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The Coming Oil Crisis And Russia

If we glance through the global market scene, Russian economy has been one of the major dawdlers in current year. The Market Vectors Russia ETF, an expression of country's stock market, fell approximately 20% from its high earlier this year. RSX was seeing a long-term low now and not more than a month ago seemed to be in danger of breaking below this major long-term support.

As per the old Dow Theory, Stock market being the single best barometer of future economic and business conditions, things looked bleak for Russia until this summer, when it caught a break from a major evolution in the commodities market.

Fortunately for Russia and unfortunately for many other countries, the price of oil has been surging since the last few weeks. Russia's economy is heavily, if not completely, influenced by the price of oil due to its reliance on oil and gas production and exports.

As per conventional wisdom, it has been rightly pointed out, 'As goes the oil price so goes the Russian economy'. Therefore, under no circumstances it is surprising to see Russia's stock market rally in response to the recent oil price spike.

As mentioned above, Fortunate for Russia and unfortunate for America. As the price of oil rise, it in turn directly affects the cost of all fuels from diesel to gasoline and as fuel costs rise, eventually the prices for all consumer goods rocket. In addition, Gasoline price is one of the major factors in the U.S. economy. Whenever gas prices become excessive it has negative repercussions for consumers in the country. Consider the long-term trajectory of the gasoline price since 2008: after the credit crash, the gas price has rebounded and isn't far from its previous all-time high.

The power that has been learned back in the late 1990's, the folly of allowing oil prices to fall too low, it nearly brought down Russian along with the rest of the global economy and since then we've seen a global subsidization of the oil price to artificially high levels. Whenever things start to look bad in Russia, rally in the energy markets always seems to come to her aid.

We may also recall that high oil and gasoline prices in mid-2008 were the final catalyst that touched off the economic storm. This isn't to suggest that a similar collapse is brewing, but only that the bull market and economic recovery will eventually be imperilled, if fuel prices are allowed to keep rising.

In order to gauge the extent of fuel price pressures on the economy and mitigate positions, there are couple of useful barometers to watch. The stocks of FedEx Corp.(NYSE:FDX) and the United Parcel Service(NYSE:UPS) would be the couple of prime indicators. FDX in particular has been holding up well until today, while UPS has taken a hit in recent times. Rising fuel costs always weigh on these two key economic indicators and if FDX and UPS start to flag, we'll have a "heads up" that the fuel price increase will create problems for the economy.

Stock Market

The story in the previous week was the new high in S&P 500 Index. The comeback of the SPX was remarkably fast and this is not unusual given the historical tendency in the index to bounce back quickly. Investors and traders may remember a similar megaphone pattern in the SPX from the year 2005; like the current bounce, the megaphone of 2005 too had a quick and violent turnaround. A very similar pattern is playing out this time with the S&P retracing all of its losses from the past few weeks and culminating in new all-time high.

A liberal rendering of the pattern's boundaries, would give us an estimated upside target of around 1,740, which is certainly within reach and not entirely out of the question.


Mr. Samuel Kress would often use the phrase, "He's caught up in his underwear," to distinguish an advisor who was forced to backtrack after making a blown market call. In current parlance, it would seem that the victim of "caught in the underwear" is the French investment Bank Societe Generale.

Recall SocGen, when it made an extremely bearish call on gold. Back in June, analysts with Societe Generale predicted that the price of gold would be at US$ 1,200 within the next quarter. SocGen's Robin Bhar maintained that continued selling of gold, coupled with a lack of jewellery demand, and that would result in the next leg down for the yellow metal.

Bhar wrote: "We believe that the dramatic gold sell-off in April, combined with the prospect of the Fed starting to taper its QE program before year-end, has resulted in a paradigm shift in many investors' attitude towards gold. This is likely to result in continued large-scale gold ETF selling this year and next. ETF gold selling has averaged about 100 tons per month since the April sell-off. We expect continued ETF selling to exceed higher demand for jewellery/bars and coins. Therefore, we have revised lower our Q4 '13 gold forecast to $1,200/oz."

SocGen's Bhar was left with no choice but to explain gold's recent bottom and mini-rally, by stating in a report that gold's largest backwardation since the late 1990's prompted a "corrective rally" and that strong physical gold demand and "nearby tightness" will persist for the near future. In addition, he also mentioned, that negative investor sentiment on the metal still translates into a bearish intermediate-term outlook. The bank now maintains that gold will average $1,150 an ounce for 2014.

In the short-term, the list of ultra-bearish investment banks are slowly lining up in the short-term bullish camp. The lesson here is that when the investment banks and research analysts all line up on the bearish side, the market virtually is guaranteed to disappoint their short-term expectations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.