Thursday, October 16, 2008

Oil's Crashing so Stocks Rallied?

Yesterday as the market suffered it's worst percentage loss since 1987 the consistent theme on most of the financial websites read something like this....

"Energy stocks were clobbered today as Oil retreated to $74". Since energy represents a huge portion of the Dow, the markets were off almost 8%.

Without the slightest bit of irony, today's rally in stocks was attributed to:

"Falling oil prices bolster stocks". Huh? Did I just step through a wormhole (shout out to all S. Hawking fans)?

Guess what, no one seems to know what is causing the crashes and rallies right now. There remains some substantial hedge fund and mutual fund selling. Hedge funds, endowments and pension funds that invested in hedge funds all played in the oil markets as oil shot over $100. Many of the positions are getting blown out now.

So oil is down 52% from it's July highs -- where is it going from here? OPEC is threatening production cuts, but they are not going to be able to cut production as fast as the world is cutting consumption. Oil's natural price given the state of the economy last year was around $65/bbl. I'd say the natural price today should be somewhere around $50, but when prices collapse like they are right now, they usually overshoot on the downside. There's a 50% chance that we break $50/bbl in the next 6 mths.

Unfortunately, that means that all of the scrambling to fix our energy crisis will be put out to pasture because everyone will forget about the crisis when gas is $2.35 a gallon.

One of my least favorite talking heads on CNBC loves to rave about the $100 billion stimulus that consumers have received from lower gas prices. Gas could be $0.23/gallon, but if you don't have a job or you've lost 35% in your 401k, you are not going to feel like blowing $999 on a new flat screen this year.

The credit economy is broken and we are going to need to finally live within our means for the first time in a generation.

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Well here's a shocker to everyone but the regular readers of the blog.

Banks Are Likely to Hold Tight to Bailout Money

The problems that began with home mortgages, analysts say, are migrating to auto, credit card and commercial real estate loans.

The deepening red ink underscores a crucial question about the government’s plan: Will lenders deploy their new-found capital quickly, as the Treasury hopes, and unlock the flow of credit through the economy? Or will they hoard the money to protect themselves?

John A. Thain, the chief executive of Merrill Lynch, said on Thursday that banks were unlikely to act swiftly. Executives at other banks privately expressed a similar view.

“We will have the opportunity to redeploy that,” Mr. Thain said of the new capital on a telephone call with analysts. “But at least for the next quarter, it’s just going to be a cushion."

If only Congress read Grindstone Financial maybe we could have saved a couple of hundred billion. Also, note that line at the beginning - credit cards and commercial loans are going to be the next big shoes to drop on the banks.

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Cheers! Tomorrow is option expiration. Crazy things normally happen on option expiration and so tomorrow could be really wild.

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