Nothing could have possibly stunned the street any more than a call by Goldman Sachs for $150 to $200 a barrel oil within the next two years.  The bank suggested that strong demand and weakening supplies would be reason enough to send prices upward, no doubt about that.

The problem with high oil prices is that it will affect US businesses more than other countries.  Since 2003, the US dollar has lost 50% of its value against the Euro.  Even with rising oil prices in dollars, the rest of the world is still able to buy cheap oil, largely because of a cheap dollar.  This increases the price for oil in dollars but for the rest of the world, particularly the Eurozone, prices stay moderate.  What is $120 in USD is 80 Euros, not much of a change from a few years ago.

Wall Street was a bit uneasy about the $200 prediction but was very quick to waive it off.  The Dow started in the red early but rose to close up 50 points.  While the market was unaffected by oil prices today, the premise of $200 should start frightening some investors.

Automakers and airlines have the most to lose or gain from oil prices.   GM and Ford, two struggling US automakers, have been losing more money on their top lines because of MPG ratings.  Gm once had a very profitable SUV wing that has since fell to the wayside as oil prices rose.  Airlines have it equally tough, the passenger airline business has very few opportunities to profit.  Small profit margins and greater expenses due to security measures make the cost of oil very important.  Though some airlines remained hedged, the price of oil will eventually come to terms with the profitability of the airline sector.

Now that a new bar has been set, look for traders to complete it.  Though oil seems to be stuck at $120 in recent weeks, a tightening supply this fall might push oil prices even higher.  Last hurricane season sent oil prices sky-high as refineries were taken off the pipes and shipments slowed.

Warren Buffett stepped in on a critical financing of a merger of Mars and Wrigley corporations.  The two produce very distinct lines of candy, Mars producing nearly every candy bar under the sun and Wrigley with the lions share of gum.  This opportunity is great for both candy producers and Buffett as well.  Any investment good enough for Buffett is good enough for the rest of the market.

Buffett’s interest would only go as far as a $2.1 Billion minority stake in Wrigley after the companies are merged.  Warren Buffett is known for buying only the most simple of companies, those that are easily understood and have a great long term perspective.  He holds huge stakes in companies like Coca-Cola, American Express, Budweiser and many other corporations that market products directly to consumers.  This is the perfect business to fit in with the many different positions he currently owns.  Eventually it seems as though Berkshire will have a horizontal monopoly on the consumer goods market.

Privately held Mars posted a serious offer for Wrigley that amounted to $80 per share, a huge premium even over today’s closing price of $76.91.  The deal will be done entirely with cash as Mars is still family owned and operated, Buffett’s investment is merely for a small stake as an investment rather than a controlling partner.

While Mars is fronting some serious cash for Wrigley with a bid that is equal to a price earnings multiple of 35, the company hopes a merger will allow the two to operate a more simpler marketing budget while competing with other confectioners.  Wrigley also gives Mars a leg up on the gum industry, one product that is absent from the Mars line.

One interesting note from the transaction is the Wrigley will take on Mars’ nonchocolate confections such as Skittles and Starburst.  The specialization of the two companies promises a better product and a better ability to grow.  Wrigley’s huge exposure to developing markets is another key marker for Mar’s which has huge success in the US but limited growth overseas.

In almost all cases this is a great deal.  Buffett wins out by taking a good position in a reputable company, shareholders get a huge premium and the deal should go through without delay to be completed entirely in less than 12 months.

The market showed is weakness when oil rose $3 on news that a US ship had fired warning shots at Iranian boats.  Investors are worried that a new war with Iran may disrupt supply and drive the price up even higher,  Oil closed up $2.46 to $118.52 per barrel.  Military action is disliked by traders who fear a weakening US dollar and supply troubles.

The rise in prices was due to a possibility of supply loss, not an actual decline in supply.  This tells us that if a supply drop would occur, prices would be likely to rise by $5 to $10 just on news.  Who knows how much past that, when the numbers are finally released.  Oil prices are very sensitive to a small disruption in supply, all of the worlds oil is purchased almost as soon as its produced.  Thus there is little room for comfort in a serious supply squeeze.

Oil prices have started affecting the commercial sector.  FedEx and UPS are positing lower earnings due to high fuel costs, foreign manufacturers spend more and more to import/export goods, airlines lost $10 Billion mostly from fuel.  As the price of oil makes its way down the chain, the end consumer is starting to pay higher and higher prices for almost anything.  Gas alone is $3.69, cutting heavily into the pocketbooks of American Citizens.

Relief is out of sight for now.  The economic stimulus package promises more inflation and a weaker dollar, eventually raising the price for commodities such as oil.  Fed plans to boost the lending industry have also pumped hundreds of billions in fresh credit to the market.  Oil prices have no where to go but up, usage will not fall but instead increase as the summer driving season heats up.

At this point its time to pay very careful attention to the price of oil.  Manage your portfolio around those companies that are the least negatively exposed to oil, it’s a terrible time to be holding a transportation company but a great time to own a refinery.

The merger between Delta and Northwest will create the largest airline in the world.  Both companies are struggling financially and through a steady loss of customers and government security, but will the two companies be allowed to merge and create one large, super airline?

Much evidence suggests that the company will not be able to merge just because of the sheer size of the two companies.  If the merger were to go through, it would be like Pepsi and Coca-Cola merging only to leave the small independent soda makers to try to fight through a monopoly.  I doubt very seriously that the companies will be able to turn a profit even when working together, neither of them suffers severely from competition.

Other than the banking industry, no other industry besides airlines has seen this much consolidation.  After 9/11, new security measures and a scared public has sent people away from airlines and back to ground transportation.  High fuel costs disproportionally hit airlines which only make a few hundred dollars each flight from passengers, the majority of their income comes from extra services and mail carrying.

I see little to gain from a merger between these two mega giants other than less pilots with a job and higher ticket prices.  There will be little regional competition on other airliners as these two control much of the domestic flights in the United States.  At this rate, I don’t think this merger stands a chance with the monopoly regulations in place.

The sentiment that the market always goes up has long been in play and is still the fact used by most professional money managers to assume positions in beaten down companies.  The average is about 10.5% a year for large cap stocks over the long run, some 100+ years.

Market timing is something that is critical for a short term trader and not so necessary to the retirement fund manager.  The short term trader needs to show huge daily profits from relatively small movements in price.  A move from $25 a share to $26 would be a gift from the heavens for most full time traders.  For the long term investor, that’s just a 4% return, very unlikely to make a considerable difference in the long run.

When the markets get beaten down, look at the last few months, the new favorite term is “timing the market.”  Many investors tried to time the real estate market only to get trounced, many ran out the commodity boom and the USDJPY carry trade watched their profits unravel as it broke down.  Market timing can be a difficult thing to learn but can bring huge gains for correct timing.  The losses can be huge as the gains, many investors lose big by chasing returns.

Short term traders do not profit from the difference in value in a company, they profit by merely buying X stock and selling it for more than they paid.  Traders, unlike investors, just want to flip their shares for a profit rather than hold on for the long term.  For this reason, data such as corporate earnings and economic outlooks play a very minor role in the short term trader.  Long term analysis is unlikely to affect a trader’s short term perspective.

For the rest of us, market timing really isn’t that critical.  As much as we’d like to follow the world’s best investments and be invested in each of them, its entirely impossible.  Most of us have our retirement portfolios invested into a series of profitable companies rather than the hot biotech down the street.

There is some role for market timing in a bear market, especially for the long term investor.  A bear market is likely to bring down the values of all stocks, even those with strong fundamentals.  A boring market in the US looks like a great opportunity for foreign countries.  Fundamentals remain strong even amongst this very technical-driven investment cycle.

As things weaken on the American front, there are still many great investments that have become oversold due to market sentiment rather than an actual difference in company quality.  Take for instance the deep-discounters, the fall in prices was due mostly to a market event than an internal event.  If anything, the balance sheets of deep-discounting corporations have never looked better.

And as much as the market hates the financial sector as a whole, there are still many great investments.  Firms with limited exposure to subprime mortgages have been hit just as hard as those with maximum exposure.  The rebound for these companies who managed their investments wisely will be huge, driven by profits rather than the rumor-mill.  Just by being in the financial industry it is likely to see a stock price tank by 20-30% without any hard evidence that the company will be doing worse.  This kind of sentiment is easy to beat with high quality, profitable stocks which are still lingering in the mess of illiquid lenders.

Bernanke’s acknowledgement of a future recession worries many on the street but it also provides the chance to get into several major deep discounters.  Deep discounters such as Big Lots and Family Dollar surge when economic news gets worse.  When people make less, they flee to these two stores for big savings on items.

Just as the housing bubble helped grow Target’s middle to upper class customer base, an ongoing recession will do much to line the pockets of Big Lots and Family Dollar which buy merchandise in bulk for dirt cheap to turn around and sell again for much lower than competitors.  These two companies are known for their low income customer base and benefit when the economy looks less than par.

Both these companies have a strong branding image and are known for their low prices.  Both stores offer brand name products with a much lower price than can be found at stores like Target or even WalMart.  The companies benefit by buying product that is overstocked and take in merchandise from other stores that might be out of season.   The loss of other retailers quickly becomes the gain of deep discounters.

I like deep discounters much more than regular dollar only stores because they have the ability to negotiate prices.  A dollar store that switches to a deep discounter usually faces tough marketability as consumers lose interest as prices rise.  Deep discounters are not as prone to losing money when the dollar falls, as the dollar loses value, the dollar only stores must cut the amount of their product or raise prices.

Big Lots reported very good earnings last quarter and set high marks for the next year.  The company has seen steadily increasing business as consumers look to cut costs by shopping at the deep discounter.  Biglots trades near its lows in share price at a tiny PE ratio of 14.  This kind of value is rarely seen even in deep discounters, especially with such high growth rates.  A PEG ratio of .7 is comforting that the company will continue to grow even amidst an economic downturn.

Family Dollar is another strong stock with much room to improve.  When the downturn of 01-02 came, Family Dollars stock moved up to the upper $40s to settle at record highs.  As you can see, this company proves to be very solid in periods of economic downturn and fluster as the market stabilizes.  Currently the stock trades at $21.40 per share, about the same price it traded before the internet bust.  This one trades even cheaper than  Big Lots at a PE ratio of 13 but has a much lower growth rate than Big Lots at a 1.26 growth rate.  Either way, if history repeats just like it did during the internet bust, this company is set to boom.

Beating the market in a downturn is much easier than in an upturn.  If the economy follows through with expectations, both companies can expect higher earnings and better than expected growth.  Both brands are known for their low prices on brand name products.

Investor confidence and market direction can be predicted just by watching the inflows and outflow of money from large mutual funds. When money floods the street, prices become inflated and stocks rise, an outflow causes large drops in stock prices as equity is taken out. After the last few months of decline, it is now apparent that outflows are huge. Investor confidence in big banking and anything related to mortgages are at all time lows.

A quick glimpse at a four week chart shows that equity funds tanked in February with the weekly outflows topping $12 Billion. Investors lost confidence in the market and thus started taking cash out of stock funds and at the same time loading up in money markets. While stock funds tanked, money market funds were taking in an extra $40 Billion a week. This shows that investors only felt safe in guaranteed return investments, even if the yield was as low as 3-4% per year.

Bond funds dipped at the same time as stock funds, either investors lost confidence in corporate holdings or they were wary of mortgage backed securities which are essentially mortgage debt repackaged as a bond. The monthly repayments of the mortgage were used to secure the bond interest, but as that money slowly dries up, the possibility of repayment drops.

Coincidentally the amount invested in money market funds has dropped with every FED rate cut, but the figures still remain positive. Net inflows to money market accounts were around $15-20 Billion a week, half as much as they were before the FED rates were dropped. Throughout the latter parts of February and into March, investors turned away from money markets and bought back into the market at bargain basement prices. Up until this week, there were heavily inflows of cash to equities of about $4 Billion a week, still much lower than money markets.

It appears that investors have again begun to take money out of equities and now back to money markets. From this viewpoint it looks like investors will start fleeing the market again, probably in droves when the Dow and other large indices drop. The impressive gains from last week are going to be wiped away if investors continue this sell off.

Watching these key statistics can help you better time the market. When the inflow/outflow statistics are weighted by a 4 week moving average, the charts flow smoothly. Very rarely do the charts move down and then back up, instead they move down and keep moving down or move up and continue up. This shows that the market is following the returns, investors don’t know where to put their cash.

Gauging just a few months history, equities are going to get killed in the coming weeks. Inflows topped at $7 Billion a week and now down to just $4 Billion a week, next week will probably go negative. If this continues, the next month will be filled with more 200 point losses. Hold on tight.

The approval of the XM-Sirius merger is now complete and both companies plan to work together to sell satellite radio subscriptions.  The companies both sell proprietary equipment that can access only the satellite radio provided by each company but now after an agreement is made the two hope to sell a package of both XM and Sirius channels for just $16.99 a month.

The companies both had the ad-free claim to fame that is popular with music and sports enthusiasts.  For just a small fee of $6.99 consumers were able to get 24/7 ad free programming of music and sports from a variety of stations offered by the companies.  Now that the merger is complete it should be possible to get programming from both companies without having two devices.

There was some serious lobbying in the merger, broadcast radio lobbying firms were adamant about keeping the merger from completion.  The lobbyists wanted to convince consumers and regulators that this would prevent competition and create a monopoly.  XM and Sirius made the case that the satellite radios were still in competition with broadcast radio and had a reason to keep prices down in order to win customers.  XM and Sirius must have been very convincing as the merger will go through, even with two giants in one industry.  The new company will not have any competition in the satellite radio industry.

XM and Sirius should be able to achieve profitability as they will no longer have to spend billions in advertising to put each other out of business.  Since their inception, neither satellite radio provider has made a profit.  In fact, both companies are on the brink of being grossly unprofitable.

We’ll have to see what the companies can do after the merger, at this point its anyone’s game.  The duo are facing huge losses and a limited customer base but have plenty of room to grow.  The balance sheets should look better after the two merge and cut costs, hopefully gaining customers in the meantime.  I’d hold here, no new positions until we see a lively balance sheet.

There is absolutely no reason to be pulling equity from the markets.  Rate cuts by the Fed have dropped interest bearing accounts to new lows, this is certainly not the time to be in cash.  Inflation is reaching 4-5% per year, its not the time to be invested at 2% per year.

Oil companies are looking very cheap when compared to other stocks.  Their revenue stream will continue for years to come as oil prices are unlikely to drop.  The only risk at these prices is a higher corporate tax, but the current administration is opposed to tax hikes.  I like Rowan (RDC) at this price.  With just a PE ratio of 8 and a growth rate of 16%, this is the best investment you’ll find in the oil market.  Rowan makes their own rigs to rent and sell to various refiners and exploration companies in the Gulf of Mexico and more recently off the coast of Africa.  They rent rigs for a daily rate in the hundreds of thousands of dollars.  Oil rigs are in short supply and the bidding wars intense, just last year Rowan moved a number of rigs to Africa where they get up to three times the rate Rowan was getting in the Gulf.  Oil companies are the place to be.

Next positions are mining stocks.  Mining companies make money regardless of current price because they enter contracts well before delivery date.  Some companies  refuse to enter these contracts and have benefitted greatly from higher prices.  Stocks like Gammon Gold do not contract price for gold or silver and thus always sell at market price, which has been remarkably high.

With the economic stimulus package right around the corner, it might be smart to make a few speculative plays on which stocks are likely to benefit the most. Home Depot and Loews are on the top of my list.

Eligible people will receive a $600 “advancement” on next years taxes, plus $300 per dependant. A family of four would receive a check totaling $1800, provided they don’t earn over the criteria.

With this amount of money fresh in the hands of consumers, chances are that a very select few will save it and the remainder will blow it on something. Home improvement stores top my list because the amount ($600) is about the price of most big appliances and summer home improvement ideas. The checks will come just in time for summer and things like lawn mowers, new air conditioners, a variety of landscaping elements etc.

To profit from this, we’ll have to see a very good quarter come out of either stock. Out of the two mentioned, Home Depot is well off its highs and looks a lot better for a turnaround than Loews. For example’s sake, lets suppose we want to invest in Home Depot.

In this particular scenario, it is a lively quarterly earnings report that we want to see out of Home Depot. Because quarters are compared to the previous year quarter, it is very likely that Home Depot will destroy last years earnings. No economic stimulus last year, $155 Billion stimulus this year. Got it?

To maximize our returns and limit the downside, we’ll elect to buy January 09 call options with a $20 strike price for just $9.10 each. This can also be used to further leverage our position, but its better just to limit the downside if HD happens to fall off a cliff.

The timeframe to January 09 also gives some time to sell when we want, rather than be tied to just a few months after earnings announcements. Good earnings in the second quarter could easily carry into the third and beyond, it really just depends on how effective this economic stimulus is.

Consider buying some Home Depot calls as a quick way to make some money when the economic stimulus package goes through. This is certainly one store that will benefit the most from the $155 Billion burning a whole in the public’s pocket. That $155 Billion has to go somewhere, I think it will go to the home improvement stores.