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

	CURRENT	1 MO PRIOR	3 MO PRIOR	6 MO PRIOR	1 YR PRIOR
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

	CURRENT	1 MO PRIOR	3 MO PRIOR	6 MO PRIOR	1 YR PRIOR
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