What a Week

What a Week! This past week saw the Dow go down 3.39%, the S&P down 2.83%. This was in part a response to economic events that were reported during and at the end of the week. On Tuesday, Standard & Poor’s/Case –Schiller’s national home price index fell 14.1% in the first quarter. On Friday, the government announced that the unemployment rate rose by an unexpected 0.5% to 5.5%. Oil futures hit $138.54 per barrel on Friday, and an investment banking firm on Wall Street said they thought it could hit $150 by summer. A consensus was building that the US economy is either in or going into a recession. The outlook for Europe is not good either. Wow! What does all of this mean? Having money in cash or cash equivalents certainly seems to make sense. Having money in investment-grade and high-yield corporate and municipal bonds paying interest seems to make sense. With the dollar on the decline, even international investments make some sense. For example: even with the worst earthquake in 32 years China’s passenger-car sales grew 16% last month. Global growth seems to be unabated. How about commodities? Commodities tend to move in the opposite direction of the dollar. This would include oil, gold, silver, etc. The commodity markets indicate that there is widespread speculation occurring presently. The head of the Federal Reserve, Ben Bernanke, is talking about a strengthening dollar. This could mean the federal government is about to get serious about reversing the dollar’s direction. Such a move would likely not be good for commodities. Could the bubble burst and the price of oil tumble? Some say world demand is such that, when coupled with flat output, this could not happen. I don’t believe it! I lived through the period when the Hunt Brothers tried to corner the market on silver. From $1.95/oz. in 1973, silver skyrocketed to $54/oz. Ordinary people were buying silver with the expectation that it would just keep rising. Bang! Down went silver prices. From 1980 through 1987, silver prices dropped to about $10/oz. Today silver is priced at about $17/oz. (More recently, Americans were sure that real estate would just keep on rising! Ugh!) Is the same now true with oil? Ed’s pendulum theory says: “Every investment market swings from being underpriced, relative to the norm, to being overpriced!” In this process it is possible for an investment market to establish a new “norm” but it will be within the range of over- and under-pricing. This is not to say that an individual investment within that market will outperform or underperform. But, the overall market, such as the market for oil, must go through this process. With commodities like oil, it is often thought that there is a finite amount of something and therefore its price can go up with no end in sight. In fact, it appears that when a particular commodity becomes overpriced, a new substitute will either be found or it will become cost-efficient to utilize a competing commodity. The question in my head now is: “Are we ready to become Green as a society and invent new ways of living?” Ed Mallon