Sunday, August 24, 2008

Last week of "Summer" Trading

Well this is the last week before all of the traders return from their summer homes and try to make sense out of this somewhat insane market. I have been doing a lot of reading and many people are confused because their highly touted correlations are confusing them. For example, inflation readings are at multi-year highs and the "gold" long trade has been anything but a sure winner. The fact is that markets are always changing and these so-called "sure-fire" correlations are not guarantees. If they were, we could all have a simple formula to retire. I personally believe that the "yellow metal" as the inflation hedge days are gone and the days of OIL as the best inflation hedge are here!! Think about it---gold has much less practical use than oil. Gold was a great inflation hedge and you could expect it to move inversely to the U.S. Dollar. What commodity has been moved the most based on the direction of the dollar over the past 6 months? OIL!!

Yes I am an oil bull over the long term, but I do think you can make money with some good stocks in sectors other than energy right here. Now those of you that have been reading my blog for a while may accuse me of being drunk when I type out this next pick, but I assure you that I am not! I like AON Corporation (AOC) and what they have done in acquiring the British reinsurer Benfield Group. I am going to watch and see what is announced on this stock Monday before I buy shares though. Standard and Poors could well reduce its debt rating on AOC because they are paying cash for Benfield and are also assuming some debt. I will tell you that I think this enhances their competitive advantage and I think it was a great time for this buyout. I think this stock heads to $55, but again I will be cautious until I see what damage S&P might do.

One stock that I have on my radar screen for a "short" trade is Almost Family (AFAM). Now this is a good company and I am basing this trade on the simple fact that this stock seems ahead of itself. It broke out and is in a sector that is seeing a lot of buying at present. The recent action is in my opinion, a classic example of the momentum driving a stock faster than the fundamentals should support. Now I will look for it to show some weakness to make sure that I am not fighting the momentum. I don't mind missing a little of the move to increase the probability that I am on the right side of the trade.

Back to energy, most of the action we have seen has been based on the action of the dollar---at least according to the mainstream media. I think Bernanke's comments that inflation will moderate with the price of oil is a desperation move in my opinion. First, Ben has said many times in the past they he is concerned with core inflation. Now he seems to be banking on relief from the headline inflation number---and I heard one Fed Governor today talk about how much that would help with consumer confidence. It seems like all of these guys have gotten their stories stratight before making public statements. I agree that if energy prices come down, it will help the economy and most certainly consumer confidence, but our real problem is inflation caused by our monetary policy---the Feds prinitng presses have been running at full-speed far too long. Inflation is a monetary problem and will have to be contained by monetary policy.

I still think that oil goes up in the long term. Stay tuned!!!!


Dollar.Discipline said...

Oil will go up if for no other reason than supply/demand in the upcoming cooler months. One THREAT of a war, and it will skyrocket during those months.