Tuesday, December 2, 2008

TUES. DEC. 2 - Basic Economics

On October 24, U.S. crude oil settled down $3.69 at $64.15, the lowest close for oil in 17 months at that time. The news? OPEC pledged to cut oil production by 1.5 million barrels per day. Over the weekend, OPEC met again, but this time it could not even agree on a number in which they should try to cut again. And what happened? Oil closed down $5.18 to $49.25, the lowest close for oil in almost three years. Now, let’s not focus on the fact that OPEC has historically not held to its pledge whenever they cut production. It is in the interest of the cartel as a whole to cut, but it is in the interest of individual member to pump as much as they can. Basically, if everyone else cuts production, but I keep pumping, I’ll do relatively OK ergo the cuts don’t work. This time, however, there is one more wrinkle major wrinkle is in the mix. See, part of that whole concept in which economics work is that in addition to the supply part of the equation, there must be demand. If the average person cannot afford a BMW thus relatively low demand, why cut the supply of BMW's to make them even less affordable in a bad market? It is the same thing here. The usage of oil is falling rapidly as factories begin to idle and the pace of activity stagnates greatly in the BRIC nations of Brazil, Russia, India, and China in particular. Thus, barring gigantic cuts (which the OPEC nations must stick to), there is no artificial quick fix to the oil market much less any market when demand is not present. Because, let’s not fool ourselves, this is clearly a demand problem as the appetite for consumption worldwide continues to decrease. For day traders, the direct correlation between equities and oil prices as established in the late summer is likely to continue for some time to come. Prices for everything but bonds and the dollar relative to the Euro currencies are marching in unison and manipulations such as what OPEC is trying to do will not stop the natural order.

Overnight, stocks in Tokyo were crushed in falling about 7.5%. However, the rest of the Asian indeces were not down nearly as much and sentiment shifted in Europe with the bourses there up a little. Oil hit a fresh 3 ½ year low overnight, but bounced back. With things more stable, look for a stronger open this morning. After that, it will continue to be thin and illiquid, but a better tone. There will likely be a big sell-off at some point followed by a choppy rally back.

Reiterating-If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 based on direction of the market unless specifiedIf something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-

Good- The following stocks have good news and/or a strong technical pattern

SNDA- beat its earnings handily

SGLP- kept Friday’s huge strength; likely a buy thru 3 when/if it gets there

RMBS- short covering continues; likely a buy thru 11.75 when/if it gets there

MRX- settled litigation with IDXX

DOW- reduced terms in its chemical venture with Kuwait, but deal still going through

Bad-The following stocks have bad news and/or a weak technical pattern

CSE- closed weak on a sell imbalance

FSP- got ravaged late in day on sell imbalance; love it as a buy thru unch if it opens down as it broke from 11 to 8.75 in the last hour yesterday

UDRL- closed on its low

CHK- closed on its low, continuing Friday’s deep declines on the share issuance news

HIG- closed on its low

EXM- closed on its low

MTL- closed on its low

DRYS- closed on its low

CLF- closed on its low

MS- closed on its low; watching this one and GS today

SPG, VNO, EQR- among the REIT’s which got demolished late yesterday

JEC- huge short covering spike ended with a thud in closing on its low

XOM, CVX, RIG, BHI, HES- among the big oils to close on their lows

LM- shored up money market funds; not necessarily good because it restricts their capital a bit

TSRA- ruling by panel that its patents are valid on its technology, but have not been infringed upon by its competition

MOS- warned

MVCO- drilled on funding concerns

FNFG, PBCT, BRKL, HCBK- among the mid-tier banks that were thrashed; many at new trend lows

XNPT- failed phase II trial

SHLD- missed earnings by a lot, but announced buyback of stock








Good luck today.


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