Sharky:

An analysis by Stephen Leeb, one of the better investment analyst in the US.

find a bottom...too bad it won't be in the double-digit range.
***** A change in our investment focus: from Chindia® to BRAC.
***** Why you should stick with gold and our recommended weightings.
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Stocks and oil are taking different roads these days. Last week, the price of a barrel of oil fell $4.84 while the S&P 500 gained.

Despite whatever short-term weakness remains, we suspect that oil will get a lot more expensive over the next 6-12 months. Meanwhile, stocks should continue to chop sideways, barring an economic accident in China or elsewhere in the developing world. At the same time the market will grow even more sensitive to the movements of oil.

Our short-term Master Key remains strangely favorable. Perhaps it is predicting that oil could correct over the next few weeks (before resuming its climb). We don't know for certain how much of a correction that might be, but here's where we think oil prices will find some support – and where we would feel oil and other commodity stocks would look like bargains...

OIL'S NEWLY ESTABLISHED BOTTOM?

Fortunately, there weren't too many earth-shaking events in the news last week, but one caught our eye. On May 29, ConocoPhilips officials commented that they can profitably increase oil production only if prices remain over $100 a barrel. Below that, America's 3rd largest oil company would have to cancel exploration and development projects. This is the first time we've heard a major U.S. oil company suggest a $100 floor would be necessary.

However, what's true for ConocoPhilips is likely true for Petrobras or any other big oil outfit in the world. Two-digit oil would provide insufficient incentive to replace oil fields as they become exhausted, let alone develop new supplies. So the message is that oil probably won't fall below the $95-$100 range anytime soon.

In fact, the only thing that could bring oil prices seriously lower would be a major recession – not something we expect or would look forward to.

One thing is clear... there is no bubble in oil prices. To assert that oil prices are in a bubble, you would need to prove that oil costs are also in a bubble, something we can't accept. Similarly, we can't blame today's markedly higher prices for all commodities on a bubble mentality. Most likely, prices are up because we are running into actual limits on commodity production.

Of course, higher oil prices do tend to feed back on themselves. When copper and steel producers suffer higher energy costs, they must pass that cost along to their customers, including oil companies. That in turn raises the cost of oil production, which leads to higher energy prices.

But the world can't really avoid this feedback loop. Unlike in past commodity booms, there are no easy solutions. We doubt any more low-cost, Saudi Arabia-sized oil deposits are going to come online soon to relieve the pressure on oil prices. The only solution would be a large-scale switch to alternative energies – an endeavor which will be anything but cheap and which could also drive demand, and prices, for commodities higher.

Speaking of commodities...

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NOT BRIC, BUT BRAC OFFERS THE BEST POTENTIAL TODAY

We are currently adjusting the emphasis in our Growth Portfolio. For some time, we have focused on Chindia as the biggest investment hotspot in the world. This set us apart from other commentators who preferred to invest in all the BRIC countries, which include Brazil and Russia in addition to India and China.

We never got too excited about Brazil and Russia before because we felt their political situation was a little less reliable. However, we are changing our minds these days. The big B and R are looking more like worthwhile places to invest.

But we aren't exactly full-fledged BRIC converts either. Though we continue to like Chindia, we think that over the next few years a lot more monetary riches will be flowing into two other nations. So instead of just widening our focus from Chindia to BRIC, we are going one step further and making BRAC our new theme. By BRAC, we mean Brazil, Russia, Australia, and Canada.

What makes these four nations excellent investments is that they are all more-or-less independent when it comes to natural resources. True, Russia does import some foodstuffs, but the amount is minuscule compared to what it exports. So put Australia and Canada on your radar screen. We will likely be informing you of opportunities in these countries in coming months.

Please note, we're not abandoning Chindia. But we think their major advantage – cheap labor – will become less of an advantage as their wages rise over the next few years. At the same time, the commodity bull will ensure that resource-rich nations will see their biggest assets become more valuable. Simultaneously, the currencies of the BRAC countries should see strong gains versus the U.S. dollar, giving you an additional source of potential profits when you invest in BRAC stocks.

DESPITE GOLD'S PULLBACK, INFLATION IS STILL A CONCERN

Overall, we remain puzzled by gold's behavior of late. Despite inflation rising all over the world, gold appears to be stuck in a long-term trading range, between $800 and $1,000.

We would not be surprised if gold even fell a little below its trading range, perhaps as low as $780. However, that would likely be an extraordinary gift.

Gold's weakness could be another signal that oil prices may correct in the near term, down to our expected floor. But again, oil will do well long-term, and we doubt it will fall below $95.

Our long-term Master Key is in negative territory, thanks to oil prices having gained this year. The long-term rise in oil prices will likely put a lot of inflationary pressure on world economies. Nonetheless, the developing world needs growth so badly that it will tolerate high inflation for the sake of that growth.

As for the U.S., looking back twenty years from now, today's 4% inflation rate will likely be viewed as very low. That's not to say we expect a large rise in the inflation rate within the next few months, but it wouldn't surprise us either.

Some have argued that, because inflationary expectations in the U.S. are quite low, our country is immune to all wage/price inflationary spirals. They should remember we have to worry not only about wages paid to U.S. workers but also about wages paid to workers in China and other developing countries we do business with – and those wages have already started to rise.

So the world will be characterized from now on by high inflation and growth. That is, worldwide growth will be high. U.S. growth will likely remain tepid.

In this climate, we also urge you to follow the allocations recommended for our Growth Portfolio. You may be tempted to overweight many of our high-risk stocks in hope of higher returns, but don't. The world remains dangerous. Right now, it's more important to overweight our low-risk hedges. They should give you all the excitement you need. Plus, they have historically thrived even in major market downturns.

When the next downturn in stocks will occur is anyone's guess. All we know is that sooner or later it will happen. Over the next month or two, we could see a little more weakness in oil and a little more strength in stocks over the next month or two. But if so, it would be a counter-trend rally. Don't get fooled by it.

Until next week

Stephen Leeb, Ph.D.
Editor,

Complete Investor

, as appropriate