Connecting the Dots

By: Tony Sagami | Thu, Oct 6, 2005
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I woke up this morning to a beautiful sight -- a fresh dusting of snow on the picturesque Swan Mountain Range that surrounds the small Montana town I live in.

For me, Montana is at its most beautiful in the fall. The leftover green from summer with a little splash of fresh white snow and yellow/gold/red autumn leaves is the best time of year in Big Sky country.

This first dusting of snow and onset of fall means different things to different Montanans.

My family and I happen to love the winters. To us, the arrival of winter means snowball fights, sledding, skiing, ice skating, and special holiday time with family.

For my rugged outdoors friends, the fresh snow signals the soon-to-arrive start of hunting season and for my sports-addicted father-in-law, it means the start of football.

For hiking enthusiasts however, the new snow means that the Going To The Sun Highway in Glacier National Park will soon close.

One thing the arrival of snow means for everybody that lives in the northern states is arrival of cool, fall weather. Our nighttime temperatures have dropped into the high 30's and low 40's and I now need to let my car warm up for five minutes before I drop my children off at school.

Yup, it is time to put away the shorts, sandals, and sunglasses and break out the knit hats, gloves, and winter jackets from storage.

This cool weather also means it is time to start heating your homes. For all Americans -- no matter what part of the country you live in -- the price of heating their homes is going to be much, much higher this year.

For example:

MICHIGAN: Two Michigan utilities -- MichCon and Consumers Energy - have filed rate increase proposals that would increase the typical monthly utility bill from $120-140 to at least $180 a month.

WASHINGTON : Puget Sound Energy filed a request increase natural gas bills by 14.7%. For the typical household, this boost would raise the average bill by $11.31 to $96.48 a month.

MINNESOTA : The Minnesota Commerce Department has warned that the average home heating bills will increase by 73% this year. In 2004, the typical heating bill was $44.63 but will increase to $77.19 this year. CenterPoint Energy, the largest natural gas utility in Minnesota, has raised its prices by 77% since last October.

CALIFORNIA : It doesn't matter whether you live in northern or southern California -- heating prices are going up.

==> In northern California, Pacific Gas & Electric is charging 70.8% more today than it did last year. A typical home will see it monthly natual gas bill rise from $24.64 to $42.10.

==> Southern California Gas Co. estimates that gas bills for a typical single-family home will hit $42.23 this month, up from $28.37 last October.

TEXAS : Even in Houston, the two utilities --- Reliant Energy and CenterPoint Energy --- have announced large price increases.

==> Reliant Energy has warned it was raising the charge per kilowatt of electricity from 12.88 cents to 14.70 cents -- a 14% increase at the end of October. Worse yet, Reliant plans on raising that rate to 16.04 cents -- another 9% increase -- on January 1.

==> CenterPoint Energy raised its natural gas rates by 27% in September. Ouch! Sorry Houston -- CenterPoint recently announced another 11% price increase. A typical CenterPoint residential customer that uses 4,000 cubic feet of natural gas will see his monthly heating bills increase from $59.13 to $65.58.

FLORIDA : Florida Power & Light said its expects to spend $770 million more than its $4.06 budget for fuel in 2005. and spend $6.2 billion in 2006. Florida Power & Light expect to increase electric rates by 15% for residential customers and by 20% to 36% commercial consumers.

The reason for these giant price jumps is simple: natural gas prices have gone absolutely berserk. Natural gas prices have nearly tripled since 2001 and have surged by 98% alone just since early July.

That's horrible news for the 75% of U.S. homes that use natural gas as its primary heating fuel.

What effect do you think these giant jumps in utility bills will mean to the average American household? Whatever extra money they are spending on heating are dollars that can't be spent at McDonalds, Wal-Mart, or Toys R Us.

What effect do you think the double-whammy of sky-high gas prices along with sky-high heating costs will mean to the average American household?

From the perspective as a convenience store/gas station owner, I can tell you firsthand how thin budgets are already stretched by $60 oil. A day doesn't go by without someone bringing in a jar full of louse change to buy a couple gallons of gasoline because they've got more month than money.

Frankly, I don't know how some hard-working, working-class families are going to make ends meet this winter. Budgets aren't stretched -- they've been blown to smithereens.

There are many implications these tough times will have on your investment portfolio.

1. Stay defensive. Consumer spending accounts for over two-thirds of our Gross Domestic Product and that spending is about to slow way, way down. I could be wrong, but I believe the stock market is overdue for a very painful decline. A big cash position is your best defense against that fall.

2. Stay Selective. What money you do keep in the stock market needs to stay far, far away from the sectors that depend on robust consumer spending. I wouldn't touch retail, restaurant, consumer lending, leisure, travel, jewelry, apparel, and sporting goods stocks.

3. Be Opportunistic. If you see the same picture and have some risk capital you can afford to speculate with, consider placing a small 5% to 10% of your portfolio in contra-assets that can prosper in a declining market. I'm talking about funds, like Rydex Ursa, or selective "put" options on overpriced and vulnerable stocks.

How you prepare is up to you, but doing nothing is the worst strategy of all.


Tony Sagami

Author: Tony Sagami

Tony Sagami
Harvest Advisors.

Tony Sagami

Tony Sagami is the owner and founder of Harvest Advisors, an investment research and money management company. Sagami has been managing money for more than 20 years and is one of the early pioneers in the application of technical and quantitative analysis to mutual funds and stocks.

Tony is a man that wears several hats. In addition to Harvest Advisors, he has launched several successful technology companies. Tony is the owner of Monocle Systems, a popular investment analytical software program that has been used by thousands of professional money managers and sophisticated individual investors. Tony is also co-owner of AdvisorSquare, one of the largest web design and hosting companies in the world.

Tony is a frequently quoted expert, appreciated for his frank and unconventional view. Tony has appeared in publications such as the Wall Street Jouranl, Barrons, Kiplingers, Smart Money, Business Week, New York Times, Washington Post, Investors Business Daily, Bloomberg, Financial Planning Times, Mutual Funds Magazine, Chicago Tribune, LA Times, and many others.

A graduate of the University of Washington, Tony enjoys coaching youth sports, serving his community as an active Rotarian, and exploring the all the beauty that Montana has to offer. Tony is a Paul Harris Fellow, an Eagle Scout, and married to his first-and-only wife and father of 4 wonderful kids.

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