Since then, even though almost all predictions from the Street were that oil prices were going to fall into the low twenties in the very near future they have been constantly increasing. Consumers have been suffering and it is only getting worse. If the Street and the most well known forecasters had not kept assuring people that prices were about to drop, then far fewer people would have gone deeply in debt to buy SUVs and other gas-guzzlers, and far fewer would have second and third mortgages based on optimistic views of their discretionary incomes.
This is another example of Shared Mistake. When all the prominent people agree on an important economic or financial forecast, and they are all wrong, the consequences are huge, and usually very painful. $40 oil is definitely not positive for the stock market, however it is the oil companies that are increasing the overall S&P earnings.
Consider the following fact. Presently, oil stocks are trading closely with the price of crude and crude and natural gas are up in similar percentages. However, also note that investors do not believe that the high prices will last, because they are not moving stock prices up faster than the prices of crude and natural gas. Think of what would be happening to the prices of tech stocks if the prices of their products were climbing by 35%, rather than falling at double-digit rates.
Look at Exxon Mobil's Q2 earnings per share, up 42% this year and 59% last year. However, the seers forecast a 22.7% decline next year. Exxon's P/E is 13; were it not for heavy stock buybacks it would be roughly 14; current dividend yield is 2.4%, and the company has boosted its dividend faster than inflation for more than two decades. XOM and its oil are the main reason why the P/E multiple on the total S&P looks reassuringly modest these days.
The fact that economists say that price increases in oil stocks are simple random increases, while the price increase of oil is so overwhelming means that the consensus continues to expect a decrease in oil prices but believes that high oil prices are reason to be worried about overall economic growth, particularly in consumer spending. Even though leading economists have for years made incorrect forecasts, they still earn huge incomes that allow them to fuel their SUVs. They recommend a switch from cyclical stocks to staples and utilities because of slowing growth, which they blame on high oil prices, which they say won't last. So if the for the first time in three years the Street were to be right about their prediction of oil prices, strategists will be calling for a back-to-boom economy in the near future.
2. Capital Spending Peak?
The temporary 50% increase in capital spending depreciation allowances expires only 59 days after the election. The question is will companies continue to acquire or upgrade physical assets when Washington is not helping them out as much? Enterprise software companies were the first to indicate that rapid growth in capital spending might already be at a high. It was shown that during Q2, competition forced this industry to discount products by as much as 89%, and that customers they expected to sign at the end of June were no longer interested.
Larry Ellison said, "I told you so," to the rest of the industry this week, when it was revealed that business software sales, which had risen 14% in Q1, were up just 5% in Q2. He has always been sure that the little companies would never survive.
Andrew Corporation, a global designer, manufacturer, and supplier of communications equipment, services, and systems announced record sales and earnings in Q2 this week. He also stated that the company’s US customers have "paused" their equipment orders. Writing about the company's conference call in the Chicago Tribune, Bill Barnhart quotes the CFO, "You're going to see a little hiccup." The stock suffered the biggest percentage decline in the S&P 500 on July 26th, down 22.9%. This was horrible news for stockholders, and forecasters began to worry that the same problem would happen to the traditional capital spending leaders.
