Oil and Financials Bring Stocks Down, Again

Includes: AIG, DBO, DIA, SPY, USO
by: Grace Cheng

Oil is once again in the spotlight today as billionaire hedge-fund manager T. Boone Pickens says he thinks that oil will reach $150/barrel this year as there is not enough supply to cover demand. This echoes what Goldman Sachs (NYSE:GS) said a few days ago, that oil would rise to over $141 in the second half of the year. Oil prices surged to new records above $129 on this news and the stock market responded by dipping lower as investors took profits and worried about the impact of rising commodities prices, higher inflation and a continued housing and credit crisis.

While gasoline at $4 a gallon seems expensive now, Robert Hirsch, Management Information Services Senior Energy Advisor, said that it will seem cheap in the future and that prices could reach $12-$15 a gallon and that there could be rationing in the future. He says that oil production has remained nearly flat since 2004 and that it could go into decline in the future.

Meanwhile, there is still a road to recovery in the financial sector. Oppenheimer & Co. analyst Meredith Whitney, thinks that banks still have over $170 billion left in writedowns and that “The real harrowing days of the credit crisis are still in front of us and will prove more widespread in effect than anything yet seen.” AIG (NYSE:AIG), which lost $7.8 billion in the last quarter, managed to raise $20 billion in its recent issue of equity & debt. While this is good news on the liquidity front, it also dilutes shareholder value.

Is today’s drop in the Dow and S&P 500 a sign that stock markets are finally reacting to the fundamental news? Or is this just temporary profit taking after a stock bull run that hasn’t been much hampered by rising oil prices or continued writedowns in the financial sector?

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