Fighting the Tape

By Eric J. Fry

"I’m looking for managers who are good stock-pickers, but
also know how to get out of the way of the tape.

Unfortunately, they’re hard to find," an influential hedge-
fund consultant complained at an Upper East side eatery
Wednesday night, as he lifted a glass of pricey Bordeaux to
his lips. "It’s a simple idea, but very tough to execute.
Too many guys try to fight the tape."

[Editor’s note: "The tape" is trader’s slang for the
predominant trend of a given market, commodity or
security].

"Agreed," your editor replied, while raising a glass of
cheap California chardonnay to his lips. "Most professional
investors can’t seem to sit still. They need to be doing
SOMETHING all the time, even when prudence dictates doing
nothing."

"Very true," said the consultant.

"I’m always amazed when investors flutter toward volatile
stocks like moths to a flame, when it’s pretty clear that
they should be heading in the opposite direction. Right
now, for example, energy stocks seem like pretty dangerous
flames. As a group, they’re cheap. But they’ve become too
volatile to accommodate low-risk investing."

"Yeah, I agree," the consultant replied. "The energy sector
looks pretty scary right now, no matter whether you’re long
or short. There’s just way too much volatility."

"If you don’t mind me asking," we inquired, "how are your
best managers positioned right now in the crude market?"

"Well I don’t really know. But I was out last night with a
couple of pretty smart energy traders…and they’re short
the market."

"Makes sense to me," we replied, "This thing feels very
toppy. It’s easy to get whipsawed in markets like this.
It’s the type of market where you feel stupid, no matter
what you do. If you’re long, you feel stupid; if you’re
short you feel stupid…Sometimes you just gotta make
yourself do nothing."

…Nothing, is exactly what Kevin Kerr, the trading pro
behind Resource Trader Alert, has been advising his
subscribers to do since late last week.

Last Friday, after Goldman Sachs analyst Arjun Murti,
rocked Wall Street by predicting a possible "super spike"
in oil prices to $105 a barrel, Kevin warned his
subscribers not to be sucked in by the hype. Kevin
dismissed Goldman’s prediction as "pure fantasy.

"There is nothing new in the report," Kevin wrote. "Demand
[for oil] has been high for a long time, and we agree that
within several years, the average benchmark for crude could
be $100 – but not tomorrow. Not unless there is some major
disruption in the oil-producing region, and even then, a
sustained oil price of $100 is unlikely in this cycle. So I
feel confident that this market is due for a correction…"

Kevin, therefore, urged his subscribers to continue holding
the put options on crude oil he had recommended a few days
earlier.

"We are betting on a crude oil price correction," Kevin
insisted, "regardless of the hysteria Goldman Sachs is
pushing. We are not looking for a big dramatic move, just a
healthy correction. Then we can jump right back on the bull
bandwagon."

Monday afternoon, he followed up with an extraordinarily
well-timed trading alert:

"Pay No Attention to That Man Behind the Curtain!" He
wrote. "Those famous words from The Wizard of Oz remind us
of the true nature of what is going on behind the scenes of
the oil market at this moment. What we need is for the
sellers to go see the wizard for some courage and heart,
and most certainly for the buyers at these levels to get
some brains.

"Let me be clear: I am 100% certain that over time,
probably in 1-3 years, we will see a $100-plus crude oil
price, most likely on the back of tightening supply and
some type of major disruption. So buying longer-term
equities and options is the way to go, but short term, the
downside is far more inviting, regardless of the present
run higher.

"Anyway," Kevin continued, "my view that oil is overpriced
right now is based strictly on supply and inventory numbers
over the past eight weeks. The bottom line is that this
market is not supposed to move on simply hype by the
investment banks and media. After a healthy correction down
to $50, or even $45, then we will once again be buyers of
crude for the long term. Rest assured, we will be looking
for those opportunities when they come. We have no interest
in buying the all-time high in crude. After all, it’s not
an honor, like being the first person to land on the moon
or something."

The oil price, which closed Monday’s trading session at
$57.01 a barrel, promptly fell three dollars over the next
three days…

Prudent stock picking counts for much. But sometimes the
best thing an investor can do is just to get out of the way
of the tape.

Maniac Resource Trader

Did You Notice…?
By Eric J. Fry

Even though oil tumbled $1.74 a barrel yesterday, investors
might not want to rush back into the market.

We remain believers that oil stocks are cheap, and we
remain believers that the bull market in oil continues. But
we also remain believers that the oil market is likely to
dispense an uncomfortable amount of volatility over the
next few days or weeks.

One of the many signs that the crude oil market may be due
for a breather is the fact that longer-date crude futures
contracts have moved from "backwardation" to "contango." In
other words, the contracts for delivery in 2006 and 2007
now carry a higher price tag than the "near-month"
contracts.

Just last week, the "out-month" crude contracts sold for
less then the "near-month" contracts. This flip-flop from
backwardation to contango may mean many different things,
but one thing it doesn’t mean is that oil investors are
bearish. Presumably, an investor would pay higher prices
for out-month contracts, only if he believed that oil will
become more expensive in the future.

The fact that crude oil has moved into contango from
backwardation suggests that futures traders have become
much more bullish than usual toward the gooey energy
source.

"The longer dated futures, which were recently 8-10 bucks
under the front month, have exploded in the last few
weeks," a futures-trading friend related last Monday, "and
now the crude calendars are basically flat all the way out
to Dec 2008, which is an amazingly-huge rally in the longer
dated contracts…You don’t hear about that anywhere but in
that pit, where a lot of guys lost many millions by betting
that the futures strip would never move into contango…But
it did, lucky for us.

"My best trader stands in the crude pit," the friend
continued, "and he had his best two weeks ever – he was
long the longer dated futures vs. short the first 6
months…Anyway, it’s always fun to talk about winning
positions isn’t it?"

"So what’s your trader doing now?" We inquired.

"I’ll let you know after the fact," he unhelpfully replied.

Why Women’s Skirts Go Up

And the Markets…