BBorSC

Oil Futures: Money for the Taking?

Maybe the reason is that it has happened? This might be telling us the price of oil is much too high right now for future demand and it will collapse soon unless there is a true uptick in the economy.

Let's say there are a whole host of folks who bought oil and futures contracts a couple of months ago on the contango bet. If oil drops to $25 per barrel and there is no demand pick-up anywhere including Asia plus Brazil brings on their fields and we continue to pump more in North America. Then they lose their shirts.

The scenario above is consistent with saying the current market rally is a bear rally. That there is not the demand out there in the real economy to support either oil or earnings and we will not begin to see an upswing in six months.

I'd say that such an outlook is 50/50 at this point. We are balancing on a knife edge. I've got my toe in the water. I like the upswing but am poised to short the market once SDS reaches the low 60's. Someone's got to bring in some real earnings that aren't based on government intervention (e.g. Goldman thru AIG thru the US gov) for us to have a glimmer.

Natural Gas: Production Is Key

Good article on the production side. What is missing is an analysis on the industrial demand side. We are coming off one of the coldest winters in probably 15 years (a check of the degree days would confirm this) so consumption from a household heating standpoint must have been higher than normal for this decade. But industrial demand for NG has fallen off a cliff as large plants have been idled.

An uptick in industrial demand for NG will signal a return of consumer demand. It's a complex equation with the coming on-stream of LNG terminals scheduled for the coming months, increased domestic supply and reduced demand. Doesn't look good for the price of NG. It is good however for industrial competitiveness of the remaining industries using NG (vs. global use of the commodity).

Percentage of Stocks Above 50-Day Moving Average

Check out the time period between the end of September through November 8th (i.e. the last time the market was hit with a psychological bomb - Lehman's collapse). It shows there is about a one month recovery time from such an event. A collective digestion if you will.

We got hit in February by the realization that the "stimulus" was actually a liberal shift to increase welfare spending (which not only will not provide a recovery but will actually worsen the future outcome). Additionally there was the realization in February that no meaningful action was to be taken on financials other than apply a stress test which has already clearly been applied (by the market).

One could argue that the stabilization plan enacted by the previous administration combined with the "hope" that the new administration would be moderate combined to give us the November thru early January bear rally.

However with (unfortunately) all eyes on government intervention the administration stumbled in the blocks with the new "transparency" revealing that there were no answers worth the paper the stimulus was written on.

Now there are some signs of a recovery despite that blow:

#1 Oil useage and refinery output have been rising for three consecutive weeks (of note - above last year's useage!). This means Americans are driving again and if they are driving then they are spending.

#2 International Trade has come off its bottom. Perhaps temporarily but still a three X rise in the BDI for an extended (one month) time period means that raw materials are being ordered to produce goods.

Admittedly it will take a much longer time period for the first two trends to mean anything more than a blip in the long downward slide but the possibility remains (of a first indicator).

#3 Retail sales (though down vs. last year) were stronger than expected.

Let's face it. We are a long way from any kind of signal of even a bear rally. However for those looking for signs of a local bottom there is some data to support it. The true reading (or kick-start) to the rally will Bank of America's earning announcement come mid April for first quarter. Ken Lewis continues to make noise that BAC will surprise the world. That certain segments (e.g. Countrywide) are providing record earnings. If that happens we will have had our one month recovery from the Obama disappointment and enough time to determine if the trends in driving and spending are real. Look to the spring (bear?) rally.

My own situation is as follows:

60% Cash or Bonds (VBTIX) (Got out right after Lehman - not great but in retrospect getting out with the Dow at 10,000 looks pretty good). I went to 70% cash and bonds at that time and have been nibbling back into the market since mid-February.
40% Equities with 4% in SDS and 2% in PST.

I have lost 24% from the market peak (sadly to say).

Of the equities I am broadly diversified but tend to be heavy in energy (as a first signal of recovery). I like UCO. You can get the same response as OIL with UCO but at much less exposure. I am thinking of buying a substantial block of SSO and will decide this weekend the buy-in level.