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We want Cake!

Wed, Sep 17 2008, 16:31 GMT
by Phil Flynn

Alaron

I guess you can’t have it all. At least that’s what I gather from the Fed. You cannot have the US cut rates and bail out AIG. It has to be one or the other. So much for having our cake and eating it too.

It looks like moral hazard is an issue of case by case study. Sometimes you can get bailed out and get thrown a lifeline and sometimes maybe not. But in this case the Fed and the treasury thought it best to save AIG as opposed to giving the market what it thought it wanted and that was a quarter point cut.

That was properly was the right decision. Moral hazard is back but now with Lehman being fed to the dogs, at least now there may or may not be consequences for your actions. This I guess is moral hazard ambiguity. Of course was it not ambiguity in the Government Sponsored Entities Fannie and Freddie charter that Treasury Secretary Paulson said was the reason they had to save them. Oh how tough is it to make these moral hazard decisions in this day and age. Things used to be so much easier when we were growing up.

At least for the moment the AIG bailout seems to have stopped the freefall in oil. That and the fact that it is options expiration day! And the fact that we will see huge draws in our weekly DOE supply report due to hurricane Gustav and the beginnings of hurricane Ike. Yet still at the heart of today’s action, we should see how the market views the bail-out of AIG. Oil is just a pawn in this greater financial chess game. The oil market in 2008 has mainly been a financial play and oil was being used as a hedge against the dollar and used as a safe haven from the fall-out of the credit crisis.

Even those that scoffed at this contention are now embracing it. I wrote time and time again that earlier this year as investors went to seek safe haven away from the credit crisis that gripped the US economy, they increasingly turned to hard commodities and oil. I also wrote that this was unsustainable over the long run. I wrote that during the bull market throughout most of this decade, oil was in a boom because it was being driven by strong economic growth but that this year the run-up in price was about something different. It was being driven by the false notion that the world had decoupled from our economy and that the rest of the world was unaffected by high oil prices. This was based on the false belief that because no matter what happened here in the US economy, demand in Europe, China and India would make up for any demand loss.

I wrote that this year instead of an oil boom we have an energy crisis. A notion that oil has not risen because of strong growth but it has risen as it tried to adjust to the US subprime crisis. Oil traders used oil as a hedge against uncertainty. They used oil as a hedge against risk and against a falling dollar. In fact they used oil as the perfect hedge against any occasion. But now that hedge is coming off because of the changing fundamentals and the false premises that the hedge was based upon.

Earlier this was not a popular position to take and I was widely criticized for taking it. Yet now those same critics are acknowledging the same. I always believe that imitation is the most sincere form of flattery and confirmation that indeed I was right all along. You just now are getting it.

Yet at the same time the energy complex has been oversold and it is clear that it is ripe for some profit taking. We still feel oil is headed lower over the long run yet we are recommending that you book some profits if you have them. If you do not have profits then this expected recovery bounce might be a great time to get in on the right side of the market.

Sell November crude oil at 10000 - stop 10200.

Sell November heating oil at 29900 - stop 30300.

Sell November RBOB at 26500 - stop 27500.

Sell November natural gas at 802 - stop 812.

Have a GREAT day!

Published on  Wed, Sep 17 2008, 16:32 GMT