High Oil Prices Drag Down Stock Prices

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Since oil prices effect basically everything else, it’s easy for investors to become depressed about the prospects for growth on Wall Street. Growth is the drug that fuels almost all stock purchases. People dream of how much money they’ll return on their investment if only the company they buy into can grow sales and earnings for years to come. But growth, and profitability, are being eroded by heavy duty and unrelenting transportation costs.

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U.S. Inflation Soars - Oil Is Main Culprit

I’m sure you already know the news if you’ve been to a grocery store, or Walmart, lately. Inflation is the United States is soaring. The main culprit, naturally is rising energy prices.

Inflation is not quite as bad as 1923, but it’s getting worse

The headline consumer price index jumped by 0.6 per cent in May, the biggest monthly increase since November, and more than economists’ forecast for a rise of 0.5 per cent.

However, traders were relieved that core consumer prices, which strip out volatile food and energy costs, remained contained last month. The core index rose by 0.2 per cent, in line with the consensus forecast.

Over the past year headline prices have risen by 4.2 per cent while the core prices have climbed 2.3 per cent.

One reason that people are taking more notice of the inflation rate is because Fed Chairman has been making more comments about that very issue this week. According to Bernanke, you can now expect the Fed to “strongly resist an erosion of longer-term inflation expectations”. I guess they plan on doing something about it, although details have been scant.

The big problem remains high energy costs. In the dead of Summer for most of the world, it’s doubtful that energy costs will drop anytime soon. Since transportation costs are passed on to all businesses, costs everywhere will likely continue in the interim.

What will be interesting is if we see any strong initiatives by the Fed to reduce inflation. I myself am amazed the United States and other big Western countries who rely on oil have just began to talk about releasing oil from their strategic reserves..

“IEA member-states are required to hold oil stockpiles equivalent to no fewer than 90 days of the prior year’s net imports. The agency calls on countries to release emergency reserves of oil if supply is threatened.”

Certainly flooding some of the strategic reserves into the open market would have an immediate depressing effect on oil and gas prices. In fact, it might even send speculators heading for the exits, precipitating a further decline.

We’ll see what move comes next now that inflation fears are increasing.

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Erin Callan Steps Down At Lehman Bros.

It was recently announced that Erin Callan has stepped down from his position as CEO at Lehman Bros. (LEH)

According to reports, he will be replaced by Ian Lowett immediately. Unlike many other CEO’s that have left their position, Callan will stay with the company in a Senior position in their investment banking division. Callan was Chief Executive Officer for 7 months.

Lehman Brothers also reports that Herbert McDade III will replace Joseph Gregory as chief operating officer, also effective immediately.

Lehman Bros. recently announced a 3 billion dollar quarterly loss. This is the first time the company has reported a loss since becoming a publicly traded company in 1994.

Shares are down in late morning trading.

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Oil Prices Down As Dollar Firms

The interplay between the dollar and the price of oil continues. Oil futures have been very strong in 2008 as supply never seems to materialize, despite reduced demand from the world’s largest consumer of oil, the United States. The high cost of gas is putting a dent in consumers wallets and it’s causing them to ride the bus or a bike for the first time in years. But oil production remains pretty much stagnant.

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Hunt Petroleum To Be Bought Out By XTO Energy

It was recently announced the XTO Energy is going to buy out Hunt Petroleum for around 4.2 billion dollars in cash and stock.

Hunt Petroleum is owned by descendants of H.L. Hunt, an oil tycoon.

XTO Energy has been aggressively acquiring energy companies to solidify their position in the “power structure.” Two weeks ago XTO agreed to buy Bakken Shale in Montana and North Dakota from Headington Oil, another privately held company, for $1.85 billion dollars. This shale can be used to turn coal into liquid fuel, another alternative fuel source.

Bob R. Simpson, XTO’s chairman and chief executive, said in a statement:

“With the quality of these assets and the strong energy prices, this transaction reflects a defining moment in building our Company’s future and creating value for our shareholders. We plan to accelerate the activities and know that the assets will achieve even more.”

The deal between Hunt Petroleum and XTO Energy is expected to close on or before September 3, 2008.

For more information, please visit XTO Energy.

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International Energy Agency Cuts Forecast For Oil Demand

Oil just keeps on going up in price, which should cause consumers to buy less. But with something as important as transportation fuel, even a lessening in demand won’t automatically create a price cut. At least that’s what the International Energy Agency seems to be saying.

“Supply growth so far this year has been poor and higher prices are needed to choke off demand to balance the market,” they wrote in their Annual report.

Right now, global demand for oil is 86.8 million barrels barrels per day. But the IEA thinks there will be a contraction in 2008 of 2.5 percent this year to 20.3 million barrels a day.

The Airline Industry has already announced that they would be offering fewer flights, which will reduce oil consumption. Statements from consumer groups and business owners indicate demand for oil could drop even further than expected.

It’s up to investors to decide if the “oil bubble” is about to burst, of if increased demand from India and China for petroleum will continue to push oil prices to unthinkable highs. Energy stocks and funds promise to be very active in the last half of 2008.

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Verizon Talking To Alltel About $27 Billion Buyout

Verizon is considering a buyout of Alltell for $27 billion. Alltell was taken private in November of 2008 by TPG and Goldman Sachs Capital Partners for roughly the same price. It doesn’t look like the private equity firms will make a huge profit, but would still make somewhere near $1/2 billion for their efforts.

Verizon (NYSE: vz) seems likely to pay no more than did TPG and Goldman, and will be doing so for a company that has increased its earnings before interest, taxes, depreciation and amortization (Ebitda) by 10 percent since the leveraged buyout was announced last may.

Verizon is expected to pay roughly 8 times Alltel’s current Ebitda, in contrast to the 9.2 times Ebitda that TPG and Goldman paid last year when they put in roughly $4.6 billion of equity and lined up $23.8 billion of debt financing to get the deal done.

When Alltel was taken private, it was an easier time for companies to get credit. Since credit has become tighter, the buyers felt they needed to get out in favor of Verizon who can put the necessary investment in Alltel to make the deal work.

The original investors are said to be happy to get out while the getting is good and make some easy money for their efforts.

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Bernanke Remarks Buoy Dollar

Remarks by Fed Chairman Ben Bernanke helped to lift the U.S. dollar to a two week high. Investors have been extremely nervous about fuel costs, and the negative effect high gas prices have on the economy. They feared that if the Fed were to continue cutting interest rates, chances were becoming greater that inflation would spiral out of control. Bernanke made it clear that he was “attentive” to the investor’s concern.

“It could be a turning point for the dollar,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon. “It’s very unusual for a sitting Fed chairman to talk about the dollar explicitly.’”

In fact, the dollar did rise to a two week high against the Euro and the Yen. Analysts seemed to be happy about what Bernanke said, but were still remaining cautious about over optimism. The dollar has faced a lengthy and brutal decline. Is this the start of the road back up or just a false start?

We’ll know more in the next few weeks, as investors react.

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Lanty Smith - Interim Wachovia CEO

Lanty Smith has been named as Wachovia’s (WB) Interim CEO after Chief Executive Kennedy Thompson was deposed from his position.

Recently deposed Wachovia CEO, Ken Thompson.

Lanty Smith said that the search for a new Chief Executive Officer is on and that the company didn’t need to raise cash. He said that Wachovia was “absolutely not” in crisis and that it needed new leadership to revitalize their core business.

This announcement is on the heels of revising a $708 million dollar loss for the first quarter of 2008 and raising $7 billion dollars of new capital.

Wachovia (WB) is currently trading between $22.00 - $23.00 a share.

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GM Shares Hit 27 Year Low

GM and Ford shares took a hit today, with GM shares reduced to a new 27 year low. The reason is obvious. The North American auto market is the world’s largest and is in the throes of an off year. Japanese auto makers have already reduced estimates for 2008, and so have GM and Ford.

GM and Ford last lived fat in the early part of the decade, when consumers (who were lucky to have such low gas prices) starting eating up gas-guzzling models that the companies made huge profits on. Now, consumers are faced with tight credit and record high gas prices. Of course they’re opting to buy smaller cars, and many less of them.

Shares hit intraday prices of $16.87, a low that hasn’t been achieved since 1981. Ford fared slightly better, but is down over 3% today.

Until gas prices lessen rapidly, the outlook for GM for 2008 is not rosy.

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