Last week, I attended Zions Bank’s (ZION) 7th Annual International Trade and Business Conference. Most of the speakers were very interesting. John Howard, the former Prime Minister of Australia, gave a lively keynote speech and subsequently fended off with aplomb the inane question of a clearly wide-eyed political science student from the university. Christopher Padilla, the United States Under Secretary of Commerce for International Trade (that’s a mouthful), spoke about the opportunities in a world featuring an emerging power in China.

The one speaker that intrigued me most was Matthew Simmons of Simmons & Company International. He spoke about “peak oil” and a world vastly transformed by the essential “drying up” of oil fields in Saudi Arabia in particular and the world in general. In a world of peak oil, we would not travel as much. Everything becomes more expensive because everything is less accessible and less transportable. New political and cultural shifts will take place that will reshape the globe as we know it. Simmon’s book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, which Zions was handing out free at the tables, is a sobering argument for why oil prices are so expensive right now. Of course, Simmons is an investment banker to the energy industry so everything he says must be taken with a grain of salt. For that matter, anything anyone says should be taken with a grain of salt. Always consider the incentives of the messenger.

Nevertheless, crude oil cooperatively jumped nearly 5% last week. Over the past year, black gold has doubled in price. Traders cite the falling dollar as one major driver of escalating spot prices, but Simmons would argue that exogenous factors such as foreign exchange rates assert much less influence than long term shortages of oil.

Two weeks ago, the markets turned in a defiantly strong performance. Equities in particular were bought up furiously by institutions like the latest Grand Theft Auto installment. Everyone loves a bull market and only the most strident bears and short sellers could lament upwardly trending indexes. But the economic indicators were still trickling out rather bleakly and thus I reasoned that the rally was overdone. The equity markets proceeded to give back all their gains and then some last week. Luck was a lady last week.

Macro

Back to oil. In the face of oil’s ascent, I dubbed our current era the Black Bubble. I attributed a good portion of crude’s rise to the influx of speculators and momentum investors/traders looking to ride the bubble to even frothier levels. It isn’t easy to make a contrarian call, so it was with great relief to find that George Soros, the billionaire hedge fund trader, philosophical political activist, and philanthropist, recently spoke of an oil bubble. He’s certainly a lot better at extracting alpha from the market than I am.

“Speculation… is increasingly affecting the price,” he said. “The price has this parabolic shape which is characteristic of bubbles,” he said.

The comments are significant, not only because Mr Soros is the world’s most prominent hedge fund investor but also because many experts have claimed speculation is only a minor factor affecting crude prices.

However, Mr Soros warned that the oil bubble would not burst until both the US and Britain were in recession, after which prices could fall dramatically.

Mr Soros also warned that the Bank’s inflation report represents a “Faustian pact”, obliging it to keep interest rates high to control inflation, even as the economy is starting to slump.

He said: “The dislocations will be greater [than in the 1970s] because you also have the implications of the house price decline, which you didn’t have in the 1970s.”

Soros is speaking of the Bank of England here, but that is essentially the same “rock and a hard place” I expected Ben Bernanke and our own Federal Reserve would have to contend with. Not only is oil a key component of rising inflation, but food is the twin prong in the vice that is squeezing the consumer’s wallet.

The government likes to exclude oil and food from “core” inflation measurements. It is as if the pinheaded bureaucrats don’t think people buy food and oil. The last time I checked, food and oil are both very “core” elements of our budgets and lives.

So indeed, I believe we are in a Black Bubble. George Soros would know better how to express that outlook with an optimal trade. I’m much more of a long term investor and quite incompetent at finding the optimal trading vehicle.

Micro

Grand Theft Auto IV on Track to Set New Sales Records – Take-Two Interactive Software (TTWO), the publisher of GTA IV, is currently being courted by the much bigger Electronic Arts (ERTS). According to some reports, GTA IV will pass Microsoft’s (MSFT) Halo 3 as the best selling console video game of all time. Seems to me there is no GTA fatigue despite many different installments since the “game-changing” GTA III. Also seems to me that TTWO ought to hold out like Yahoo! (YHOO) for a higher price.

Travel Appears To Be Next Up For Google – Travelzoo (TZOO) has been a fashionable pick by some value investors. What’s not to like? The company essentially traffics in information, one of the most scalable and profitable business models ever invented by man. The company has healthy margins and return on equity (ROE), an unencumbered balance sheet, and a flock of short sellers ready to be squeezed. Heavy insider buying adds a cherry on top. But something wicked this way comes; Google (GOOG) is expected to extend its tentacles into the online travel information industry.

Mindray Medical: Strong Report and Fast Growth – Mindray Medical (MR), one of the leading medical device companies in China continues to hum along with breathtaking growth. More than half of the company’s revenues come from outside of the Middle Kingdom, but the recent humanitarian disasters brought on by earthquakes and aftershocks may send demand skyrocketing in the homeland.

A Wrench In The Machine? – Conventional wisdom says the United States is losing its manufacturing sector. Mostly true. Badger Meter (BMI) is one of the few companies thriving as a manufacturer of specialized industrial equipment. BMI makes water, oil, and fluid meters. ESCO Technologies (ESE) competes directly against Badger Meter in pushing the next generation of networked utility meters that will eliminate the need for the local utility company to send a technician out to read your water meter. Full Disclosure: I currently have a long or short position in BMI in one or more of my private investment partnerships.

Blackboard Application on Facebook – Having operated Web startups involved in the social networking space for over 3 years, most news items involving Facebook or Myspace (NWS-A) usually register a blah on the blah-bam scale. The new Facebook application by Blackboard (BBBB) is a bam. This web application will not change Blackboard’s fortunes much, but the idea that social networks, unlike the banal uses self-proclaimed social networking gurus foist on unsuspecting clients, can actually be used to facilitate something robust sends chills up and down my spine. The megatrend of online education cries for an intelligent implementation of an educational social network.

Natus Medical prices public offering of 4M shares – Shareholders reacted allergically to Natus Medical’s (BABY) registration of secondary offering shares. Turns out demand for the secondary offering was stronger than expected and the company’s stock rebounded. Natus Medical’s recent acquisitions make sense. Company management has shown an ability to allocate capital intelligently. The capital raised through the secondary offering will allow the company to bolster its competitive position as weaker competitors exit the industry by selling. Full Disclosure: I currently have a long or short position in BABY in one or more of my private investment partnerships.

The stock market’s rebound has been so fast and furious that it might make folks forget that we just experienced a nasty credit crisis and market downturn. Have sinking home values not registered with the national psyche? Surf around on Zillow.com and witness the vast amounts of wealth disappearing over the last few months as homeowners see their most significant asset crumbling on a shaky credit foundation. Of course, institutional money managers are the ones buying furiously and fueling this market rebound. It is entirely plausible that, unlike the average American, their homes are not their most significant asset. Maybe most of their wealth is stored in Swiss bank accounts, gold bullion, Impressionist paintings, or first edition copies of Superman and Batman. Thus, unlike Barack Obama, Hillary Clinton, and John McCain (average Americans all), hedge fund managers don’t feel your pain.

But we are all shareholders now. Even as our home values continue to sink, our brokerage accounts are softening the pain as equities turned in a strong performance over the last week. Technology stocks, much to my chagrin, turned in a 3.4% pop. In investing, paradoxically, there is nothing as potentially humbling as having a strong opinion. The S&P 500 and Dow Jones Industrial Average followed the leader and also rallied impressively. Curiously, REIT stocks topped them all, suggesting that the market is discounting further weakness in real estate.

“Go East Young Man!” That ought to be the rallying cry for ambitious college graduates. Learn an Asian language and stake your future in emerging markets. While almost all equity markets have performed negatively over the last twelve months, emerging markets continue to appreciate at a blistering pace with Asia being a driving force. I count myself lucky that my parents taught me to speak Cantonese-Chinese. They displayed amazing persistence as I was not a receptive student to one of the most difficult languages in the world to master. I am still amazingly inept at it, but I could survive in Hong Kong and Guangzhou.

The Black Bubble inflated just a tiny bit. Nonetheless, crude oil set a new record high – topping $127 per barrel before settling at $126.02 per barrel. As the summer driving season approaches, will the high cost of oil discourage road warrior Americans from taking that trip to the Grand Canyon and other national monuments?

Macro

American corporations are flush with cash. Big blue chips are flush with cash. Mid-sized companies are flush with cash. Small capitalization technology companies are flush with cash; actually, a wide swath of technology companies is flush with cash. So while the major market indexes have rebounded strongly, many individual company stocks are still way off their price highs. We need more dudes like Carl Icahn.

Mr. Icahn last week announced that he had accumulated a significant stake in Yahoo! (YHOO) and plans to nominate an alternative board in order to force a sale of Yahoo! to Microsoft (MSFT). He contends that the current Yahoo! board acted irresponsibly by rejecting Microsoft’s buyout bid.

This is precisely the time for cash-rich companies to go shopping for fallen competitors on the cheap. If the pickings are slim, then they ought to deploy their cash and buy back shares. If corporate managers cannot put corporate coffers to good use by engaging in business activities that produce strong returns on investment (ROI), they should return that cash to shareholders.

There are plenty of situations that could use a good activist investor to spur intelligent deployment of cash. Smart acquisitions and stock buyback programs would further bolster the current rally. There are few good reasons, given the prevailing environment, to hoard cash.

Micro

CBS in $1.8B deal for online news, info site CNet – This is exactly what I’m talking about. CBS Corporation (CBS) has a decent balance sheet and plenty of cash to make this acquisition of CNet Networks (CNET). Startup entrepreneurs rejoice! With Rupert Murdoch’s News Corporation (NWS-A) busily gobbling up web companies to bolster its Fox Interactive Media unit and Time Warner buying new properties in an attempt to make its eventual spinoff of AOL more attractive, the rest of the media giants will play lemming to catch up. Suddenly, everyone wants to be Web 2.0! Here’s a very informative piece from Amy Webb showing who owns what in Web 2.0 – a handy thing to keep at the side of your desk if you’re a venture capitalist with some Web 2.0 in your portfolio:

Meet Carl Icahn’s Yahoo Board – Let’s revisit the drama that is Yahoo! Mark Cuban is on the alternative board. Cuban is the smart fellow who sold Broadcast.com for $5.7 billion at the height of the dotcom bubble. He also had the foresight to sell whatever shares he had for cold hard cash. In life, timing is everything. This time though, the payoff for Cuban will not be quite so lucrative. If Icahn is successful with this proxy battle, I liken Cuban’s likely short stint, as a director, to community service. He’ll perform a service to the community of Yahoo! shareholders by forcing a sale to Microsoft.

Comcast to Acquire Plaxo – Here is one that doesn’t make sense, no matter how flush Comcast’s (CMCSA) coffers are. Did I mention that big media companies will begin to behave like lemmings? If the big cable giant is going to move into this space, it should also set its sights on LinkedIn.

Ask.com buys Dictionary.com parent Lexico – Ask.com, owned by IAC/InterActiveCorp (IACI) takes ownership of Lexico for a reported $100 million. IAC/InterActiveCorp is another one of these bigger tech companies with a boatload of cash. The options are simple – invest it, buy competitors, or return to shareholders. IAC/InterActiveCorp will undergo big changes itself as it prepares to spin off non-core properties.

Natus Shareholders Throw A Fit – Let’s look at a different kind of tech. Natus Medical (BABY) develops and sells medical devices that help in the screening, detecting, and monitoring of newborn conditions. It filed to issue a secondary public offering of 3.5 million shares. Shareholders reacted violently to the potential dilution, but the company is simply attempting to raise more cash in order to make more acquisitions. It is essentially the same theme being played out over in the software industry with Microsoft, AOL, and IAC/InterActiveCorp. Full Disclosure: I currently have a long or short position in BABY in one or more of my private investment partnerships.

The market takes a breather after several weeks of blistering recovery from last winter’s doldrums. Commodities all around saw amazing advances. Crude oil rose 8.3% last week and has more than doubled over the last year. I remember taking my first car, a Honda (HMC) Civic, out for the first time and pumping gas for about $1.18 per gallon. This was also in the notoriously gas-expensive San Francisco Bay Area. Base commodities and gold continue to follow oil’s lead in going the opposite direction of the U.S. dollar. Will the likely Democratic presidency mean a material difference to the nation’s budget policies and thus the value of our currency?

The tech-laden Nasdaq Composite took a 1.3% dive last week. Does this in any way validate my technology industry bifurcation thesis? Absolutely not. Relative to the rest of the equity markets, the Nasdaq Composite performed decently. The S&P 500 stock index saw a 1.8% decline while the Dow Jones Industrial Average (a poorly constructed index) lost 2.4% over the last week. More painfully for investors anticipating a real estate recovery, REIT stocks lost 3.2% collectively. The Nasdaq Composite (actually a very well constructed index) performed better than other equity indexes. In essence, technology stocks as a whole, large blue chips and second tier small caps, did better than the old industrial giants found in the DJIA and the big caps in the S&P 500 by a significant margin.

We have seen very little evidence of second-tier technology companies suffering from the recent slowdown in economic activity. This is particularly interesting because one of the historic catalysts for technology capital investment by enterprises, the Microsoft (MSFT) operating system upgrade cycle, is not a large factor in this market. The Vista operating system has not caught fire like previous Microsoft operating system launches. The Windows XP operating system was a blockbuster and so were earlier versions of Windows. Prior upgrading cycles resulted in renewed investment in computer equipment, computer peripherals, and secondary software products.

Macro

I’ve alluded to my concern about Ben Bernanke’s ability to display great staying power in his effort to jump start the economy by lowering interest rates. With oil and commodity prices barreling higher every week, the specter of inflation looms menacingly and hampers the Federal Reserve’s ability to continue lowering rates. The macro themes of globalization and emerging giants like China and India have been the drivers of skyrocketing prices in oil and food commodities.

However, I see imbalances developing between asset prices and the underlying supply and demand curves. Crude oil’s meteoric rise to record prices never before seen in history is rooted primarily in fundamental, systemic growth in demand. But the recent, almost parabolic rise in oil prices suggests that speculators and trend followers are piling in, hoping for continued profits flowing. Speculators and trend followers, by definition, introduce inefficiencies and imbalances to asset prices. China’s trade surplus is growing at a decelerating pace. Our diminished dollar makes our goods and services much more attractive to foreign consumers. It also makes foreign goods and services much more expensive for Americans to buy. The trade frictions caused by our historically cheap dollar might just slow down emerging markets growth and thus the demand for oil. Oil is the hot investment right now, but it could be flammable for recent riders of the bandwagon. We might be caught in what I call the “Black Bubble.”

Micro

Priceline surges on strong earnings, outlook – Priceline.com (PCLN) hit an eight-year high as both its domestic and international businesses enjoy huge demand. The company’s business model, which allows travelers to name their own prices or bids, has been attracting legions of bargain-hunting travelers. How long will this last? Priceline.com is one of the few companies thriving in the travel industry. The airlines, other online travel retailers or portals, and car rental companies have mostly seen their stocks decline over the last year.

Constant Contact’s first quarter revenue soars – Email marketing is so Web 1.0, isn’t it? Older Internet users still rely heavily on email. Early adopters and younger users of the Internet are less reliant on email. Instead, they gravitate to other services such as instant messaging, text messaging, and social networking. Twitter, is a very interesting next generation platform that further reduces the need for email communication. All these usage patterns do not bode well for Constant Contact (CTCT), a provider of software for email marketing campaigns.

The CAPS Screen: 10 Small Caps on Fire – The Motley Fool includes Interactive Intelligence (ININ) in one of their interesting screening exercises. Interactive Intelligence makes software that manages call center or contact center operations. Screens are a good way to generate investment ideas, but a formulaic investment program based on screened variables does not automatically lead to good investments. Many investors employ screens to find stocks selling cheaply. Sometimes, companies are cheap because they deserve to be cheap as the economic merits of their businesses deteriorate. An investment decision made solely by screening and without knowledge of the competitive standing of the company in question is akin to marrying a girl solely because she comes from a good family. Full Disclosure: I currently have a long or short position in ININ in one or more of my private investment partnerships.

National Oilwell Varco, Inc. Q1 2008 Earnings Call Transcript – I mentioned that oil appears to have become a speculative market surrounded by a thin film of soapy substance. Bubbles don’t fizzle out, they usually burst or pop with ferocious force. National Oilwell Varco (NOV) provides equipment and supplies to the oil and gas industries and has been a big beneficiary of the rising price of crude. The price of oil may continue its amazing ascent or it may flush out the speculative latecomers, but the imperative to keep searching and producing oil will hardly diminish.

James River Coal 1Q loss widens on higher costs, stoppage – Alternatives to oil become more attractive as black gold becomes more expensive. Thus, oil shale, ethanol, coal, solar power, and biofuels become serious considerations. I have been investing with this thesis for over a year. James River Coal (JRCC), one of the worst managed coal companies around, has seen its stock move in lockstep with the rising price of oil. So although it continues to run into management and operating gaffes, the stock market has rewarded it and its highly leveraged balance sheet with new price highs. Full Disclosure: I currently have a long or short position in JRCC in one or more of my private investment partnerships.