StocksAtBottom - Sitting Around the Table Aug 12, 2005

Okay, here's where we are at. Interest rates are low, there is still a financial wind at our backs that is pushing us forward. Unemployment is also low, and the American economy is in an expansionary mode. The equity markets are doing well, and only narrow sectors like energy and natural resource commodities have truly outperformed. Based on all of the above, our first advice to you is NO MARGIN. Don't be strung out on debt in this environment. In our opinion people on margin are going to get hurt.

We believe there is a DISCONNECT in the markets between what the markets are doing and the price of oil. Now the guys up at Harvard would argue that the market is EFFICIENT. They would tell you that the price of oil is completely reflected in the price of every publicly traded stock and therefore the market as a whole. We would say that our real world experience is different than what they teach at Harvard.

A couple of years ago, one of us at StocksAtBottom.com went up to Harvard to become involved in a series of lectures regarding the market and the economy. This was during the Internet bubble. These giant intellects were justifying Cisco at $100 per share and Qualcom at $400 and why it was going to a $1000. They were completely 100% wrong on what they were preaching. They were EMOTIONALLY INVOLVED, and lost the ability to reason.

This economy runs on MONEY and ENERGY. We consider both to be the equivalent of OXYGEN. In war, logistics is everything. Deny an army fuel, and it dies. During WW II, General Patton required 300,000 gallons of fuel per day to fight. It took 350,000 gallons of additional fuel just to get him the fuel he needed.

Let's look upon the American economy as a world class athlete. Deny the athlete oxygen and he's out of the game. Deny this country energy at an economically viable price and boom, we get hurt. The stock market and other markets have not taken this into account in our opinion.

We will tell you what will happen. We have seen this over and over again over the last 30 years. NOTHING MATTERS UNTIL IT MATTERS. Right now the price of oil doesn't matter to the economy in terms of the markets. IT WILL, and when it does the market will react swiftly. Is it starting today, there's no way to tell. We will tell you, it's coming. It sounds crazy, but wherever I travel, I tend to frequent the same gas stations. There is a gas station in San Diego I go to. In 2001, I paid 97 cents a gallon for gasoline in that particular station. Recently, I paid $2.72 per gallon. Same station, same gas, drastically different price.

Now for people like many of our subscribers, the price of gas simply doesn't matter. It's simply another check we write at the end of the month. For America and corporations, it's a different case. Everything moves by energy. The bread you eat, the detergent you use, it all moves by truck, by rail, by ship. The vast majority of shipping throughout the world moves by boat. This is why for five centuries, he who controlled the sea lanes controlled the world.

England and Spain controlled the shipping lanes for centuries. During the 20th century, Germany tried to take back the sea lanes by using submarines to deny the allies the use of them. They came close to succeeding. Today the United States since WW II has controlled the sea lanes, allowing international free passage of shipping. The cost to ship is going up drastically because of these fuel increases we are seeing.

Oil is a lagging indicator. There are three types of economic indicators. They are leading indicators, lagging indicators and current or co-incident indicators. What this means is that all indicators will tell by you by their direction if the economy is moving up or down. Some will tell you ahead of the movement in the economy (leading). Some will tell you after the movement (lagging), and some will tell you at the same time (current indictors).

Oil lags the economy by about a year. It has been a year since oil has started to rise strongly in price. This means that the higher price for oil is only now hitting or affecting the economy. Every time the price of oil at the pump goes up by a penny a gallon, you take $1 billion out of consumer spending. Hike prices by 50 cents and you take $50 billion out of consumer spending.

Please understand we are not pessimists. We live our lives in an optimistic manner. We believe completely in America's ability to deal with, and overcome problems. We see no country on the horizon that can threaten our economic hegemony for at least another century. It's all happening here. We are the model for whoever wants to get into the game. From Noble Prizes to medical technology, America dominates...................

I post this excerpt from the newsletter I receive because I enjoy it for the common sense approach. They are good at telling stories and communicating their point.

"We are the model for whoever wants to get into the game. From Noble Prizes to medical technology, America dominates................... "

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