Standing on the slippery slope
In this week's update
***** Interesting times
*****boring markets.
***** Transports join the party.
***** Standing on the slippery slope.
-------------------------------------
Today's geopolitical turmoil makes us think about Robert F. Kennedy's famous rendition of a supposedly Chinese curse, May you live in interesting times. Certainly there is a lot of interesting political drama in the world today, in places such as the U.S., Mexico, Venezuela, Cuba, the U.K., and many other countries. Even more interesting is the appalling violence occurring in Iraq, Afghanistan, and elsewhere, not to mention natural disasters.
We feel sad for the millions of innocent bystanders trying to raise their children in such interesting environments. And speaking of environments, the global environment seems destined to be a lot more interesting in future years too, according to the recent report by the Intergovernmental Panel on Climate Change. It concludes that human activity will make the world a lot hotter and stormier in coming decades. Drier too, unless you live on a seacoast, in which case youd better learn how to swim.
In fact, the only thing in the news which seems boring these days is the stock market. Shares are in an uptrend, which is unlikely to break anytime soon. That's good news for you, as an investor, although it makes our job as commentators more difficult. (Bear markets are so much easier to write about.) But we don't really mind, of course. As long as you're making money, we're happy to work a little harder. So sit back, put your feet up, and bask in the comfort of today's rising prices, while we natter on about other pressing matters
TRANSPORTS HIT NEW HIGHS
The good news last week was that the Dow Transportation Index finally decided to join the party and make new highs. This completes a Buy signal, according to Dow Theory. Before you get too excited, we must remind you that often such buy signals are followed by brief market corrections on the order of 4-6%. We aren't predicting such a correction will occur this time.
And we certainly don't recommend you sell stocks! The indicators are so strong today that we feel any setback if it occurs will be short-lived. We just don't want you to be surprised if it happens. What's particularly positive about the new high in Transports is that it occurred at the same time that oil rallied back above $59 a barrel. This shows that transportation stocks are not as dependent on oil prices as they are on a strong economy. The Transports are important to Dow Theory because they reflect actual goods being shipped, so the recent action is a sign that the U.S. economy is stronger than some of the other indicators suggest.
Of course, we must also keep in mind that the U.S. is not the biggest engine of growth in the world today. Chindia, which is expanding at 10% a year, is becoming more important. India alone is on the verge of overtaking Japan as the world's third-largest economy. Money supply is ample, and stock valuations are not overstretched. All this bodes well for stock prices this year. Longer-term, we see a dark and slippery slope
OILS THE THING THAT WILL MAKE OR MAR THE BULL
Ultimately, it all comes down to black gold. We're not surprised that oil has rebounded into the high $50s again, and we won't be surprised if it rises further. In recent months, Saudi Arabia has cut back on oil production and that move was destined to lead to higher prices.
The question we must ask ourselves is whether the Saudi production cut was voluntary, or the result of its oil fields falling into decay, as has long been argued by some analysts. It is undeniable that Saudi production has been declining for the past several years. We can't help noticing that during this decline there have been two oil spikes in 2005 and 2006. On both occasions, oil prices reached over $70. Why didn't OPEC raise its production during these spikes, to take advantage of the higher prices?
Perhaps they really were unable to. And that is an ominous thought. Consider, for example, what has been happening in the world's second largest oil field, the Cantarell field in Mexico. For years now its decline has been the talk of the oil industry. According to a recent article in the Wall Street Journal, The virtual collapse at Cantarell is unfolding much faster than projections.
By 2007, it may be producing 50% less oil than in 2005. That's a serious situation which certainly will help make oil more expensive. However, it's not the worst. The real problem is that most of the world's other giant oil fields, those in Kuwait and Saudi Arabia, may be in equally rough shape. We doubt that the engineers who monitor fields in the Middle East are any better than those in Mexico, they are simply more secretive. But we are seeing some signs that production in the Middle East has also peaked.
If this is true, we are looking at the start of the last great oil bull the one force on earth that can, in time, put a halt to the bull market in stocks. For now, however, please don't panic. The important phrase to remember is in time. The market can withstand oil at $60. At $70, investors might start to have a few doubts. But it would take new highs in oil to put real pressure on the market and create a difficult situation for the Federal Reserve.
We have a little time before that happens, during which we can continue to enjoy the bull market. However, while the economic stats remain favorable, the front page of the newspaper reveals a world that's just too interesting for us to ignore. What happens if the world does acknowledge a peak in Saudi oil production?
What happens if something goes terribly wrong with Iran? So as a prudent measure, we continue to recommend you overweight energy stocks. And despite the market's apparent strength, we are sticking with our theme of high quality stocks. Meanwhile, provided nothing too interesting happens, we think the market is likely to be higher six months from now.
Until next week,
Stephen Leeb
Editor,
The Complete Investor
Disclaimer
TCI Enterprises LLC, The Complete Investor, Emerging Investments, Leeb Index Trader and their affiliated companies and publications ("TCI" or "Letters" or "Publications") are not registered as a broker dealer or investment advisers with the U.S. Securities and Exchange Commission or any state securities authority. Letters and their information and content providers make no representations or warranties of any kind in connection with the subject matter, performance or the suitability of the information contained in publications for any purpose and are not liable for the timeliness, accuracy, or completeness of the information contained herein. The information contained in publications is provided for general informational purposes, and is not a substitute for obtaining professional advice from a qualified person, firm or corporation familiar with your personal circumstances. Please seek the advice of professionals, as appropriate, regarding the evaluations of any specific security, report, opinion, advice or other content. TCI is not responsible for any trades placed by the recipients of TCI based on the information included therein. There can be no assurance that your portfolio or positions can achieve the indicated performance and therefore, the sample performance information should not be relied upon. Investment recommendations are not intended to be construed to be personalized advice, or recommendations to buy, hold, or sell mentioned securities and readers should consider their personal situation before making any investment. All opinions expressed and information and data provided therein are subject to change without notice. TCI, its officers, directors, employees, and/or associated entities may have positions in and from time to time make purchases, or sales of the securities discussed or mentioned in TCI.
TCI shall have no liability for any newsletter that is lost, intercepted or not received by you in a timely manner, or at all, for any reason.
TCI Enterprises LLC
500 5th Ave., 57th Floor
New York, NY 10110
©2006 TCI Enterprises. All rights reserved.
***** Interesting times
*****boring markets.
***** Transports join the party.
***** Standing on the slippery slope.
-------------------------------------
Today's geopolitical turmoil makes us think about Robert F. Kennedy's famous rendition of a supposedly Chinese curse, May you live in interesting times. Certainly there is a lot of interesting political drama in the world today, in places such as the U.S., Mexico, Venezuela, Cuba, the U.K., and many other countries. Even more interesting is the appalling violence occurring in Iraq, Afghanistan, and elsewhere, not to mention natural disasters.
We feel sad for the millions of innocent bystanders trying to raise their children in such interesting environments. And speaking of environments, the global environment seems destined to be a lot more interesting in future years too, according to the recent report by the Intergovernmental Panel on Climate Change. It concludes that human activity will make the world a lot hotter and stormier in coming decades. Drier too, unless you live on a seacoast, in which case youd better learn how to swim.
In fact, the only thing in the news which seems boring these days is the stock market. Shares are in an uptrend, which is unlikely to break anytime soon. That's good news for you, as an investor, although it makes our job as commentators more difficult. (Bear markets are so much easier to write about.) But we don't really mind, of course. As long as you're making money, we're happy to work a little harder. So sit back, put your feet up, and bask in the comfort of today's rising prices, while we natter on about other pressing matters
TRANSPORTS HIT NEW HIGHS
The good news last week was that the Dow Transportation Index finally decided to join the party and make new highs. This completes a Buy signal, according to Dow Theory. Before you get too excited, we must remind you that often such buy signals are followed by brief market corrections on the order of 4-6%. We aren't predicting such a correction will occur this time.
And we certainly don't recommend you sell stocks! The indicators are so strong today that we feel any setback if it occurs will be short-lived. We just don't want you to be surprised if it happens. What's particularly positive about the new high in Transports is that it occurred at the same time that oil rallied back above $59 a barrel. This shows that transportation stocks are not as dependent on oil prices as they are on a strong economy. The Transports are important to Dow Theory because they reflect actual goods being shipped, so the recent action is a sign that the U.S. economy is stronger than some of the other indicators suggest.
Of course, we must also keep in mind that the U.S. is not the biggest engine of growth in the world today. Chindia, which is expanding at 10% a year, is becoming more important. India alone is on the verge of overtaking Japan as the world's third-largest economy. Money supply is ample, and stock valuations are not overstretched. All this bodes well for stock prices this year. Longer-term, we see a dark and slippery slope
OILS THE THING THAT WILL MAKE OR MAR THE BULL
Ultimately, it all comes down to black gold. We're not surprised that oil has rebounded into the high $50s again, and we won't be surprised if it rises further. In recent months, Saudi Arabia has cut back on oil production and that move was destined to lead to higher prices.
The question we must ask ourselves is whether the Saudi production cut was voluntary, or the result of its oil fields falling into decay, as has long been argued by some analysts. It is undeniable that Saudi production has been declining for the past several years. We can't help noticing that during this decline there have been two oil spikes in 2005 and 2006. On both occasions, oil prices reached over $70. Why didn't OPEC raise its production during these spikes, to take advantage of the higher prices?
Perhaps they really were unable to. And that is an ominous thought. Consider, for example, what has been happening in the world's second largest oil field, the Cantarell field in Mexico. For years now its decline has been the talk of the oil industry. According to a recent article in the Wall Street Journal, The virtual collapse at Cantarell is unfolding much faster than projections.
By 2007, it may be producing 50% less oil than in 2005. That's a serious situation which certainly will help make oil more expensive. However, it's not the worst. The real problem is that most of the world's other giant oil fields, those in Kuwait and Saudi Arabia, may be in equally rough shape. We doubt that the engineers who monitor fields in the Middle East are any better than those in Mexico, they are simply more secretive. But we are seeing some signs that production in the Middle East has also peaked.
If this is true, we are looking at the start of the last great oil bull the one force on earth that can, in time, put a halt to the bull market in stocks. For now, however, please don't panic. The important phrase to remember is in time. The market can withstand oil at $60. At $70, investors might start to have a few doubts. But it would take new highs in oil to put real pressure on the market and create a difficult situation for the Federal Reserve.
We have a little time before that happens, during which we can continue to enjoy the bull market. However, while the economic stats remain favorable, the front page of the newspaper reveals a world that's just too interesting for us to ignore. What happens if the world does acknowledge a peak in Saudi oil production?
What happens if something goes terribly wrong with Iran? So as a prudent measure, we continue to recommend you overweight energy stocks. And despite the market's apparent strength, we are sticking with our theme of high quality stocks. Meanwhile, provided nothing too interesting happens, we think the market is likely to be higher six months from now.
Until next week,
Stephen Leeb
Editor,
The Complete Investor
Disclaimer
TCI Enterprises LLC, The Complete Investor, Emerging Investments, Leeb Index Trader and their affiliated companies and publications ("TCI" or "Letters" or "Publications") are not registered as a broker dealer or investment advisers with the U.S. Securities and Exchange Commission or any state securities authority. Letters and their information and content providers make no representations or warranties of any kind in connection with the subject matter, performance or the suitability of the information contained in publications for any purpose and are not liable for the timeliness, accuracy, or completeness of the information contained herein. The information contained in publications is provided for general informational purposes, and is not a substitute for obtaining professional advice from a qualified person, firm or corporation familiar with your personal circumstances. Please seek the advice of professionals, as appropriate, regarding the evaluations of any specific security, report, opinion, advice or other content. TCI is not responsible for any trades placed by the recipients of TCI based on the information included therein. There can be no assurance that your portfolio or positions can achieve the indicated performance and therefore, the sample performance information should not be relied upon. Investment recommendations are not intended to be construed to be personalized advice, or recommendations to buy, hold, or sell mentioned securities and readers should consider their personal situation before making any investment. All opinions expressed and information and data provided therein are subject to change without notice. TCI, its officers, directors, employees, and/or associated entities may have positions in and from time to time make purchases, or sales of the securities discussed or mentioned in TCI.
TCI shall have no liability for any newsletter that is lost, intercepted or not received by you in a timely manner, or at all, for any reason.
TCI Enterprises LLC
500 5th Ave., 57th Floor
New York, NY 10110
©2006 TCI Enterprises. All rights reserved.
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posted by Oil Shock at 12:06 AM
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