Monday, November 24, 2008


Have we all of the sudden seen a dramatic improvement in confidence? The action over the last 2 days (the best 2 day gain since 1987) would indicate that it has, but lets take a closer look. Even with the rally, we are right back where we were last week--which is essentially at the October 10th lows. The mainstream media is parading around "experts" that are offering varying opinions. One set says that we will meet huge resistance at 850 and will return to the downward pressure. The other set of experts contend that we are in the "bottoming process" and the fact that we are back at the October lows means that we have flushed out or "capitulated" (I have come to hate that term due to its obvious overuse by the mainstream media) and are now headed much higher. I must say that I was surprised that today was so strong. I bought the SDS at 103.49. It traded down below 95 at one point to close at just over $100. In after hours trading it moved down to about $98. I kept asking myself the question, WHAT HAS CHANGED? The only possible answer is confidence in the President-elect's economic team. In my opinion, there is no team, no person, no idea that is going to make this mess better immediately. Yes, I know that the market will turn around before the economy does--but are we there yet? I don't think so.

One thing that still scares me is the connection between oil, the metals, and the market. Would we normally see the market move up on a day when oil moves up almost 10%? When everything moves in tandem, it appears to be driven by a restoration of confidence than a normalization of prices. Confidence (more properly termed an increasing tolerance for risk) can start a rally and cause short covering, but it doesn't mean that things are normalizing. I by no means am saying that the market should go down each time oil prices rise, but I am saying that rapid increases in the price of oil are not healthy for the market and should be seen as such. Yes we need confidence to be restored, but confidence will not prove to be as stable or lasting when it is predicated on political news as it would be if we were seeing actual improving economic conditions.

The market seemed to be excited today over the Citigroup bailout. Lets analyze that--one of the largest players in our financial system was in such poor shape they had to have a government bailout---and that it good news? Never mind the inflation that will come from all of the government bailouts. For those of you that believe in the deflation argument, did you not see that when money flows (like it has the last couple of trading days) it will flow back into commodities. I will say again that there was much forced selling and there is a lot of smart money on the sidelines. Oil and natural gas may be out of favor right now, but it won't last for long. And by the way, you won't have deflation when commodities prices are rising. INFLATION IS ON THE WAY!!!

I am happy with my Fluor (FLR) and while it may pull back over the short run, I see it headed much higher. Another favorite of mine is Sanofi (SNY). To talk about bad timing, I originally bought this one at $47. I think they have an awesome pipeline of medications and vaccines. They are paying a good dividend and should be somewhat insulated from any further economic weakness.

At the risk of sounding like a broken record, one of the best inflation plays is Freeport (FCX). This is a well-run company and they should benefit as the price of gold rises. I believe that we are getting close to a bottom in copper as well and again this company will be a major benefactor of rising prices.

At the time of this writing, the futures are holding up fairly well--but as we have seen lately things can change quickly.