Feds May
Raise Rates
Due To High Oil Prices
by George Fisher, editor
Power Investing with DRIPs
Investors
have a lot on their plate right now. The Feds may raise rates
after the election due to the inflationary impact of high oil
prices and to defend the U.S. dollar against ever rising trade
deficits.
I don't believe our
economy is as insulted from the effects of high energy prices
as some believe. Just think about the cost of generating electricity
from oil or natural gas to run all those .com Web servers and
Web based gizmos. Fuel costs to get products to market has gone
up by 64% in the past two years. Truck manufacturing is slowing
substantially, down 40% - 50%, with anticipated sales down 30%
industry-wide. Freightliner, the largest truck manufacturer,
announced layoffs of 3,500 employees.
High-energy prices
drive up the costs of all plastics and petrochemical raw material.
Look for plastics manufacturer Newell (NWL) and chemical manufacturers
RPM (RPM), Crompton Corp (CK), Dow Chemical (DOW) and DuPont
(DD) to report lower earnings over the next few quarters.
High-energy prices
and a weak Euro currency are double whammies on both the European
economies and multinational corporations with high exposure to
European revenues. The Euro dollar is trading at record lows
against the U.S. dollar. As oil is always paid in U.S. dollars,
the 44% increase in the price of oil since the first of the year
translates into a 71% increase in weaker Euro-dollars. As the
European economies slow down at a faster rate than ours, multinational
companies are feeling the pinch in their profits from both slower
sales and currency losses.
Consumer spending,
the backbone of our economy and representing about 2/3rds of
our GDP, is starting to slow just a bit. Look for future slowing
in auto sales as one of the first signs of consumer spending
weakness. Auto Parts suppliers, like Johnson Controls (JCI) represent
good long-term value at current depressed prices.
The tech sector continues
to be a rocky place to invest. Many big names, like Intel and
Lucent, are trading closer to their 52-week lows than their highs.
Investors are afraid that a slowing economy will cause consumers
and businesses to slow their capital spending on technology.
If LU were to drop another 20% to $25 a share, it could become
an intriguing long-term opportunity.
Keep in mind that there
has been a selected bear market. In 1999, more than 50% of all
stocks listed on the NYSE and Nasdaq declined, while the indexes
moved higher. The opposite is now happening, with many sectors
stronger than the stagnate indexes.
Financials, Energy
and Utility sectors have been the strongest sectors since the
first of the year, and should continue. If the Fed does raise
rates in November, it may be for the last time. Most economists
foresee declining rates mid to late 2001 as the economy slows
to a 3% growth rate.
Energy stocks will continue to be strong, even if oil drops back to $25 - $27 a barrel range. For example, Apache (APA) bought huge reserves when the price was in the $10 range, and they are pumping more "black gold." Current stock prices reflect these substantially higher cash flows, and waiting for a retreat in oil and stock prices would be prudent.
Utility companies, much like financials, respond positively to declining interest rates. In addition, there is still strong consolidation going on within the electric and water industries, providing the potential for nice capital gains. Electric prices are high and electric generating companies are able to sell their excess capacity at huge profits. Telecommunication stocks have been in the doldrums, but are starting to show signs of life. SBC Communications (SBC) is moving into the long distance market and Century Telephone (CTL) recently purchased rural customers from GTE, just prior to GTE's merger with Bell Atlantic and now known as Verizon (VZ).
Editor's Note: George Fisher is editor of Power Investing With DRIPs, P.O. Box 97, Winnetka, IL 60093, 1 year, 6 issues, $149. For a limited time, Mr. Fisher is offering Bull & Bear readers a 1-year subscription for only $99. Mr. Fisher is working on a new book, All About DRIPs and Direct Investing due out in March 2001. Visit the Web site at www.powerinvestdrips.com.
