Market Review: oil.com and Other Mutterings

Given that we just flew into Myrtle Beach with our golf clubs in tow, we probably shouldn’t be in the hotel room watching that greasy pickpocket, Larry Kudlow, on CNBC. But alas, such is life…

Andy Kessler was on the show. So was a strategist from J.P.Morgan.

"Pessimism is spreading through Wall St. like a wild fire," shouts Kudlow, rudely interrupting his guest mid-sentence. "I don’t get it. The way I see it, things are looking great."

His guests agreed. The strategist said we’d reached a great buying opportunity. Kessler predicted the Dow would stay in a range between 10,000 and 11,000 and then spurt upwards again in 2007, on the back of another tech-driven stock frenzy.

Mr. Market disagrees. Stocks had one of their worst days of the year on Friday. The Dow fell nearly 200 points, handing investors a 381-point loss on the week. The Nasdaq fared even worse, falling 39 points on Friday for a weekly loss of 4.5%. Tech stocks are now down 12.3% this year.

The conversation turned to energy.

Kudlow called it "Oil.com"

Kessler thought oil would soon be back below $40.

The strategist agreed.

Dan Denning, whose latest issue we have sitting on the sofa next to us, is far more reasonable. He chose to label oil as "the dominant story of the month."

You see, dear reader, Dan isn’t surprised by the price of oil. First of all, he explains, in real terms, oil is trading well below the levels it hit during the oil shocks of the 1970s. "Oil is still cheap!" he writes. "It would have to rise to $80 in today’s dollars to reach its past highs. In other words, the big bull move in oil – even after a doubling of crude futures in the past year – may not have even started yet."

"The fundamental picture is very simple, even childishly so," Denning goes on. "Demand is increasing; supply is not. That’s it. No hidden logic. No secret turn of events. More people are competing for the same scarce energy than ever before. If anyone tries to tell you that oil should be at $25 and this is a bubble top, ask them what recent forecast showed an increase in the world’s oil supply. Don’t be surprised if they look at you like you have three eyes…no such forecast exists.

Oil.com was down last week, losing $2.83 a barrel to close at $50.49.

While oil may not be as expensive as it was in the 1970s, it certainly feels like a tax hike to the average consumer. Still, high oil prices didn’t stop your editor traveling down to Myrtle Beach for a 4-day golf holiday with James Boric and his dad.

Boric says his old man spent $75 in gas on the way to Myrtle. "Damn energy prices," Boric muttered as we stared out over the Atlantic Ocean from our hotel balcony.

Turns out James would do a lot more muttering as the day progressed…

He shot a pathetic 98 on the first day – his worst round in the last two years, he says. Right now, he’s working out his duck hook on the driving range, and vows never to play poorly again.

We’ll see how he does tomorrow, but we like our position after day one. Dyson leads the head-to-head match 1-0, but like oil, Boric is a resilient sort…

Regards,

Tom Dyson
The Daily Reckoning

April 17, 2005

P.S. Dan Denning loves to trade both sides of the market. For instance, you’d think the correction in commodities – like we saw last week – would slap a commodity bull like Dan in the face. Wrong. Dan was short the whole way down with put options on a raw materials index, landing his subscribers with gains up to 90%.

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THIS WEEK in THE DAILY RECKONING: "The busy man is never wise, and the wise man is never busy." — Lin Yutang. Mark Skousen wrote this fantastic quote on his blackboard in a Columbia University economics class, and half the students never came back the rest of the semester. Check out his essay below…

LIMBIC MEDALS                        04/15/05
By Bill Bonner

"Recent research shows that the brain has two centers for decision-making, which may explain why Americans save so little – one part of the brain told them they should save, but the other insisted on buying a wide-screen TV."

A SURPRISING SOLUTION         04/14/05
By John Mauldin

"World oil demand is currently surging far higher than normal rates…and nobody knows how high oil prices will go. What does this mean for the U.S. economy? John Mauldin explores…"

BANDAG BANDIT                       04/13/05
By Chris Mayer

"There is an overlooked industry, which may not be growing by leaps and bounds, but could still be profitable for patient investors. Chris Mayer explores the industry, and explains the hidden fortune in – retreaded tires…"

THE THREE AMERICAN VICES     04/12/05
By Mark Skousen

"Americans take pride in their workaholic tendencies and their desire to succeed at all costs…but a Chinese philosopher asserts that this way of life will only be successful in working yourself into an early grave."

THE ROOT OF ALL EVIL               04/11/05
By The Mogambo Guru

"It is often said that money is the root of all evil – but The Mogambo disagrees with that thinking. He likes money; it’s our monetary system that gives him the willies…"

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FLOTSAM AND JETSAM: A "Horde of Risks" in Housing: An update…

By Dan Denning

A quick note on the housing/mortgage-lending bubble. It’s starting to get more press, the way the Nasdaq began to make investors nervous in 1999. Of course, some investors would shout you down and call you an idiot for suggesting that things might, perhaps, be a little out of hand.

Last week, I quoted Alan Greenspan on the nature of the systemic risk posed by Fannie Mae and Freddie Mac. Those stocks are up off the mat and moving ahead cautiously, despite the road ahead. But IYR and ICF, two ETFs that track the real estate market (both of which are optionable), are not having so good a go of it.

Foreclosure.com reported last week that 28,190 foreclosed homes were put up for sale in March, a 50% increase over February. And Robert Shiller, the voice crying out in the wilderness during the Nasdaq bubble and author of Irrational Exuberance, gave an interview on NPR recently in which he spoke about the way Americans are psychologically affected by asset prices. Shiller says:

"People will increasingly fear that their livelihoods really depend on their wealth, wealth that is highly unstable because of market changes…There is an increasing perception that the price of assets matters very much to our lives…There is indeed much to be said for the ownership society in terms of its ability to promote economic growth. But by its very nature, it also invites speculation, and, filtered through the vagaries of human psychology, it creates a horde of risk we must somehow try and manage."

Shiller shows that investors and homeowners are on the horns of a dilemma. Asset prices DO matter, because many of us count on them for income and a way to save against the day when our wage-earning power declines. But that is a very different concern than wondering if condo prices in West Palm will double and if you should buy now.

The best way to manage the risk of the mortgage bubble is steer well clear of mortgage lenders, subprime lenders, and home building stocks, and to also wait and see how rising rates affect the whole financial sector, which has become addicted to the easy credit the GSEs made possible.

You can also buy hard and tangible assets. In fact, The (Toledo) Blade reports that the state of Ohio has been investing in rare coins since 1998. Those Ohioans are ahead of even California on this one. Since the state waded into the market, The Blade reports, it’s split over $12.9 million in profits with its partner in the deal. What is Ohio holding, you wonder? How about a 1792 silver piece estimated at $2 million and a bevy of 18th-century nickels and dimes?

Alas, an 1855 $3 gold coin – one of only two in the world – was "lost" in the mail. Note to self: When buying rare coins, use FedEx.

Regards,

Dan

P.S. At the end of last month in Strategic Options Alert, we closed out on a tidy 47% gain after holding our energy sector puts for a brief 2 weeks.  Again, I saw a correction due in an over-frothy, rabid market even though I’m a long term energy bull.

And The Markets… (Courtesy of the Rude Awakening)