China vs. India

This is the final day of the Forbes cruise. We are actually pulling into Hong Kong at the moment. I see a lot of mountains and many beautiful tall buildings. I will spend one more night on the ship then fly back to New York tomorrow afternoon.

Jim Michaels, former Editor of Forbes magazine, moderated a spirited discussion yesterday about the merits of investing in China and India. John Dessauer, who travels to China frequently, was not keen on investing there. He thinks there is insufficient transparency. He would not even recommend buying ADRs of Chinese companies. He prefers to invest in large U.S. conglomerates such as Citigroup and Wal-Mart that are conducting business in China. But Arjuna Mahendran was willing to pick a few Chinese stocks. He particularly favors oil company CNOOC. Warren Buffett also likes Chinese oil, but he prefers PetroChina.

Despite all the excitement over China, Jim Michaels thinks India offers better opportunities for investors. He said the Chinese are focused on manufacturing low-cost items, but the Indians are specializing in high-skilled services.

Bulls on Board

Forbes magazine Publisher Rich Karlgaard started off the 11th Forbes Cruise for Investors this morning with an excellent presentation. He said Americans seem to hate a good economy, but that’s a good thing for investors because it keeps expectations low. He pointed out that there is a correlation between one’s view of the economy and one’s view of President Bush. He also talked about the media and how it tends to lean left and focus on the negative. He even made some predictions about real estate. He said the gap between real estate prices on the coasts and prices in the interior is greater than it has ever been. He believes that baby boomers will increasingly retire to interior regions of the country. He favors college towns in low tax, non-union states.

John Dessauer spoke next. He was extremely bullish about the stock market. He sees stocks going much higher primarily because of corporate earnings growth. He says stock price appreciation has lagged earnings growth rates. Therefore, he believes it will require a strong rally in stocks to straighten things out. According to Dessauer, those who warn about slowing earnings growth are simply wrong.

In addition to the presentations, the cruise has been wonderful. As usual, the food is great. However, the seas have been extremely rough the last couple of days. Running on a tread mill was all but impossible. I finally had to give up after half a mile. In fact, most people look drunk simply walking around on board trying to keep their balance.

Cho Was Purely Evil

Now we know his name. Cho Seung-Hui is the Virginia Tech student who in just a flash of time killed 32 innocent people, injured 14 others, and disrupted the lives of tens of thousands. He was a loner who talked to no one and had no friends. Today he is world famous and will never be forgotten by the loved ones of those he killed. By the time the media is through, we will know all his deepest and darkest secrets. And we will hear all the experts theorize about what went wrong and how an immigrant Korean child could grow up to become one of the greatest evil doers in American history.

Just a couple of days ago I briefly wrote about my favorable impression of Koreans. I have no doubt that Koreans all over the world are absolutely shocked by Cho’s crimes. I am sure many are now feeling shame and trying to understand how one of their own could have done so much evil. This is nonsense. Cho was not one of their own. He was not one of anyone’s own. The fact that he was of Korean descent is about as relevant as his height or his weight or the color of his hair. This guy was pure evil. And as we know, evil comes in all colors, lives in all countries, and practices all religions.

Investing Like Buffett

The 11th Forbes Cruise for Investors continues. Today we heard from Marilyn Cohen, a fixed-income specialist who also writes a regular column in Forbes magazine. We also heard from Arjuna Mahendran, Chief Strategist Asia Pacific at Credit Suisse. Both made excellent presentations. I also gave a presentation, which focused on my research on Warren Buffett. For the past several months I have been writing a book about Buffett. While there are a number of books already in publication, they are all “love” stories. I believe my book is the most objective one by far. While I criticize Buffett for advocating certain views that I believe hurt investors, I also conclude that he is clearly the greatest investor of all time. My respect for him has grown immensely since I began this project. If all goes according to plan, the book will on the market by next spring.

Horror in Blacksburg

I’m on the high seas cruising from Osaka to Hong Kong. I woke up Tuesday morning at 5:00 am our time (which was 5:00 pm Monday in New York) and turned on the television to find out how the stock market had done. Instead, I was horrified to hear news of what was being called “The Virginia Tech Massacre.” I was stunned. I spent five years of my life studying at Virginia Tech where I earned two graduate degrees. Blacksburg is one of my favorite places in the whole world. I absolutely love it. I also considered it one the safest places to live. I couldn’t believe this kind of horrible tragedy could occur in such a wonderful place. I extend my deepest sympathies to the families and loved ones of all the innocent victims of this terrible crime.

Polite Societies

I'm in Osaka, Japan. I just boarded the Crystal Symphony for the second half of the 11th Forbes Cruise for Investors. I arrived Saturday evening, which of course, was Saturday morning in New York. I'm still jet-lagged.

I haven't been in Asia long, but I have made a number of observations. Let me start with the flight. I took Korean Airlines from New York to Seoul then changed planes for Osaka. The service was outstanding. The stewards and stewardesses were wonderful. The food was as good as anything you would expect to find in a fine restaurant. I had steak for lunch and an arrangement of seafood wrapped in phyllo dough for dinner. I had a second codfish dinner on the flight from Seoul to Osaka. Both planes were Boeing 747s. Since I flew business class, there was plenty of leg room. The seats reclined to an almost horizontal position, making it much easier to get some sleep.

Getting from Kansai International Airport in Osaka to the Westin Hotel was easier than I expected. The airport is not near the city and I heard cab fare runs around $200. So I took a bus to the New Hankyu Hotel and a taxi from there to the Westin. That cost about $25 in total. The Westin was very nice, but there was no wireless Internet access and no wired access in the rooms. The next morning I had a delicious traditional Japanese breakfast. I'm not exactly sure what I ate, but I do know there was a lot of seafood involved. In any case, I really liked it. I've had plenty of sushi back home, but this was the first time I ate a real Japanese breakfast. By the way, the tea was excellent. It was much better than what I've had in typical Japanese restaurants in American.

After breakfast, I returned to my room and read The Daily Yomiuri, an English-language newspaper. One story really caught my attention. It turns out that "more than 400 Osaka municipal government workers lied about their academic backgrounds when they applied for posts designed for workers who had only graduated from high school or middle school." That’s right; these people actually denied having graduated from college! I've heard plenty of cases of people embellishing their resumes in order to secure better jobs than they were qualified for, but these workers had done exactly the opposite. They had purposely downplayed their qualifications. Either finding a job in Osaka is very difficult, or this is a society that suffers from an extreme case of humility.

Perhaps the one thing that strikes me most about the Koreans and Japanese is how incredibly polite they are. I realize my perception may be skewed. After all, I was primarily exposed to people working in service industries. They are required to treat customers nicely. But the workers here seem to be in a league of their own. Of course, we are all aware of what happened to all those manufacturing jobs that used to be found in the U.S. If customer service jobs could be outsourced as easily, I'm not sure what kind of work would be left in America.

Ethanol Is Not The Solution

With crude oil and gasoline prices at high levels, it makes sense to look for alternatives. President Bush seems convinced that ethanol is the best solution to our energy problems. Ethanol certainly has a lot going for it. Most importantly, it is relatively easy to manufacture automobile engines that can run on high ethanol-content fuel.

But like gasoline, ethanol comes with its own share of problems. For example, it isn't as efficient as gasoline. As a result, it takes more ethanol than gasoline to drive the same number of miles. Also, growing demand for ethanol is pushing up food prices all over the world. This is because today's ethanol is made from sugar or corn. Both products are widely used in all kinds of foods. President Bush says we should make ethanol from switch grass, but that's not so easy.

So in the end, will we be trading our dependence on expensive gasoline for even more expensive ethanol? In order to protect U.S. farmers, our government taxes ethanol imports, but can the U.S. even make enough ethanol to meet its expected needs? And what will happen when those tariffs are eventually reduced or eliminated? Instead of being dependent on the Organization of Petroleum Exporting Countries (OPEC), will we become dependent on a new Organization of Ethanol Exporting Countries (OEEC)?

I'm not saying we should not use any ethanol. Ethanol certainly will help reduce our reliance on oil and gasoline. That's a good thing. But I am saying that ethanol by itself is not the answer. What we really need are technologies that allow us to drive more miles at a lower cost. One way to achieve that is with more fuel-efficient cars. Don't get me wrong. I am not in favor of government mandates that dictate how many miles per gallon cars must get. Rather, I prefer market forces. Let gasoline rise to $4 or $5 per gallon and we will quickly see new solutions. In my opinion, the best solution in the near term is the plug-in hybrid vehicle. Since most people drive less than 50 miles a day, a car that can go that far on electricity before having to switch over to gasoline will significantly reduce our appetite for foreign oil.

Of course, a more immediate solution is to drive smarter. The last time gasoline prices topped $3 per gallon, demand actually fell. That's because people took matters into their own hands. Many who own gas guzzling SUVs also own more fuel-efficient passenger cars. They parked the SUV and drove the car. Some started car-pooling. Others began using public transportation. Those who couldn't do these things began planning better to minimize the number of miles driven.

Unfortunately, when people respond in this manner and demand falls, gasoline prices also fall. After a while, people notice the lower prices and revert to their old ways. Demand rises again and so do prices. We end up in a vicious cycle. If we really want to get serious about energy conservation, perhaps it is time to consider a floor on gasoline prices. This is a solution many economists favor, but you certainly won't find any politicians talking about it.

Forbes Investors Roundtable Discussion

Last week we hosted a Roundtable discussion with a few notable investment experts at our headquarters at Forbes. Participants included Barbara Marcin, Mike Holland, Joe Battipaglia, and Nikhil Hutheesing. Our discussion began with an overview of the economy and stock market. Barbara, Mike, and Nikhil were all bullish. Joe and I were bearish. Each of the participants also presented some of their best investment ideas for the year. The full report is available only to subscribers of the Forbes Growth Investor and Special Situation Survey investment newsletters.

Largest Supply of New Homes Since 1995

Just a few days ago, I heard an analyst defend the home building industry. He said home builders were cutting back on construction in order to reduce inventories. He seemed certain business would soon pick up.

Not soon enough according to today's report from the Department of Commerce. It turns out that on a seasonally-adjusted and annualized basis, only an estimated 848,000 new homes were sold in February. That's down 3.9% from the revised January estimate, which is itself down 5.9% from the initial January estimate reported a month ago. At this rate, we could conceivably see today's figure eventually revised to less than 800,000.

Regardless of any future revisions, it is clear that problems persist in housing. While home builders may be reducing inventories, they are also selling fewer homes, which means supply is actually rising. In fact, according to the latest report, there is now an 8.1 months' supply of new homes on the market. That's the highest amount of supply since December 1995.

Amazingly, prices are holding up. In fact, February's median price of $250,000 was up 2.8% from January. But prices should be taken with a grain of salt. Home builders are making all kinds of concessions to move houses. They are throwing in every conceivable upgrade to hold the line on price.

What does this mean for the economy? I think the Fed will worry more about slowing growth than rising inflation. In my view, today's report raises the odds of a Fed rate cut by year-end.

American Superconductor May Soon Turn the Corner

In the interest of full disclosure, let me first say that I am an American Superconductor (AMSC) shareholder and have been on and off since the late 1990s. The stock has been one of my favorites—and most profitable—even though the company has yet to make any money. But now I am starting to believe that profitability is just around the corner.

AMSC has three segments: Wires, SuperMachines, and Power Electronics. Power Electronics, the largest by far, recently turned profitable on an operating basis. However, profits in this segment are dwarfed by operating losses in the other two segments. This is because management is pouring a ton of money into R&D. It is no longer manufacturing its first-generation high temperature superconducting wires. Instead, it has moved on to making second generation (344 and 348) wires, which will provide superior performance and eventually incur much lower manufacturing costs.

Another promising area is ship-propulsion systems. AMSC has been working on a 36.5 megawatt superconducting motor for the U.S. Navy. Superconducting motors deliver the same power as conventional motors, but are much smaller and lighter. They are quieter, too. That is particularly important in military applications.

The company's January acquisition of Windtec is one the primary reasons I am turning more optimistic about future profitability. Windtec is an Austrian company that designs wind turbine systems that rely on AMSC's PowerModule systems. The acquisition makes strategic sense and already appears to be paying off in the form of major orders from Sinovel Wind Corp. of Beijing. Windtec is also receiving orders from South Korea.

Warning—this is an extremely risky and volatile stock. It has already run up about 50% so far this year. And the company is still burning cash. This means management may decide to take advantage of the recent rally by issuing more shares, which would likely push the price back down. Nonetheless, I think there is a good chance the company may break even in fiscal 2008, which begins next month.

You can view a MoneyMasters interview I conducted with CEO Greg Yurek back in December. It's called "Powering the Future."

Chances of a Rate Cut Are Better Than you Think

With the Fed wrapping up its two-day meeting, investors are betting on the outcome. Conventional wisdom is calling for no change in interest rates. Indeed, CBOT futures are pricing in a 98% probability that the Fed will stand pat and just a 2% probability that it will cuts rates by a quarter point.

I believe chances for a rate reduction are higher than the numbers indicate. I am convinced the Fed is seriously concerned about the housing market. Fed officials are fully aware that higher rates at the longer-end of the yield curve could accelerate the pace of mortgage defaults and foreclosures. The sub-prime market has already been hit. If troubles spread to the alt-A and prime markets, the economy would easily be thrown into recession.

So is the Fed willing to risk a little inflation in order to prevent a housing meltdown? Inflation is currently running a bit higher than the Fed's so-called comfort zone. That's why many investors believe the Fed won't cut. But inflation is still quite low by historical standards. As a result, the Fed can feel comfortable about cutting rates at this time. A rate cut, however, would scare the markets and could result in a significant sell-off because it would send the message that recession is a likely possibility.

Of course, like most investors, I'm betting against a rate cut. Nonetheless, I won't be surprised if it happens today.

Housing Still Hasn't Bottomed

Housing starts for February came in at a better-than-expected 1.525 million. Several commentators jumped on this as evidence that the housing market has bottomed and that the economy is strong. They shouldn't celebrate.

Although the figure was 9% better than January's 1.399 million estimate, the 90% confidence interval is ±10.2 percentage points. In other words, there is a good chance housing starts did not rise at all. Furthermore, February's figure is 28.5% lower than it was a year earlier.

Housing is not out of the woods. The bust in the sub-prime mortgage market will continue, especially if the yield on the 10-year note starts to rise. This will force more homeowners into default as their monthly payments rise. The prime market, however, should be fine; unless the economy slows further and the unemployment rate begins to rise. At this time, I don't expect current problems in housing to cause a recession. Yet there is little doubt that economic growth will be more anemic than many economists had previously expected.

Less Guidance Means More Risk

Earnings guidance is a topic that is near and dear to my heart. I have written a number of articles that criticize efforts to ban guidance. The first two, In Defense of Earnings Guidance and Is Buffett Hazardous to Your Wealth?, were published in 2003. The third, Gimme Guidance, was co-authored with Mike Ozanian and published in 2006.

Guidance is in the news again because the U.S. Chamber of Commerce recently came out with a report encouraging companies to put an end to the practice. Even Warren Buffett, perhaps the most successful investor of all-time, opposes guidance.

There are a number of objections to guidance. However, the one that gets the most play is that guidance encourages executives to focus on the short term rather than the long term. As a result, managers worry more about managing earnings than they do about managing the business. For example, it is argued that managers who provide guidance are more likely to reduce R&D spending in order to "meet the number." Doing something like this will boost short-term profits at the expense of long-term profits. Everyone, include myself, agrees this is a bad idea.

The problem with the argument is that it falsely assumes that "short-termism" is caused by guidance. It isn't. The fact is that investors will form expectations whether guidance is provided or not. They currently form quarterly expectations simply because the SEC requires corporations to report earnings every quarter. If the SEC required monthly reports, investors would form monthly expectations.

Guidance plays a valuable role because it ensures that investor expectations don't get out of hand. I have theorized about this in the past and said that without guidance, the disparity between actual earnings and the consensus estimate will only be larger than it already is. Now there is empirical evidence that supports this theory. Baruch Lev of NYU and his co-authors, Joel Houston and Jennifer Tucker of Florida, have a very interesting paper in circulation called "To Guide or Not to Guide?" They find that earnings estimates do indeed become less accurate when companies stop providing guidance. What's worse, they find absolutely no evidence that those companies that end guidance increase the focus on the long term. Companies that end guidance do not increase R&D spending, they do not increase capital expenditures, and they do not provide investors with any additional information.

A second study in circulation by Shuping Chen, Dawn Matsumoto, and Shiva Rajogopal of the University of Washington called "Is Silence Golden?" finds that eliminating guidance destroys shareholder wealth. When companies announce an end to guidance, they suffer a statistically significant decline in stock returns.

There really is only one thing that can be said for sure about ending guidance. Less guidance results in less information. And all investors know that less information creates greater uncertainty, which means more risk. It seems odd in the post-dotcom era when regulators are trying to encourage more disclosure, that some of the most vocal corporate critics of the past are now telling corporations to keep mum.

24 Hours a Day

An energy analyst recently said that demand for gasoline will rise because of daylight savings time (DST). She believes people are happy to have an extra hour to drive.

Of course, they don't have an extra hour to drive or do anything else for that matter. Despite DST, there are still only 24 hours in a day. What she apparently means is that the additional hour of daylight in the evening (at the cost of an hour of daylight in the morning) will somehow convince people to drive their cars more.

I don't buy this argument. Neither do I buy the argument that DST saves energy. Even if it did, how much energy could it possibly save? People will run their refrigerators and computers just as much as they did before. They will still heat or cool their homes, vacuum their houses, and blow-dry their hair. Perhaps they might use a little less lighting in the evening, but compared to everything else, light bulbs don't use that much energy.

It was dark this morning when my alarm went off. As a result, I had to turn on the lights. I didn't have to do that last week. I might have my lights on for an hour less in the evenings, but I'm making up for it in the mornings. I don't believe DST makes a meaningful dent in energy consumption; and I certainly don't believe it has any impact on gasoline demand.

Why Are Gasoline Prices Rising?

I'm often asked to comment on energy prices. MSNBC asked me today why gasoline prices are rising again. First, since oil prices are up about 20% from their early January lows, it isn't surprising to see gasoline prices up about the same amount after a bit of a lag. Second, because gasoline is a refined product, refinery problems add to its cost. For example, we recently had a couple of refinery fires. Also, many refineries are down for routine maintenance. In addition, refineries are now switching to more expensive summer blends that produce less smog.

People often wonder why gasoline prices vary so much from state to state. Many New Yorkers, for example, make a point of filling up in New Jersey whenever they can. Price differences have to do with state and local taxes that are added on top of federal taxes. California has the highest gasoline prices in the country. It also has the highest taxes. In addition, California demands a much cleaner burning fuel than is required by federal laws. It is simply more expensive to produce "California" gasoline.

I'm also often asked why gasoline prices go up faster than they come down. I'm not convinced they do, but economists have studied this issue of sticky prices for many goods. When input prices go up, manufacturers often raise prices for finished goods in order to protect profit margins. But when input prices fall, they aren't as quick to reduce finished goods prices. This may be partly due to a belief that the drop in input prices will prove to be temporary. It may also be due to a desire to enjoy fat profit margins for a while. Yet, I haven't seen any evidence that gasoline prices are any stickier than the prices of other consumer goods. On the contrary, it appears that gasoline prices are extremely responsive to a change in oil prices. The correlation coefficient between gasoline and oil prices is well over 90%.

Commentary from Forbes Growth Investor

I released the March issue of the Forbes Growth Investor yesterday to my subscribers. Here is the front-page commentary:

For many months, market watchers had been wondering what had happened to the risk premium. Investors seemed to have no fear of risk. Volatility had all but disappeared. But all that changed on Feb. 27. For reasons that are not completely clear, investors decided in mass they didn't like risk anymore. They sold stocks like crazy and bought bonds. Down volume on the New York Stock Exchange was 100 times larger than up volume. The system that tracks the Dow fell behind because trading volume was too much for it to handle. When it finally caught up, investors were shocked to see the Dow down by more than 500 points. Stocks did manage to gain some of that back by the end of the trading day, but the Dow still closed 416 points lower. As for bonds, the credit risk premium expanded as the yield on the 10-year Treasury note plummeted to 4.5%. Just two weeks earlier, it had been above 4.8%.

When stocks fall this much in a single day, inquiring minds want to know why. The media hunt for pundits and put them on the spot. What was the catalyst? If I were superstitious I would say it had something to do with the fact that I had lunch that day with Robert Shiller, author of "Irrational Exuberance," the book that correctly called a market top in 2000. But there are other explanations. Some blamed the selloff in New York on the selloff in China that immediately preceded it. Others said stocks fell because former Fed Chairman Alan Greenspan suggested a day or two earlier that a recession was possible by the end of the year. Still others blamed the selling on a disappointing durable goods report that came out that same morning. And at least one reporter said traders were telling him the plunge was in response to a failed attempt by the Taliban to assassinate Vice President Richard Cheney. (I am sure, however, that these traders were not suggesting a successful attempt would have caused a rally.)

Investors were understandably anxious the following morning. Yet stocks stabilized and even inched a little higher at the open even though the Commerce Department said it was revising down its fourth quarter GDP growth estimate to 2.2% from 3.5%. Investors even shrugged off evidence of further weakening in housing as January new home sales plummeted 20% year-over-year and 16% from the prior month. Stocks gained steam when Fed Chairman Ben Bernanke began his testimony to Congress. He expressed strong concern about entitlement programs and deficits, yet investors focused more on statements relating to interest rates. Bernanke said economic growth should remain at moderate levels, which was interpreted to mean that further rate hikes are unlikely. Many traders were disappointed, however, that by the time the markets closed, the Dow had managed to get back only 52 points of the previous day’s loss.

Where do stocks go from here? The signs are troubling. I said in our December issue that rising volatility would be a negative indicator. The CBOE market volatility index, commonly referred to as the VIX, has suddenly reached levels not seen since last July. Oil prices are another concern. After falling back to $50 per barrel, they are now comfortably above $60. And although some say former fed chairmen should keep their opinions to themselves, it is not good news that Alan Greenspan is talking openly about a possible recession. All these factors are making at least a few institutional investors nervous. Individual investors should exercise caution as well.

Start of Something Big?

Robert Shiller published his book, "Irrational Exuberance" in March 2000. The book argued that stocks were overvalued. For those who may have forgotten, March 2000 is also the same exact month that the Nasdaq Composite peaked.

Today, the Dow lost over 400 points. The Nasdaq lost almost a 100. Maybe it is just coincidence, but today I also interviewed Shiller for my MoneyMasters video program. The Dow was down about 140 points when I left my office to go to our studio. After the interview, we went out for lunch. Sam Masucci, CEO of MacroMarkets, joined us. Fortunately, I wasn't aware the sell-off was getting worse; otherwise I might have had indigestion.

Why did the market fall so much today? The simple answer is that there were more sellers than buyers. No one knows for certain why. Perhaps it was the big sell-off in China. Perhaps it was the disappointing durable goods report that came out this morning. Perhaps it was Alan Greenspan's comments about a possible recession by year-end. Or perhaps, investors suddenly decided there really was no good reason for stocks to have rallied in the first place.

Earnings growth is slowing, oil prices are above $60, the housing market is struggling, and the Fed is unlikely to cut rates. Unlikely, that is, unless things get so bad that a rate cut becomes necessary to boost the economy regardless of what that means for inflation.

Although the second edition of "Irrational Exuberance" focuses on overvaluation in the housing market, Shiller told me he still thinks stocks are too expensive. I don't feel comfortable betting against him. My interview with Shiller will be posted on March 8.

Housing Has Not Bottomed

Last Sunday I did a hit on MSNBC with Alex Witt about the housing market. This was partly prompted by remarks by Fed Chairman Ben Bernanke and former Fed Chairman Alan Greenspan that the housing market has bottomed.

My view is quite different. Just about every metric indicates a continuing deterioration. Whether you look at year-over-year sales, building permits, housing starts, orders, or cancellations, things are getting worse with no real evidence of a bottoming.

Let's look at some recent reports by major home builders. Toll Brothers (TOL), which caters to luxury home buyers, reported net income of $54.3 million for fiscal Q1. That's down from $163.9 million in the year earlier period. Much of the decline was due to writing down the book value of land the company owns. Yet even if write-downs were ignored, net income would have been only about $118 million. Signed contracts were down 34%. The company delivered fewer units and signed fewer contracts in every geographic region it serves. It also has significantly less backlog than it did a year ago.

Other home builders such as KB Homes (KBH) and Hovnanian Enterprises (HOV) are reporting similar problems. Indeed the entire housing market seems to be weakening by almost every conceivable measure. Even home prices are showing signs of trouble. Nationwide median prices haven't really fallen, but they have stopped going up. While there are pockets of falling prices all over the country, it seems like it's now just a matter of time before prices start falling in all geographic regions.

Optimists insist the worst is over. But pessimists appear to be more realistic at this time. Those who follow the housing market closely are betting on a continuing decline. Forbes columnist Gary Shilling remains extremely pessimistic. I plan to interview Robert Shiller of Yale University and MacroMarkets on Feb. 27 about his views on the housing market. Shiller recently announced a new home price index he is launching with Standard & Poor's and Fiserv. This index will track actual transaction prices for single-family homes only. I will ask Shiller about this and other issues in our interview, which we plan to post on MoneyMasters on March 8.

Is Bernanke Right?

Although I didn't make it to Disney World, I did spend a few days in Orlando last week. I took part in a panel discussion for the CFA Society of Orlando, and I participated in the World Money Show.

The CFA Society panel discussion focused on the outlook for the markets. It was moderated by Vinny Catalano. The other panelists were Kathleen Camilli, Chief Economist of Camilli Economics; Timothy Hayes, Chief Investment Strategist at Ned Davis Research; and Lee Schultheis, CEO and Chief Investment Strategist at Alternative Investment Partners, LLC.

Catalano pointed out that most strategists these days are bullish. So far, they've been right. Stocks continue to flirt with new highs. The Dow is closing in on 13,000. His concern is that there is too much consensus. I think he is right. A few concerns that came up during the discussion were the sub-prime mortgage markets and investor complacency when it comes to emerging markets.

I moved on to the World Money Show, which was filled with newsletter editors and money managers. There I took part in a panel discussion of several Forbes newsletter editors including Ken Kam, Jim Lowell, John Christy, Richard Lehmann, and James Stack. Interestingly, this group did not seem overly bullish. Caution was the rule of the day. One thing I pointed out in both discussions is that OPEC and other oil exporters have learned that the world can easily tolerate higher oil prices. They no longer fear causing recessions by restricting supply and raising prices. That's not very comforting.

Yet Ben Bernanke is pleased with moderating energy prices, which he says takes some heat off inflationary pressures. In other words, don't expect another rate hike. That's why stocks rallied today. But what if he's wrong and energy prices move higher. Oil is already up almost 20% since bottoming recently at $50 per barrel. And what if the housing market has not bottomed as many expect. Each day seems to bring more bad news about canceled orders and fewer homes being built. Yet investors are not giving up on the housing stocks. I think those who remain cautious are right to do so.

Oil Prices and Interest Rates Are Up Again

Oil prices, which had recently fallen to $50 per barrel a month ago, are once again approaching $60. Despite this 20% increase, gasoline prices have actually fallen 7% during the same time. Yet the average consumer seems convinced that when oil prices go up, gasoline prices go up more; and when oil prices fall, gasoline prices don't fall as much. There is no truth to this. The fact is that gasoline prices are less volatile than oil prices. That's because only 50% of the cost of gasoline depends upon the cost of oil. The other components are refining costs, taxes, marketing, and distribution.

In addition to rising oil prices, another growing risk is rising long-term interest rates. The 10-year bond was yielding less than 4.5% about a month ago. Now it's above 4.8%. Most investors focus on what the Fed might or might not do. But the Fed can only change short-term rates. It influences long-term rates only indirectly. And rising long-term rates are not usually good for stocks.