The Oil Factor by Stephen Leeb.

This is the book that was recommended by Starry (see here) that explains in detail the impact of oil prices on the stock market.

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This is an editorial review from Publishers Weekly:

Stephen Leeb, editor of the "Complete Investor" newsletter, believes the U.S. economy is headed for a significant fall because of a severe shortage of oil, which has been inextricably tied to the economy for the past 30 years.

Leeb, author of several books including Getting In on the Ground Floor (also co-written with wife Donna), believes the country must become less dependent on oil imports over the long term.

Meanwhile, though, Leeb advises individuals to choose investments based on the longstanding relationship between oil prices and the stock market. He has a number of solid observations based on an examination of the past 30 years of stock performance and oil prices:

Since 1973, the economy and stock market have danced to oil's tune.

Sharp rises in oil prices have led to recession/stagflation and plummeting stocks, while declining prices or prices that are just mildly uptrended have led to good times.

Leeb provides a great deal of historic context and analyzes industries, selected companies, and other investment choices such as bonds and Treasury notes. Leeb's thesis is well researched, and the book offers a solid, concise overview of the economy and stock trends.

Still, given the uncertainty of the stock market-and the lack of job security-readers should consider Leeb's strategies carefully before overhauling their portfolios.

This is the top-ranked customer review on Amazon dot com:

Unevenly assembled concept; much practical investing advice.

"The Oil Factor" is a comprehensive and practical investing book disguised in a misleading title. The book is best described as a very lengthy investment newsletter that describes how to use the price of oil to time major investment decisions.

For a book with the word "oil" in the title, you expect discussion of concepts such as Hubbert's Peak and the state of current oil production. Mr. and Mrs. Leeb do not disappoint and present these topics in a way that is palatable to the uninitiated. However, this is not the main focus of the book.

The main focus of the book is the use of a market timing indicator that they call "the Oil Factor".

They describe a way to use the price of oil to predict the direction of the US economy and thus the direction of US stocks. The premise is that all economic activity in the US involves energy and the principle energy source is oil.

It is an interesting idea and they have a decent amount of back-tested results to show how utilizing the Oil Factor to switch between the S&P 500 index and Treasuries would have resulted in a doubling of your returns in the tested time period.

This indicator is surprisingly simple and can be easily calculated and monitored by anyone. It is so simple, that it occupies only a single chapter to describe in full.

The bulk of the book is subsequently used to present the case that the economy is in for hard times and investing strategies that will help you prosper. A surprisingly thorough treatment of the entire US Economy is presented.

The book is an unexpectedly excellent summary of the bear's case for the next decade. The recommendations are surprisingly specific. Mr. and Mrs. Leeb name specific companies, believing strongly that their recommendations will stand the test of time that is demanded of books but not demanded of magazines and newsletters.

Complete model portfolios are presented. They describe a model inflation portfolio for when the Oil Factor swings in one direction and a model deflation portfolio for when the Oil Factor swings in the opposite direction.

The highly specific and pragmatic nature of the book will surely be a breath of fresh air for those accustomed to theoretical treatments, but very serious flaws of construction undermine the main thesis of the book.

The first is that the Oil Factor is yet another simple mechanical method perfected through data mining. That is, they found something that correlates with market performance and have made the assumption that what worked over the past 30 years should work into the next decade.

Suffice to say that out of countless models invented over the past century that utilize simple rules to outperform the market, none has ever stood the test of time. Some may remember the once popular "Dogs of the Dow", one of the more recent demonstrations of such a failure.

I see no reason why the Oil Factor should survive and in fact see many reasons why it should fail. For example, the back-tested strategy uses only the past 30 years. The past 30 years excludes an enormously crucial factor clearly visible into the future: China.

Strangely enough, Mr. and Mrs. Leeb discuss the enormous impact that industrializing China will have on the world's oil supplies, but neglect to discuss how this might influence the reliability of the Oil Factor, which has never seen a nation of 1 billion people pushing into the industrial age.

A second serious flaw is that even if you accept the premise of the Oil Factor as a method of switching between stocks and cash, the authors then go on to argue that you should not use the Oil Factor to switch between stocks and cash, but rather to switch between an inflation portfolio and a deflation portfolio.

They do not bother to backtest this strategy, but present only forward-looking fundamental arguments of why this should work in the future. It is a flaw stacked on top of a flaw.

In summary the book is a poorly unified in concept. It should be noted, however, that the proposed deflation portfolio and inflation portfolio are excellent. Few people have arranged diverse asset classes under these banners.

This alone makes the book worthwhile. If you believe that we are headed for inflationary or deflationary times, you may want to buy this book and skip to the last few chapters to find out what to buy.