Oil Pushes Wall Street Off the Edge

The biggest news of the day – the precipitous drop in the value of the dollar against other major currencies – may have had some negative effect on the market but it is not what actually pushes the major indices into the red. It is the rise in the price of crude that does.

The few investors who bother to trade today were already sulking over the inflationary effect of a weak dollar – higher prices for imported goods - when suddenly, OPEC puts the nail in the coffin with unofficial talk of further oil production cuts at the December meeting of the cartel.

A weakening dollar and a rising price of crude are the worst of both worlds for Wall Street since both fuel inflation, and thus engender higher borrowing costs for firms in terms of increased interest rates. From all indications the greenback will remain weak over the coming year so the only hope for investors is for oil to trend lower in 2007.

For the week, the folio beats the S&P in gains. Again! The last time the S&P topped the folio, which came into being in the second week of September, was the week ended October 6 – six weeks ago!

Worst-known +0.92%
Nasdaq +0.59%
S&P -0.02%
Dow -0.51%

Who are the stars that help the folio shine this week? Here they are:
Top Five Stocks by Average Weekly Return to Date (RTD)

Stock	RTD(this week)	Rank	RTD(last week)	Rank
SLV	13.32%	1	12.89%	1
EBAY	9.15%	2	9.54%	2
IGE	6.52%	3	6.19%	3
MSFT	5.97%	4	5.58%	5
EEM	5.95%	5	5.65%	4

SLV has occupied the number one spot for as long as the folio has beaten the S&P. I initially had doubts about holding SLV with IGE – they have a positive correlation of about 0.39 - and even stopped putting more money into it for a while. However, the increasing prospect of the dollar remaining weak through 2007 has given me second thoughts.

Though gold is a more popular hedge against a weakening dollar, and thus inflation, I prefer to hold SLV because I suspect many Central Banks will unload some of their gold reserves next year as gold rises in response to the weakening greenback. Since many of these banks don’t hold reserves of silver, the white metal won't suffer from supply-side pressures as much as the yellow metal.

Also, with regard to the folio, SLV is negatively correlated with more stocks in the folio than IGE is. In other words, SLV acts as a better diversifier of portfolio risk than IGE does. So not only has SLV been the star stock so far, it likely to remain so in the coming year. Of the precious metals, silver is where the smart money is.