Market Commentary for the week of January 7, 2008

For your consideration:

“While lower interest rates might stimulate spending and borrowing, they really precipitate more speculation rather than greater investment. Lower interest rates have created the home building surge.” (February 5, 2007)

“The biggest threat to stock prices is the mania and greed that pervades Wall Street caused by abnormally low interest rates, high levels of speculation, and eroding profit margins caused by rising core and commodities costs.” (March 19, 2007)

“In spite of all the mania, rising commodities prices, including gasoline and food, give rise to a scenario in which earnings acceleration patterns are contracting.” (April 23, 2007)

“Oil has already begun its climb towards $100-a-barrel. For the past week, fuel oil has closed at record levels and held firmly. Only five years ago, crude oil was priced in the spot market at $22 a barrel.” (September 24, 2007)

“Our “integer obsession” about $100 per barrel masks the bigger picture that the trend in energy prices has been rising steadily since the late 1990’s and has triggered a price pressure/inflation-driven economic expansion. It is no accident that real estate and other tangible assets have risen sympathetically during an era in which portfolio price expansion was at its greatest.” (December 3, 2007)

The preceding excerpts were contained within the past year’s Market Outlooks. They are significant as benchmarks against which asset allocation and market prognostication might be measured, and further enhanced by the market’s disjointed activity in the opening week of 2008. Crude oil prices finally soared above the $100 milestone.

Surging economic development in India and China lent credence to the belief that global demand for petroleum products might one day outstrip supply. Further “exogenous noise” was provided by politically inspired violence in Nigeria, export tensions from Iran, and bad weather in Mexico.

As if world events were not sufficient cause for concern, the U.S. reported its own strategic petroleum reserve is significantly below capacity. Traders used these data to bid-up energy shares on exaggerated speculative buying. Fundamentals were thrown out the window, along with any sector not already “nailed to the floor”. Primary attention is focused upon any disruptions in the supply of oil from global sources.

Meanwhile, gasoline prices at the pump edged higher after holding steady during the always busy holiday driving season. A similar scenario as this past spring’s (2007) gasoline price hike might occur this year, too, causing prices to inflate well above $3.50 in the U.S. by springtime 2008. The rest of the globe already knows the burden of $6 per gallon gasoline.

Last year the stock market accelerated out of the gate early. I expect for that not to happen this year. Instead, I am expecting significant shift into longer-term demographic themes such as tangible assets, pharmaceuticals, food/agriculture, and, of course, energy, including alternative fuel sources. The cycle of capitulation is here, and more meaningful than any time in the last decade.

Relax, rebalance, be prudent.