Oil, Iraq, Interest Rates...All in June

Oil and geopolitics are intricately entangled. It will take more than a strong dip in oil futures to give stocks a boost; likewise, it will take more than good news reported from Iraq to do the same. For our markets to continue moving, we'll need both to happen. Fortunately for us (or unfortunately), we're about to reach a fork in the road and the flatness in the market may change.

The month of June will be a significant month for stocks. Three major events will take place in June that could heal or hurt our markets; and one of these events has already taken its toll at the marketplace.

* June 3rd, OPEC will meet in Beirut to discuss oil output.

* June 30th, Iraq will begin taking control of her future.

* June 29-30th the Fed meets to decide on interest rates.

Let's start with oil. Although oil futures have traded up past $40 again this week, OPEC is expected to announce production increases on June 3rd in Beirut. One would think this announcement would send oil futures noticeably lower, but it hasn't. There is a number trick that OPEC could use to make good on their promise without touching supply. OPEC is expected to announce a 1.5 to 2 million barrel per day increase in production quota. Here's the trick though...OPEC already pumps 2.2 million barrels over quota. If OPEC raises the quota it will not necessarily raise production. Quota will meet production...Tricky tricky.

But, dear reader, there is a good chance that actual production will be increased. Saudi oil minister, Ali al-Naimi assured the world that Saudi Arabia will output 9 million barrels a day and perhaps as high as 10.5 million if necessary. The Saudis pumped 8.35 million last month. If real production is increased, equities should run up. More on oil in future...for now, let's tackle the other two.

Iraq is perhaps the single most important factor in American markets today. A little bad news and stocks plummet. Good news and stocks wait for more bad news. June 30 will not only be a historical day for Iraq and the US government, but the effects will give our market direction for the rest of the year. If the transition is smooth our markets will be happy and move forward. If Iraq becomes bloodier, our markets will pull back further.

The exit plan is in motion. We have to keep our fingers crossed and hope extremists don't decide to destroy the future of one of the oldest civilizations on earth. Handing over power will be a knife in the back of terrorism. Although we've taken casualties, much more than terrorists believed the soft American public would allow, we've stayed in the fight and are a big step closer to winning.

Because of twisted news media, it's difficult to get a real grasp on how Iraqis feel about freedom. One thing is for sure...They like to protest. The first sign of democracy!

Once Iraqis have a functioning government, police, military and new infrastructure, we'll leave if they ask. But that day is far in the future. As for now, we must support not only American GIs and families, but the Iraqis themselves. They're going to have a tough time at this freedom thing. Let's hope for our sake and theirs that this transfer of power goes relatively smooth.

And finally, interest rates. On June 29-30, the Fed will meet to discuss interest rates. The market priced an August rate hike in several weeks back, and has priced in a June hike over the past two or three weeks. One thing is certain; rates will increase...but not necessarily in June. If May employment figures beat estimates, as happened the previous two months, the Fed may increase rates, but if OPEC can bring the price oil down significantly (energy being the only significant inflation area) rate hikes could wait until August.

Strap on your seat belts, June could be a wild ride.

Luke Hodgens is the editor of
Powerhouse Profits a conservative investment newsletter. Click here to read more of his cogent analysis."