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I wrote an article back in early June calling this summer's market to be the I.O.U market, meaning interest rates, oil, and uncertainty. I went on to state that with the markets being confused by how to interpret these uncertainties, it could be a difficult time for young investors to get their start. Looking back, (and vision is always 20/20 from this perspective), I think I should have called it the summer of common sense.
First, let's look at the oil situation. Referring back to our basic microeconomics classes, we know that because the supply of oil is lower than the demand, price has been driven up. While some of them have fallen of late, most oil refiners, which help increase oil supply, saw 10 to 20% increases in their stock value between June 9, 2004 and today. Even given the recent pullback, these stocks have certainly outperformed the S&P500, which is down 4% over this period. This increase in oil prices is also a sort of inflation. A major hedge against inflation, as well as the recent decline in the dollar, the slow down in the economy, and the widening trade deficit (all of which have been pretty apparent news), is gold. One major gold mining company, Newmont Mining, is up 13.6% over the aforementioned period.
Another example that you couldn't have missed is that it has been a rather cool summer. For example, in my home town of Pittsburgh, we are yet to have a day above 90 degrees. This bad weather, combined with high interest rates and rising oil prices, have hurt the boating manufacturers of late. For example, West Marine Products is down a whopping 28.6% since June 9.
I will give one final example for those of you who, like myself, haven't made it out of the house of late to notice the bad weather because you have been consumed by the recent release of Madden 2005. Electronic Arts is up 5% in the past 10 days.
So, next time you're looking to buy a stock, don't go chasing the latest buzz. Instead, look around into economic trends and what products are popular, and then get into all those ratios and statements. It will save you headaches, time, and most importantly money.
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