Wednesday, September 13, 2006


The wholesale price of gas is now around $1.57 per gallon. The "normal spread" between wholesale and retail is around 60 cents per gallon (mostly taxes). The retail price will soon adjust to around $2.17 per gallon.

Over the past 6 days, the Rydex Precious Metals Index is down 14.5% and the Rydex Retail Index is up 4.27%. Leisure and transports were up strong while energy services were not far behind precious metals. Over the past 20 days, one small cap fund was down 9.41% while an electronics index was up 8.46%.

Ah! Guess which was the number one performing stock among the Dow and NASDAQ 100 over the past 20 days! CAL was up 21.85% in 20 days. BEAS was close behind, up 21.15%. Williams Oil was the down leader, -5.9% and XOM was close behind at down 5.8%.

Yesterday, the airline index was up 4.88%!

Should the wholesale price level off at today's price, how would you spend your 80 plus cents per gallon savings?

The above question is bigger than it seems. We are living through a special time. Major industrialized nations such as Canada and UK have not had a recession since 1991. Like the US, Canada and the UK were in a slowdown similar to the one we are in now on 9/11/2001. Had we not been attacked, we too might have skipped the historic "manufacturing" recession.

Americans investors have been slow to appreciate the beauty of exporting volatile light manufacturing jobs while retaining the management, design and research and development jobs. Schumpeter and Ricardo have been under appreciated economist for too long. School kids should be taught about creative destruction and comparative advantage.

So many kids today are so good at so many things. I watched an elementary kid do no hands forward flips yesterday. There were only a couple of kids in my high school who could do a no hands flip. Kids need to understand that even if the top surgeon in the land can type faster than his secretary, he (or she) should not type his own notes.

The point here is that the world economy is so strong that $78 oil could not kill the goose. Now there are plenty of golden eggs lying around. The decline of oil from $78 to $64 means that consuming nations will not spend 1.19 Trillion Dollars Per Day!

I hope you can see the reason investors should be excited. If you are not excited, go back to see what happened after other collapses in the price of oil. Go back and read the August 1982 Business Week Magazine. The lead article spoke of the death of equities because high interest rates and high oil prices had killed the economies of the world. Over the next 9 months, stocks flew!

Democrats and Republicans should realize that with retail gas on the way to $2.17 (at least), with public trials of the "master mind" of 9/11 ready to start, with a stock market on fire and with plentiful jobs available, there is not likely to be a change in the leadership of the congress. While I understand the consensus opinion, confirmed by the betting sites, is that the house will go Democratic, these folks also mistakenly believe the wheels are about to fall off the economy. The public has braced for a housing led collapse that was disputed strongly by the market yesterday. The bottom line is that the fear of tax increases is subsiding. Even if the house does flip, the Senate and President will prevent tax increases.

Low taxes and low inflation are the mother's milk of stock performance. Hold onto your hat because the powerful forces of increasing interest rates and increasing commodity prices have now turned. Instead of pulling inflation higher, these forces will now tug downward. Since inflation is a lagging indicator and since stocks are "the" leading indicator, stocks will climb as interest rates and oil prices fall.

I must throw in a note of caution. Investors typically wait until after a really nice move in the market before adding to their accounts. Over the last 20 days, the Bullish Percentage Index for oil stocks has dropped by 49% and the Bullish Percentage Index for Consumer Discretionary stocks has increased by 45%. Under these circumstances, it would not be unusual for the market to "digest the move". It could pull back or trade sideways for a while. Just a little bad news out of the Middle East could cause a significant bounce in energy and a drop in the transports. Just remember that I have never found anyone who can profitably predict short term moves.

Besides, the action of the past couple of weeks is that bad news is not as powerful as this market. It took a long time for this market to get so well positioned. My guess is for a 30% up-move or more in the broad averages over the next 9 months.

I did an informal poll of 6 business executives last Friday night. Six of six believe Democrats will win the house, taxes will be raised, the war in Iraq is getting worse and that negotiating with Iran is hopeless. The WOW (wall of worry) has been built to the heavens. Stocks climb walls of worry.

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