Stock ETFs: Oil Price Increase Causes June Gloom

Jun. 8.08 | About: iShares S&P (IJK)

The double whammy positively obliterated stock assets on this "first Friday" of June. Unemployment vaulted from a respectable 5% to a less desirable 5.5% in a single month. It had been 22 years since we had seen a move in employment data this discomforting.

Yet it was the second piece of news that really sent stocks into the "blood red." Specifically, oil jumped $5.49 on Thursday alone, a record for the NYMEX, only to be followed Friday by a $10 leap in crude. $16 in 48 hours?

Yet the fear and loathing over oil's inevitable costs does not take history or economics into account. Those who think that oil is heading permanently higher, in fact, have already forgotten the lessons of the current declines in real estate. They've even forgotten how dot-com mania turned to dot-com disaster.

Let's take a look at booms and busts.

In the late 90s, new experts proclaimed that the ""world of stocks had changed." Apparently, one was not supposed to value tech stocks on traditional metrics. The future "was" now... until it wasn't. The bear of 2000-2002 eroded 80% of the NASDAQ 100 (QQQQ). And 8 years later, QQQQ holders are still down 50% from the top.

In the mid-2000s, newfangled gurus explained that the "world of real estate had changed." Unique loans were making the American dream more affordable (i.e., more demand). And we were "running out" of construction-worthy land (i.e., less supply). Once again, the laws of economic cycles prevailed, as the housing boom went bust.

Now we are hearing the call that the "world of natural resources has changed." Emerging markets need oil, and there's very little to go around. We're running out of everything, and there's too much demand for too little supply.

However, "oil-can-only-go-up" thinkers are neglecting to consider the most recent cyclical evidence.  For instance, super-cheap loan deals fostered an increasing demand by home-buyers, a demand that was said to be permanently on the upswing. Builders mistakenly overbuilt, believing that meeting the new demand with more and more supply would lead to permanent profit windfalls.

But the newfangled loans weren't permanent, and neither were the number of buyers. What's more, the supply went from "there's no more land" to a year's worth of inventory.

Granted, demand has most definitely soared worldwide. And supply has had difficulty keeping pace. That explains $60-$70 oil. Yet the weakening dollar and rampant speculation accounts for the rest. (Read my "take" on the dollar here.)

Nevertheless, the world won't continue to pay inflated prices. Oil-rich countries will pump out oil like the homebuilders were building homes, eventually creating too much supply. And if you doubt the supply exists, you doubt human ingenuity.

What's more, demand decreases when the pain gets too great. Big cars are disappearing, airlines are cutting flights, conservation is gaining in popularity, and alternative energy as well as transitional energy is being fast tracked.

Oil will drop dramatically, it's only a question of time. Even the loopholes in commodity speculation may come under increasing regulation, making it less likely that speculators will drive prices higher.

But for now, investors are scared. The economy is weak, and oil at $136+ is making it weaker.

However, one pattern that stock investors need to keep focused on is the resilience of mid-cap ETFs. As I noted in a previous post, mid-caps are falling less on down days and rising more on up days.

The net result? As horrific as the ticker tape has been throughout 2008, the "middle path" is proving profitable. I am particularly partial to the iShares Mid Cap Growth Fund (NYSEARCA:IJK).

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