It is time to be in the market, not out

May 23, 2008 – 10:55 am

We actually had good economic news this week but no one noticed as oil prices spiked on a daily basis to new price highs until Thursday. It is interesting that despite these oil prices making new highs, the stock prices of many oil companies are not moving up, and in fact, in the refinery arena, the average stock price has fallen since the beginning of the year, while companies in big oil have moved up only slightly. The price for a barrel of oil has risen more than 30% this year while Exxon’s stock price has only retraced what it lost since January and Chevron is up maybe 8% for the year. The drillers and certain service companies for the oil companies seem to be doing well. Be very careful. The price for a barrel of oil seems way overextended to me. However, the opposite argument is that the fundamental demand is still in place which is true. Still, most of the recent move is speculation. We have short term speculation with long term demand pressure. A stock ‘traders’ perfect storm.There was other news this week besides oil. Leading economic indicators were slightly better than expected. It was actually up, not down. Inflation, though increasing, is well contained despite higher food and energy prices. A housing report this morning showed a fall in prices nationwide. However, sales in California have picked up sharply. Lower prices are having an effect. Still, inventory is very high as foreclosures are flooding the market. Look for lower prices but rising sales. Watch the inventory levels; that will give you a hint of the bottom when it starts to fall.

The market struggled this week. There is a battle between the bulls and bears. We are at an inflection point. I think we are going higher. In fact I am convinced the stock market is going higher. I also think that oil prices will fall. If high oil prices do not tank the stock market, which has been the case so far, then at some point, when oil starts to fall, the stock market will rally and likely rally strongly. The problem is from what lofty level will the price for a barrel of oil begin to fall. We have seen a 4% reduction in consumption of gasoline by U.S. drivers. They will change their habits to respond to higher prices. That will continue. Could that be the catalyst?

The two big drags on our economy were housing and financials. They are still a drag though no one is talking about it anymore. The news has moved on to commodities and its drag on our economy. It is a never ending wall of worry. This worry is good for the stock market. At some point the worry is going to be over or at least all the worry will be built into the market. Then we turn to valuations and future growth of earnings. When that happens is that we will be looking at over $3 trillion sitting in money market accounts looking for better returns. Also, all those sovereign wealth funds with their billions will be looking to invest.

Finally, isn’t it a good thing that commodity prices are rising? I know that does not sound right but bear with me. The demand side of the economic equation looks strong. More and more people around the world are wealthier and are demanding a better quality of life. That means they want to get off their feet and bicycles and ride on motorcycles and cars. They want to eat out more or just eat better and more often. The world is moving toward a freer economic system, one which tries to emulate the U.S. – that is all good and we should take some pride that our way of life is spreading. That is why I say high commodity prices are a good thing. Supply will keep up- it always does and always has.

It is time to be in the market, not out. Keep pressing and use pullbacks to increase your exposure to the market. It’s hard to do in the face of falling stock prices but if you want to make better than average returns you buy when others are selling. You look for the next thing that will move, not what has already moved. Don’t be the last one on the commodity train that has already left the station. Look for the next train.

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