The Rude Awakening
Laguna Beach, California
Wednesday, August 1, 2007 ------------------------- - The credit driven debacle continues to unravel around
the globe, - Speaking fluent Fibonacci as the markets spiral
downwards, - Fear and awe on Wall Street and plenty more…
------------------------- Eric Fry, reporting from Laguna Beach, California… Watching the U.S. stock market's recent gyrations has felt a lot like watching my 15-year old son's skateboarding maneuvers. My fear exceeds my awe. Whenever he gets airborne, I feel confident that he will land successfully… either on his board or his head. So far, his occasional skateboarding mishaps have produced no injury worse than a sprained ankle. I think he's been lucky…just like the Dow Jones Industrial Average.
After touching a new all-time high on July 19th, the Dow skidded 800 points in just seven trading days. Global stock market also tumbled, erasing about $1.5 trillion of shareholder wealth in the process. $1.5 trillion seems like a lot of money, but the selloff was really nothing more than a financial sprained ankle. (A plain-vanilla 20% correction would erase about $6 trillion of shareholder wealth). Almost immediately after the Dow managed a brief 200-point bounce, the CNBC perma-bulls resumed their shrill cheerleading. "The selloff is over!" one commentator squealed delightedly. But, of course, it wasn't. Our colleagues over at the 5-Minute Forecast were not so easily duped. Right around noon yesterday, as the Dow was flirting with a 100-point gain, the 5-Minute gang declared, "Sure, the market had a fun Monday. But until we see what tightening credit can do to the leveraged buyout binge…and until the bean-counters fumble their way through the mortgage-backed derivatives maze…any 'rebound' is just the sound of dead felines bouncing." The Dow tumbled during the final two hours of trading yesterday to make a new 5-month low. You see, dear investor, after stock markets fall a lot, they usually bounce a little…but only a little. To anticipate and calibrate this recurring tendency, the chart-gazing crowd of investors will refer to "Fibonacci numbers." (Leonardo Fibonacci was an Italian mathematician from the Renaissance, whose mathematical theories have been co-opted by modern investors. Roughly speaking, Fibonacci observed a tendency of markets to "retrace" an upward or downward move by three key amounts - 38%, 50% and 62%). For example, a 38% retracement of the Dow's drop from its record high would lift the index to 13,523. Coincidentally, the Dow brushed within 25 points of that mark during yesterday's trading, before slumping into the close. The S&P also stalled close to its 38% retracement level yesterday. We have no idea, of course, what the ancient Italian's mystical measurements might portend for the U.S. stock market. But we have a non-mathematical "bad feeling" that we cannot escape. The Dow's rationality-defying acrobatics inspire awe, but they also inspire fear. So we are afraid that Dow's next attempted jump might produce an injury worse than a sprained ankle. Harboring this angst, we checked in yesterday morning with our friend Jay Shartsis, a seasoned options trader who speaks fluent Fibonacci. "So what d'ya think, Jay?" "I'm nervous," he replied. "One good reason to think that this rally will not be a replay of what followed the late February/early March market smash, that is, a move back to new highs, comes from the dollar-weighted QQQQ ratio. At that market low on February 27th, the 21 day dollar-weighted ratio stood at about $1.20 traded in puts for every $1.00 in calls. That was a lot of put buying…and enough of a "wall of worry" for the market to climb. Now however, this ratio reflects only about .80 cents traded in puts, for every $1.00 in calls. That is the lowest amount of put-buying (hence, most option trader optimism) since December of 2005. This lack of put-buying is telling us that option traders are far too optimistic to support a sustainable rally now." Dan Amoss, editor of Strategic Investment, agrees. He provides the details in the column below… --- Urgent Investment Special Coverage ---
The Full-on Oil War of 2007 : Bloody New "Backlash" Set to Rocket Oil Past $150… and Send Gas Soaring to Over $6 per Gallon Wed Aug 01 07:12:39 2007. US/Eastern. The Full Report Here ------------------------------------------- Perma-Bulls and Dead Cats
By Dan Amoss The stock market's sudden, sharp selloff is paralyzing investors with fear. Even the "perma-bulls" are terrified. The recent declines are breathtaking in speed, but not particularly large, as far as corrections go. At least not yet. In the short term, the market's movements can be explained entirely by the collective appetite for risk. Up until a few weeks ago, this appetite was strong, but it has weakened significantly. The aggressive indiscriminate buying of everything from junk stocks to blue chips during the first half of 2007 is likely over. In last Monday's update to the subscribers of Strategic Investment, I wrote: "The market is long overdue for a nasty correction, and you can hedge your overall position by buying a bit of UltraShort Financials ProShares (SKF), the August recommendation." SKF has performed brilliantly, thanks to the stock market's sharp selloff. Key Energy has performed less brilliant. But I emphasized that Key Energy as attractive for long-term investors at $17. So it's now a better value at $15, and I'm standing by both recommendations. I expect that the price-discovery process currently underway in the CDO and leveraged loan markets will continue in the coming months, and perhaps lead to a few more high-profile hedge fund blowups. But eventually, cooler heads will prevail. We must always keep in mind the global economy's highly inflationary monetary backdrop. If you look at out-of-control money and credit creation emanating from all parts of the globe, it's hard to believe that any asset price can decline in nominal value over the long term. Sovereign wealth funds -- from Asia, the Middle East, and any country where exporters earn more U.S. dollars than they can handle -- will likely increase the buying pressure under U.S. assets. In a future environment in which the supply of paper money is virtually limitless, it makes sense for these funds to shift their focus away from bonds and toward stocks, especially stocks of companies that provide what they demand: energy, commodities, and other key components of infrastructure. The Chinese government controls one of the largest sovereign wealth funds and has announced headline-grabbing investments in Blackstone and Barclays, two firms heavily exposed to the financial economy. Odds are good that China will eventually announce investments in natural resource-related companies. This week's issue of The Economist describes the recent shift in the behavior of sovereign wealth funds worldwide:"Many emerging markets, notably China, have built up vast reserves of foreign exchange. Such reserves are traditionally invested in liquid assets like Treasury bonds, which could be sold quickly if the central bank had to prop up the currency. But many countries have far more reserves than they need for this purpose…That leaves the government free to buy more exciting things where it might make a better return. Earlier this year, China decided to set up a sovereign fund. "Most of the other funds get their money from oil exports. Such funds have been around for some time -- Abu Dhabi, for example, started a fund in 1976 -- but have been multiplying recently. Russia intends to channel some of the money from its Oil Stabilization Fund, which invests in safe, liquid assets, into a more adventurous sovereign wealth fund. Kazakhstan, Azerbaijan, Venezuela, Bolivia, Nigeria, and Angola have all either set up funds recently or are looking at doing so." The shift from bonds to stocks should only grow over time as these funds slowly realize that holding U.S. dollar-denominated bonds until maturity means holding the bag in the U.S. dollar's inflationary endgame. The rest of the world already has far too many U.S. dollars. They are constantly getting flooded with more of them, and they are certainly going to take action that's in their best interests. Keep in mind that the stock market is first and foremost a "market of stocks." Rather than get distracted by the day-to-day movements in the Dow, concentrate on the sectors and stocks that remain entrenched in strategic positions. Oil and oil services remains at the top of that list, and we were reminded of this industry's importance in Petroleos Mexicanos' (Pemex's) recently published 2006 annual report. If the status quo is maintained, Mexico will face a crisis, as all of its proved oil reserves will be exhausted within seven years. Mainstream economists continue to focus almost entirely on the drivers of U.S. demand for oil, when the real factor at the margin is demand from rapidly growing Asian economies. China's oil imports are currently growing at a rate of 20% year over year. Longer term, I expect that global oil demand will be constrained by global oil supply, and the key variable in the equation will be price (volatile, but upward-trending). Supply will go to the highest bidder, since the rest of the world is now on an equal playing field with the U.S. when it comes to bidding for shipments of oil on international markets. Higher oil prices usually prompt producers to produce as much supply as possible. Yet we're not seeing this response. Last week's earnings report from Exxon clearly indicates that it is not investing enough in future production growth. Also, looking at entire oil-producing regions shows that many are having a hard time maintaining production despite high prices. The Alaska Department of Revenue just published a report concluding that North Slope oil and gas production declined 12% last year. The long-term investment picture for energy remains positive despite the credit market turmoil that's currently rattling financial markets. [Joel's Note: Dan Amoss has been guiding readers of his Strategic Investment newsletter through tough times in the markets, even in these volatile trading days. In this special report he outlines the case for an alarming new energy crisis that could seriously impact your investments. Read it here: The Global Oil Grab of 2007 --------------------------------- Rude Endnote: Yesterday we tuned in to CNBC.com to watch Kevin Kerr of the Resource Trader Alert discuss the impact of the speculative money pouring into the energy market. Kevin believes this is just one of the reasons we are seeing higher energy prices. You can watch the clip here. Learn more about Kevin's Resource Trader Alert right here. Addison and Ian are toiling away in Baltimore and will have all the intraday trading activity for you, neatly bundled in the 5-Minure Forecast, arriving shortly. Keep an eye out for it. Cheers, Joel Bowman
Rude Awakening | 
