Inflation Ahead

According to the Hulbert Financial Digest, which tracks the performance of almost 200 investment newsletters, the Forbes Special Situation Survey is the best-performing letter year to date. Hulbert has us up 28.1% through the end of May.

Obviously, we are extremely pleased with this result. However, stocks have weakened considerably in June. Indeed, one of our holdings, Coventry Health Care (CVH), took a big hit last week when management warned that earnings would fall well short of expectations. Yet CVH will report strong revenue growth for the year, and 2008 earnings will likely exceed $3.50 per share. With a forward multiple of just nine times earnings, the stock is extremely attractive. Assuming management does not unload any more surprises, CVH should stage a bit of a rebound in the near term

Of course, macroeconomic factors continue to cast a pall over the entire market. Consumer confidence fell to a 16-year low and housing prices are still falling at an accelerating rate. It is at least a little encouraging, however, to see that the rate of change of the rate of change in housing prices is finally slowing down. Nonetheless, housing prices will probably keep falling on an absolute basis throughout 2008 and possibly into 2009.

Energy prices are another major concern. The extremely high price of gasoline is one major reason why shares of General Motors have plummeted to levels not seen in three decades. But crude oil prices are not just high; they are also remarkably volatile. Intra-day swings of 2% or more now occur on a regular basis.

As for the Fed, its most recent statement mentioned rising inflationary expectations and an uncertain outlook. The FOMC chose to hold interest rates steady at 2%, but it now has a clear upward bias. One member, Richard Fisher, voted against the decision to keep rates steady. He believes the time has come to start increasing interest rates. This comes as no surprise to Fed watchers since Mr. Fisher has dissented on every decision since being appointed to the FOMC in January. He may be a party pooper, but it looks as if he is also the only FOMC member who is ahead of the curve.

Making the Rounds in Boston

I have been in Boston the past few days. No, I did not come here to root for the Celtics. I came to give a couple of talks about my book and to attend a Forbes conference.

On Wednesday morning I spoke at the UMass Club in downtown Boston, which boasts a wonderful view. On Wednesday evening, I spoke at the Armenian Library and Museum of America in Watertown. I ran into several old friends at both venues.

On Thursday afternoon I tried to drive into the City to attend the Forbes Leadership Networks Forum. Unfortunately, I got caught up in the Celtics parade. Although the parade was officially over, the police still had not opened several key streets and I could not get to the Four Seasons Hotel where the event was taking place. I had to give up and try again a few hours later. I finally made it to the Four Seasons toward the end of the program.

When I finally got settled, I noticed that oil prices had fallen more than $4 per barrel because the Chinese said they were going to ease gasoline subsidies. It's about time they did this. By keeping gasoline artificially cheap, they have been encouraging consumption. Higher fuel prices in China should take the heat off of demand. Now if we can get the dollar to strengthen a bit, oil prices should fall back down to a level that is more in line with supply and demand considerations. I expect that level is about $80 per barrel.

The Pro-American Ahmadinejad?

There has been much debate lately about high oil prices. Some say they are fully justified simply because of the forces of supply and demand. Others say they are in a bubble. Well, I came across a rather bizarre story on Bloomberg.com. It appears that President Mahmoud Ahmadinejad of Iran believes in the bubble theory. He says there is plenty of oil available and the price rise is unjustified. He blames it on efforts by some to weaken the U.S. dollar. He also called for greater use of nuclear energy, which he called "clean and cheap."

Ahmadinejad suddenly sounds like an American. In defending the U.S. dollar, he is doing a better job than our own Treasury Secretary. And by urging greater use of nuclear energy, he is encouraging us to stop relying on OPEC. Ahmadinejad is not particularly popular in Iran. Perhaps he has aspirations for a political career in America? You can read the Bloomberg story by clicking here.

The Leon Charney Report

Although I have been interviewed dozens of times on television and radio, I always enjoy appearing on the Leon Charney Report. Charney is an extremely successful investor. He also served as an advisor to Jimmy Carter during the Camp David Accords. He hosts one of the most intelligent talk shows on television. There are no sound bites on this program. No screaming, no yelling, no cutting people off. Instead, Charney takes the time to conduct interesting conversations with interesting people. I have had the honor to appear on his show four or five times. In my most recent appearance on May 18, Charney interviewed me about my new book, Even Buffett Isn't Perfect. I thank him for the plug. You can watch this May 18 interview at the Leon Charney Report website.

Avoiding Oil-Related Stocks

Today, we released the June issue of the Forbes Growth Investor. The 50 stocks on our recommended list are up 2.11% year-to-date. In comparison, all the major indexes are down more than 4% during the same period. We have been seeing quite a bit of strength in the technology sector. For example, Sohu.com (SOHU) surged 83% during the three months it spent on our recommended list.

Our Special Situation Survey investment newsletter takes a more concentrated approach. We typically have only about 15 stocks on the recommended list in this newsletter. One of our best picks this year was Trinity Industries. The stocks in this newsletter are up 26% year-to-date, making it one of the best-performing investment newsletters so far this year as well as over the past five years.

Interestingly, neither newsletter has benefited from the surge in oil prices. There are no oil-related stocks on the recommended list of the Forbes Growth Investor. Currently, there is only one in the Special Situation Survey, but it hasn’t done particularly well. In general, energy is an area I have been avoiding. In fact, as far as oil goes, I am in the bubble camp. Supply and demand factors certainly explain a good part of the rise in crude oil prices, but I believe Federal Reserve policies that have weakened the dollar also carry some blame. U.S. demand for gasoline is actually falling. Gasoline is subsidized in many other countries, but their governments are finding it increasingly difficult to continue this practice. Oil prices could plunge as subsidies are lifted and as the dollar strengthens.