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Connecting the Dots

Is $60 oil as harmless as Wall Street thinks?
The flip side of the real estate boom
Campbell Soup profit rises on higher prices
Flat yield curve hurts profits at CBH

Merger Monday

The bulls were delighted to hear about a trio of billion dollar mergers: Oracle is acquiring Siebel Systems for $3.61 billion, EBay is paying $4.1 billion for Internet-phone company Skype Technologies, and Wachovia is buying rival Westcorp for $3.42 billion.

If you ask a bull, they'll tell you that mergers are irrefutable evidence that stocks are going to the moon.

The market was also helped by a drop in the price of oil below $64 a barrel.

Given that merger and oil news, I would have expected the bulls to cobble together more than a mild 4-point gain.

What I think is happening is that the Wall Street crowd is becoming increasingly worried that the Fed will indeed raise interest rates next Tuesday instead of pausing with its "measured pace" strategy.

Frankly, I'm not sure what the Fed will do. I know it should raise rates again, but the political pressure after Hurricane Katrina may be too high to ignore.

What I do know is that inflationary pressures are getting worse and whether or not the Fed raises rates next Tuesday or not...there will be several more rates hikes down the road.

Is $60 oil as harmless as Wall Street thinks? About the only people that don't think $60 oil is a problem is the hear-no-evil crowd on Wall Street. The rest of America knows better.

1. Gas is so expensive that Americans are looking for cheaper forms of transportation, such as European-style scooters. In Montana, the owners at Scooterville said their sales are up by 50% over last year and customers as far away as Florida are calling because scooter dealerships in bigger cities are already sold out.

" With the gasoline situation, things have been going pretty well for us. It's booming."

2. Just like during the 1970's, thieves are siphoning gasoline from people's cars. In response, many Americans are buying locking gas caps. Pep Boys and AutoZone report a boom in the sales of locking gas caps. Bill Furtkevic of Pep Boys:

"There has been a discernibly higher shift in sales, and it's nationwide."

I have seldom talked about it because I don't want to sound like a braggart, but in addition to my investment business, my wife and I also own a convenience store, which sells gasoline.

I too can vouch for the increase in gasoline thefts. In the past, we used to have one or two drive-off thefts a month. Now, we are getting hit for 2-4 drive-off thefts a week!

That's in addition to the regular cussing out we receive from irritated customers over high gas prices.

3. Goodyear Tire announced a price increase -- for the third time this year -- of 8%. The reason? Soaring oil prices.

"If you look at it from a tire manufacturer's perspective, an oil-price increase is a triple whammy for us. Oil is a major ingredient in the production of tires. It affects the cost to make tires, it affects the cost to heat or cool the plant where we make tires and, of course, the trucking cost to ship the tires."

4. Heck, even the IRS understands the impact of $60 oil. The IRS has increased the standard mileage deduction rate by 8 cents to 48.5 cents a mile.

Rising oil prices are hurting Americans much more than the Jack-and-the-beanstalk crowd realizes.

The flip side of the real estate boom. Last week, we told you how soaring real estate prices were busting the budgets of young Americans buying their first homes.

Well, there's another painful side to rising real estate values: skyrocketing property taxes.

According to the Census Bureau, the national average for property taxes increased 24% in 2004. Those numbers are likely to increase again this year.

Those types of tax increases -- just like higher prices -- are busting the budgets of Americans. Instead of young families just starting out, retirees living on fixed incomes are also feeling the pain.

James Dieterle of AARP explained:

"The taxes are driving people out of their homes. One resident whose house is paid for said her property taxes now are higher than her mortgage payments and taxes were combined."

The combination of rising interest rates, rising property values, and rising property taxes are hurting everybody other than the affluent and will ultimately act like a heavy anchor on the real estate market.

Campbell Soup profit rises on higher prices. Campbell Soup reported a 63% surge in quarterly profits. Wow! How'd they do that?

Easy. Raise prices.

Sales increased by 5% to $1.50 billion, but most of that increase came from higher prices -- not from higher unit volume, which actually fell by 1% in the last year.

Those higher prices are good for Campbell Soup, but it also means that you and I will be spending a little bit more the next time we buy Campbell Soup, goldfish, Pepperide Farm cookies, V8, SpagettiO's, Prego Spaghetti sauce, Pace hot sauce, or Godiva chocolates.

Nah, there's no inflation to be found.

Flat yield curve hurts profits at CBH. Commerce Bancorp warned that its Q3 and Q4 earnings would fall below Wall Street expectations.

How come? The flat yield curve.

"The continued flattening of the yield curve over an extended period of time has had a greater negative impact on net interest income, net income and earnings per share than originally projected by management."

The bulls were so busy high-fiving each other over the Wachovia/Westcorp merger that they didn't bother to pay attention to this nugget of information.

The bulls treated this warning as if the flat yield curve challenges are company specific to Commerce Bank. Look, the flat yield curve affects every bank and you can bet that there will be more banks crying about the same squeeze on profits next month when we enter pre-announcement season.

Bank stocks haven't rolled over yet...but they will.

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