Hold on to your hedges

The Dow Jones Industrials lost some of its luster last week, as most of us took some time out to celebrate Thanksgiving. The S&P ended the week basically flat. The overall trend in both indices, however, is steeply up with no sign of a market top in sight. We wish the Transportation Index would join the party, but it still remains below the high of around 5,000 it made earlier in the year.

The divergence between it and the Industrials remains in force. Nonetheless, market breadth is good, and the Party Season is now in full swing, with Santa Claus popping up in just about every TV commercial. These days, it seems you can barely clean out the roasting pan from one turkey before youre on a mad dash to prepare for the next holiday feast. In such an atmosphere, who has time to think about selling stocks?

Consequently, a market correction this time of year is almost unheard of. That doesnt mean stocks couldnt fall a tiny bit, say 3% to 5%, as buying pressure ebbs as well, but we doubt well see a full-blown correction while the fairy lights are glowing. Of course, if any factor could trigger a drop in stocks prices, the most likely candidate is of course

THE WILD CARD our old friend oil. At long last, oil prices are showing signs of life. Having touched on their lows of a year ago, they appear to have spent the last four weeks resting up for another push higher. Last week, West Texas oil finished just a few pennies below $60, while Brent Crude closed just over $60. Fundamental support is due to arrive shortly as the OPEC production cuts start making their effect felt. You doubtless recall that OPEC cut production about a month ago.

It takes roughly a month for such a cut to affect oil shipments arriving on our shores. While supply is set to decline, demand for oil is due to increase. The Party Season also means winters arrival, and while we cant predict the weather any better than the weatherman, two unseasonably warm winters in a row seems unlikely to us. Even an average winter would mean higher oil and gas consumption than last year. Finally, the biggest wild card is todays geopolitical situation, which is just plain horrible, mainly because it too is all about oil.

Some of the worlds worst tourist destinations today, Iraq and Iran, have a lot of leverage over the U.S., and cause the U.S. so much headache and anxiety precisely because they are in the biggest oil-rich region. The situation in Iraq has clearly taken a tremendous turn for the worse. Even Washington is finding it hard to avoid using the term civil war to describe the on-going violence. According to the New York Times, the insurgency has now become self-supporting, with an annual budget of as much as $200 million with which to wreck havoc and let slip the dogs of war. (By contrast, the U.S. government spends more than that on Iraq each day, and cannot balance its budget.)

Were not trying to criticize the government, just face up to the facts. Unless a dramatic about-face happens quickly, civil war is what Iraq will get, and then just let anyone try to ship oil out of the country through legal means. In other words, oil prices will rise worldwide. As we have been saying for years, as long as the world remains dependent on unstable countries to supply its energy needs, the world economy is on a dangerous slope. And then theres Iran, which continues to fund virtually every enemy of the United States.

Not the least of our problems concerning Iran is the threat to our biggest ally in the Middle East, Israel. Sooner or later, someone either Israel, the U.S., or the two combined will feel compelled to eliminate Iran as a potential threat. Whether that means crippling Irans economy, or taking out its oil industry, or curtailing its nuclear program, we dont know. But either way, it cant be good for oil prices. (Incidentally, Irans internal energy consumption is increasing at such a high rate, it expects to stop exporting oil within 20 years.

Rather run short of energy itself, Iran is attempting to construct 20,000 megawatts worth of nuclear reactors. But can the world trust Iran not to build A-bombs as well?) And thats just two of the worlds trouble spots. Unless politicians get way better at diplomacy than they have been lately, its hard to imagine either peaceful solutions to these situations or stable oil prices.

Of course, we dont know exactly when oil will make its next move; we just wont be surprised when it does. As weve said repeatedly, the current rally in stocks began almost exactly when oil prices last peaked. Last week, stocks slowed as oil prices started to rise. Our guess is that when oil passes $65 a barrel, the market will feel the downward pressure once more.

Meanwhile, lets not forget there are also some positive factors in the world economy. The U.S. leading indicators were up last week. The OECD leading indicators remain in a strong uptrend. And industrial commodity prices are rising. Ironically, oil has been the weakest of the major commodities in recent months. Its not likely to stay weak, but if it did we would have the best of all worlds.

Cheap energy and rising commodities would indicate a strong economy with low inflation. But most likely, oil will rise. So continue to hold those oil stocks. Dont head for the hills, at least not until February. Maybe by then the world will have improved. On that cheerful note, party on.

Until next week,

Stephen Leeb

Editor,

The Complete Investor

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

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Emerging Investments Market Update

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STOCKS OFFER THEIR HOLIDAY WELL WISHES WHATS DRIVING (DIVING?) THE DOLLAR CHINA KEEPS IT IN THE FAMILY

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Counting our Blessings Stock investors have plenty to be thankful for last week. The major averages are trading near their highs and are up some 15 percent for the year, valuations are reasonable and economic growth remains healthy and inflation remains in check, auguring further gains in the months ahead here in the U.S. Our favorite overseas markets (most notably China and India) are likewise doing well and set to advance even further in the coming months.

The lynchpin for equities markets globally remains energy prices. Stocks have soared in the wake of crude oil prices topping out last summer. If oil prices remain contained or rise only slowly from here stocks will rallies weve seen in many bourses will have room to run further. If, on the other hand, prices spike for whatever reason, its a safe bet stocks with take it on the chin.

Energy prices are sliding today in the Energy Information Agencys weekly inventory report, but we would caution against reading too much into the data. Relative to days supply to cover, inventories arent all that high. Moreover, OPEC is increasingly likely to cut production further if prices dont stabilize or creep higher from here. The Greenback Slips Last week we reported that the Bank of China (BoC) was gearing up to diversify its foreign currency reserves away from U.S. dollars, which account for more than two-thirds of those reserves.

Its starting to look like the BoC is moving more rapidly than anyone was expecting. While we dont have concrete evidence of Chinas shift out of dollar investments, were hearing credible whispers that its starting to take place. And the currency market seems to bear this out. Also pressuring the dollar are rising interest rates (and expectations for more hate hikes) in Europe and Japan, and to a lesser degree, investors here at home anticipating rate cuts some time early next year here at home.

The dollar has been quietly weakening against the major currencies since early October. And with our currency having now having fallen through key support against other majors currencies, we can expect further weakness ahead. While a weak dollar is ultimately inflationary for U.S. consumers, foreign investments and companies selling abroad will benefit from continued weakness in the greenback.

A Taxing Problem What a difference a few short years can make. At the turn of the century, the Chinese government was imposing stiff import tariffs on a wide range of goods, including base metals such as copper, nickel, zinc and aluminum, so as to encourage the development of the nations basic industries.

In the ensuing years the government lowered those tariffs so as to meet the strong demand of its flourishing economy. But with its economy continuing to expand at a near double-digit pace, demand for base metals has grown as well. With no slackening in demand, supply constraints have therefore pushed prices considerably higher. Now, the government is taking a decidedly different tack:

Its imposing export duties on these same base metals. With domestic metals reserves rapidly being used up, the move is aimed at keeping as much base metals as possible in its homeland. The taxes are also designed to encourage more efficient production methods with a two-pronged hope of reducing waste while promoting reduced energy use in what have traditionally been energy intensive operations.

The clear takeaway from this move is Chinas action is bullish for base metals over the long haul.

Until Next Time,

Your Emerging Investments Team

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

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Leeb Index Trader Update Market Recap: The equity markets started this week lower after the long Thanksgiving holiday weekend. The sharp decline on Monday came without any major market or economic news, but after three solid weeks of gains and with the major indices hovering near all-time highs, investors chose to take some profits.

Concerns over retail sales data, a weaker dollar and higher energy prices were cited as the main culprits. Early data on holiday retail sales suggest that the holiday season got off to a healthy start but clearly the equity markets had higher expectations. According to Chicago based ShopperTrak, retail sales on the weekend following Thanksgiving were 2.8% higher in comparison to the same period last year totaling $18 billion.

The National Retail Federation said the average consumer spent 19% more than they did last year. Although it is still very early in the holiday shopping period, these are respectable retail sales figures - at the moment the consumer is still spending. While the early retail sales data was respectable, the equity markets obviously had higher hopes. The severity of the declines on Monday displayed dramatic shift into nervousness about the outlook for equities by investors.

Prior to Mondays declines, investors had been displaying little concern about that sharp correction in equities, as was seen in some key option volatility gauges such as the S&P 500 volatility measure (VIX) which had declined to multi-year closing low below 10 on Monday and Tuesday November 20th and November 21st. This was the lowest close on the VIX since December 22nd 1993 and suggested that investors were not overly concerned about a sharp market correction.

But as the market began declining on Monday, investors began aggressively buying up option protection in reaction driving the VIX up 15%. The VIX eased slightly on Tuesday but investor nervousness remained as was seen on yesterdays quiet trading. Year-to-date the equity markets have posted respectable gains with the Dow Jones Industrials currently near its all-time closing high - up over 13%.

Similarly, the Russell 2000 small cap Index is trading near its all time high of 792 posted on Wednesday November 22nd and is currently up nearly 15% year to date. The Nasdaq and S&P 500 Indices have each equally posted solid returns, with the Nasdaq up over 9% and the S&P up nearly 11% so far in 2006. But data suggests that the economy and earnings are slowing and the market may struggle to post such gains next year.

This week the Paris based Organization for Economic Cooperation and Development (OECD) reported in their semi-annual outlook they expected declining housing prices to slow the U.S. economys growth to 2.4% in 2007 from the 3.3% expected for 2006. This, in turn, will slow the OECD members growth to 2.5% in 2007 from the expected 3.2% rate for 2006.

Housing remains a key concern and while existing home sales data increased 0.5% to a 6.24 million unit pace in October allaying some of the panic about housing, concerns about the economy remain. We will continue to watch housing, energy and inflation data as key drivers of the equity markets in the near term.

Until Next Time,

Peter Dunay

Editor,

Leebs Index Trader

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Leebs Aggressive Trader Gesundheit. Stocks showed the first sign of catching a cold Monday, suffering their worst one-day loss in five months. There was plenty of finger-pointing as to the cause, including the weak U.S. greenback, expectations for good but not spectacular Black Friday holiday shopping numbers, and the prospects for higher energy prices.

While our short-term trading indicators remain positive, we wont be surprised if stocks fall a bit further here, given that their strong run up in recent weeks has pushed them into overbought territory. Most likely, though, this is nothing more than a case of the sniffles and not the start of a more serious malady. In the wake the markets strong rally off the July lows, rather than a Santa Clause rally, the major averages will most likely meander for the remainder of the year.

The markets technical picture is still fairly goodalthough not great. And theres still plenty of pent-up demand for equities on the sidelines. Individual investors are showing greater concern in the form increased put option buying, even as theyre committing more cash to equities. Our favorite insiders, the NYSE Specialists, meanwhile, remain firmly in the bullish camp.

Conditions for a major decline simply arent in place at present, although that doesnt rule out a more modest setback. And given seasonal factors, a decline of any size in the next month isnt all that likely. Of course, as weve said more times than we can remember, everything really hinges on energy. Oil prices are back above $60 a barrel. As they approach $65 stocks again investors will give pause.

Until Next Time,

Gregory Dorsey

Editor,

Leebs Aggressive Trader

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

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