Monday, May 14, 2007

New Top for Dow, Other Indices Fall Late; Gas at Record $3.10 per Gallon

The markets were cruising along in positive territory Monday until mid-day when everything began to slide. By the close, only the Dow remained on the plus side, setting another record high finish.

Dow 13,346.78 +20.56; NASDAQ 2,546.44 -15.78; S&P 500 1,503.15 -2.70; NYSE Composite 9,765.38 -21.65

It was a split decision in more ways than one. Declining issues beat advancers by a better than 2-1 margin, though new highs upticked to 386 against 116 new lows. There's a bit of churning going on as investors take profits, reassess and reinvest.

According to general assumptions, much of today's action was attributable to apprehension regarding the monthly release of the government's Consumer Price Index figures, the April numbers due out tomorrow morning prior to the market's open.
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Conventional wisdom seems to be that if the numbers are bad (i.e., they show an inflationary trend), the Fed may be influenced to do nothing, or worse, raise rates, when the markets are hoping for some easing. If the headline number comes in at 0.5% or less, with the core at 0.2%, that should allay investor fears, but anything over those figures will be cause for concern, especially at the Fed, which has vowed for years to keep inflation under control while failing miserably in the process.

Regardless of Fed performance, Bernanke and company has made reference to an "inflation target" of between 1 and 2 % (using the core number, of course, which excluded food and energy) and they will use the tried and true interest rate hike to cool off the economy should they determine inflationary risk to be at an intolerable level.

Whatever the Fed does has little to do with the fundamentals of individual stocks, though an interest rate increase would cast a significant pall over Wall Street. Most days are precarious for investors and speculators, though being in record territory does impart some peculiar thought processes. On the one hand, stocks are robust and the economic picture is rosy. Meanwhile, the pessimist sees this high-flying behavior an open invitation for everything to come crashing down.

In the long run, it's probably going to take an event more significant than a 25 basis point hike in the federal funds rate to stop the party.

Side notes: Sure enough, the only time I make a prediction on an individual stock, it goes the other way. On Wednesday of last week, I noted that Marvel Enterprises (MVL) may be considered for a long term hold. As of today, it has slipped nearly 3 points from where I called it a buy to 26.81. I called the stock with an 18-month upside in the 38-42 range. I suppose all I can do now is reiterate my position. At it's current level Marvel sports a forward P/E ratio around 17. It is shouting, "buy" now; any lower, it will be screaming. This is not a falling knife situation. Once options expire on Friday, expect a congenial rebound.

Lest I forget, oil grabbed a bid on a Saudi pledge not to increase production. It closed modestly higher, up 9 cents to $62.46, and every American must be grateful to our Vice President, Mr. Cheney, for all he did while in the Middle East last week. The Lundberg Survey quoted the national average for unleaded regular gas at an all-time high of $3.10 per gallon on Monday.

Tomorrow, May 15, is the date certain for the "American gas boycott" whereby we're not supposed to buy any gas. Nobody seriously expects the effort to have any effect at all, though the sentiment of millions will be with anyone who refrains for a day. A better solution would be to have a national no-driving day. That could be effective.

I have two suggestions. One is to stay home and drink Canadian beer. In most northern states, it can be had for about the same price per gallon as gas, and it goes into you, not your car. Plus, the effects on one's mental well being are far superior.

My second suggestion is for Big Oil to just skip $4/gallon and go straight to $5. They have shown no propensity to stop increasing the price, so why not just goose it up good? They can always lower it later on and look good by comparison.

Gold and silver were both off marginally. Somehow, their fates are tied to oil's, though the relationship has become tenuous at best.

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