San Diego Housing Market News and Analysis

Conspiracy theories again...

It's very hard (or impossible) to manipulate prices like that. To answer your first question, inventories are up for reasons analagous to RE inventory: oil prices were going up so much and so fast in the recent past, that many companies (even non-oil companies!) got in the game.

It looked like a fool-proof way to make money: buy oil, then sell it at the same time in the futures market, for a nice, risk-free profit. Even after factoring-in the price of storage, these companies made a lot of money. But too many did the same thing at the same time, worsening the oil shortage (and high price) in the short-term. Up to a point, of course. Now everybody has a big chung of oil to unload, and prices are moving accordingly (downwards!).

Unlike SFHs, oil prices are not sticky on the way down. (Retail gasoline prices are coming down, though not as fast as crude). At the same time, demand is contracting as the economy enters a slower growth period.

This has nothing to do with the political cycle, IMO. Politicians perhaps wish they had that kind of power in international markets!

vcguy_10, that makes sense.

Chris Johnston wrote about this also in his blog, and I just had another look today (see his post from today, Crude is getting crunched, and also his entry on 8/16).

From an interview on NPR this morning, the insight information was that 10-15% fluctuation (minus or plus in prices per barrel of oil) is linked to pure speculation. According to the oil analyst, (I don’t remember his name) is that the true value of a barrel of petrol, based on fundamental economics of supply & demand, should be in the low $50s . Hence – or + 10-15% is just pure speculation (specifically based on Geo-Political news…….or BAD news).

However, today’s price is somewhere around $61/ barrel. My guess is there should be some more room to future drops (as long as Iran and Middle East issues are being tamed).

According to the same report, OPEC is working hard to keep the production & price of oil in the low $60s (that is OPEC’s production optimum / equilibrium)

I thought it had something to do with Chevron's recent discovery in the Gulf of Mexico...?

PS,

The fundamental demand supply equation that you are talking about would fix the price of oil around $55 per barrel but oil was touching $80 and was bound to come back. The reasons are speculative money leaving after waiting for the bad geo political news or hurrican news, that never happened. The media actually says that oil is comign down as investors focus back on fundamentals of oil price and not on speculative geo political moves or hurrican forecasts. Nobody cares what that clown Ahmadinejad said in UN anymore. The focus has shifted.

The problem with high oil prices is that once people make arrangemnets for the high oil price, they don't necessarily go back once the price comes down. e.g. I wouldn't sell my hybrid, people won't remove inuslations from homes, corporate fleets will not sell the hybrids they have bought for commute and R&D money spent by Ford/GM/Toyota to increase mpg won't go down. This is why high oil prices are actually dangerous for OPEC.

The biggest factor though is that oil is down because of fear of expected slow down in US and maybe global economy. That is why I was surprised to see oil move up today. Maybe it was tehcnical.

My take ...

Fluctuation Happens.

"The media says it was due to increasing inventory. They don't say anything about demand going down"

Growing inventory can be as much a result of reduced demand as over-supply. Which is it? Only the market knows.

By the laws of supply and demand, when prices are high, demand falls off, except for short-term speculative demand, which falls off a little later - after the bubble builds.

Reduced "normal" demand due to high prices, coupled with the end of speculative demand can cause big price changes.

There's a couple reasons it is coming down:

The potential good news with the Gulf of Mexico discovery.
Opec maintaining volume.
Summer driving season ending.
Hurricane season not materializing for the Gulf oil industry (knock on wood)
Iran not escalating
Nigeria not escalating.
and Chavez while being more bombastic, continuing to ship oil.

All of these made oil nervous throughout the summer. All are slowly becoming non-issues or standard political posturing.

vrudny, good analysis. So are you still shorting oil related stocks? When do you think that you'd re-enter, and what type of stocks (integrated oil, services, refinery, sand-oil, etc)?

PS and others. I have a friend who is fairly astute with regards to oil and natural gas. He goes to

http://www.eia.doe.gov

to find out about the official energy statistics and projections for the future. Unfortunately there are no real conspiracies. For instance for many many months the projections for natural gas were flat many years into the future.

There is a wealth of data over there, it just takes time and energy to sift through.

Politics, politics, politics. This is an election year. Faced with real estate disaster, oil disaster, war disaster, employment, inflation if not recession, ... What can be controlled? Oil prices, c'mon we still have friends over there. If oil prices are lowered, what is the effect on the economy? Less overall inflation, so, don't need to increase interest rates, so, housing stabilizes for a bit, ... Just flirting at the brink of collapse.

vrundy,
How did you buy RMB?

vrudny,
since you are so well versed, I have a question on shorting. Since you have some account in China, could you think of using a foreign account to short QQQQs. This would sound like a safer way for me, since either the US stock market goes down, or the dollar drops (or both). This way you wouln't have to fight an uphill battle against inflation, should it occur. I understand that put options, if they are available on foreign exhanges, wouldn't be any better, since they might already price in the additional risk of dollars. But shorting on a foreign exchange should be easily possible. Any experience on that?

Regarding the mutual funds investing in China. I guess, the common theme should be that they contain more domestic than international companies. Take for example Taiwan or Japan. It wouldn't make sense to invest in multinational electronics or computer companies, since they have again their sales in the US, and will show lower earnings if the dollar drops.
Second, you probably have to pay higher taxes here, since the currency gain adds to your capital gains. With the bank-account in China, I suppose you can at least postpone the taxes on the currency gains, if not completely avert it when claiming gains in RMB (Sections 985 and 989(a)?). Or make sure you own them in an IRA.

Thanks vrudny.
Also, if anyone has experience with a brokerage account in other countries with strong currencies. I heard Singapore is one prime example. Others could be Canada, New Zealand, Japan, or Switzerland.
I myself have a brokerage account in Germany, and I always buy U.S. (e.g. mining) stocks. It is true that they are also a little behind in most aspects, but I think one can also short now.
But I don't like the Euro much better than the U.S. Dollar. I think the Europeans have no balls when it comes to tightening, and they will just follow the U.S. Symptoms are the ongoing deficits and the outcry of countries like Italy for devaluation. Only the balance of trade looks ok.

Chris Johnston
iamafuturestrader.com

I am constantly blocked from being able to log in but I magically got through this am so I wanted to just make a brief comment about oil.

Many of you have posted some very good commentary on possible reasons for the Oil price drop. If you go to my blog and read my Aug 16th entry, I explained why fundamentally in trading terms this market was looking bearish, the price was at 73.19 at the time which you will see.

I do not make investment decisions based on larger scale global economic judgements. The reason is that I have no idea at any given point in time which of any of the arguments put forth in here might be the actual reason behind the price movement. It is just impossible to quantify these types of things tight enough to frame a decision around.

More importantly, larger scale economic influences might very well influence the asset class but timing is very important, you can be right and get wiped out financially with bad timing. This big rally in bonds that I began telling people about in July has really accelerated to the upside. The most likely cause of this is economic weakness coming. However, that does not matter at all. The trend is up so most of my entries but not all will be longs. This is in spite of a heavy commercial short position at the moment. The trend is your friend etc..I will still countertrend trade the really extended moves for reversions to the mean. ( anx go read a book or two before making another embarassing comment about this )

Oil is in a downtrend, so just short the rallies at this point. Whether or not there is some broader economic reason for $100 Oil eventually, who knows. The bottom line for me is the trend is down. One of the old trading adages about sharp moves like this is always take the first retracement entry ( which means short the first bounce against the downtrend ).

Everyone have a great weekend

vrudny, Nouriel Roubini is hot! I would love to meet that guy. I read his blog every day. He has many detractors, and many people call him names for his forecasts, so I can relate to him on that aspect. vrudny, you make a lot of sense, too. I like your posts very much.

More info on the drop in oil prices. Peter Schiff says it was due to speculators unraveling their positions:

Quote from Peter Schiff
Over the past several weeks, oil and gas prices have fallen sharply, prompting many to conclude that the bull market has finally run its course. With oil prices back to $60 per barrel, most are now calling for prices to fall back below $50, and some see even lower prices dominating in the years to come. As there is no real evidence that suggests an abatement of those forces that pushed oil prices up from below $20 six years ago to near $80 dollars last month, such rosy forecasts really amount to wishful thinking. The recent sharp decline is likely technical in nature, providing long-term investors with an excellent opportunity to build on established positions, or create new ones.

Oil’s impressive gain over the past six years has attracted "hot money" from leveraged speculators, particularly hedge funds piling into the market. This has resulted in increased volatility, particularly on the down side. This week we learned that Amaranth Advisors, a $10 billion dollar hedge fund, blew up, losing better than 60% of its value as a result of highly leveraged natural gas bets that turned bad. The unwinding of these huge positions obviously exacerbated recent declines, and will likely help form a significant bottom to this correction. It is important to remember that the speculative money is not the driving force behind the underlying move. The fundamentals have been powering the energy market for years, and will likely continue doing so regardless of how many speculators tag along for the ride.

I have been buying oil and gas related stocks for my clients since 1996, long before the recent run up caught most investor’s attention. In the 2002-2003 run-up to the invasion of Iraq, when most strategists were calling $30 oil a temporary fluke, reflecting a “war premium,” I agued the reverse. My take was that oil prices actually reflected a “war discount” and that rather than falling when the war ended, oil prices would rise even further. See my commentary from March 13th 2003 entitled “There is no "war premium" in the price of oil!” available here. In fact, I was one of the first on Wall Street to officially forecast oil prices of $50 dollar per barrel. After that forecast proved accurate, and most top Wall Street strategist were calling for prices to collapse below $30 per barrel, I was one of the few who correctly forecast the move above $70 per barrel. In a Barron’s article dated November 2, 2004, with oil trading just shy of $50 per barrel, and oil strategist at both Merrill Lynch and Salomon Brothers predicting a quick return to the $30 level, I was the only one quoted who accurately predicted oil prices rising to $70 per barrel.

There are two primary reasons that I still believe oil prices will continue their long-term ascent. First, years of cheap oil, and the false perception that prices would stay low indefinitely, lead producers to under-invest in exploration and development, and consumers to over-utilize energy resources. As a result, it will take a long time for supply and demand to readjust to the new reality, ensuring high prices for years to come.

Second, once Asian central banks finally allow the U.S. dollar to collapse, Asian demand for oil will surge. That is because appreciated local currencies will not only make oil cheaper for Asian consumers to buy, but result in risings living standards throughout the region. As the values of their savings and incomes rise, more affluent Asian consumers will then be able to afford more energy utilizing products. Currently the purchasing power of Asian consumers is being suppressed by their governments' foolish policies of propping up the purchasing power of American consumers.

Since there will not be enough new oil to satisfy the explosion in Asian demand, it will instead be satisfied with oil previously consumed by Americans. The flip side of increased purchasing power for Asians will be decreased purchasing power for Americans. As a result, precisely when oil gets cheaper for Asians, it will get more expensive for Americans. As the value of Asian wages and savings rise, those of Americans will fall. The extra oil consumed by wealthier Asians will no longer be consumed by poorer Americas, who will therefore be forced to conserve and economize in ways currently unimaginable.

As the yuan or yen price of oil drops, the U.S. dollar price of oil will surge. Therefore American investors, who hold oil investments instead of dollars, will in effect be able to preserve their purchasing power and protect their current standard of living. One of the best ways to accomplishing this is by purchasing Canadian energy trusts. These unique investment vehicles offer tax-advantaged, consistently high, monthly income directly related to the price of oil and gas. With many funds off 20% or more from their recent highs, now is likely an excellent time to invest. - Peter Schiff, Euro Pacific Capital

Since the recent rally, I am thinking of jumping in and shorting the Dow and S&P500. I found two ETF's to short:

DIA - Diamonds Trust Series 1 -DJA Index
IVV - iShares S&P 500 Index

I was going to sell short at market and do a bracket trade with trailing stop at $1.00 for upward movement and a price 10 pts below for a target price.

First, has anyone ever shorted these ETF's?

Second, should I increase my trailing stop to say $2.00?

Third, do you think the recent rally will be the last
considering the Philly Fed report yesterday?

Thanks for your advice.

I have been shorting QQQQs for a while and quite frankly not made the big bucks yet. I have done OK, since I was writing some options occasionally either on the tops or bottoms, and I usually kept the premium, since they expired in my favor. I have two arguments for shorting QQQQ.