I have not updated my site for nearly a month as I was busy professionally. In addition, I felt quite frustrated by the low volume trading which meant that there was nothing of importance to comment on. The B-teams that typically man the desks in hedge funds and mutual funds during August are usually there to react only when big moves occur in their institutions' largest holdings. Otherwise, these B-teams are given explicit instructions to do nothing. So markets drift during the month of August on abysmal volume. But it's now September and the A-teams have returned tanned and refreshed to their turrets, you can see more direction and conviction in the markets. Hence I have returned to my frequent updates...so stay tuned.
In my last update exactly a month ago, I mentioned "I am bearish here and expect a 7-10% decline in the indices before this selling squall ends." How wrong I was! The markets "bottomed" August 16th and made a joke of my predictions. However, I must say I was pretty stunned that the markets "bottomed" on August 16th due to two major reasons: 1. The VIX never hit a major high other than a minor one-day spike to 20 which would be laughable as a sign of fear. 2. Markets usually don't bottom on low volumes unless they have "based" for several months or years and selling dries up. In this case, they hadn't.
There is a third though minor reason: With B-teams manning the turrets in August, what chances are there for institutions to act on their instincts with conviction when pretty much all heads of such institutions (usually rich guys and gals) are in Europe or in the Hamptons or in Mexico? I think the chances are pretty close to zero that August 16th was a major bottom and that it will not be revisited.
However, that is not to say that I did not notice a few calls for bottom from people that I normally respect: Dick Arms called a bottom to the day on August 16th in RealMoney based on his Arms Index. Similarly, I felt that a lot of hedge funds I spoke to were frustrated beyond belief by the market action in August and told me that they "hated this market with a passion". Some would interpret that to mean that fear was at its peak. But hatred is not equal to fear, and I am slightly wary of that claim.
I also wanted to touch upon a subject that I usually talk about: Oil. As you know, I have been bullish on oil and energy stocks since the beginning of the year and in fact oil stocks have been a major source of profits this year. But I noticed with considerable alarm in August that oil was moving towards $50 with ease. The key word here is "ease".
Normally, oil is a supply driven market. But in this case, all the "pundits" on TV focused on five factors for oil's rise that told me that they didn't understand oil: 1. China's "voracious" appetite for oil 2. Economic growth in the US and elsewhere 3. There is not enough oil in the world 4. We don't have enough refining capacity in the US 5. OBL is going to strike oil targets.
Except for reasons #3 and #5, almost all other reasons are wrong for running up oil. #1 and #2 may look neat on paper but they explain demand and not supply. In addition, "China growing" was last year's story, not this year's. Economic growth in the US is questionable. Reason #4 may explain gasoline prices but not oil's. We can debate #3 for another century and still not get an answer. Peak oil is a nice theory but I am not sure it is so in practice. Only #5 sounds as a possible explanation but you can't run up prices to the moon before it happens. You can't wait forever for #5 to happen either. So oil prices cannot go to $50 or $100 or whatever nonsensical number that was floating around on TV last month, just because Osama Bin Laden was going to strike Saudi Arabia.
SO as I watched the mad rush into oil last month where it went up $1 or $2 every day on nothing more than recycled variations of the five reasons above, I felt the folly of madness in markets. Since a whole lot of fools rushed into the markets in August I am sure oil now has a very large overhang of (fools) "longs" in the market that will cause it to go down or outright collapse in very short order. This is what happened this week when the Saudi's started threatening the market with talk of oversupplying it. Now nothing gets the old geezers in the oil market riled up as much as talk of "oversupply" especially from the Saudi's! Immediately the market started cracking and now I think it is on it's way to $40 or below unless Reason #5 happens some day (which may be now or never).
One reason that I think the chances of OBL hitting us (or Saudi Arabia) in the near term have been weakened is due to the recent capture of Muhammad Naeem Noor Khan, a 25-year old computer expert who may have been a sort of "Network Admin" for Al Qaeda. Well, the mainstream US media as usual, missed the major significance of his capture. Here's the real significance.
Mr. Khan was captured on July 13th. But news of his capture did not hit even the Pakistani media until August 1st - his capture was such a state secret there. The US media picked up the story on the morning of August 3rd. But do you think Mr. Khan was fiddling his violin from July 13th to August 1st? This is where the major US media failed to put together the real story.
The real story was that from July 13th until news of his capture leaked to the Pakistani press on August 1st, Mr. Khan had turned into a double agent for the US intelligence and special forces that had captured him. This allowed the US to perhaps infiltrate Al Qaeda at least for 2 weeks. This is a major breach in Al Qaeda's defenses. Knowing that, do you think Bin Laden will peep out of his fox hole until he is doubly sure that none of his defenses have been compromised? I don't think so. That's why I think the chances of Bin Laden hitting us or the Saudi's have been greatly diminished. It is also one reason that I think the Bush Administration has been recently "over confident" in touting their track record of no attacks since 9/11. They must know that either Bin Laden is on the run or that he is very near capture that he will not do anything at least until the coast is clear and who knows when that might be (November 2nd)?
In addition to the notion above, you have to really wonder about the mental sanity of all those hedge funds when they rushed into oil futures in August when many of them were short semis because the economy was slowing. If the US economy slows, that slows demand for oil just when supply is in high gear. Together, it can mean only one thing: oIL COLLAPSE! So it was funny to see the manic run to $50 oil on nothing more than highly flimsy and extremely contradictory reasons.
With that said, here is how my holdings look this week:
Gold: Gold stocks had a good week but I have mostly silver in my portfolio. I still have only IMXPF (a silver play) in that sector though it's a big position.
Oil: Oil services stocks still look decent here and I am long DVN and OIH.
Oil: I am short some oil plays here because oil has gone parabolic that even the refiners may be hurt rather than helped by high oil prices. I am Short VLO.
Financials: I think the rally in financials was a dead cat bounce that is over. I am long GS Puts.
Tech: I think tech's days are numbered as macro concerns overwhelm any positive earnings surprises. I think 2005 earnings numbers for tech are too high and as they are brought down, these stocks will be hit. I am short COGN and long HYSL.
Happy investing and researching! We'll see what next week will bring.