The unknown damages from Hurricane Ike will likely cause a spike in gas prices along the Gulf Coast. But once the assessments come in, and refinery production ramps back up, oil and gasoline prices will continue to correct.
Despite the obvious risks, if oil prices continue to fall, I am optimistic about the the stock market will muster up an impressive rally into the end of the year. In the short term, we have a better than average chance that the major market averages will retest the July lows, and it is possible a mini panic could drive the DJIA down to the10,000 level.
After the sell-off, my logic for a rally is a simple one. The cash strapped consumer needs help. Oil prices have acted as a massive tax increase, and slowly that burden was (until the hurricane) being removed. The major factor for higher inflation has been the rising price of energy. If energy prices continue to decline, inflation fears will subside.
Corporate profits have been hurt by rising fuel and commodity costs, and if the current trend toward lower prices continues, profit margins will improve, and so will stock prices.
This October will mark the one year anniversary of the peak in the market which occurred in 2007. Sure the housing market, and financial sector is still in disarray, but that doesn't necessarily mean a strong counter-trend rally can't occur.
The ideal set up for a rally would be for the DJIA to trade down around 10000, the S&P 500 to trade down to 1175, and the NASDAQ to the 2000 level. These three areas would provide a nice springboard for an 8-10% rally.
Here are our Top 10 ETF's for the week of September 15th:
1) DBA: Powershares DB Agriculture Fund- .205
2) EWZ: Brazil Index- .171
3) SLX: Market Vectors Steel Index Fund- .152
4) FXF: Currency Shares Swiss Franc Trust- .110
5) EEB: Claymore ETF BNY BRIC- .088
6) DDM: Ultra Dow 30 Proshares ETF- Not Rated
7) KBE: KBW Bank ETF- Not Rated
8) IYF: iShares Dow Jones US Financial Sector- Not Rated
9) PGJ: PS Golden Dragon China Fund- Not Rated
10)
At first glace, it looks as if the commodity and BRIC nation trades have dissipated. For the short run that is true. But, the highest ranked ETF's in our universe remain T-Bills, short term bonds, crude oil which are falling in strength also. Our current position in DDM, KBE, and the IYF balance out the weakness of our commodity and BRIC holdings. Once we get closer to the election, and the magic ends, we will be adding more commodity and oil related positions.
Here are our Top 10 Fidelity Sector Funds for September 2008
1) FSCHX: Chemicals
2) FSMEX: Medical Equipment
3) FSCGX: Industrial Equipment
4) FCYIX: Industrials
5) FSPTX: Technology Portfolio
6) FSCSX: Computers & Software
7) FSCPX: Consumer Discretionary
8) FWRLX- Wireless
9) FSRBX: Banking
10) FSVLX: Home Finance
NEW BUYS:
None
NEW SELLS:
None
Honorable Mention (Holds):
None
The Week in Review:
What a week! Hurricane Ike will likely cause a mini panic in the stock market as gasoline prices spiked over the weekend. With Lehman Brothers is on the verge of collapse, and Alan Greenspan saying that John McCain's tax cuts will not worked unless the government cuts spending, enough uncertainty exists for a mini panic. In addition, GM and Ford are asking the government for a low interest loans, and our monetary authorities have run out of options on how to fix the banking and credit crisis.
Given all of the reasons above, the stock market has more than enough reasons to drive the major market indexes to new cyclical lows.
With the seizure of Fannie and Freddie, and the woes at Lehman, investors flocked into US Treasury Bills and T- Notes. The dollar sold off on Friday, and Gold prices rebounded as money rotated back into the Energy and Materials sector.
Investors who bought Gold, Energy, and Materials as their respective RSI's (Relative Strength Index) dropped below 30 will find this trade to be very profitable. By the end of this week, and maybe into early next week, traders will probably take profits and return the the short side of this trade.
Investors are currently sitting on the highest level of cash in 26 years, and the S&P 500 is trading at its lowest price-to-earnings ratio in almost 18 years. Given this tidbit of information, I would view any significant sell-off in the market indexes as a major buying opportunity.
So, the stage is set for a major sell-off;
1) Lehman files for bankruptcy protection.
2) Merrill Lynch may be on the ropes too. Does Bank of America come to the rescue?
3) Are A.I.G., and Washington Mutual next?
The Rest of the Story
For those of you worried about your investments in China, I would not be overly concerned. I received this e-mail from a US Olympic coach who just return from Beijing;
I wanted to send a brief message regarding my experience in China, not to gloat about my selection to represent the USA but instead to offer a warning regarding our future.
What impressed me the most regarding the entire trip to China? Not the impressive Olympics that the host country did what everyone witnessed was a spectacular job. Yes it is always a wonderful opportunity to work on the athletes we all watched on T.V. performing in track and field events.
What most impressed me is the incredible Chinese culture and the strength of the economy, the commerce, the work ethic and the strategies that the work force have implemented to become the country where everything is made.
In the book written by Thomas Friedman entitled, "The World is Flat" he warns that the global economy has put the United States in jeopardy of loosing our dominance as the world leader and economic giant.
What I observed: More building cranes in two cities (Dalian and Beijing) than in all of the Western United States. 60% of the world's concrete is poured in China. There was building and new commerce everywhere we looked. People are employed with a six day a week work schedule. I went expecting to see the majority of the population riding bicycles and pulling donkey carts. Instead they are a vital population with a feeling of a modern 21st century city instead of the image we most commonly hold of the poor third world country. The college age volunteers we met all had cell phones and could fit into any campus in this country including the English they spoke.
My concern: How are we going to maintain our global dominance when the Chinese have 1/5 of the worlds' population? As Friedman said, "Our children need to be the best educated, the most progressive and the most creative to maintain our competitive advantage."
In summary, we are facing global competition which is just beginning to be felt in our culture. We need to be aware of the issues and start now to prepare our children for the future. Our country depends on the decisions of our current leaders. It also depends on our children's education and readiness for the world. We are very naive when it comes to understanding our most daunting world economic and energy concerns. We all feel powerless when it comes to these issues, but our children will definitely face major concerns regarding these problems. The American way is to roll up our sleeves and solve the problems. We have some great challenges before us.
For the Week:
INDU :11,220.96/ -323.00
SPX : 1,242.31/ -40.52
COMP: 2,255.88/ -111.64
-Gold closed at $764.50/oz -38.30 for the week. Last week gold closed at $802.80, and was trading at $835.20 two weeks ago.
-The Commodities CRB Index closed at 360.01, down from 367.70 last week, and down from 391.71 two weeks ago.
-Crude Oil closed at $101.25/bbl down from $106.23 last week, and down from $115.46 two weeks ago..
We need to see $75-$85/ barrel oil in the weeks ahead to get the economy back on track. Oil has remained above $100 for twenty consecutive weeks.
The "Pickens Plan" seems to be working. The more T. Boone spends on advertising, the lower oil prices go. The oil cartel is scared that Mr. Pickens is educating too many of us common folks.
Late last week however, traders took advantage of lower prices after Hurricane Ike zeroed in on the oil fields along the coast of Texas and Louisiana. Any increase in the price of oil should be looked at as a trading opportunity- meaning I would be a seller and not a buyer. If oil prices trade down around the $85/ bbl mark, I will be tempted to buy.
-The U.S. Dollar closed at 78.98 up from 78.94 last week, and up from 77.31 two weeks ago.
August was the best monthly gain for the U.S. Dollar Index since 1999.
We raised our allocations last week by 5% across the board when the DJIA dropped below our 11,300 target. Going forward, the next 5% increase will come at DJIA 10,600 for Aggressive, and Moderately Aggressive portfolios, but Moderate, Moderately Conservative, and Conservative investors are not advised to get fully invested unless the DJIA breaks below the 10,000 mark.
Our current asset allocation is as follows;
75% Equities: (Normally 95%) Aggressive
65% Equities: (Normally 80%) Moderately Aggressive
55% Equities: (Normally 60%) Moderate
35% Equities: (Normally 40%) Moderately Conservative
15% Equities: (Normally 20%) Conservative
