Hi Bill, this post probably belongs over here instead.
some very nice data you had in your Real Money article on
the dearth of bearish sentiment.
As you know the starts were all aligning for me for
a top right at the labor day weekend, give or take a day
or two.
I see that Cramer is being converted to the argument
I postulated on the mkt lab about the very disruptive
influence of the rampant bull market in the energy sector
especially the distillates and natural gas.
one thing that even Cramer and most of the mkt does not
seem to "get" is how it's almost impossible for the
refineries to ramp up heating oil and other distillate
output meaningfully in the next 6 months. (Unless we
have an extraordinarily warm winter)
(I can see some shops looking into strategies of being
short energy degree day's and arbing that with being long
equities or short the energy complex since, if we
have electicity degree day futures that don't deviate too much from the 65 degree day norm, will mean a warm winter
, less fuel consumption and a softening of the energy
complex esp. NG and Heating oil.)
But premier integrated companies such as XOM have sold off
their refineries as they were low margin businesses and
their is not the type of refining excess capacity that
existed 5 years ago.
Natural Gas is also in a supply demand situation where
it's hard to just pull a switch and ramp up output by
30 or 40 %.
This energy situation can be directly attributable to
the Asian and south american depression of 1997-1998.
their GDP's contracted by 25% for countries like Korea,
Thailand, Maylasia, etc and the reduction in global fuel
consumption, cut the legs out of capital expenditure along
the entire energy spectrum, from exploration, to drilling
to refinery capacity.
John
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The 1994 Scenario Is Looking More and More Like 1990
By James J. Cramer
9/12/00 7:23 AM ET
1990.
The longer oil stays in the $30s, the more likely we are to lose the 1994 scenario and break down into the bear market of 1990.
There, I said it. It's been bothering me ever since oil vaulted past Iraq-war prices and I can't pretend that everything is on a particular plan, when it isn't.
Remember back to my thinking earlier this spring. I thought the Fed would raise rates, we would get a soft landing and we would be whisked back to 1994, when the Fed was done
tightening. It was good news for virtually every group and fortunes were made in the stock market.
But there was another time, in 1990, where oil went to where it is now, and it was bad news for virtually every group, including, it turned out, the oil and oil-service stocks, because boom led
very quickly to bust.
Then, as now, retail was terrible. Then, as now, the consumer slowed down. However, then, the financials rolled over too, because of the savings-and-loan crisis and the overbuilding that
went on as a part of it. The Fed ended up having to ease and ease aggressively in order to remove the stress from the financial system. The Fed cut rates to save the biggest banks from going
under.
We are by no means in that kind of situation. In fact, the financial stocks are roaring, reflecting, I suspect, a potential cut in short-term rates. The credit risk to the economy doesn't seem that
great.But the spending slowdown seems to be as great or greater. People are worried. They aren't buying as much as they were before. Corporations are worried, too. They aren't buying as
much technology as we thought they would.
We have been reluctant to take any action on this negative thesis because, frankly, we thought the oil situation was temporary. How long, though, is temporary? Is six months temporary?
What's happening might be somewhere between temporary and permanent, a phenomenon that could destabilize things just enough to make it tougher than it was a few months ago to make
money in the market.
The euro doesn't help. One look at what happened to IBM (IBM:Nasdaq - news - boards) this week tells you that you have to worry about the euro. Business is strong at IBM, but its
European business profits get cut by a weak euro. That wasn't in the cards a month or two ago, either.
At my firm, we are creatures of what the companies tell us, not the charts, and not the brokers and not the strategists. In the last 10 days we have spoken to or heard from a tremendous
number of companies in this economy. These companies are in every nook and cranny of the economy. The only ones not worried about the current short-term conditions are companies in oil
service. Those are the only ones.
So what do you do? For us, it means committing no new money to this market at these levels. We tried to trade it yesterday to the long side, thinking that the retreat could be over. We think
that expiration is going to give the market some lift. But while we normally would be inclined to try to make that trade into expiration, to get long in front of it -- we are not, with oil where it is,
inclined to do so now. After hours of discussions, we think that we have to lighten up into any strength that comes from expiration.
Is this is a new posture? Yes. We had believed, and I had argued fervently, that oil would top out here and head south, fast. That belief has been shaken by the persistent climb in oil. We can
cut back on our driving if gasoline gets too high. But we can't cut back on our heating bills. Fact of life. Too much discretionary income is going to go toward those bills. If the stock market
were firmer and more people were making money in it, there would be an offset that would make things a tad rosier. But that's not happening. While the Fed may have to cut rates, I don't see
that happening near-term, either.
You know I am predisposed to be a bull. It has made my firm a tremendous amount of money. We have to remain flexible, though. In 1990, when many money managers thought that things
were going to get good, we made a bet against the market that put us well ahead of the averages. We made that bet because my wife and I thought the price of oil was an out-and-out
negative tax on the consumer that could really hurt both the economy and confidence. We chose not to ignore skyrocketing oil (and the Kuwait backdrop, of course) and stepped to the
sidelines.
Unless oil comes down precipitously in the next few weeks, we will have no choice but to make a negative bet on this market. Oil will hurt the fourth-quarter numbers for just about every
company we deal with. Those not hurt by oil will be hurt by the weak euro. The universe of stocks that we can pick from on the long side will get smaller and smaller.
We don't arrive at this posture idly. We still want to buy tech weakness and sell tech strength. We are, however, finding it incredibly hard to find companies worth owning away from
technology. We haven't gotten more negative; the companies we talk to have gotten more negative for us. So, we wait for a ramp into expiration so we can trim our holdings. We are lean
enough that we can take some pain here. We can wait for better prices to sell. But to ignore that something has changed for the negative would be to stick our heads in the sand, as so many
did in 1990.
We want to keep our heads up and our eyes open. Can't do that in the sand.
Random musings: Tonight at 5 p.m. I want to discuss this worrisome new posture with you on RealMoney.com. We have to talk about this because I don't want you to be surprised by my
thinking. This is a very important chat and you should be there. Only on RealMoney.com. |
