Trading
Tip
Oil and Gas �Crudely Speaking Part IX
� Socialist Barbarians at the Gate
by
D.R.
Barton
In
the short-run, the market is a voting machine; in the
long-run, the market is a weighing machine. --Benjamin
Graham
The
insanity continues.
Let me
start by saying that I don�t like paying $80 to fill
up the family people hauler either.
And I travel a bunch by air, so escalating ticket
prices are not fun. And I�m not thrilled that the value
of our house ain�t what it used to be.
But when
the free market is attacked from all sides during a
downturn, I get really frightened.
(As a quick note-- I�m not a Libertarian, though
I do support much of their smaller government, personal
freedom, and free market issues).
This
whole article won�t be a political rant � we�ve got
some market stuff to talk about � but a confluence of
governmental maneuvers is threatening to set horrible
precedents. I�m
always concerned when there is governmental intervention
in market activities.
Because it always costs us (consumers and
taxpayers) in the long run.
Here are three recent items that have come across
the radar screen:
1.
Fannie Mae and Freddie Mac bailout.
2.
Short selling curbs for financial stocks.
3.
Airline execs and others asking for limits
on oil trading.
I�d
like to address each of these and then wrap up with some
analysis of what�s happening in the oil markets.
Fannie
Mae and Freddie Mac bailout.
No rant needed here.
The horse is already out of the barn, as they say.
If any legislation was needed, it was when the
mortgage machine was leaping to lend money to anyone with
an expired fishing license for a house worth five times
what they could afford.
That worked out just fine � as long as real
estate prices kept rising at astronomical rates.
Many of those infamous subprime mortgages would not
even work if prices leveled off.
And let�s not forget, many homeowners and
almost all of the institutions involved in the mortgage
and homebuilding industry made HUGE amounts of money for
many years when things were going well.
But alas,
a downturn came (as they ALWAYS do), and highly leveraged,
underfunded plans no longer worked.
So companies and individuals who made lots of money
when the going was good, got hammered.
They took big risks and now taxpayers have to bail
them out.
There is
only a relatively small chance that Fannie and Freddie
will actually fail. But
if they do, as one article put it, our national debt will
double overnight. If
only regulators had the foresight to take massive action
when all of those high-risk loans were being written
instead of after the pain became intense�
Short
selling curbs for financial stocks.
Does this seem like the �old boy�s network�
to anyone else? The
SEC, along with Department of the Treasury and the Federal
Reserve decide to curb short selling in Fannie Mae and
Freddie Mac. Oh
yeah, almost as an aside, they also put the same curbs on
short selling the stock of 17 other financial firms like
Goldman Sachs, Lehman Brother, Merrill Lynch and Morgan
Stanley. Talk
about the fox guarding the hen house!
And worse yet, this is another severe blow for free
markets.
When a
southeast Asian country outlawed short selling on their
exchange, they were seen as reactionists who didn�t
understand how markets work and were driving their
country�s economy backward.
Ditto that for the folks who want us to think that
short selling is the problem.
(I can assure you that not one of those astute guys
and gals believe that short selling is the real issue.)
We have a whole industry that made a massive error.
They profited massively from their high risk
strategies during the good times (remember the reports of
Goldman Sachs bonuses being an AVERAGE of over $600k?).
But now when we see that these highly leveraged
strategies could not be unwound quickly enough when the
tide turned, everyone hides behind the regulators.
Limiting legitimate short selling disrupts the
balance of the markets; there�s no way to legislate
ever-increasing stock prices!
In fact, this is a risky move; there are studies
that show down moves are more severe when short selling is
limited. This
is because there is little way for stock prices to proceed
down in an orderly fashion if there is not a two-way
market. Then
when enough share holders are concerned, there is a mass
exodus and a disorderly drop.
Time will tell if this comes back to bite the
companies that seem to be getting temporary protection�
Airline
execs and others asking for limits on oil trading.
I have a proposal for airline companies: let�s
limit the amount of your companies� stock that can be
purchased to only those people who will attend the annual
meeting and vote on governance issues.
Because that�s what the airline companies want to
do with the oil markets.
Seems to me they wouldn�t like limits on their
stock prices�
I�ll
say here that I believe the airline business is one of the
toughest around � huge amounts of competition, large
capital costs, big labor costs � and then there�s
fuel.
But to
write an open letter to customers asking them to take
action against oil speculation?
That sounds like desperation.
(Thanks to David Meyer for
forwarding the United Airline letter to me.)
Yes,
trading volume and speculation have increased in the oil
markets. It
seems that people want to make money by buying stuff
that�s going up in price.
I think they call it trend following.
Shouldn�t hedge funds and institutions be able to
put their money where it�s being treated best?
The argument that the markets are being moved by
�speculators� who have no intention of taking delivery
of oil, is absurd. More
people would buy airline stocks if they thought the price
would go up! (That�s
a low blow to industry that has plenty of struggles �
but it is true). And
yes, individuals and institutions often (usually or
always) buy stocks purely to make money, not because
they�re interested in being involved in the governance
of the company. Some people buy condos never intending to live in them �
they just want to make money if the price goes up.
Others buy collectible NASCAR plates or stamps
for the same reason -- to make money on price
appreciation.
Billions
of people across the globe are starting to consume more
oil-based products and energy.
Gas and jet fuel prices have gone up.
Everyone would like something to be done about
that. The bad
news is this � there may not be much we can do.
If I want that cool bright red and burnt orange
throw rug on Ebay and three billion people are willing to
bid more than I paid last year, I can�t exactly tell the
seller to give it to me at last year�s price.
I have to pay the market price or not get it.
China
and India are aggressively bidding for oil, both in private deals
and on public exchanges, so they can meet their energy
needs. Individual
and institutional speculators want to take advantage of
that trend � and they should be allowed to do so.
And now a
quick look at what the market is doing.
Here is a look at an interesting chart from two
weeks ago:
You�ll
note that we�ve crossed three of those �slope
acceleration� lines that I drew.
But there are key support levels at ~131 and again
in the 120 zone. It�s
interesting to note that just at the point where the
whining about oil prices reaches a crescendo, oil prices
are breaking down, at least a bit.
My prediction: more volatility and a market
that�s tougher to read than a Thomas Hardy novel on two
hours of sleep�
Please
keep those comments coming to drbarton �at� iitm.com.
Great
Trading!
D.
R.
About
D.R. Barton: A
passion for the systematic approach to the markets and
lifelong love of teaching and learning have propelled D.R.
Barton, Jr. to the top of the investment and trading
arena. He is a regularly featured guest on both Report
on Business TV, and
WTOP News Radio in Washington, D.C., and has been a guest
on Bloomberg Radio. His
articles have appeared on SmartMoney.com and Financial
Advisor magazine.
You may contact D.R. at
�drbarton� at �iitm.com�.
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