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August 31, 2005

To begin with, a follow up to the Crude Oil idea....November Crude closed down 46 cents at $69.41 today.
Sell/Short Crude Oil
After looking at the November puts options, I came to the conclusion they will work just fine and was initiating short positions today by buying puts $2.00 to $3.00 out of the money....When I look at the November chart, I do believe the last thing one should expect is a $2.00 or $3.00 range for the next 46 days until November options expire....If I'm right, and we have hit the emotional peak in energy, to see a $10.00 drop in a matter of days or weeks, would, I believe, be easy to see. If this is the case, and my timing is right, just about any reasonable put you buy should become a solid moneymaker. Obviously if I'm wrong they can become a solid moneyloser...
So, on the chart below is an example of one put option at today's close. They aren't cheap, but this is a big time market situation.
I am getting calls with real world stories detailing how there really is no diesel fuel to be had, i.e., "There isn't any left"....Also noting there are lines at gas stations as people fear we are running out....Maybe I will look like an idiot a week from now (It won't be the first time...It absolutely goes with the territory in this business) but that is exactly what you should expect at a major top....You can't get any worse than "not having any" and the next thing that happens is suddenly you do "have it".....And if you do have it, in the final analysis, petroleum buyers are not that excited about buying crude at seven times the price it was just six years ago....and when they put their hands in their pockets, there is no telling how fast it can come down....
I should also say I think we are looking at a top similar to that of $875 Gold back in 1980. I entered this business in August, 1980, with Gold having made its all time high in January of that year. As a rookie, prospecting for commodity market speculators, I can tell you that there was NOBODY, NOWHERE, ANYWHERE who didn't think Gold, which was then down in the 600's, was going back up to $875 and far beyond that....Everybody had all the reasons in the world as to why, and NOBODY could ever believe it could end up back at $250 twenty years later.....I'm not saying Crude is going back to $10.00, but I do think it definitely possible we will now enter a long, long price decline stretching out some number of years. There will be bear phases and bull phases, and for a long time, "fundamental analysis" by some really blue chip experts will argue, "it could be headed back toward $70.00 and beyond".....but in the end, where we are now may turn out to be a major, major high for, at a minimum, the rest of this decade....This opinion has nothing to do with this immediate trade, but is just a thought from a big picture standpoint....
Buying puts and selling futures...
Buy the Stock Indices
Back in April, I made a recommendation to buy the Stock Index Futures and was about one week early, causing me to cough up my position pretty much on the low tick. We'll see what happens this time....
Since their monster rally during the better part of 2003, stock have been decidely sideways, and it might be said, decidely "resilient", in spite of Iraq, in spite of the Fed's tightening campaign, in spite of escalating health care costs, and in spite of the rampaging bull market in energy....And now we have the devastation from Katrina, which together with the corresponding last spike in energy prices, would certainly make it easy to argue against stocks going up. I would suppose the obvious economic conclusion now is, "The economy has to weaken/struggle and stocks ought to do so as well"....I think I see it from a different perspective....
Any chart of GDP (the sum of all goods produced) for the United States, going back for several hundred years, looks very much like the 40 year chart shown below....It just keeps climbing. This is not to say things can't go sour periodically, but the combination of our geography, natural resources, political system and conglomeration of 400 years of immigration (people come here to work, to better themselves) might be the force that does keep the USA being what it is: The Economic Engine of the entity that ALWAYS keeps moving forward, sometimes grindingly, sometimes wildly so. I don't say this as some sort of patriotic, everything-is-rosy sort of statement, but simply to say the "inertia" of this country tends to be up...And, at any time, one should be aware that the stock market, or the nation's economic barometer, can suddenly shift to a higher gear and quickly be moving higher.
I may be wrong but my feeling is the public currently has zero expectations for the stock market....And that any move up will now be accompanied by the classic "wall of worry", easily citing all of those negatives noted above as reasons for any bull move to the market moves, and moves, and moves.
Interest rates are obviously important to the economy and the stock market. Katrina is an unforeseen event and any intentions the Fed had of tightening any further have just been thrown out the window. With the economic disaster facing the Gulf Coast, I would guess the Fed has no choice now but to flood the market with liquidity, and under no circumstances should you be reading a Fed statement that says, "The risks in the economy are balanced". The next thing you hear from them will reference the economic shock to the system from Katrina as well as the dangers to the economy implied by current oil prices....And the Fed will OVERNIGHT have gone from a tightening mode to just the opposite, which, as it has in the past, may light a real fire under the stock market.
Take your pick....I am buying futures contracts in the Dow, S&P 500, and NASDAQ. All of them have mini's as well as full sized futures. I have no idea as to objectives, only that from right here, I think some sort of big, fast move may be in the works over the next 2 to 4 months and I will be trading those contracts from the long side.
Here are the futures contracts....
Buy Feeder Cattle
Feeder Cattle are 600-700 pound steers that are placed in a feed lot to be fattened up for slaughter as a full grown animal...More you don't need to know....
This is a market trading on its highs and is, I believe, either about to break out and run 5 to 8 cents, or it will fail here and fall away at least 3 to 5 cents fairly quickly. With this in mind, I see this trade as ideal for the Both Sides Strategy (2 calls & 1 put), meaning I think this trade has a strong possibility of either making good money, or, if wrong, recouping 100% of your investment as the market heads south. It goes without saying the trade can also lose you money....
It may or may not be of significance, but here is a market trading on its highs, and, per Commitments of Traders, Small Speculators (market fodder) are short this market at a better than 2 to 1 ratio.
Bill Rhyne
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