Thursday, October 26, 2006

The Big Picture...

So, here we sit watching bad news pile up on the tape and the market keeps chugging higher. I'm sometimes seen as a purveyor of gloom and doom for the economy in the US, but clearly there is a disconnect between stocks and the economic reality today. So what gives?

This is a mirror image of 2002. In 2002, no news, no matter how positive was good for the mkts. Instead stocks ground lower every day. Today, bad news no matter how bad (how about losing $6 billion in 3 mths Ford) can't take a stock down. There are two main drivers of this ---

--- Most money today is being run by investment professionals that are followers not leaders and they are desperately chasing performance to enhance their year-end numbers. In 2005, it was easy to invest in commodities or commodity stocks and let it ride. In 2006, they've had to work a bit and now they are all chasing performance which might end very badly.

--- Most money managers are overly-obsessed with Fed Interest Rate moves. They continue to believe that there is a single variable model showing lower interest rates = higher stock prices.

My advice to sophisticated investors now is to trade the market short-term to the upside, but to use all profits to build substantial short positions. for 2007 and 2008.

Re: Exxon's profits - yes it is unreal to earn $10 billion in a quarter, but it is the nature of the beast. Their cost per barrel doesn't change and when the price per barrel in the open market went up, their profits went up on the same trajectory. Don't blame Exxon, blame the 25yr-old oil trader in NY that pushed up prices because he thought he was a hurricane expert.

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