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Volume 5, Number 23 

June 4, 2008 

The Chairman of the Fed, Ben Bernanke, has finally signaled that inflation is becoming a more prominent concern and that interest-rate cuts are on hold for now. The market responded by rallying today. Of course, falling oil prices and the good news on the economic front helped. The U.S service industries experienced stronger than expected growth, expanding in May at a faster pace than previously forecasted.

 That's a sign that the economy is riding out the effects of the housing crisis and record-high gasoline prices. On the job creation front, a report from ADP this morning revealed that U.S. companies added 40,000 jobs in May, as compared with 13,000 job increases in April. Analysts were expecting a decline for May. 

But we are by no means out of the woods yet; it seems we have come to a point where increase in gas prices can no longer be easily brushed off. The high oil prices are only beginning to show their economic effects, and aren't fully reflected at the gas pump yet. One of the many negative responses to high oil prices includes United Airlines' announcement that it will shut its low-fare Ted airline, ground 70 planes, and cut as many as 1,100 jobs in order to help counter record fuel costs. 

Earlier this week, T. Boone Pickens was quoted regarding the Commodity Futures Trading Commission (CFTC) probe into manipulation of oil prices, among other commodities, versus price changes due to natural demand cycles, saying that current oil demand is over 86 million barrels per day, while supply is at 85 million. Until demand can be quelled, prices will continue to rise. Pickens estimates $150/bbl oil by the end of the year. 

Billionaire investor George Soros told the Financial Times this week that while he feels the commodities markets, in general, are a-bubble in the making", a crash there is not imminent. He further stated that the prices of oil have been driven much more so by institutional oil futures investment surges. We side with T. Boone Pickens; and while we expect higher oil longer-term, we view most oil stocks, including the stocks of oil service companies, as undervalued. 

As investors we like seeing stocks rising; we still see the overall environment as relatively positive for equities. Apart from some unforeseen external shock, we expect the trading range, such as the one we're locked in, to continue.