Gas prices and our subprime dollar

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I saw premium unleaded gasoline priced at $3.77 a gallon recently. It brought back a memory.

When I was a youngster I had a minibike, a kid-sized version of an off-road motorcycle that was little more than a light metal frame with a Briggs & Stratton lawnmower engine attached to it. I could ride it all day on its tiny tank of gas -- which at the time cost about a quarter to fill.

A quarter won’t buy you much today, which begs the question, what has happened to the value of the dollar?

At one time, a dollar was backed by a specific amount of silver. With the dollar no longer backed by either gold or silver, its value is determined by its relation to other currencies, which also aren’t backed by gold or silver.

In other words, the entire global economy and commerce is based on the exchange of paper that is valued by perception. Which, by the way, is also how subprime mortgages and derivatives were valued.

We may need a recession

Recessions are unwelcome, but they are inevitable and often necessary to wash out the excesses that could lead to a new era of inflation. Most politicians and economists understood this at one time, but today, recessions are treated as policy failures when in fact they are merely part of the natural business cycle.You don’t hear that point right now, which is to say it must be an election year. Heaven help us.

When fiscal and monetary policies are formulated with the intention of mitigating the effects of a recession, more often than not they aggravate inflation, which leads to much harsher recessions later.

The markets continue to retrace the sell-off, powered in no small measure by the recent Federal Reserve rate cuts and suggestions that more cuts will follow. Rate cuts will eventually flow through to the economy, but there is a lag time. Speculators and some traders, having little patience for and no understanding of the concept of time and price, are trying to move the process along.

Whether their efforts prove to be sustainable remains to be seen, but the market averages are making a valiant attempt at recovering lost ground.

The stocks I'm watching

There is change afoot in our IQ Trends universe of Select Blue Chips. Four stocks -- Keycorp (KEY, news, msgs), Leggett & Platt (LEG, news, msgs), Motorola (MOT, news, msgs) and SLM Corp. (SLM, news, msgs) -- have been downgraded to what we call the "faded blues" because their S&P quality rankings have declined.

Two stocks, PPG Industries (PPG, news, msgs) and A.O. Smith (AOS, news, msgs), were lifted out of the "faded blues' blues by upgrades in their quality rankings. Two new companies, Lockheed Martin (LMT, news, msgs) and Schlumberger (SLB, news, msgs), have earned Select Blue Chip status.

None of these are in my Strategy Lab portfolio, but the common threads among these changes may be of interest.

Keycorp and SLM are financials, which are suffering the negative consequences of the mortgage and lending debacles. Leggett & Platt manufactures a range of products for the home, office, retail stores and automobiles, which may suggest a slowdown in those segments of the economy.

Motorola is losing market share to Nokia (NOK, news, msgs), Sony Ericsson and LG Electronics, which may just be a matter of the market delineating between winners and losers.

PPG Industries is a specialty chemical company, much like Strategy Lab holding Rohm and Haas (ROH, news, msgs). This is a sector we know to be on the rise. A.O. Smith is in the water-heater and electrical-motor business. With the home-building market still depressed, water heaters seem counterintuitive, but the earnings quality is there.

Lockheed Martin is a defense contractor; war, it seems, is good for business. Schlumberger is in the oil-service business; with crude oil trading above $100 per barrel, this one isn’t hard to figure out.