need for fuel.
"China is a low-income economy and cannot sustain its rapid growth at current oil prices," Xie writes. "Although current oil prices are still half as high as their peak during the oil shock in the late 1970s, China's per capita income is less than one-tenth of that among the OECD economies at that time."
Like some other, more well-known Morgan Stanley analysts, Xie has been warning about a variety of doomsday scenarios over the past year. As a good contrarian, his bubble call may be a better sign of the durability of high prices.
contributor Christopher Edmonds is urging investors not to give up on the energy patch. He
argues that even if oil retreats to $40 a barrel, a lot more exploration and drilling will occur than had been expected a year or more ago when oil was much lower. He says investors should use any weakness related to upcoming seasonal factors as an opportunity to build positions.
Some of that weakness was evident on Tuesday, even as Morgan Stanley raised estimates for some big energy companies, including
, which fell almost 2%.
What is oil saying about the big picture?
contributor Howard Simons
cranked up his regression analysis to look at the impact of crude prices and copper prices. Both respond cyclically to a growing or shrinking world economy but otherwise respond to very different forces of supply and demand.
Of the major industry sectors in the S&P 500, materials, financials, utilities and discretionary consumer stocks all rise along with copper. At the same time, financials, industrials and consumer discretionary are hurt by rising oil. So far, economic strength as seen in the price of copper has been keeping oil's increase from dragging down stocks much, he says.
There are few signs of a slowdown that could reverse that trend. Economic news on Tuesday was mostly bullish, following Monday's mixed bag on inflation and home sales. Chain-store sales last week were 3.3% higher than a year ago, the best increase since mid-January, construction spending rose 0.7% in January, slightly better than forecast, and the amount of corporate borrowing in commercial paper in February was 9% higher than a year ago, according to the Fed.
"Today's release is a definite positive for bond bears as credit demand and the resulting pickup in new issues should result in higher Treasury yields and widening corporate spreads," Zoltan Pozsar at Economy.com noted about the jump in commercial paper.
Manufacturing activity appeared to be growing at a slower rate in February, however. The Institute for Supply Management's index fell more than forecast to 55.3 from 56.4. Any reading above 50 indicates expansion but the rate of growth was the slowest in over a year.
There were also some smaller, unsettling data points amid the overall glory of lower oil prices. In signs of growing inflation, the projected inflation rate seen in the Treasury Inflation Protected Securities (TIPS) climbed to 2.7%, the highest since June, according to
. TIPS pay a fixed rate plus the CPI, so the difference between the yield on a TIPS issue and the same-maturity regular bond issue reveals the market's inflation prediction.
Also, the world's biggest bulldozer and front-end loader maker
, the favorite stock of toddlers around the globe, announced that it would raise prices by as much as 5% in the spring due to rising materials costs.
For many months now, the prices of materials have been rising more quickly than prices paid by retailers and consumers. As more companies feel the squeeze and pass it on, inflation pressures will mount. And if price hikes won't stick, corporate profit margins will feel the pinch. Needless to say, neither scenario is particularly bullish.
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