Monday, April 24, 2006

Investing, Stocks

Today most commodities took a dive along with the US dollar. Is this the turn many have been waiting for? It seems the market has been unstoppable, today taking only a small loss. A few articles I came across still suggest a major growth spurt for large cap companies. I do not see where this growth will come from. As oil, gas, and industrial metals continue to rise in value the cost of consumer goods will start to rise as manufacturers seek to recoup lost revenues. If this is how the market works, then consumers will purchase fewer products, and we will see a recession.

I would also like to address what the market has coined the “Volatile Energy Sector”. Yes energy has been volatile, although the nature of the volatility is questionable. When I think of volatile, I think of rapid gains and surprising losses. In this market energy only seems to be going up. Failing to consider the effects of inflation in order to make the energy market look good is a significant mistake!

What does it mean for consumers as the US dollar loses value in the world market? Perhaps more people should be talking about the effects. I see it as a significant reason for the price of imported oil to rise, and continue to rise as the dollar loses competitiveness in the world economy. It will also be a deterrent from companies purchasing goods from overseas because it will cost them more money.

A great deal has changed since then, energy prices have fallen, considerably!  And the dollar has been on an absolute tear.  China continues to dominate the consumer market with inexpensive manufacturing costs.  The market is nearing an all time high of 20,000, and we could go higher 25,000 or more!

Now, more than ever investing in stocks appears to be the best option.  However, we need to consider these variables.  Interest rates are still as low, as low they have ever been, as the Fed is committed to continue raising. In a raising environment, those investing in stocks should see their PE come down as investors seek safer returns in Treasury and other less volatile instruments.  We should not see this transition until rates are appealing to savers, and worth making the switch.

Although markets tend to react in advance of changes like these, the initial reaction almost always corrects until stock investors get the actual information needed to make a decision.  Until interest rates rise enough to tempt stock investors to change into Treasury, we can expect the market to continue with lofty valuations, LONG RUN THE BULL.

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