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New Orleans: Why Rebuilding Is A NoBrainer.
Oil: Gas Lines And Cooling Futures Prices.
Stocks: Employment Friday.
Dallas, TX, September 2, 2005, 08:00EST * excerpts from daily reports
Editor’s note: If anyone can find a piece anywhere that offers international aid tothe United States in the wake of this natural disaster, send us the link. So far, wehaven’t seen anything other than Venezuela’s president Hugo Chavez taunting theU.S. about how stupid its officials were in their evacuation plan. The silence isdeafening. Makes anyone wonder about the response from the U.S. the next time mothernature strikes around the globe.
Anarchy is the word of the day for New Orleans. Gas lines are springing up, with Drudgehaving a headline field day. Northwest airlines is near bankruptcy. But oil, natural gas,and gasoline prices are starting to cool off in the futures markets. Traders, thus, willbe focusing on the employment report and oil prices.
Today’s Analysis: New Orleans: Why Rebuilding Is A No Brainer
Important: Visit our energy section for new recommendations on U.S. Dollar Trading System,the bond market, and resurgent energy stocks.
House speaker Dennis Hastert told a Chicago newspaper that New Orleans should not berebuilt, but a careful, thoughtful, and useful analysis based on geography and economichistory says otherwise and makes us wonder about Mr. Hastert’s understanding of howthe world outside the beltway really works.
To be sure, a knee jerk analysis of the situation might make anyone think about whyrebuilding New Orleans is worth the trouble. After all, the faults in its design, and theapparent lack of planning, and foresight by government officials at all levels, local,state, and federal are appalling. But the fact is, that if you take a step back, NewOrleans, and the Mississippi river are the reason America is the world’s number oneeconomy, and to write the city off without an understanding and appreciation of its rolein how America works, is irresponsible.
Stratfor.com’s George Friedman, in alengthy analytical piece penned on 9-1, summarized it succinctly in three paragraphs:
1) “The New Orleans port complex is that it is where the bulk commodities ofagriculture go out to the world and the bulk commodities of industrialism come in. Thecommodity chain of the global food industry starts here, as does that of Americanindustrialism. If these facilities are gone, more than the price of goods shifts: The veryphysical structure of the global economy would have to be reshaped. Consider the impact tothe U.S. auto industry if steel doesn't come up the river, or the effect on global foodsupplies if U.S. corn and soybeans don't get to the markets.”
2) “The American political system was founded in Philadelphia, but the Americannation was built on the vast farmlands that stretch from the Alleghenies to the Rockies.That farmland produced the wealth that funded American industrialization: It permitted theformation of a class of small landholders who, amazingly, could produce more than theycould consume. They could sell their excess crops in the east and in Europe and save thatmoney, which eventually became the founding capital of American industry.”
3) “But it was not the extraordinary land nor the farmers and ranchers who alone setthe process in motion. Rather, it was geography -- the extraordinary system of rivers thatflowed through the Midwest and allowed them to ship their surplus to the rest of theworld. All of the rivers flowed into one -- the Mississippi -- and the Mississippi flowedto the ports in and around one city: New Orleans. It was in New Orleans that the bargesfrom upstream were unloaded and their cargoes stored, sold and reloaded on ocean-goingvessels. Until last Sunday, New Orleans was, in many ways, the pivot of the Americaneconomy.” <!--------- end Market IQ excerpt ------------>
EnergySector
Oil Market Summary And Outlook: Energy Stocks Are On Fire
Oil and gasoline prices have managed to hold their own, but the oil, oil service, andnatural gas sectors are on a tear.
This has significant implications for the market. If history holds true, then a rally inthe stocks is likely to precede a rally in the commodities. If we follow this logicfurther, then it makes sense to expect higher prices in crude, gasoline, and heating oil.
This is not a guarantee by any means though. For example, if the oil stocks start to gostraight up on a daily basis, and do so for several days, at some point they will comedown and come down hard. If and when this scenario unfolds, traders will be payingattention to what happens in the commodities.
It’s important to note the following. There is improvement in New Orleans, at leastwhen it comes to oil infrastructure, as the port structures look to be repairable, andsome progress is being made with the damaged levee system. This news, may or may not beprominent enough for the markets to have acted on it yet, with traders focusing only onthe short term aspects of the situation, meaning the potential for gasoline shortages.
Oil has failed to close above $70 for four straight days, on the October contract,although December is above $70, now.
The current scenario does not guarantee that a top is imminent. But it doesn’tdiscount it either. Considering that the current bull market in oil started after 9/11,and that prices have risen nearly 50% in the last year alone, the trend is now well inplace, and the market has had just about every opportunity to price in the worst of theworst case scenario short of the world running out of oil tomorrow.
Markets are irrational, and simultaneously and perversely efficient. With the tabloidsfalling all over themselves trying to find the highest gasoline prices to put on theircovers, and The Drudge Report featuring headlines about gasoline lines in Atlanta, onething is certain, this is crazy time, that point in the market cycle where any sense ofrationality is non existent and price swings are very dramatic. Crazy time, is often theprelude to major break time.
When that time will actually materialize is the question. Whomever can answer it correctlywill make a fortune.
From a trading standpoint, this market is now both a technical affair, and a news drivenmarket, with the action in the Gulf the key to developments. Active traders should stickwith exchange traded funds, such as the Oil Service HOLDRS trust which offer a good way toparticipate in the overall trend, but still offering liquidity and allowing for theconsolidation of the trade into one position that can be liquidated and sold short whenthe market turns.
Our very long term opinion on oil has not changed. We are still in a very long term bullmarket in oil, until proven otherwise. The long term line in the sand, for us, remains $40per barrel. That means that prices can correct to $40 and we could still be in a longterm, secular bull market. If prices were to fall below $40, then the very long term trendwill have likely reversed.
Chart Courtesy of StockCharts.com
TechnicalSummary
Chart Courtesy of StockCharts.com
Two Fairly Good Days Back To Back
It's employment Friday. Watch bonds and the dollar. Visit our energy section for fulldetails on both.
The Dow is faltering, but the S & P 500, behind energy, and the Nasdaq, behindbiotech, are holding up.
So far, energy, biotech, and the small stocks are the only real standouts of this two dayold bounce. The action need to improve, and needs to do it soon, or this rally could fadegiven the difficult situation in New Orleans, and the geopolitical problems facing theUnited States.
As we noted on 8-31, things were getting so bad that “from a contrarian standpoint,though, it is important to keep an eye on the action in this market, as the level ofdevastation in New Orleans may lead to surge of pessimism and could create a buyingopportunity. We would wait to see it, though, before buying aggressively. This situationis not fully factored into the markets by any means. “
So, we’ve seen a bounce. If this is a tradable rally, not just a bounce, volume willstart to pick up, and breadth will remain excellent. If there is a heavy volume day wherethe NYSE volume shows a ratio of 9 to 1, up volume to down volume, then we’ll bedealing with something serious.
At this point, we may just be seeing some energetic short covering, so the jury isstill out on the rally.
The currency markets are also interesting, as the dollar looks increasingly weak. Visitour currency trading model, found on our energy page.
There is no need to be particularly aggressive here, unless you are an active trader andare lining up some short positions, or can find some stocks with relative strength to golong on. If you are wanting to buy stock, think about it hard, before you do, and lookcarefully, sticking to stocks that are showing major strength. There are still some stocksthat are doing reasonably well, but most are just going sideways or drifting lower. Thisis not a market in which to be very bold, and those who can remain patient and be cautiousare likely to do better.
What To Do Now
Remain patient. Consider currencies, energy, and biotech as up front plays. Hold on tosome cash. Buy only exceptional strength, and be ready to sell quickly. Take this marketone day at a time. See our health, technology, and biotech areas for short selling ideas.
Check all our sections daily. See tech, biotech, Fallen Angels, and timing systems forthe latest adjustments. Our ETF trading systems for energy, Spyders, Small Caps, andtechnology have also been updated.
Chart Courtesy of StockCharts.com
