With the shutdown of the Trans-Alaska Pipeline, gasoline is not only expensive, but could soon be in short supply if you happen to live out west.

How did that drill go again back in ‘73? I think it was the odd-numbered license plates that were allowed to purchase gas only on odd-numbered days of the month, and even-numbers were allowed to buy on the even-numbered days. Maybe we could go back to this strategy…

Aside from the long lines and sold-out gas stations, that seemed to be the best system during the oil crisis of 1973. But I doubt something like this would fly today, when Americans are increasingly reluctant to sacrifice anything at all, even a few days a week to fill up their tanks.

However, sacrifice could very well be the new tune everyone is forced to sing as higher gas prices continue to take their toll. As the rest of this year unfolds, you will see revised earnings and slower sales at plenty of familiar retail and restaurant chains as the middle class is forced to curb spending.

The New Middle Class

I’ve read plenty of theories on how this will play out. Some analysts have said that rank-and-file middle-class workers will turn out to be the ones who will quit spending the most due to higher energy costs. According to this logic, high-end retailers will continue to perform well (the rich will always have money to spend), while places like Target and The Gap will suffer.

But I’m not buying it. The phenomenon Americans have been experiencing for the past several years is one of mass affluence. In order for companies that offer traditionally higher-end goods (think Starbucks and Tiffany & Co. Jewelry) to continue strong growth, they have to appeal to a broader market: The upper-middle and middle class spenders.

Slate Moneybox columnist Daniel Gross spells it out for his readers in his Aug. 7 column, “The Rising Cost of Living Well”:

“Sales at Starbucks and its sister high-end retailers may be faltering because the cost of living well is rising more rapidly than the overall cost of living,” Gross writes.

You see, Starbucks disappointed shareholders with its most recent quarterly results. The coffee giant said that due to the summer heat, there were more orders for icey coffee drinks, which contributed to longer lines because they take longer to make. And longer lines caused more thirsty patrons to find their caffeine fix elsewhere.

Gross sees the announcement as the beginning of hard times. He continues:

“Merrill Lynch economist David Rosenberg has examined the spending and consuming habits of his colleagues and clients on Wall Street and has created his own ‘Wall Street core inflation index,’ which tracks the rise in prices of the necessities of yuppie life: ‘jewelry, spas, lawn care, health care, sporting goods, housekeeping services, tuition, airlines, hotels, salons, legal/financial services, and dry cleaning.’ His conclusion: The price of spoiling yourself rotten is rising rapidly. ‘The Wall Street core CPI is running at 4%, nearly double what it is for Main Street,’ he wrote in a report on July 28.

“In other words, forget about the heat and the Frappuccinos. Sales at Starbucks and its sister high-end retailers may be faltering because the cost of living well is rising more rapidly than the overall cost of living.”

Gross blames tax cuts and rising home values for contributing to the ranks of the mass affluent consumer. While this may be the case, it could go back even further. There was the great stock market run-up in the 1990s, where the average investor could get his hands on easy money. And if the tech bust of 2000 left you broke, there would soon be easy money to be found in your home. Don’t own a home? Not to worry…there’s plenty of credit to go around. (Don’t forget, Americans spent more money last year then they made.)

What Goes Up, Must Come Down

The trouble with all of this isn’t so much that it’s happening, but that even the companies are in denial about it. While the Starbucks longer-line theory is interesting, it doesn’t even come close to explaining what is really happening: It’s getting too expensive for most people to maintain their current lifestyles.

Many people have sustained for more than 10 years on the tech boom and the housing and credit bubbles. Will they be smart enough to alter their lives before they become a casualty of changing times? Unfortunately, many will continue forward like Starbucks, refusing to admit what has already arrived.

Next week, I’ll look at some solid small-caps that could catch the attention of the middle class as they continue to cut back.

And the Winner is…

Thanks to everyone who participated in James Boric’s challenge issued back in April. Everyone who wanted to play was asked to send in a model portfolio of 10-15 stocks worth no more than $250,000. The only conditions were that participants had to explain what the companies do and why they chose them. The winner was promised a free one-year subscription to James’ Small-Cap Insider.

It was a tough market, but a clear winner emerged. Intern Jimmy has the full write-up and the winner’s portfolio on the website. Check it out.

Best,

Gunner
August 14, 2006

Greg Guenthner

Greg Guenthner uses his experience as a former journalist to dig up the hard-to-find headlines that could lead to big gains for your micro-cap portfolio. Greg offers his readers the scoop on topics ranging from alternative energies to biotechnology, digging up the best penny stock opportunities before they’re discovered by the mainstream media. On top of contributing to Penny Sleuth, Greg also heads Penny Stock Fortunes and Bulletin Board Elite. Special Report: Imagine Getting Rich as Ignored Stocks Soar - You could turn $200 into $1.2 million!

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