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January 25, 2007

One Reason The Market Has Done So Well

I am not a trader and Northlake's investment strategy is designed to outperform on a relative basis so whether the market goes up or down is a little less important to me than other money managers. However, that doesn’t mean that I am not amazed by the steady strength in the market since July. Steady adn strong are the operative words even though the absolute percentage gains have been large. Pullbacks have been minor and brief.

As I was driving the 465 miles home from Lake Superior to Chicago yesterday I was pondering the market and trying to get a better handle on what has been going on. When I pulled in for gas, a light went on. I know it is no surprise to anybody that oil and gas prices have collapsed but suddenly the impact on our collective pocketbook hit me. I paid $2.23 a gallon for gas down by over $1 per share from trips I took to Wisconsin in the past year. This trip is almost 1000 miles roundtrip, so at 20 miles a gallon in my 1992 Acura Vigor the savings is over $50. A commuter coming to downtown Chicago from some of the new suburbs might drive 60 miles roundtrip a day. That works out to a savings of over $60 per month. Small change to Wall Street tycoons maybe but real money in many checkbooks.....

When I got home I followed up by looking at our recent gas and electric bills vs. a year ago. I was shocked. In December 2006, our utility payment was down 23% producing a savings of $111. In January 2007 (I already received the bills), our payment was down 32% or $231!

There are about 110 million households in the United States. If just one quarter are saving a couple of hundred dollars per month in heating and gasoline, the savings are in the neighborhood of $5 billion. I know our economy is huge but that is real money. Maybe more importantly, it is real money in each individual household and that is good for sentiment towards the economy which impacts other spending.

I know there are offsets. In particular, the recent uptick in interest rates could impact tens of millions of adjustable rate mortgages. But given that the bear case for the last few months has revolved around a weakening U.S. economy, the savings in our energy consumption bills due to falling prices and a mild winter are a significant positive in the investment landscape.

Posted by Steve Birenberg at January 25, 2007 02:02 PM in Market