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February 27, 2012

Proceed with Caution: Gasoline, US Bonds, Stock Rally

By Louis Basenese of Wall Street Daily

Today I’m dishing out three timely warnings about gas prices, bond investments and the S&P 500 Index.

Take heed!

Expect More Pain At the Pump

As I write, Brent crude oil prices just topped $124 per barrel, up about 15% this year. The cause? The same old thing – rising tensions in the Middle East.

Even if you don’t listen to the news or track the commodities markets, chances are you’re aware of the unrest.
How so? Because prices at the gas pump are ticking higher – up about 10% this year, according to AAA.
Well, I hate to tell you this, but we shouldn’t expect relief any time soon.

Although crude oil consumption in the United States might be declining, that’s not the case in emerging and international economies.

As this chart reveals, New World and Old World demand are on divergent paths.

Bottom line: The United States needs to get serious about curing its addiction to foreign oil, stat! The competition for the limited resource is heating up.

Here’s a novel idea: How about tapping into our vast natural gas resources? Nah. That would make too much sense.

Got Bonds? Look Out Below!

It’s not often that we can say bonds were the best-performing investments. But they were in 2011. They were up 7.84%, on average. Mind you, that’s almost four times the return of the S&P 500 Index.

As the investment mantra goes, past performance is no guarantee of future results. And I wouldn’t bet on bonds to shine in 2012, even if you put up the capital for me.

As this 10-year chart of 20-year U.S. Treasury bonds reveals, we’re long overdue for a correction. And the last time bonds corrected – in early 2009 – prices cratered 26.4%. Yikes!

Bottom line: If you insist on buying bonds, make sure you stick to shorter-term maturities. Otherwise, you’re begging to get whipsawed by the market.

The Untold Tale of the Stock Market Rally

After last year’s dismal showing for stocks – the S&P 500 Index returned a measly 2.1% – we should be downright giddy that the Index is already up 8.3% this year. And that corporate profits keep climbing, right? Well, not exactly.

Even though there are 500 stocks in the Index, it turns out that one in particular is distorting the numbers. The culprit? None other than Apple (Nasdaq: AAPL). Its unfettered ascent and gargantuan $480 billion market cap are having an impact. Take a look:

Bottom line: Thanks to Apple, we need to view any performance stats about stocks with a tinge of skepticism. That is, until someone finally gets rid of the stupidly skewed, market-cap weighted indexes, which give a heavier weighting to bigger companies.

Courtesy  Louis Basenese  at Wall Street Daily (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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