OPEC takes action but as usual, no one takes it seriously

Inside this weeks update

***** The Dow passes 12,000 and may not take a break until after New Years

***** OPEC takes action but as usual, no one takes it seriously.

***** The weathermen predict a warm winter so expect low temperatures.

***** Stocks that could thrive after a Democratic victory.

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Since July, weve argued that a decline in oil prices would create an opportunity for stocks to rally to new highs. Last week, the Dow closed above 12,000 for the first time in history, while the S&P set another recovery high. Oil meanwhile closed last week at under $57 (the closest contract), having retreated from its July all-time high of near $80.

We think this illustrates quite clearly the inverse connection between oil and stock prices. But we also think oil has a better chance of setting a new high than it has of sinking much below current levels. The best possible scenario would be for stocks to keep rising and oil to keep falling.

That would be a return to the good old days of the 1990s. Unfortunately, we think these trends are already looking a little tired. OPEC has threatened for some time to intervene in the oil market in order to keep oil prices over $60.

Specifically, it warned it would reduce production quotas by a million barrels a day. We expected it would make good on that threat, and it did. Last week it exceeded its promise and cut production by 1.2 million barrels per day. This doesnt sound like good news, so naturally no one believes it.

The media swiftly became awash with speculation that OPEC isnt serious about the cut or will have trouble enforcing the cut or that the cartel acted because it believes oil demand is falling (so expect lower prices) or the cut will be less than stated.

Consequently, the November contract for light crude was pummeled down to just under $57. This shouldnt surprise you. It happened in 2004 as well, the last time oil had a comparable correction. Then too, oil fell over 25%, resulting in an OPEC agreement to impose production cuts.

A REPRIEVE FOR STOCKS MAYBE NOT FOR OIL

We should add, not incidentally, that OPECs production cut coincides with the beginning of the heating season, when oil prices tend to rise anyway. Lately, many voices in the media have been calling for a mild winter. However, these were the same voices that last year called for a cold winter.

With their track record, wed better stick to developing our own forecast. So far, weather in the Northeast has been unusually cold, and is expected to remain so for the next week or so. We dont know for certain what will happen after that. But we cant be lucky every year.

Even if temperatures this winter are merely average, the OPEC cut and seasonally strong demand are likely to cause a sharp rally in oil prices over the next five or six weeks. If youve been reading our updates for some time, you know that a sharp rally in oil would probably put a cap on the stock market rally.

However, we are growing hopeful lately that such an event may not occur until early 2007. Yes, there is the risk of a big rally in oil. But our technical indicators for stocks remain favorable. The year-over-year price change in oil is still negative, and thats a big positive for stocks. Yes, the market shows a few signs of technical wear and tear the broad market still lags, and the transports have not made a new high but these signs have yet to develop into anything serious.

This is good news, because it means the rally could continue for at least another month or even longer. The setback, which we feared would occur this quarter, may even be deferred until next quarter. It would take the return of higher oil prices, resulting in rising inflation in the context of an uncertain Fed to trigger a serious correction. With luck, that may not happen until after New Years.

PRE-ELECTION BETS

Regarding the upcoming elections Though Barrons disagrees, most polls show the Democrats will take control of one or both Houses. Naturally, we must consider which industries will gain in the event of a Democratic victory. Our first choice is one that will benefit further from a Democratic Congress, alternative energy, more specifically wind energy.

We expect Democrats will be more willing to embrace wind, since it is the leading clean energy. Though it never seems to get the respect it deserves, wind has more potential than most alternatives, including gas-to-liquids and tar sands.

Until next week,

Stephen Leeb

Editor,

The Complete Investor

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EQUITY MARKETS CONTINUE TO SURGE

*** U.S. Economy Remains Strong While Inflation Moderates

*** Chinese, Indian, and Other Emerging Economies Continue to Grow At Rapid Rates

*** Oil Prices and Inflation to Rise

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EQUITY MARKETS CONTINUE TO SURGE

Equity markets around the globe have continued to rally, with the Dow Jones Industrial Average rising above 12,000 for the first time the BSE Sensex (India) Index closing at an all-time high of 12,928 earlier this week.

Meanwhile, the Hang Seng Index was rapidly approaching its all-time high. Stock markets in other emerging markets, such as Mexico, Brazil, and South Korea have also been on a tear. With economies expanding at a healthy rate, the emerging markets growth was not limited to Chindia only - second-quarter GDP grew at a year-over-year rate of 5.3% in South Korea and 4.7% in Mexico during the second quarter.

While our technical indicators are still bullish and suggest that stock prices in general might have more room to run over the near-term, fundamental indicators are somewhat mixed. On the positive front, the employment situation remains strong, with initial claims for unemployment benefits unexpectedly falling during the latest week to their lowest level since the third week of July.

Meanwhile, industrial production at the nations factories, mines, and utilities has rose at a year-over-year rate of 5.6% during September - the fastest rate of growth since June of 2000. Another big positive for equity prices in general has been the significant declines in oil and gas prices since early August. As a result, most inflation statistics have also declined.

For example, the consumer price index ("CPI") fell during September (on a year-over-year basis) to its lowest level since March 2003, while the producer price index fell to its lowest level since January 2004. Meanwhile, consumers confidence in the economy rose significantly, which was exemplified last week when the majority of the nations major retail chain-stores reported another strong month for same-store sales for September.

Somewhat surprisingly, capacity utilization at U.S. factories, mines, and utilities fell slightly during September to 81.9%, from 82.5% in August. This is another positive development because the Fed closely monitors capacity utilization; when this indicator of "resource utilization" rises to levels above 85%, workers tend to become less productive and to "fall over each other trying to get their work done".

High levels of capacity utilization can also lead to higher inflation. With the decline in capacity utilization, and oil prices declining approximately 21% since the beginning of August, we expect the Fed to maintain the Fed Funds rate at its current level of 5.25% during the remainder of 2006. As long as oil prices remain at low levels, we also expect the major stock market indices to continue trending higher.

However, once the winter heating season sets in, we expect the situation to reverse. Oil already reacted to the OPECs decision to cut oil production by 1 million barrels per day. Another potential negative, the housing market, is showing signs that it continues to deteriorate, with building permits for new privately-owned housing starts - a leading economic indicator - falling 28% during September as compared to the same period a year ago.

Until Next Time,

Your Emerging Investments Team

http://www.emerginginvestments.net/mf/

TCI Enterprises LLC
500 5th Ave., 57th Floor
New York, NY 10110

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