Trend Watcher – Are you ready for $6 gasoline?

Joseph Gomez, Sr. Investment Advisor and Portfolio Manager

I just paid $4.29/gal for premium fuel in Coral Gables, Florida. How much are you paying in your part of the country or world? (Please use our comment section below.) This is one of the drawbacks of a strong(er) economy.

On many occasions during our Investment Committee meetings, I opined on the resiliency of oil prices despite all the economic uncertainty. The price of crude stubbornly held the $95-$100 level throughout much of 2011 despite a feeble recovery in the U.S., a self-imposed austerity plan in Europe and a slow-down in China. It was pretty clear to me that once the global economy improved, the price of oil would resume it’s upward trend. Now add to that backdrop of improved economic activity, the possibility of military action in the Middle East (Israeli attacks on Iran), and there is potential for a historic high in oil prices in our future.

Almost every industry is somehow impacted by rising oil and gasoline prices — some more significantly than others. As oil and gas prices continue to climb, consumers are likely to reduce their overall discretionary spending. As in the past, rising gas prices will result in consumers cutting back on their amount of driving and travel in general. This will have a significant impact on the summer travel economy.  A few industries that are negatively affected are consumer discretionary industries, such as autos, retailers, hotels, restaurants, shipping and electric utilities. Industries that benefit are alternative energy, refining, and exploration equipment.

At Alhambra, we will be positioning our accounts accordingly. It should be noted that each industry will have winners and losers despite higher oil prices. One play in our client accounts that I’m fond of is the Dow Jones US Oil Equipment Index (IEZ). IEZ is up over 15% so far this year.

The fourth quarter earnings season ended this week with Wal-Mart’s (WMT) report on Tuesday. The percentage of companies that beat analyst earnings estimates this season was 60.4%. This is just below the reading from the prior earnings season and 1.6 percentage points below the historical average of 62%.

A major positive for the market is how strong breadth has been recently. Not only are breadth readings for most sectors at or near new highs, but the A/D (Advance/Decline) lines have also been repeatedly making new highs for the last few weeks. The only two sectors where this is not the case are Telecom Services and Utilities, which are again both defensive in nature.

With the market at fresh new highs, you’d think sentiment might be getting a bit too bullish, which is a contrarian indicator. However, the AAII Bullish Sentiment reading declined slightly over the last week as well, and it’s well below the level it was at in early 2011 just before the correction started. With a current reading of 43.6%, AAII Bullish Sentiment is just 3.6 percentage points above its long-term average.

Below you’ll find an economic calendar, key interest rates and a list of new highs from last week.

Have a pleasant and productive week.

 New Highs from last week

Ticker Company Sector Industry P/E Price
MA Mastercard Incorporated Services Business Services 28.02 415.61
LMT Lockheed Martin Corporation Industrial Goods Aerospace/Defense Products & Services 11.48 89.53
HOG Harley-Davidson, Inc. Consumer Goods Recreational Vehicles 20.36 47.04
MRO Marathon Oil Corporation Basic Materials Oil & Gas Refining & Marketing 14.59 35.01
TDC Teradata Corporation Technology Diversified Computer Systems 31.94 65.48
ECL Ecolab Inc. Consumer Goods Cleaning Products 29.29 62.69
DFS Discover Financial Services Financial Credit Services 7.45 30.19
EIX Edison International Utilities Electric Utilities 14.32 42.23
PG Procter & Gamble Co. Consumer Goods Personal Products 19.62 66.71
V Visa, Inc. Services Business Services 31.01 117.54
ABT Abbott Laboratories Healthcare Drug Manufacturers – Major 18.9 56.7
CAT Caterpillar Inc. Industrial Goods Farm & Construction Machinery 15.68 116
PM Philip Morris International, Inc. Consumer Goods Cigarettes 17.12 83.02
SE Spectra Energy Corp. Basic Materials Oil & Gas Pipelines 17.83 31.73
LTD Limited Brands, Inc. Services Apparel Stores 15.95 46.26
MJN Mead Johnson Nutrition Company Consumer Goods Processed & Packaged Goods 31.46 78.02
LSI LSI Corporation Technology Semiconductor – Specialized 56.67 8.5
SHW The Sherwin-Williams Company Industrial Goods General Building Materials 24.47 101.06
UNH Unitedhealth Group, Inc. Healthcare Health Care Plans 11.77 55.65
TGT Target Corp. Services Discount, Variety Stores 12.9 55.22
ARG Airgas Inc. Services Industrial Equipment Wholesale 22.67 81.85
AXP American Express Company Financial Credit Services 13.04 53.33
CMG Chipotle Mexican Grill, Inc. Services Restaurants 57.31 387.42
FISV Fiserv, Inc. Services Business Services 19.61 66.87
VRSN VeriSign, Inc. Technology Application Software 44.81 37.64
EBAY eBay Inc. Services Catalog & Mail Order Houses 14.72 36.36
FAST Fastenal Company Industrial Goods General Building Materials 42.95 51.97
FFIV F5 Networks, Inc. Technology Application Software 40.86 127.48
PCLN priceline.com Incorporated Services General Entertainment 31.24 590.41
CMCSA Comcast Corporation Services CATV Systems 19.46 29.19
NWSA News Corp. Services Entertainment – Diversified 15.52 19.56
QCOM QUALCOMM Incorporated Technology Communication Equipment 22.9 63.44
ORLY O’Reilly Automotive Inc. Services Auto Parts Stores 23.03 85.67

Key Rates from Bloomberg.com

Fed Funds Rate 0.11 0.08 0.08 0.12 0.16
Fed Reserve Target Rate 0.25 0.25 0.25 0.25 0.25
Prime Rate 3.25 3.25 3.25 3.25 3.25
US Unemployment Rate 8.30 8.50 8.90 9.10 9.10
1-Month Libor 0.24 0.28 0.26 0.22 0.26
3-Month Libor 0.49 0.56 0.51 0.31 0.31

Mortgage* (National Average)

provided by Bankrate.com
30-Year Fixed 3.87 3.95 4.02 4.31 4.87
15-Year Fixed 3.16 3.27 3.37 3.49 4.16
5/1-Year ARM 2.82 2.90 2.97 3.09 3.56
1-Year ARM 2.71 2.71 2.78 2.96 3.02
30-Year Fixed Jumbo 4.70 4.54 4.68 4.90 5.40
15-Year Fixed Jumbo 3.95 3.79 3.96 4.28 4.64
5/1-Year ARM Jumbo 3.25 3.14 3.22 3.34 3.86

Economic Calendar by Econoday.com

Monday Feb 27 Tuesday Feb 28 Wednesday Feb 29 Thursday Mar 1 Friday Mar 2
Redbook [Bullet8:55 AM ET

Sandra Pianalto Speaks 7:15 PM ET

2-Yr Note Settlement5-Yr Note Settlement7-Yr Note Settlement30 Yr TIPS Settlement

GDP [Report][Star]8:30 AM ET

Richard Fisher Speaks 9:30 AM ET

Chicago PMI [Report][djStar]9:45 AM ET

Ben Bernanke Speaks 10:00 AM ET

Charles Plosser Speaks 12:00 PM ET

Beige Book [djStar]2:00 PM ET
Farm Prices [Bullet3:00 PM ET
Weekly Bill Settlement

Sandra Pianalto Speaks 8:00 AM ET

Jobless Claims [Report][Star]8:30 AM ET
ISM Mfg Index [Report][Star]10:00 AM ET

Dennis Lockhart Speaks 12:30 PM ET

Money Supply [Bullet4:30 PM ET

John Williams Speaks 10:00 PM ET

James Bullard Speaks 8:00 PM ET

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