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Oil crossed through the $60 support today and ended at $58.60. COP, VLO, XOM are all down big today. Gold got hit bad and is at $580 today and will decline to $500 if it breaks the support at around $560. But seriously, anyone think oil can go back and stay at $2 per gallon for sometime? Most oil analysts are bullish that this short term trend will correct as they think global economy will not be pulled down by US economy and China/India will provide the demand for oil. I think in short term, China/India will be affected by the US slowdown (the whole world will be affected) and so oil wil go down and will pull gold down with it. A trader on bloomberg said today that people are tried of listening to the doom and gloom “what if” scenarios that had supported oil & gold to reach $80 per barrel and $725 an ounce.

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“The Dow is up about 8 percent since mid-July and seems poised to break its all-time closing high set in 2000.

But while the Dow index has performed well of late, the Russell 2000 index – the most-watched index of small-cap stocks – has dropped more than 10 percent since May.”

First of all, the statement above, craftly yet unfairly uses May timeline for Russel2000 but July timeline for Dow. To have a fair comparison, both Dow and Russel2000 are up about 8-10% from their July lows. Both Russel2000 and Dow are in the positive for the year. So the bounce is there across all stocks but considering the upcoming slow down in economy, focus has shifted from small caps to large caps and from growth to value. Small caps are generally more volatile, risky investments than large caps and small caps had outperformed large caps for the last 4 years and naturally there is a change in leadership this year.

Stocks are up simply because there are large group of people who believe that the US will have soft landing, who don’t agree that a recession is going to hit the US and that the slowing housing sector alone is not sufficient to bring a recession with other sectors being strong. They believe that the mid of 2007 will spur another growth cycle as Fed starts to cut rates and these guys are positioning themselves early. Note that there also loads of very smart people with numbers and stats to make their point for the case of soft landing. There are no absolute truths, only interpretations (Nietzsche). We shouldn’t be bewildered as to why the stokcs are behaving against our theory, instead we should be discussing a strategy (diversification, stop losses, hedges, etc) to minimize the losses if market turns to prove that we are wrong.

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vrundy,
How did you buy RMB?

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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.

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The gold bugs basically love conspiracy theories and their complaints that central banks are keeping gold prices “artificially” low is another crack pot theory. They didn’t complain when speculative hedge fund buying was forcing gold prices to actually “artificially” moving gold prices up through the roof hitting 730, without any fundamentals backing them. There is no consipracy theory but basic fundamentals that Gold had too much speculative money in it that is now leaving and inflation is coming down thus putting fundamental pressure on gold prices. I cannot understand people here who expect housing prices to decline 50-70% and still expect huge inflation in the coming years. Such huge declines will kill economy, kill commodity prices and reduce inflation (price appreciation not money supply) and barring a dollar collapse I don’t see gold going up. I will use gold for diversifying my portfolio though (5%).

As for oil prices, I said so when people were posting $100 oil threads that there is too much speculative money in oil that is going to run away (geo-political situation is ok, a clean hurricane season). I think we are going to run into a transitionary period where oil prices will go down to $55-65 range. If that range is broken then it will go to $40 until the Asian economies can create a domestic consumer maket.

Commodity bulls miss this very importaant point that China/Japanese economies are extremely export dependent right now and it will take few years before they can sustain their growth by domestic consumption. Commodity bulls keep repeating their pet sentence “Its a correction since nothing has changed in supply and demand” yet they know deep down that commodities demand is diminishing because of the economic slowdown expected in the biggest of world economies and the lack of an alternative consumer to replace that demand. I am keeping an eye on Japanese and Asian consumer and their retail prices as I think they will indicate the next time commodities will start going up again.

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Zeal does believe in commodity bull market and they research to provide recommendations of how you can benefit from the best of stocks during that bull market. Believing in commodity bull is not a bad thing, it is personal belief and if you don’t agree with the core thinking of zeal (equties are over priced, commodities are in bull run that will continue till 2013) then you shouldn;t even go look at zeal.

I personally don’t ascribe to newsletters that subscribe to a commodity or equity or one way or other mentality. Also, based on my personality, I like trading as I don’t have the patience for long term investing so I normally try to capture short term trends. You need to have a lot more patience and risk tolerance to be long term investor as it means believing in long term you will come out doing better than most. But this also depends how early you need your investment back and what are you investing it for. e.g. I don’t trade the money I am setting aside for downpayment of a house in 3 years time frame as 3 years is too short.

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So what do people think of the latest declines in oil price and the corresponding hit seen on stock prices of oil companies? Did anyone see oil going below $65 and COP going below $60? What are the oil bulls like zeal saying and I would be interested to know how folks think the drop in oil prices will work for other equities.

I think if commodity prices keep dropping, we may well enter a state of deflation. With real estate going bust and recession on the horizon, there is not much support for oil prices to hold up barring geo-political tensions. The argument for peak oil seem to be losing ground as the latest discovery of the oil reserve by Chevron indciates and as production from oil sands become more cost efficient and OPEC reduces production to support oil prices. As per Fed, the biggest concern for inflation has been high energy prices. If oil drops and economy slows to snail pace due to housing then we may as well enter a cycle of deflation where comodities, housing and equities will all lose value.

However, as per previous experiences, our Fed seems to be more capable of handling deflation than inflation. Maybe they will come to the rescue again by cutting rates drastically. What do folsk think?

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I returned from a one week stay in Shanghai and I was just amazed by the sky scrapers in that city and how many are under construction. From the 50th floor of my hotel, I could either see apartment buildings or sky scrapers. However, pollution is a real problem and water and air are distinctly worse than in San Diego. Traffic is insane there and people are always trying to sell you something.

The positives of China are that they just produce almost everything person needs for daily life. People work hard and have turned into money minting machines more or less. I was very impressed by China’s infrastructure of roads/Telecom that is world class. Human resource is cheap and will stay cheap for sometime as there is a huge migration of people from villages to cities and new industrial cities are growing rapidly.

The main problem with China is definitely that most of the money seems to be in the pocket of certain %age and government and major population is very savvy with money. I talked to a Chinese guy who made money from defaulting loans from banks as there are lots of loop holes. Pollution is just an enormous issue (you can always feel it as you breath) and will soar Chinese health costs for sure in the coming generations. An important difference I noted was that most people listen to the comunist media and are anti US but also lack the creativity of US workers. Housing prices in China have quadrupled in last 7 years and have not shown signs of cracking but may will do. However, unlike US it is not tied to consumer spending in China. Entertainment opportunities are limited for Chinese people. Prostitution is widespread and one child policy is a concern for most Chinese as they depend on children for their old age.

For me China will be facing real challnges in about 7-8 years. Right now, the main consumer of western prodcuts (mainly cell phones entertainment, etc) in China are few top percentage of wealthy people and new generation in cities inspired by MTV and addicted to big franchises. Otherwise most middle class Chinese already consume everything produced from within China and I don’t think they can extend themselves to replace the huge US consumer spending. The middle class wages are ok but it is already extended considering the increase in oil/housing/transportation/health costs. Healh costs are not provided by corporates or government and are soaring considering pollution. Factory workers have to save money to take care of unpredictable accidents in life. I just don’t see the Chinese consumer being able to offload the US consumer and the Chinese government knows this.

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Stocks are leading indciators because price of current earnings have been priced into stocks and then you pay a premium for stocks with more potential profits and get discount on stocks that have poor forecasts. e.g. You hold COP and where has it gone after reporting a stellar quarter recently and why is it back at 63 now when its recent earnings have been absolutely phenomenal? GM has been reporting huge losses but have done well in the last quarter or so, why? Tech and Semi stocks reported stellar current quarter earnings last quarter but fell further back because they lower earnings forecasts. Housing stocks have been doing terrible since 2005 because market had sensed the housing collapse much earlier than actual home owners.

It is the game of expectations on Wall Street and sometimes it makes sense to just follow the momentum/trend. At times of economic uncertainty, investors get more attached to future forecasts then what a company reported last quarter.

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Poway,

While you were 95% cash, investors who were nimble and bought their way in Mid July or when Fed stopped raising rates, have made some killing. An opportunity to realize profits is equivaeltn to loss incurred, for traders and investors. When stocks pulled back in May, you were among first to point out that stocks are leading indciators of the economy and how they are predicting a recession. This recent rally has been going on for almost 50 days now despite all the doomsday economists plike Fleckenstein predicting it wouldn’t last a week or two. Now SP500 is almost back to its May levels. Forget about summer 2007, where do you think SP500 will end after the earning season? All of us are here, not to satisfy our our egos as to who was correct or not, but to make money. Dealing with short term trends is best way to make money in an uncertain or bear market.

So good luck with making/preserving money. Do the way, you think is right but do realize it is not the only way.

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HereWeGo,
There has been inflation all over the world in the last 3-4 years, not only the US. Housing and real estate has jumped multi fold in US, Australia, Europe & China/India. There has been inflation in stocks and general living standards throughout the world. Do you have any data to prove that inflation has been tame for the last few years? By tame, do you mean the govt inflation numbers that excludes housing, food, energy? and as always, speculative investment has come into gold in the last year or so to add the push to the price. I am not justifying lofty gold prices, just explaining why they are where they are.

Everyone in the US should hold cash in a portfolio of gold/euros/aud/yen along with dollar. Simply put, why should we pay for the stupid fisccal policies of this govt spending billions on war? BTW, dollar weakness adds to inflation, as being the biggest consumer, we import so much of natural resources from around the world. What is the range you are looking to enter in gold?

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Gold follows inflation, soaring oil prices add to inflation and hence help gold indirectly. Gold has risen because interest rates had been going down and liquidity had been increasing throughout the world for the last few years.

For gold play, note that you pay much higher long term tax on gold. If you held gold or gold ETF for more than a year, you still have to pay 28% tax whereas the tax is almost half of that for stocks held more than a year. This is because gold is considered a collectible by IRS.

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I am data/fact dependent to form opinions. Till now, data seem to be pointing that folks like Bill Gross in bonds are right (till now). Sorry, but I just see Fleckenstein’s opinion/view in the original post without any facts/data to back him here.

Fleck doesn’t see this lasting more than few weeks but actually stocks had been preparing to rally and had been off their worst lows since mid/end june. If this rally continues for one more month then the charts for averages will not look like any bearish market but a correction. The next few months will clear things up as we actually see how bad will the economy will actually do and how it will affect inflation.

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This is what the post reads:
“As the U.S. economy contracts, the Federal budget deficit will grow and the perceived appeal of U.S. financial assets will be lost. As a result, foreign capital will flee at precisely the time it is needed the most. This will put additional upward pressure on interest rates, further increasing mortgage rates, suppressing real estate prices and consumer spending. More importantly, it will also cause the dollar to fall”

It seems like he is implying that as foreign capital runs away from the US markets it will cause 1)higher rates 2)weak dollar. Sorry but I don’t believe both can happen at the same time right now. BTW, what will happen to housing prices when dollar falls to dear lows? Also, bearish housing sentiment and stagflation expectations are kind of contradictory as housing assets will beneft from falling dollar.

People looking backward at the 70s stagflation generalize too easily. If you let inflation go out of hand then you can have stagflation where you have to raise rates despite economy already reeling from high prices stripping consumers. So the key is not to let inflation run rampant and I believe as long as Fed REALLY prioritizes controlling inflation as top priority then we probably won’t hit stagflation. As I said before, there is more downside risk but there are no sure bets.

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I don’t understand how Schiffer is implying that rising interest rates will cause the dollar to fall. Currency traders are most sensitive to interest rates. The dollar fell 40% vs Euro in 3 years before the Fed started raising rates and since then it has stayed its ground vs Euro in almost 2 years. The budget deficit in the mean time has grown and grown but hasn’t been able to hurt dollar while rates have been rising. Also, if the dollar falls, then after a transitory period, US exports will grow reducing the trade deficit. This will help dollar as well as economy. Moreover, falling dollar will boost real assets like housing keeping the prices up though value may go down. There are just too many confusions for me in this post.

Also, traders and hedge fund managers have been betting on a dollar decline for nearly 4 years now. Consider that as there is huge amount of money shorting dollar. Any short squeeze can result in unexpectedly boosting the dollar. Same happened to Yen in 1996-1998 when everyone was short on Yen.

US economy, dollar, housing, bond and stock markets are all very delicately poised. Things are definitel going to get ugly but by how much, is difficult to say. Whether we hit stagnant economy and rampant inflation is potential possibility but not a sure bet.

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