"The Battle Continues" by WCM 06/06/08 |
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Just when the Bulls thought they had the Bears on their knees (or back paws), we have a day that sees Oil rise up over $10, an Unemployment Rate up half a percent, and a declining dollar, causing Gold to rise over $20. After the market closed the day before, the optimistic thoughts of “Larry Kudlow’s Goldilocks Camp” was this: Looking forward, the economy was seeing some improvement. This improvement would lead the Fed to begin their inflation battle by raising interest rates later this year. Rising rates would lead to a strengthening dollar; a strengthening dollar would lead to lower commodity prices, including oil, which then would ease the burden to consumers and thus help the economy and the markets. Today’s market news will make many question the above synopsis.
Regarding oil, remember, oil producers sell their products in dollars. These dollars are used to purchase other goods in international markets. As the dollar lost its value, oil producers could afford to buy less in international markets with their dollars. To compensate for this loss of buying power, they may have raised the price of oil (I believe they did, but I am just trying to be tactful). I would suggest that the rise in price of oil is due to three factors. The first is a real increase in the worldwide demand for oil. The second is the falling dollar, with the reasons outlined above. The third is due to speculation where you have investors simply bidding up the price of oil as they are chasing the "hot" investment. Eventually, as the demand for oil slows, or the dollar rebounds, the speculative demand for oil will subside, and the price may come back down as quickly as it rose. Back to the markets and the battle ahead. I would recommend going back and reading the “Range Bound” commentary once again. We all know who the players are: housing, oil and gas prices, the dollar, inflation and the election ahead. The key to a successful portfolio in markets like these are sector weightings and cash flow. Remember, on January 1, 2000 the S&P 500 was at 1455, and today it closed at 1360. But, the total return for the S&P 500 for the time period is actually positive. Why? Dividends. It is the difference between someone buying a large apartment complex and not renting out any of the units, just betting the value goes up over time, vs, renting out all the units creating an internal rate of return by the cash flow received. The market will continue with the volatility we have seen lately. It reminds me of the stockbroker who jumped out of a window on the twelfth floor, saw a quote machine on the seventh floor and did a U-turn. As the market and economy battle it out, we will continue to weight sectors according to the economic environment we see coming. We will also continue to provide yield for the Range Bound market that we expect to see for the upcoming months. If the market is not working for your portfolio, you want to at least make sure your portfolio is working for you. |
