Politicians Pounce on Fuel Prices

All over the world and all at once, politicians and decision makers are pouncing on fuel prices in a desperate effort to push them down.

Twenty six countries are releasing 2 million barrels of oil per day from their strategic reserves for the next 30 days.

Saudi Arabia
is urging the Organization of Petroleum Exporting Countries to lower prices and pump more oil.

In Washington, senators from both sides of the aisle are condemning high gasoline prices at the pump, trying to find ways to attack the problem.

Even state legislatures are jumping into the fray … debating proposals to suspend local gas taxes … talking about rebates to motorists … even considering cutbacks to planned road projects to make up for the lost tax revenues.

Why All These Efforts
Are Going To Backfire

Fuel prices are driven by market forces not politicians. And as weve been telling you here repeatedly, the primary market force driving fuel prices higher is not supply its DEMAND.

So how do you curtail demand?

Simple: By letting market forces play themselves out and allowing market prices to rise naturally.

But this is exactly the OPPOSITE of what the politicians are doing. Instead of curtailing demand, they are effectively doing everything in their power to STIMULATE demand.

When major nations release oil from their strategic reserves, it temporarily lowers the price, as weve just seen. What is the response of refining companies, investors and speculators?

Thats great, they say. Now we can buy MORE oil.

Or when states temporarily suspend gasoline taxes, lowering the price to consumers, what impact does that have? Same thing! It automatically encourages consumers to hold on to their SUVs and maintain their current driving habits.

Thank you, they respond. Now get out of the way so I can buy some more gas.

This is dumb.

The politicians are flying in the face of the most elementary principles of economics. And their initiatives are going to backfire in their face like a clogged cannon with another explosion in fuel prices.

Oil Service Stocks
Already Rising

Apparently, some smart investors have already figured this out.

They can plainly see the long-term damage that Hurricane Katrina has done. They know its going to take many months for production to be restored. And they also know that the release of strategic reserves is going to end very soon — in just 30 days.

So yesterday, even while oil prices were retreating, most oil stocks were advancing.

OIH, the exchange-traded fund Ive been tracking here in Money and Markets which represents a basket of oil service companies, was actually UP by 1% yesterday.

Thats not a big jump. But its enough to send the clear message that the oil-price decline youre witnessing right now does NOT represent true market forces.

And its enough to give you the not-so-subtle hint that these forces should soon return with a vengeance.

Or, just step back from OIHs day-to-day fluctuations and look at the picture year to date. When you do, youll plainly see that it retreated only slightly this week, and is now holding firmly ABOVE its pre-Katrina highs, despite the correction in oil prices this week.

The performance of Enerplus (ERF), my favorite Canadian royalty trust specialized in energy, has been even better, marching upward from a low of less than 38 to a high of over 42. This stock has hardly retreated at all in the past two days.

Enerplus illustrates a pattern of TOTAL DEFIANCE of the oil-price correction a confirmation that smart investors are thumbing their noses at the political efforts to hold back the rising tide of energy.

I recommend you do the same.

Tell them to stop playing games with market forces.

Whether they listen to you or not, protect your own portfolio by keeping most of your money safe.

Whenever they try to fool with Mother Nature, artificially pushing energy prices down, consider it a great opportunity to buy on the dips.

But, be very cautious with most other stocks, for reasons that Tony will now explain …

Stock Market Still
In Dreamland
by Tony Sagami

While you and I know that Mother Nature always prevails, most stock investors still seem to believe in the tooth fairy. They see governments waving their magic wands. They see oil prices coming down a bit. And they rush in to buy.

I think theyre in dreamland.

Plus, September has historically been the worst month of the year for the stock market. But since investors couldnt care less about fundamentals, why in the heck should they worry about history?

Maybe thats why the Wall Street crowd, still basking in the glow of their leisurely weekend in the Hamptons, was in a giving mood yesterday, handing out upgrades to a fistful of companies, such as Cisco, Colgate-Palmolive, Coca Cola, Albertsons, and Ann Taylor. In fact, a total of 32 companies got upgrades. But …

Back Here in Montana,
I Have a Different Perspective

One of the greatest jewels of Northwest Montana is Flathead Lake, the largest fresh water lake west of the Mississippi.

The only thing better than living next to Flathead Lake is spending time ON the lake.

Although its a luxury, my boys favorite way to enjoy the lake is zipping around on a jet ski.

Jet skis are loads of fun but consume lots of gas. I almost fainted when I took our jet ski to the marina for a refill over the Labor Day weekend and discovered that gas was $3.99 a gallon!

I know that marinas always charge more than land-based gas stations, but I wasnt prepared to fork over $50 just to fill up a jet ski.

Did I have a choice? Could I have packed up and gone home? In theory, yes. In practice, no. For Kobe, whos 7 and his older brother, Ryan, now 21, the disappointment would have been more than a father could bear.

I figure gas prices would have to be well over $5 per gallon before Id retire the jet ski, and maybe even higher before wed start changing how we run errands and take care of essential tasks.

Will other Americans change their habits? Sure. But will it be enough to make a big dent in the demand for gasoline? I think not. Indeed, to the degree that politicians can hold gasoline prices at these levels or push them a bit lower in the weeks ahead, it will only mean more demand and much higher prices later.

According to AAA, the average price for a gallon of regular-grade gas hit a record $3.057 last week. Thats a 65% increase from the $1.84 we were paying last year. This week, its supposed to come down a bit. But not much.

Meanwhile, the hear-no-evil crowd isnt the least bit worried about sky-high energy prices affecting the economy.

I say that because they sure arent listening to the moans from the public. According to a CNN/USA Today/Gallup poll taken on August 28-30, 7 out of 10 Americans said the rise in oil prices is causing hardship. And that survey was taken BEFORE Hurricane Katrina.

Causing hardship, however, is one thing. Cutting back on how much gasoline they buy is another. Meanwhile, please consider …

The Flip Side of
Surging Real
Estate Prices

If youve owned a home for some time, the surge in real estate prices has given your balance sheet a nice boost.

But if youre a young family just starting out, the surge in real estate prices is often translating into a budget-busting strain to make payments.

In California for example, more than 50% of new homebuyers are spending MORE than one-third of their gross income on housing.

Meanwhile, the Department of Housing and Urban Development recommends that you should spend LESS than one-third of gross income on housing. They say that should be the LIMIT. Obviously, a lot of people in California arent paying much attention.

Worse, 20% of California new homebuyers are using more than HALF of their gross income on house payments.

And those statistics dont factor in the impact of cheap-but-dangerous mortgages, such as those with teaser rates, negative amortization, or interest-only payments.

Plain and simple, Americans are stretching themselves dangerously thin to buy homes today. Any decline in values or rise in interest rates could send millions into foreclosures.

Burning Both Ends
of The Jobs Candle

Maybe that is why more Americans than ever are working two jobs to make ends meet.

According to the Labor Department, the number of Americans working more than one job grew by 350,000 to 7.6 million. Thats 5.3% of the workforce.

The main reasons people cite for taking a second job are to earn extra money (35.4%) or pay off debt (27.8%).

There arent any hard statistics to explain this pattern. But you can bet that sky-high energy and housing costs are an important reason for a lot of Americans.

My advice:

1. Dont get carried away by the stock markets euphoric reaction to the latest news.

2. For most of your money, stick with conservative investments.

3. Avoid the stock market sectors that are likely to get killed by surging fuel prices and rising interest rates. That includes airlines and other transportation companies as well as banks and mortgage lenders.

4. Stick with stocks that are grounded in energy, gold and other natural resources, always investing modestly and always keeping a good chunk of your portfolio in safe, liquid, cash investments.

Best wishes,

Martin Weiss and
Tony Sagami

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

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