Sunday, October 01, 2006

Allow me to introduce myself.....

After an extended absence I'm back, but Don't Call It a Comeback!! I've been here for years..

It might take a couple nights to get my groove back so bear with me. Here we go.....


Here is the deal - There was once a brilliant financial mind that wrote in April of this year....

1) Major oil companies are drilling like mad right now and they will bring online lots of new supply over the next 2-5 yrs. More supply = lower prices

2) The double whammy of real estate slowdown and rising interest rates is going to severely crimp growth in the US economy. Weaker US economy = lower prices

3) A slowdown of our economy will reduce manufacturing output and economic growth in China and the rest of the Asian developing world. Reduced economic activity in Asia = lower prices.

Kudos to those that could see this coming. In addition, there are a couple of other factors at play

- big hedge funds are rotating out of commodities and into credit derivatives (mark my words - this is the death knell for our economy)

- there is some speculation that we stopped filling the Strategic Petroleum Reserve

- And for whatever reason (political or otherwise) the rhetoric vs. Iran has come to a screeching halt.

These factors have all helped to lower the cost of a fill-up from $42.50 to $36.75. Now what to do with all that new found wealth?? Super-size two more Big Mac meals? Get a couple of outdated shirts from Kohl's Clearance rack?

The reality is gas gets way to much blame on the way up and way too much credit on the way down. Gas will, in my opinion continue to fall for the foreseeable future (at least through the first week of November, unless Iran does something to stir things up) because OUR ECONOMY IS IN REAL TROUBLE. I'll go into a further discussion of the economic risks facing us in posts later this week.

Stay tuned........

Let's break this down - if an index is just now reaching new highs after 6 years, do you know what that really means? That means that the index is actually FLAT over the last 6 yrs and if you adjust for inflation you are probably down about 10-14%.

But the fact remains that there is a decent chance that at some point over the next month we might close above our previous high. This will be a lead story in every paper and both political parties will run out to claim credit for the resurgent economy. Please, please don't fall for that. If you learn anything from reading my rantings it is that there is always a much more interesting story behind the scenes.

Here is that story - the Dow is a flawed price weighted index - I won't bore you with the details, but a high priced stock carries more weight. Of the 30 stocks that comprise the index 20 companies (like GM, Intel, Microsoft, IBM, Coke, Walmart) are DOWN from their 2000 prices. And furthermore, 16 of those 20 stocks are down a staggering 20% or more (4 were down 50% or MORE!!!).

To offset the weakness of these stocks you had to have some pretty stellar performance - that was achieved through a 60% gain for Exxon ($3 gas was good for someone), an 80% gain for Boeing (war is good for someone), a 99% gain for United Technology (war is really, really good for others), a 150% gain for Caterpillar (lots of backhoes sold to help overbuild condos in Las Vegas and Pheonix), and a 220% gain for Altria (Marlboro's are good for someone).

So as you can see, the "strength" of the Dow's resurgence has been concentrated in just a handful of companies - Energy, Defense Contractors, Construction and the old Phillip Morris. Not exactly a growth engine for a 21st Century Economy.

So if and when we do close above our 2000 prices on the Dow remember where that "strength" came from.

*** In the interest of full disclosure - I own shares in Altria - yippee for me, huh!!


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