Editor’s Note: Money Morning’s William Patalon III says crude oil prices above $142 a barrel and the 20% slump in the Dow Jones Industrial Average (DJI) since October are the chief concerns for investors. A rate hike by the European Central Bank this week will put further pressure on the dollar. And data releases in the run-up to Independence Day will give more clues about the health of the economy…

With the Dow in Bearish Territory, and Oil Prices in the Stratosphere, New Potential Problems Abound

By William Patalon III

With the Dow Jones Industrial Average down 20% from its October peak — placing it firmly in bear-market territory after what’s so far been its worst June since the Great Depression — neither institutional traders nor individual investors seem able to find anything positive about the economy, corporate climate or financial markets.

The subprime-mortgage mess and the ensuing credit crisis continues to exact a toll on the financial-services sector, meaning we can be certain those write-downs won’t be ending anytime soon. Oil prices can’t seem to find a ceiling as new records are again being set – regardless of whether you choose to call it market fundamentals or speculation. The U.S. Federal Reserve surveyed the financial landscape last week and left interest rates unchanged for the time since September as Chairman Ben S. Bernanke & Co. try to find a compromise between a slow (and hopefully not recessionary) economy and escalating inflation.

A new debate rages on with some analysts forecasting an August rate hike, while others expect no activity until after the November elections. The European Central Bank meets in the coming days and is expected to bump up its short-term rate, putting additional pressure on the U.S. dollar and on Bernanke. On one hand, the economy remains weak (though not recessionary at this point) and higher rates could prove devastating. On the other hand, rising commodity prices could trickle (or free-flow) into other areas, inflation could escalate, and higher rates would be justified (needed) to offset those price risks. (Sounds a bit like another Catch-22.)

The economic calendar remains hectic in advance of the July 4 holiday. Traders will have to settle for a mere three-day weekend as Thursday brings the much-anticipated unemployment and nonfarm-payroll reports, which will give us another view of the struggling U.S. labor market. Crucial news from manufacturing (Institute for Supply Management and factory orders) should reveal whether the factory sector is still contracting.

Also coming up in the week ahead: Construction Spending (tomorrow -Tuesday); ISM – Manufacturing (tomorrow); Unemployment Rate (Thursday); Nonfarm Payroll Additions (Thursday); ISM – Services (Thursday); Independence Day (Friday).

Market Matters

Once upon a time, homeownership became much more than the American Dream. It became more of an entitlement as politicos grandstanded for virtually everyone to be able to afford a house. Then, lenders began offering “less-than-qualified” buyers some “interesting” rates and real estate speculators took advantage of easy terms, fully intending to flip properties for quick profits. Greedy investors bought those complex mortgage securities to enhance the yield in their portfolios and credit agencies failed to recognize the actual risks involved. Regulators often turned the other way and allowed the entire debacle to escalate into a full-fledged credit crisis.

Last week, California’s attorney general sued Countrywide Financial Corp. (CFC), claiming deceptive advertising and unfair competition. Meanwhile, Securities and Exchange Commission Chairman Christopher Cox has moved onto the hot seat for not doing enough to intervene or attempting to restore confidence in the financial system as the crisis spread out of control. History shows that past SEC chairs took far more active roles during such challenging times as the collapse of junk-bond king Drexel Burnham Lambert and the economic aftermath of 9-11; and yet Cox has seemed AWOL throughout, allowing Bernanke and U.S. Treasury Secretary Henry Paulson to offer plans and compete for headlines.

And that begs the question some on Wall Street are asking these days: Just how relevant is the SEC these days?

Financials took shots at each other this week as Goldman Sachs Group Inc. (GS) lowered its rating on the whole sector from “Attractive” to “Neutral;” Lehman Brothers Holdings Inc. (LEH) and Sanford Bernstein & Co. LLC predicted additional write-downs for Merrill Lynch & Co. Inc. (MER); and Wachovia Corp. (WB) downgraded Goldman (perhaps a little tit for tat?). Citigroup Inc. (C) kept those pink slips flying in their investment banking area as the one-time global giant continued to struggle through billion-dollar losses.

Barclays PLC (ADR: BCS) turned to Middle East sovereign funds (namely the Qatar Investment Authority) for a significant capital infusion. And news from the non-financial world was not much better. UPS, Inc. (UPS) reduced its profit forecast; The Dow Chemical Co. (DOW) announced new price hikes; Blackberry-device-maker Research in Motion (RIMM) missed on its quarterly earnings and lowered future estimates; and General Motors Corp.’s (GM) stock price fell to a 53-year low. Oil prices surged further into record territory (over $142/barrel) on some untimely comments by the leader of the Organization of the Petroleum Exporting Countries and more of a run-up in commodities as global equities tumbled.

The bears officially came out of hibernation as the Dow Jones has plunged some 20% below the highs hit back in October 2007 to its lowest level in about two years (a 20% decline represents the definition of a bear market). Investors fretted over the weak financial company news (particularly the projections offered by their own analysts) and, of course, the never-ending rise in oil.

On the international front, the MSCI World Index fell to its lowest level since March – and is also on track for its worst monthly performance in almost six years. Bonds moved higher on a “flight-to-quality” as the yield on the benchmark 10-year Treasury once again fell below the 4% level.

Source: With the Dow in Bearish Territory, and Crude Oil Prices in the Stratosphere, New Potential Problems Abound