Zacks Analyst Blog Highlights: The Gap, Rex Stores, HH Gregg, Transocean and Diamond Offshore.

Business Wire, June 10, 2009

http://www.profits.zacks.com/

CHICAGO -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: The Gap (NYSE: GPS), Rex Stores (NYSE: RSC), HH Gregg (NYSE: HGG), Transocean (NYSE: RIG) and Diamond Offshore (NYSE: DO).

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Here are highlights from Tuesday’s Analyst Blog:

Will Oil Prices Prevent a Recovery?

Higher oil prices are coming at a time when the economy is still very fragile. Retail spending on goods other than energy face strong headwinds from both the need for consumers to rebuild their personal balance sheets (pay down past debts and build up savings) and from much worse personal income statements (unemployment, hours and wages cut, lower interest rates on savings).

This is just one more unhelpful factor that will pressure sales, particularly for stores that sell discretionary items, including clothing stores like The Gap (NYSE: GPS) and appliance stores like Rex Stores (NYSE: RSC) and HH Gregg (NYSE: HGG). Higher oil prices are of course good news for the energy sector, but for the overall economy high energy prices are a significant negative.

The rise in oil prices does not seem to be consistent with the overall weakness of the world economy, but there are several reasons why it just may be sustained or extended, even in the absence of a global economic rebound. The first is that oil is a good hedge against future inflation, and given the expansion of the Fed balance sheet, that may be a very serious concern down the road. Currently the bigger threat is deflation, but it will be hard for the Fed to sop up all the liquidity that has been created to fight the deflationary fire.

A second and somewhat related reason is that China has been increasing its purchases of all sorts of commodities, trying to take advantage of the lower prices (note that the price of other commodities like copper have also increased sharply from the lows of last winter, but remain well off the highs of last summer). OPEC has also shown greater discipline this time around than they have in the past. How long that will last nobody knows, but so far they have been keeping it together.

The third reason is that the looming danger of peak oil has not gone away, it has only been masked by "peak demand" caused by the economic downturn worldwide. Any incremental oil is now coming from very expensive sources like the Canadian oil sands or the very deep waters of Brazil, both of which require oil prices in the mid-$60’s to be economically viable.

With oil prices rising above those levels, the drilling off Brazil should pick up steam. There are, however, very few rigs capable of drilling at such depths. Most of those are controlled by two firms, Transocean (NYSE: RIG) and Diamond Offshore (NYSE: DO), both of which will benefit enormously if oil prices stay high.

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