Thursday, November 20, 2008


So many people are confusing deleveraging with deflation. Lets go back to Jim Rogers fundamental discussion on oil. He simplified the equation by saying that we obviously have growing demand for oil over time and we haven't discovered "major" new field in the last 30 years. So I ask the question, is demand for oil falling this rapidly or are falling prices the function of hedge funds selling? Many investors are selling anything they can get their hands on to raise capital. Now I don't doubt that oil may have gotten overdone to the upside, but markets tend to overrun.

Ask yourself another very simple question. Do we have to have oil to operate our economy? Yes we do and this economy will get going again. We have overrun to the downside and will see the demand story emerge very soon. Think about this in terms of "percentage chances". As oil prices fall, consumers will either do more driving or they will have more disposable income to buy goods. How do goods move around the country? It takes OIL. I know that is a ridiculously simple example, but it will materialize quicker than most believe.

We all know that markets aren't supposed to move in a straight line. When they appear to you must look for an extenuating circumstance. That circumstance in the case of oil is the dollar rally. The dollar and oil have been feeding off of each other since the late spring. What happens when this dollar rally ends? How can you believe that the dollar can continue its run in the face of all of this government borrowing? Jim Rogers was concerned about the Federal Reserve destroying the value of the dollar back when the only bailout was Bear Stearns. Many so called "pundits" are patting themselves on the back bragging about how they have been right on the money with their deflation call. They have been patting themselves because they have seen the greatest deleveraging in the history of the world. Will any of you out there argue that our economy---from hedge funds to consumers and their credit cards-- was not abusing leverage? If you would like to make that argument, please post a comment.

I don't want to touch any new stocks here. I sold some stocks today. I said last night that we didn't need to see a 400-500 point down day on the DOW today. We didn't see the slam down---just the slow bleed. I think we could see 6500 on the DOW before the end of the year. I do believe that 450 on the S&P is also possible. We are almost certain to have some form of a suckers rally soon, but it won't be a very big one. We could rally tomorrow as some shorts cover their positions and go party the weekend with the money they made. When it seems too easy---and the short side has been easy---it is likely to change even if only for a short period.

I still like UNG. Yes I know I am down in that trade, but I think natural gas is the poster child for getting smacked during the deleveraging. I also like gold for a longer term play. Gold may be headed down if the deleveraging keeps getting mistaken for deflation over the short term. GOLD IS A LONG TERM PLAY.

Most people don't want to hear that the pain for our markets is just beginning. Someone make a comment and let me know what positives you can see---I don't see them. The good news is that we have ETF's which will make it easier to profit once inflation begins. GOLD OIL NATURAL GAS.