Oil, US$, Euro, Gold, Nat Gas, etc...

Still want to be a trader when you grow up?

Oil, Gold, Ag, Nat Gas, Silver all down.  Silver alone lost over 12% LAST WEEK.

I wrote this post on April 8, 2008.  The key point in the post was this:

If you have been reading my stuff you know I hate the U.S. $, and I have for years. I gotta say that the Euro, at today's exchange rate, is even less appealing than the U.S. $, and if the ECB begins to cut, the Euro could plunge vs the $. Also, you know my saying: "markets zig and zag, they don't zig and zig and zig" - and the commodity markets have been zigging pretty hard again.

When the ECB cuts that first time and the Euro sags and the Dollar moves hard to the upside it is VERY likely that many of the commodities are going to get rocked. I am preparing now for that opportunity. I don't give specific advice in this forum, but you can figure this one out.

Well the Euro is correcting, and the correction in commodities ain't over, so if you were hoping for a V bottom monday, you got a better chance of an early visit from Santa.  Commodities are NOTORIOUSLY volatile.  There is no such thing as BUY AND HOLD in this market, with the exception of fully paid for bullion.  Speaking of bullion (Gold and Silver), and you know I am a BIG bullion fan, the end of the Euro bubble and the correction in the rest of the currencies is going to make it rough for "Gold Bugs" for the time being.  And NEVER listen to those Gold Bug Jag Offs and their ridiculous analysis which I can some up like this:  

"If Gold and Silver prices go up, the markets are behaving correctly and all is right with the world.  If Gold and Silver head down, or in last week's case get walloped, then it is a huge Government conspiracy to get you out of gold and into the currency."

Not that I saw this past week coming in the Gold & Silver markets.  I didn't.

Oil followers have their fair share of loonies, too.  I got dozens of emails from folks asking me if the Oil price decline was engineered by the Bush Administration to help McCain's campaign.  These folks gotta get a grip!  The world Oil market is the largest, most liquid market on the planet. The Bush administration can't find its ass with BOTH hands, but suddenly they are competent enough to engineer a world wide decline in Oil prices.  

Some of the folks I emailed back said I was being naive, that the Saudi's were releasing more oil, blah, blah, blah...  "Amateurs talk strategy, professionals talk logistics" is a famous military saying.  Well, logistics matter in Oil, too.  These guys are saying that the Bush Administration manipulated the world tanker fleet, pipeline flows, and production flows from the world's exporters - perfectly timed to coincide with the Presidential campaign!  Must be fun to be so detached from reality.

If any of the above were true regarding the Oil markets, we would have seen an increase in inventories - they decreased; and, the U.S. would have experienced a pick up in imports - and imports declined.  So why did the price of Oil go down?  

Sorry conspiracy theorists, the Oil market was over bought, and now is likely oversold (and it can get much more over sold).  That is how markets work.  The Oil market is, in fact, controlled to a large extent by OPEC, but if you say that OPEC engineered this for Bush and McCain, you gotta have rocks in your head.  All of the OPEC countries, not just Saudi Arabia, would have needed to COOPERATE to drive up Oil to nearly $150, and then put increased supply back on the market, allowing for and calculating the time element of the world's tanker fleet all timed perfectly for the American elections!  The law of unintended consequences would negate any potential benefit intended to any particular party.

Back to the real issue:  Oil was $10 in 1999.  Oil is $115 as I write this.  Notice a trend here?

I can see the headlines in August 2010 or 2011 now:

"Oil prices collapse $65 in less than 1 month!  The Oil bubble has popped!  Oil down to $225 per barrel and falling!"

2 years ago, oil fell from $80 to just under $50, rose to $147 at the peak and fell to $115.  During the past 25 years or so, the average decline for crude during the "shoulder period" (the "head period" is peak summer driving and winter heating, the "shoulder period" is the time in between) has been about 26%. If this year met that average we could expect a $38 decline, peak to trough, or $109 per barrel. I would be very surprised by a decline to $100 or lower, but it could happen.  I would give that a very low "probability event horizon".  Any individual stock can go to ZERO. Commodities, while far more volatile than stocks, cannot.  It just feels like it when you are long.

Now, some of the rise in Oil was related to the decline in the U.S. $ in relation to the other major currencies.  The currencies were never worth what their exchange rate implied.  If you think the U.S. has some whacked out social programs, Europe makes us look positively fiscally disciplined.  On the other hand, the U.S. portion of worldwide military spending is over 50%. That is a HUGE drag on the US$ that won't be going away anytime soon.  The U.S. spends more than 3 X on Law Enforcement, "Justice", and the U.S. prisoner population than the Euro zone does.  This is another HUGE drag on the U.S.$ (and just look at what us taxpayers get for our money!).

What I am getting at is this.  ALL currencies are going to lose value in the aggregate as measured by purchasing power.  Right now, looking at the Gold & Silver market for last week, that might sound silly, because if that were true, why is Gold going down?  

In 2000 Gold was $350 per ounce and front month gold is $864 as we speak.  Notice a trend here?  True, Gold has lost 15% from its peak - welcome to the markets.

Trading and investing is notoriously hard on the nerves.  This is one of those moments.  Commodity trading is even worse than stock trading.  And, if you use LEVERAGE it can kill you, especially if you are one of those folks that cannot admit you are wrong every once in a while.  

SO, to sum it up...  EVERYTHING revolves around Oil.  No exceptions. 

If Oil supplies to the U.S. are/become no problem, total imports will rise, and the price will fall back to $50, the housing crisis can be easily resolved, the U.S.$ will rocket higher, the banks re-capitalized, the Dow would break 20,000, and SUV's will once again  conquer the planet.

If Oil supplies continue to decline to the U.S. the opposite will be true.

Which way do you think its going to go?  Then lay your money down.  If you are not a participant, you are nothing more than a JAFO  (Just Another F@#ing Observer).  In the markets, elections, and life JAFO's just don't matter.  Not that JAFO's aren't perfectly fine human beings, they just don't matter and have no impact.  (Actually, they do.  Most JAFO's I know do an AWFUL lot of talking, shouting, and screaming about their ridiculous opinions - in which they have no confidence or they would take action and put some skin in the game.  The bluff & bluster is all show, no dough.  All Hat, No Cattle.  Kind of like people that define themselves as "Country", but never milked a cow, grew a crop, slaughtered a chicken, or owned a horse.  I live half the year with a bunch of suburbanites outside of Nashville that think because they know the words to a couple of "Country" songs, well, they must be "Country".  Very strange.)

None of this will occur in a straight line.

Which, by the way, is what makes trading worthwhile.  Think about it.  The economy is affected by the AVERAGE PRICE of Oil in any given period.  The economy has no idea that a couple thousand barrels of oil changed hands at $147.  NONE.  ZERO. ZIP.  The economy knows only the average price of oil during any given month, quarter, year, or decade.  A TRADER does not give a good tootie about the average price, he only cares where he bought it and where he sold it.

Next year, I think the price of Oil will average $150 give or take, and I think it will have 1 standard deviation of $50, implying $100 low and $200 high.  I am very interested in those 2 numbers, whereas the $150 average (or whatever it is) is the ONLY number that Fed Chairman Ben Bernake and U.S. Treasury Secretary Hank Paulson really should care about.

Now if I am wrong about the AVERAGE price but correct about the high and low prices, I can do well in the trade.  It does me little good to be correct about the average and wrong about the standard deviations.

There is, in my opinion, NO WAY, that the U.S. economy can handle a $150 Oil average price in 2008, and that is why you are witnessing the fall in Oil prices.  The U.S. will need time to adjust, smaller cars, more foreclosures and house abandonments so that workers can live closer to work, or more commercial abandonments so that workers can work from home.

Read that last line again.  The key word is "Abandonments".  There will be plenty of abandoned homes built out in the middle of nowhere and requiring a long car commute.  Additionally, when companies allow and individuals have NO CHOICE but to work from home, there will be considerable abandonment of  commercial properties.  Still want to buy Real Estate?

(You know what they call 1 million Real Estate brokers lined up at the unemployment office?  A good start.)

$200 Oil IS coming, but sustained $200 per barrel is a ways off.

Lastly, the recent rally in financial stocks is giving folks an excellent opportunity to get while the getting is good, in my less than humble opinion.  If you think that the mortgage crisis has passed, and that housing prices have bottomed you can ignore me here.  Otherwise, it is time to exercise the "Sell" key on your keyboard.

Good Luck!

Mentatt (at) yahoo (d0t) com