It is no longer boring to talk about the weather.

For critics of Al Gore's theories on global warming, this winter has been inconveniently nonexistent in the Northeast. Seeing flip-flop-wearing families in the park on a New York Saturday morning in January is just not normal. The topic is also no longer the usual taboo because the unseasonable warmth has driven down the price of natural gas and heating oil.

But things aren't always as they seem, and the weather, commodities prices and the stock market can all turn sharply, as investors and Mother Nature can be fickle. Like many of the year's trading sessions thus far, Wednesday was a volatile session as major averages swung between red and green. But stocks turned up late in the day, suggesting that investors are adapting not only to the drop in commodities prices but also to the notion that the Federal Reserve is not ready to signal rate cuts.

"We have had counterintuitive moves with commodities down and the markets down, and this is an inflection point where investors realize that cheaper energy prices are non-inflationary," says Art Hogan, chief markets analyst at Jefferies & Co. "There's a realization that this commodities weakness isn't a hard landing scare," he says, echoing the theme of Tuesday's column .

The price of crude oil plunged 3.8% to a 19-month low of $53.53 per barrel Wednesday. Heating oil finished the day down 2.54%, and natural gas closed up 1.42%.

The Dow Jones Industrial Average gained 0.2% to close at 12,442.16 while the S&P 500 gained 0.2% to close at 1414.85. The tech-heavy Nasdaq Composite finished the day up 0.6% to close at 2459.33, boosted by further gains in Apple Computer ( AAPL).

Amid the media fuss over its new iPhone, Apple hit an all-time high Wednesday, up 4.9% after jumping over 8% Tuesday. Chipmakers Marvell Technology ( MRVL) and Nvidia ( NVDA) rallied by 5.8% and 4.9%, respectively, on speculation they are providing components of the iPhone, while industry leader Intel ( INTC) gained 2.3%. The Philadelphia Stock Exchange Semiconductor Index rose 1.8%.

A strong start to earnings season was another reason for optimism Wednesday. Alcoa ( AA) beat estimates after the closing bell Tuesday, sending its shares up 6%. After the close Wednesday, Genentech ( DNA) reported stronger than-expected earnings and solid guidance. Its shares were recently up 0.3% in after-hours trading.

Among other stocks in the news, Sears Holdings ( SHLD) jumped 3.5% after the company raised its earnings guidance for 2007.

M&A activity was also still bustling. U.S. Airways' ( LCC) shares jumped 1.8% on news that the company increased its bid for Delta Air Lines ( DALRQ.PK) to $10.3 billion from $8.5 billion. Delta's shares surged 7.7% while AMR ( AMR) rose 5.9% amid speculation of further industry consolidation. The Amex Airline Index climbed 2.7%.

Exaggerated Reports of Economy's Death

The recent weakness in commodities and related stocks is exaggerated due to investors' jitters about the economy and a hard landing, says Hogan. And the move could reverse quickly.

"If you believe that the price of oil is falling because hedge funds and speculators are getting short, once the price finds its bottom, the jump up could be dramatic in a short-squeeze pop," says Hogan. "It could go from $54 to $58 in short order."

Chief energy economist at Deutsche Bank Adam Sieminski says that natural gas has bottomed on the warm weather story, and that oil prices will rebound to $60 per barrel in 2007 due to global growth demand fundamentals and OPEC production cuts.

A rotation out of energy and other commodity stocks makes sense amid tighter central banks around the world, not to mention warnings from majors such as Chevron ( CVX), which lost 1.3%.

But change doesn't mean disaster. The mid-cycle soft landing remains the most likely scenario, and investors embraced that idea again Wednesday.

Chicago Federal Reserve President Michael Moskow agrees. The voting FOMC member reiterated the message that inflation is "the predominant concern" for the Fed. But regarding growth, he emphasized the economy's strength. "I do not expect a large spillover of the weakness in housing to other sectors of the economy," Moskow said in a speech in Coraville, Iowa, on Wednesday. "Consumer spending has held up quite well."

Investors didn't react poorly to the hawkish talk, which was echoed by Dallas Fed President Richard Fisher, and Wednesday provided a slew of good economic news.

The U.S. trade deficit in November fell more than expected, in part because of improving exports; this improves economists' estimates for fourth-quarter GDP. The deficit for November fell to $58.3 billion -- below expectations for $60 billion. The deficit is now 15%, or $10 billion lower from its August peak, writes Peter Kretzmer, senior economist at Bank of America.

Weekly mortgage applications were also strong, supporting the notion that the housing market correction is bottoming. Mortgage applications jumped 16.2% in the week ended Jan. 5, the biggest weekly gain since the week ended May 2, 2003, notes Tony Crescenzi, chief fixed-income strategist at Miller Tabak and RealMoney.com contributor. The data suggest that "home sales continue to stabilize," he writes.

As for the weather, don't put your hats and scarves away just yet. AccuWeather.com's chief long-term forecaster Joe Bastardi says this winter could yet mimic some of the country's worst, according to a press release. The ugliest possible scenario is a repeat of the 1977 to 1978 winter, which was marked by a warm start and a "waning El Nino" that spun into back-to-back blizzards in 1978 in the Northeast.

But, if you think that means global warming isn't happening, just search Google for "Ayles Ice Shelf" for some sobering reading.
In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click here to send her an email.

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