The Highs Keep Rolling in

***** The highs keep rolling in.

***** Where Dow Theory says our focus should be.

***** Factors conspiring to drive oil higher

***** Dont worry, be happy.

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Try as we might, its hard to find much to complain about in the market lately. The Dow keeps making new highs (last week it gained another 1.9%). The S&P keeps hitting new recovery highs (up 1.5% last week). If this continues, we could all end up rich. The only downer is that darn Transportation Index, which remains stubbornly below its high.

Its not that weve invested much money in transportation stocks. We care about the Transport Index because it is an important indicator in Dow Theory. Dow Theory, as you may know, is the longest surviving technical theory of stock market behavior. It was created in the 19th century by Charles Dow, and today in the 21st century investors still rely on it.

Whether you are judging companies, theories, or even trees, longevity counts for something. And in the financial world, where theories come and go with each major trend change, no other theory has such a long history of success. Today, the leading practitioner of Dow Theory is Richard Russell, who has published his newsletter,

Dow Theory Letters, continuously since 1958. Longevity says something in the newsletter business too. Whats more, at 82 years old, Russell has seen more market action firsthand than most writers today. The next issue of TCI will tell you a bit more about why Russells newsletter is one of the few we recommend, and why he is one of the few commentators today worth listening to.

For now, let me tell you the biggest reason: thanks to his knowledge of Dow Theory, Russell has called the turning points in the market with far better success than most. One of the key principles of Dow Theory states that a long-term bullish trend is not in place unless both the Dow Jones Industrials and the Dow Jones Transports set new highs.

One of the reasons we were so bullish back in July, even though the market looked weak, was that the previous high had been confirmed by both these indices. Since then, as we have been pointing out for many months, the failure of the Transports to reach new highs makes us unwilling to say that a long-term bull market is in effect today.

Of course, its possible that the Transports will finally catch up. In that case, we can all sit back and enjoy the bull market in comfort. Until they do, we have to treat the current rally as a short-term phenomenon. That doesnt make us bearish. In fact, we dont expect any declines in the immediate future greater than 2% or 3%.

The question remains, however, what the next big move will be. Dow Theory is as good a prognostication method as any. What this tells us is that if the uptrend in the Dow reverses before the Transports make a new high, the next big move will be down. So we will keep an eye on Transports to see what they tell us over the next little while. For now, let us share one small cause for concern

NOT MUCH REASON TO BE OVER-PESSIMISTIC

Another reason we are particularly concerned about the Transports is the fundamentals in the oil sector. Oil prices have been weak ever since hitting a high in July. And that weakness has helped stocks make gains for the past few months, especially those in the technology sector and other aggressive stocks and also the Transportation stocks. Now that oil prices are close to where they were last year at this time, various factors seem to be setting the stage for another rally in energy, which could send the Transports falling, leading to a non-conformation.

If were wrong and oil prices remain low, we will expect further gains from the aggressive stocks. If we get a small rise in oil prices, the market will likely shrug it off. However, a big rise would cause the uptrend in stocks to grind to a halt. Our best guess at the moment is that over the next several weeks oil prices will move higher, and they could move significantly higher.

For this reason, and despite the past week, we continue to believe oil service companies offer us the biggest potential gains over the next twelve months. As usual, we hope we are wrong about oil moving higher. We hope we are wrong about Transports not moving higher. And we hope the bull market in stocks continues.

Certainly, the leading economic indicators for the OECD are in good shape, as are industrial commodity prices, boding well for the economy and the markets. So the worst case scenario at the moment for investors would be a brief pause, or perhaps a decline in stocks prices of 3% to 10% before the bull market resumes. And the best case would be no pause at all.

Either way, we dont think a big bad bear market is in the cards. And either way, oil service stocks are a good investment. So as we head into the Holiday/Party season, be of good cheer. As the song says, dont worry, be happy.

Until next week,

Stephen Leeb

Editor,

The Complete Investor

http://www.completeinvestor.com/mf/

P.S. Last week, we suggested that the new Democratic Congress would be more likely to support the alternative energy industry. It was an admittedly easy call, but we are satisfied to see other writers last week also seeing signs of a more pro-green agenda in Washington.

However, we doubt well see any repeal of tax breaks for oil companies (as some have suggested). No politician who wants his party to be re-elected can be expected to promote higher gasoline prices. So oil companies really have little to worry about.

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Emerging Investments Weekly Update

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THE BANDWAGON ROLLS ON OIL, WATER, CASH:

CHINAS WOES FAIRWELL MILTON

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Here At Home The U.S. the economy remains healthy (excluding the housing sector). And while the best news on corporate earnings is behind us, profits should continue to grow at strong rates for at least the next several quarters. The year-over-year decline in crude oil prices (which in effect acts as a tax cut) can only help spur growth.

Not surprisingly, the near-term path of least resistance for U.S. stocks is upward. Stocks typically perform well from November through December. Valuations are attractive, and the low yields on bonds are making equities increasingly attractive. Moreover, investors who moved to the sidelines last summer are slowly coming back as stocks mark repeated new highs.

But theres still plenty of cash waiting to be put to work. The major averages could tack on several more percentage points in a classic market melt up before a correction of any real size sets in. Whats more, next year could well be a good one on balance for U.S. investors. We generally dont put too much stock in to market cycles. That because patterns can be found in just about anything if you look hard enough. And they dont explain why something is happening.

That said, we simply cant dismiss whats known as the Presidential Election cycle. More specifically, the third year of the Presidential cycle is usually a good one investment-wise, with the S&P 500 having returned 15.4 percent (excluding dividends) on average during these years since the early 1950s. In no case did stocks lose money during these years. We wouldnt invest solely based on this cycle, but it does offer a bit food for thought.

Two Shortages and a Surplus Oil and water dont mix. And in China neither exists in sufficient quantities. China has been combing remote regions of the world intent on securing sources for oil to fuel its energy hungry economy. During the first 10 months of this year, the nation imported 120 million tons (nearly 3 million barrels a day) of oil. Thats up 14 percent from last year. The price tag for that oil rose 44 percent to a hefty $56 billion.

By the end of this year, China's oil demand should top 7 million barrels a day, according to the International Energy Agency (IEA). By 2030, the IEA pegs that figure at 15.3 million barrels a day. With demand slated to grow in excess of 5 percent annually in the coming years, and Chinas domestic conventional energy production well past peak, the nation is also looking within its borders at unconventional sources of energy to keep up with consumption.

According to Bloomberg, China is drafting policies to boost exploration for heavy oil resources such as oil sands and oil shale. Chinas Land and Resources Ministry estimates that the nations explorable reserves of oil sands at about 3 billion tons and its recoverable oil shale reserves at 12 billion tons. But the nation is still in the early stage of developing these resources and its demand for conventional oil will remain high indefinitely.

So dont look to that corner of the world for relief from high oil prices. Energy isnt the only commodity in short supply in China. Severe drought conditions there have left the flow of the Yellow River running 33 percent below the average. Nearly two-thirds of the river's water is being used to supply industry and residences. A senior Chinese official warned that China could run out of water by 2030.

One thing the Chinese have no lack of these days are U.S. dollars. Given its massive trade imbalance with America and mushrooming debt levels here, its no surprise the Chinese are becoming increasingly concerned about how their funds are invested abroad. The word from one senior Chinese official that Beijing is considering moving some of its $700 billion in US dollars and investments into other currencies put pressure on the greenback.

The Japanese yen rose on the news relative to the dollar and the euro. China will no doubt follow a gradualist approach to shifting out of our currency, so theres no immediate threat to our markets. Ultimately though, if the yuan follows the pattern of the yen under similar circumstances, the Chinese currency could rise more than fourfold against the dollar in the years ahead.

Goodbye Uncle Milton Nobel Prize-winning economist and free market champion Milton Friedman passed away last week at the ripe old age of 94. Friedman was one of the most influential economists of the 20th Century, popularizing the concept of the link between the nations money supply and inflation in what became known as the Monetarist school of economic thought.

China today owes a debt of gratitude to him for encouraging its leaders in the late 1980s and early 1990s to adopt free trade and free market policies. Likewise, the free market views of the Chicago school of economics (which Friedman led) served as a guidepost for post-Soviet Union Russias shift to capitalism.

Although the move was initially painful for the average Russian, the end result was a successful leap to free enterprise. The rest, they say, is history. Our thoughts and prayers go out to the Freidman family.

Until Next Time,

Your Aggressive Trader Team

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

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Leeb Index Trader Update Market Recap:

The equity markets continue to show strength and are hovering around their highs. The November options expiration last week had little impact on the overall markets and the remainder of this shortened holiday week is likely to be very quiet. Beyond the key fundamentals of the economy and earnings picture that both remain positive,

Mergers and Acquisitions are helping to spur the equity markets higher and are on pace for a record year. Earlier this week another wave of announced deals hit the marketplace with ninety deals announced with a combined value of $51 billion. Year to date there have now been close to 24,000 deals announced globally with a combined value of $3.18 Trillion.

In the U.S. this year there have been 9,831 deals announced with a combined value of $1.5 Trillion while Europe makes up the bulk of the remainder with 8,169 European deals announced with a combined value of $1.40 Trillion.

Private Equity groups such as the Blackstone Group have gained eminence in the takeover world. These sophisticated pools of investment capital have raised cash from investors which they in turn use to seek out firms that have strong balance sheets and are generating cash flow that can help finance the buyouts. Private Equity groups have announced over $600 billion of acquisitions, up from $222 billion in 2005.

With strong M&A activity is likely contributing to the markets gains, the equity markets continuing to move higher and the Dow Jones Industrials and the Russell 2000 indices at new all-time highs. It is worth noting that the end of the year tends to be one of the busiest times for takeovers as companies try to close deals before year end, so this year is certainly poised to be a notable record year for M&A.

Increases in the size of buy-out firms aided by a pools of private equity capital is a major factor contributing to the increase, and while it is often seen as a sign of confidence, it should also be considered as a potential omen as it can be spurred by corporate over-confidence. In the past, excessive buyout activity has been associated with market tops, so investors need to be cautious about taking the spur in M&A too optimistically.

With measures of option volatility hovering near multi-year lows, investors may be growing a bit too optimistic. Option volatility measures such as the VIX (Standard and Poor 500 Option Volatility Index) below ten to level, a range last seen in December of 1993 and the VXN (Nasdaq 100 Volatility Index) hovering around 15, the final quarter of the year may still see a pullback.

Until Next Time,

Peter Dunay

Editor,

Leebs Index Trader

http://www.leebindextrader.com/

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

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