CAPITAL MARKET COMMENTARY
WORLD STOCK PRICES ARE “MIXED” THIS MORNING:
Once again we fin the leader of the worlds’ stock markets to be Japan, whose citizenry went to the polls this weekend to support the current government while dislodging the ‘old guard’ of the LDP in a virtual landslide victory for Prime Minister Koizumi. Her shares were higher by +1.6%. And once again we are certainly impressed; so much so that we consider Japan’s rally not yet even close to being over…and we shall look to buy pullbacks when and where the develop. We stood in awe on Friday at price movement; today we stand in more awe after the election…and we will soon vote with our capital.
CHINA CRUDE OIL IMPORTS ARE RISING…BUT OIL PRODUCT IMPORTS ARE FALLING:
While we expect crude oil prices and eventually oil-related shares to fall – and perhaps unexpectedly and sharply in the not to distant future; we note that China imports of crude oil fell in August by -6.1% to 8.76 metric tons; however, for the year-to-date – she imported +3.9% more to total 83.12 metric tons. In terms of products – both August and year-to-date numbers were lower…-11.7% and 19.1% respectively. These numbers are ‘lost upon the market’
given the challenges the US Gulf Coast refiners are experiencing. But if you were to tell us that 4 refineries were to be ‘down for a couple of months or even longer’ – we would have thought crude oil and its product prices would be substantially higher. In fact, crude oil prices are lower than they were before Katrina; product prices are coming down – and this is clearly being driven by the fact the whole world is releasing oil and oil product reserves to the US to make up for the refining capacity lost as well as damaged platforms et al. This is further the ‘perfect political cover’ for President Bush and other world leader to have released substantial reserves into the marketplace. Whereby it wasn’t politically expedient to do so then – it most certainly is now – and they will continue to supply more than enough crude and oil products so that prices are likely to ‘plunge’ rather than rally sharply due to this enormous increase in supply. We are watching carefully; we are watching whether the broader averages can move forward on lower oil prices – and we are monitoring oil stocks for short positions in the days ahead given their bubble-like parabolic rise.
THERE ARE NO ECONOMIC REPORTS OF INTEREST TODAY:
None, zilch…nada. However that will change tomorrow with the July Trade Balance data as well as August’s PPI data. Since this is “BK” or “before Katrina” – we look for the trade balance to reach over - $60 billion while the PPI headline figure is +0.9% vs. consensus of +0.7%. The more widely watched ‘core rate’ is expected to have risen by +0.1%...we will see as they say.
On that note, the Philadelphia Business Journal notes that a survey by the National Federation of Small Businesses shows small business holding back on expansion plans, new technology and hiring plans due to the uncertainly surrounding rising energy prices. The NFIB stated that 59% of the respondents saw a rise in their costs for goods and services, with only 18% able to pass those costs along or better said…82% of business couldn’t pass those costs along. We think Katrina now gives businesses an ‘excuse’ to raise prices…and a good one. But rather increase the costs of goods and services…we expect to see more “fuel surcharges” added to everything, from pizzas to ball bearing to Frisbees. The cost of transportation has increased…and eventually so will the cost of goods. We wonder aloud how the PPI captures ‘surcharges’??
[ETF PORTFOLIO AND “PAID-TO-PLAY” PORTFOLIO SUMMARIES ARE RESERVED FOR SUBSCRIBERS]
“PAID -TO--PLAY” PORTFOLIO CHART COMMENTS
Our broader market indicators are pointed higher; thus being aggressively short at this juncture isn’t the proper position to take. However, given the weak manner in which prices have rallied in the past week suggest ‘lack of leadership’. Hence, we inclined to consider short positions sooner rather than later given the S&P 500 at major high resistance levels; and we would consider doing so before our indicators turn lower.
Why may you ask? Quite simply, this is due to the fact we can define our risk at the highs...and first and foremost we are risk managers – the risk is that a breakout occurs and we cover our positions, whereas the reward is a rather sizeable several percentage point drop.
If we venture out onto the ‘risk ledge’, we would do so via being short of the housing shares. On Friday, we intended on becoming short RYL on a test of the 30-dma, but we mistakenly didn’t provide a recommendation. Thus, today we will rectify that this by clearly moving short RYL. Also, we noted we want to consider shorting various oil-related shares such as APC or even AHC. They have not reflected the decline in crude oil or its product prices; and if we had a favorite to short...we would look at APA. This is cleary an ‘out of consensus’ trade, but one that has good riskreward potential we think...but we don’t have a catalyst yet to trade.
Turning to the long side of the portfolio, we are growing rather impatient with several of our long positions; chief among them are CAG and BAC, of which we are considering exiting them and replacing them with MMM and RGEN. We want long exposure, but the former’s pattern shows very modest basing action and may take longer, whereas the latter shows more favorable patterns that would yield immediate results.
About Richard Rhodes and The Rhodes Report
