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September 7, 2005

Oil Change

Oil enthusiasts who were giddy buying $70 oil are having their aspirations deflated. The price of black gold slipped again today and is now nearly 10% off its peak from just a week ago. No doubt this development, along with hopes that the Fed will ease from its rate-rising stance, has buoyed equities. How far the pop will go is yet to be seen, but fundamentals really haven't changed. The U.S. is still facing precarious threats to its well-being, not the least of which is enormous debt, both internally and externally.

Hope springs eternal. Optimism knows no bounds. Choose whatever cliché you prefer. Psychology is a tough thing to change, especially when traders have been conditioned to expect a Fed rescue from any sort of trouble. At some point Fed stimulus will not work, and the pain will be tremendous. That won't stop the Fed from trying harder, which will ultimately debase our currency and send precious metal prices soaring.

Housing stocks gained moderately today in the regular session, but tanked in after-hours trading in response to Hovnanian's earnings disappointment. Traders punished HOV as much as 7% as it lowered 2006 guidance. Almost farcically, HOV decided that it would still meet 2007 estimates. Traders obviously aren't buying into the spin job these days. I see this as another sign that psychology has indeed shifted in the housing sector. Other big names, such as Centex, Toll Brothers, and Lennar, were dragged down around 2%.

Disclosure: Short CTX; Long TOL Puts.


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