What wonderful things that can happen over a two week period! We have quietly witnessed one of the most bullish events for the U.S. economy which is that of falling energy prices!!! I remember when we balked at paying $2.00 a gallon at the pump, until we were slapped in the face with $3.00 + per gallon for a few weeks!!! Just yesterday I filled up my tank with $2.15 a gallon and was ecstatic! Couple that with falling natural gas prices which will mean that home heating bills will be lower than initially feared! Falling oil and gas prices will have the same effect as a tax rebate back to consumers! Wooohooo it is beginning to look like it will indeed be a very merry Christmas for the economy and especially the stock market!
In my last article I wrote to you about how we had been scouting defensive issues in an effort to be ready for any cracks that could appear on the economic horizon! Jack has informed me that some of you had become worried over the scenario which I painted as a possibility. This was not my intent!!! Jack and I have been bullish on this economy, the global economy, and the U.S. and Japanese stock markets since 2003. I wrote the last article in an attempt to let you know that even though both of us were bullish long-term, we were formulating a “ Just-In-Case Defensive Portfolio” in case of any change on the economic forefront. I was trying to reassure you that we are always looking out for your best interest and it was not intended to make you nervous at all!
Now lets get to the great news! Jack’s favorite index, the Dow Jones Transportation Index, hit an all time new high yesterday (Thursday, November 3rd)!
Chart courtesy of Stockcharts.com
The above chart shows the index for the last three years and you can see the recent breakout over the last three days! We believe that this index is one of the most reliable measures of the U.S. economy, and why? Well it is simple. This index contains transport stocks, e.g. airplanes, trains, and trucking companies. All of them haul goods from the manufacturer to the retailer. So if demand from consumers is great, then business for these companies will be great as well! Now the last few days’ moves in the index have been exacerbated because of falling oil prices which means that operating costs for these companies are falling as well! An all-time new high is not just because of falling oil prices, but really a sign of demand! We like to use this index as just one barometer of the health of our economy and so far we have blue skies!
The FED!!!!
Queue the drum beat! Even though the fed rose to 4% yesterday I have become less worried about an inverting of the yield curve as oil prices have fallen! Combined $70 a barrel oil and a 4.5% Fed rate would have been very scary, but this scenario has been fading fast! As oil falls, inflation will begin to come down and the Fed will not have to raise much more! We are seeing a continued slowing of many housing markets and this combined with falling oil prices will make the Fed happy and thus I believe they will not have to raise much more! I have previously stated that oil could settle out in a range of $40-$55 dollars a barrel, and we may be seeing this scenario begin to unfold.
Going forward the economic picture is becoming much brighter than even Jack or I could have imagined! GDP rose to a very robust 3.8% in the 3rd quarter! I don’t think I would be wrong if I called this a blistering pace!!! Falling oil and natural gas prices will spur this economy which has already been very resilient in the face of many problems! So in my opinion a healthy growing GDP, coupled with increased government spending on public works projects, and falling energy prices could give this market the push we need to break out of the year-long trading range that we have been stuck in! It is shaping up, possibly, to be a very exciting end of the year!
Thanks, and have a great day!
Brad
Next: Why 2006 will be the return of TECH!!!
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