WHY $125 OIL hasn't CRIPPLED the S+P

For my REFerence, an AMAZING write-up from Jim Cramer courtesy his Realmoney.com (subscription site) blog...Jim discusses why he believes the S+P 500 is able to hold up despite the incredibly high price of crude OIL ($125/barrel):

*Net of Cramer's argument is that he believes the internal make-up (sectors) + future growth opportunities of the companies in the S+P 500 are becoming more and more levered to WW INDUSTRY demand vs. the U.S. consumer

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Oil's Not the Widespread Tax It Used to Be
By Jim Cramer
RealMoney.com Columnist
5/19/2008 7:45 AM EDT
URL: http://www.thestreet.com/p/rmoney/jimcramerblog/10417287.html

"Oil's not a tax on EVERYTHING -- it's a tax on the consumer. That's what I come down to when I see the charts this weekend and ponder what's happening in so much of industrial America.

Company after company that I examine -- the new techs, as I call them -- actually benefit from higher oil prices. Or they can pass them on with ease, because of the worldwide demand being so strong.

Take all of the companies involved with making a Boeing jet (BA): Boeing itself, Alcoa (AA), Honeywell (HON) and Precision Castparts (PCP) being good examples. Each of these is necessary because the new Dreamliner burns lots less fuel, and with fuel the biggest airline cost, it stands to reason that higher energy prices make the plane more desirable even at a higher price point.

Or how about all of the companies involved with process and flow control and efficient motors: Parker-Hannifin (PH), Emerson (EMR), Eaton (ETN) and Flowserve (FLS). Those work higher with higher energy prices. Railroad stocks like CSX (CSX), Burlington Northern (BNI), Kansas City Southern (KSU), Union Pacific (UNP) and Norfolk Southern (NSC) are smaller energy users than trucks, and they ship plenty of ethanol and fertilizer.

Of course everything farming: Deere (DE), Monsanto (MON), Du Pont (DD), AGCO (AG), Potash (POT), Agrium (AGU), Mosaic (MOS) and Archer Daniels (ADM) (these are big companies in market cap now, powers of the S&P or companies just waiting to get into the S&P but stalled by a lack of mergers). And everything that drills, ships and transports oil and gas: Rowan (RDC), Parker (PKD), Weatherford (WFT), Cameron (CAM), Noble (NE), Transocean (RIG), FMC Tech (FTI), Oceaneering (OII) and so many others -- and of course, Halliburton (HAL) and Schlumberger (SLB).

And then there is oil and gas itself, ever a larger portion of the S&P. Look at the charts during last week's run: Apache (APA), Anadarko (APC), Nabors (NBR), Exxon (XOM), Chevron (CVX), Occidental (OXY), XTO (XTO), Southwestern (SWN), Chesapeake (CHK), Ultra (UPL) : these all count.

Coal, of course, is a huge beneficiary. Infrastructure works because these companies get the benefits of the oil companies' largesse by being able to build energy-related production centers.

Even the autos can be viewed as benefitting, as the newer cars use less gas than the old ones, making them viable alternatives in multiyear paybacks. Along those lines, energy-efficient appliances get a boost.

Then there are the myriad alternative energy plays that are always dominating the headlines but haven't yet made it into the S&P or are very small parts of the S&P: the wind plays -- Trinity (TRN) , Woodward Governor (WGOV) , Owens Corning (OC) (also insulation); solar -- First Solar (FSLR) ($24 billion market cap), SunPower (SPWR) , and all the Chinese plays that people love so much.

Pipelines galore: Kinder Morgan (KMP) , Enterprise (EPD) , Boardwalk (BWP) , so many others.

Many companies are neutral -- financial, telco, utilities -- although some benefit from the price umbrella of higher oil costs and can pass on costs they don't have. Tech's been fairly neutral. The weaknesses we have seen in tech are related to consumer slowdown (customers such as Office Depot (ODP) ) or financial. Media's neutral, too. Health care can't be considered a negative either when it comes to energy consumption.

Most of the conglomerates say they are energy-positive: United Tech (UTX) and, famously, GE (GE), which has said that its fortunes should improve as oil goes higher, although we haven't seen that yet.

We know there are plenty that don't. Anything that is sold in the supermarket. Anything retail. Anything that uses oil or natural gas and can't really pass it on: Minerals and mining (although global demand really helps), glass (although recycling really helps), and chemicals and the paper producers.

But those companies aren't that important anymore, even though they dominate the consciousness of the marketplace, despite the encroachment of energy as a part of the S&P 500.

In fact, if finance could turn itself around -- something that seems increasingly possible, although it has sucked up a huge amount of capital and done nothing -- you could argue that we are on the cusp of a major move as it dawns on people that energy isn't the tax it used to be.

There are plenty of 30,000-foot flaws to this. We have seen time and again that our own growth in this country is heavily consumer-related. But the industrial growth owes itself not to the U.S. consumer, but the worldwide consumer.

All of these facts can go far toward explaining how higher oil prices have not been able to block the advance of the S&P or the Dow Jones averages. In fact, if the latter were more responsive to energy -- the Chevron nod was accompanied by ne'er-do-well Bank of America (BAC) instead of a Deere or another oil play like an Occidental or a Schlumberger -- we would be taking out 13,000 with ease.

All of this is worth thinking about when you are gloomy, because it doesn't add up to a decline, it explains the advance. Keep it in mind during the next downturn. It explains a lot why they've been fairly shallow. And I don't expect anything deeper now that finance seems to have stabilized."

(At the time of publication, Cramer was long XTO and Owens-Illinois)

Data Courtesy: RealMoney.com.
Full Disclosure: I own shares of DE, RIG, HAL and NBR.