Rattle Of The Snake (part 1/3)

We find ourselves in the midst of an economic crisis. Bears abound, growling about a multitude of problems including stagflation, financial failures, rising commodity prices, and capitulation to name a few. These issues are no picnic in the park, but have become so overwhelmingly redundant that the masses seem to take the negativity in stride. As opposed to accepting defeat, allow me to dissect the crisis at hand, ending at the root of the problem. Once we find the root, we will be able to identify the signals of a bottom.

The following is the first section of a three part segment focusing on the economic crisis at hand. I move from the tail to the head, or root, of the situation. We begin with commodity prices, and their eventual impact on core inflation.

Though some may see rising commodity prices as the root of the problem, they are but the rattle of the snake.

Whether walking through the grocery store aisles, or pumping gas into your tank, rising commodity prices have taken a bite out of everybody's pay check. Though most all commodities have experienced a significant increase, oil is grabbing headlines around the country. With a barrel of oil gaining 45% on the year, it would be an understatement to say there is a problem. However, despite cries of inflation, economists continue to point to the stability of the Core CPI, or price movement minus food and energy. Though a correct observation, a significant upwards movement in this indicator could take us a step closer to the next leg down in equities markets.

As gas and grain prices rise, consumer purchasing power continues to fall. Meanwhile, companies outside of the grocery store/gas station arena are trying to hold prices steady in order to maintain sales. Propped up by global demand, many internationally positioned corporations have been able to weather the storm. Unfortunately, the international purchasing power is artificially elevated as countries such as China and India prevent the pain of higher oil prices from affecting their consumers via subsidies. However, both countries are beginning to reduce these subsidies, as China recently increased petrol prices by 18%. Despite these subsidy reductions, oil has continued its ascent. As oil prices climb, and global demand cools, profit margins should dwindle. Therefore, macro-inflation could soon take place as more companies will be left with no choice but to raise prices.

To begin conceptualizing what rising oil truly signifies, we'll begin with a general list of objects using various elements of petroleum: cosmetics, tar, asphalt, sealants, paint, fertilizer, plastics, detergent, waxes, nylon, polyester, cleaners, lubricants for machinery, sealants, medical equipment, and sliding doors.

Furthermore, we must not forget oil is often prevalent in several aspects of the manufacturing to consumption process, including: the transportation of raw materials, production, and the transportation of finished goods.

Hence, oil dependency goes far beyond the gas in your tank. Companies of all breadths have some form of reliance on petroleum when getting their products from point zero to finalization.

Second quarter earnings season is upon us. Computer graphics chip maker Nvidia(NVDA) was the first shoe to drop. Falling over 30% on Thursday, Nvidia reported a decrease in revenue and gross margin. The company attributed the unexpected earnings disappointment to a decrease in demand. This could be connected to the global economic slowdown described above. As a slew of 2^nd quarter earnings are reported over the next few weeks, we could witness a continuing theme of disappointing earnings, and gross margin reductions.

Now that we've identified the rattle of the snake and its implications, Part 2 of this economic analysis will identify the body of the crisis. What is behind the incredible rise in the price for a barrel of oil?

Risk Disclosure: This market commentary is provided for information purposes only and under no circumstances should be regarded neither as an investment advice nor as a solicitation or an offer to sell/buy any financial product. I assume no responsibility or liability from gains or losses incurred by the information herein contained.