[MrBill]

Great interaction! Thanks.

How about this? Say, OPEC did not know where the 'new' equilibrium price was for crude to match world supply with global demand. They thought $60-65 was a fair price. But even at $75 the demand for crude has not abaited. As they are trying to optimize proftits why would they open up the taps and drive oil back down to $60-65 when there is no visible demand destruction taking place?

In fact the world economy is still growing at 5% p.a., and seems quite capable of absorbing higher pump prices. Then it may not be peaking oil production at all, but simply that OPEC is finding out that it is more profitable afterall to produce less oil.

If we know that SA was pumping too quickly and threatening the health of some of their oilfields then is it not reasonable to expect that they know that as well? Perhaps they are taking a much needed step back to analyze how to better manage their own production? Saudi Aramco appointed to outside directors to their board this week from weastern majors. Perhaps they are looking for outside the box answers as well? Just a thought.

I dug up some counter-intuitive information on demand destruction that I thought was very interesting. It seems that transport fuel demand, according to two different studies, is not all that inelastic afterall. Here is a summary.

This is based on one-year elasticity from a 1% increase in the price of retail gasoline.

-0.48 gasoline elasticity
-1.87 heating oil & coal
insignificant change in demand for nat gas or electricity
-0.84 demand for vehicles

Overall, a 1% increase in energy price equals approximately -0.04% demand destruction.

Therefore, per household with income of $4000 per month, or $48.000 per year, each would cut back $41 per month, if gasoline increased by 25% due to a supply shock. In other words, peanuts!

Source: The Economic Effects of Energy Price Shocks

And that is for a nation that is a net energy importer. But as we know higher energy prices are more accurately described as a wealth transfer from consumers to producers. So that net loss from importer shows up as a net balance of payment transfer to the exporter. That producer can therefore increase their consumption. So how much demand is actually destroyed through higher prices overall? Not much.

UPDATE: more thoughts on 'new' equilibrium price
$this->bbcode_second_pass_quote('', 'T')hrowing a wrench in the works
So what are the chances oil prices will crash back down?
"At this point, I'm not sure if any scenario exists for oil dropping back down to $50 or even $60 per barrel because the days of OPEC being able to open up some spigots and send oil prices considerably lower are past us," said Ryan Oil & Gas' Ryan.
He said he's not sure how high oil prices have to be in order for "demand destruction" to start, but it's "going to be higher than the $80 handle we're currently staring in the face."
Indeed, "the demand and concerns globally for crude indicate that this market could support an $80 price tag with little or no problem even with fairly positive fundamentals," said newsletter editor Kerr.
What's the scenario with the highest probability that would send prices back to $70?
"After the fourth quarter demand should drop, allowing prices to fall. It could even happen during the fall season, especially if there are no hurricanes that disrupt supplies," said Hassey of Gold & Energy Advisor.
A major global recession is a scenario he dubbed "low probability." But he also said peace in the oil-rich Middle East would be of "very low probability."
In a "worse-case scenario for a price crash," oil prices would remain high until OPEC meets on Sept. 11, said WTRG's Williams.
If prices do remain high until that meeting, the cartel would be "very likely to increase production [and] if that was followed by bad economic news, the price would crater," he said.

[BigTex]

Mr. Bill,

The thing that makes me wonder about demand elasticity for fuel is that we've seen pump prices more than double in the last three years in the U.S. and I don't see any demand destruction at all. Maybe it's there and I just don't see it.

Another thing I wonder about is the historical tendency for recessions to follow oil price shocks. I don't see that occurring this time around, and I'm not sure what is different. Perhaps it is the one-time nitrous-like economic burst that the early stages of globalization represent that is offsetting the recession that would otherwise have been triggered by this rapid runup in oil prices.

RE OPEC, I would like to think that they are searching for a new equilibrium that is consistent with economic growth, managing their fields better, thinking strategically, etc. However, when has this ever happened before? My guess would be that with $75-$80 a barrel oil every OPEC country would be producing every drop they could and cheating like crazy on their quotas.

The weak dollar does throw a bit of a wrench in some of the analysis of OPEC production. If I'm a rich sheik who wants to get richer, I would say "I'll open the taps when you put a little more mojo in the dollar. As long as it is weak, I am going to need at least $75 a barrel to make my harem payments."

[seahorse]

Opec managing their fields better? Don't think so. You need to go read the posts by Energy Digger made in the Peak Oil Discussion thread. He made a great post about his experience as a driller in Saudi Arabia. He also said they were at peak.

[BigTex]

It's nice to have a weekend to try to assimilate everything that is going on in the markets right now. I am amazed at how much fear selling is going on. It sure drives home the point, however, that stock prices are determined by supply and demand. If everyone is selling and no one is buying prices will go down, no matter how strong the underlying fundamentals (short term anyway).

I heard someone say once that in the short term the stock market is a popularity contest; in the long run it is a scale. I'm also, reminded, though, that in the long run we're all dead.

[Mechler]

MrBill,

Can you remind us of the support levels we should be looking for. You called this correction a while back - now we just need you to call the bottom!

Anyone have a theory as to why the energy sector is leading this decline? I mean, the financials taking it on the chin makes sense considering that most of the fear in the market is about the housing and subprime mortgages, etc. I'm not sure how that relates to oil, except for people just being scared and wanting to protect their gains (or mitigate their losses).

[BigTex]

$this->bbcode_second_pass_quote('Mechler', 'M')rBill,

Can you remind us of the support levels we should be looking for. You called this correction a while back - now we just need you to call the bottom!

Anyone have a theory as to why the energy sector is leading this decline? I mean, the financials taking it on the chin makes sense considering that most of the fear in the market is about the housing and subprime mortgages, etc. I'm not sure how that relates to oil, except for people just being scared and wanting to protect their gains (or mitigate their losses).

[eastbay]

The world may no longer be awash in oil, but USA is quickly becoming awash in oil company buying opportunities. There are currently many rediculously low p/e ratios and when that's combined with the clear trend of rising prices (due to peak oil) they're even better looking!

Cramer may be correct when he claims COP will soon be a $120.00 stock.

[MrBill]

We are already trading the September contract now, so whatever happens the future price now reflects demand after the summer driving season is officially over. We can still have a hurricane or eight, but we are past the peak in terms of seasonal demand.
$this->bbcode_second_pass_quote('', 'C')rude oil fell in New York, heading for its biggest two-day decline since June, after OPEC increased output and on concern losses in the U.S. mortgage market will slow economic growth and reduce fuel demand.

Members of the Organization of Petroleum Exporting Countries, excluding Angola, raised production last month by the most since September 2004, a Bloomberg News survey showed. Prices of commodities including copper in Shanghai and platinum in Tokyo declined, and stocks in Asia fell, extending a global slump, on speculation waning economic growth will slow demand.
----------------------------------------------------------------------------------------------
Hedge fund managers and other speculators increased their bets on rising prices to a record in the week ended July 31. Net-long positions in New York oil contracts, the difference between orders to buy and sell oil, rose 17 percent to 127,491 contracts, the highest since at least 1993, the U.S. Commodity Futures Trading Commission said Aug. 3.

[MrBill]

Just some thoughts on whether the sub-prime fiasco and credit crunch is a US financial crisis caused by debt and leverage or symptoms of wider problem? It seems that we are not the only ones asking such questions.

This was quite interesting from ML...
$this->bbcode_second_pass_quote('', ' ')Is this a US problem or a Global problem?

Yesterday, we put a call together for a client and one of ML's CDO analysts (pls. let me know, if you like that as well)

Findings are:
Who owns it?

Super senior- Mono line insurers holding 75-80%- hedge funds & other insurers the rest.
Mezz and AAA- 50% banks; 10% insures; 5% hedge, 5% Private client, 5% pensions
AA to BB go right into CDOs to make up the high grade.
Regional- where are the holders?
AAA and AA
75% are US investors
15% Europe
10% Asia
Mez and ABS are mostly US managed with 5-15% in Europe and Asia

At this point there has been little trading- Key question is if future ratings downgrades, which we expect, cause a fire sale from pensions.

Key take from me, and ML European financial analysts in their recent reports, is that this seems to be more of a US issue. Looking like the global economy, where when the US is sneezing, maybe the world no longer catches a cold?


2/ What does the slashing of US economics forecasts do for our latest forecasts on global growth?

The answer is: not much.

We lowered our US 2008 growth forecast from 2.3% to 1.5% for 2008. This brings 2008 global growth to 4.8% (from 5% previously).

Note that 75% of global growth comes from emerging markets, with China and India contributing the lion's share. I am not trying to downplay the current market volatility--credit risk premia needed to be readjusted, that readjustment is difficult, and it inevitably spreads to other asset classes.

But we've reached the point where the US economy alone cannot significantly change the global growth outlook (barring a major recession). A slowdown in China--now that changes the picture a lot. A housing-driven slowdown in the US, which spreads to the credit markets? That only changes the growth picture a little--and we've been anticipating it for a long time.

So our decoupling call is intact--strong global growth, weak US growth, and periods of violent risk reassessment as markets unwind the excesses of the bubble years.

3/ US financials rose 5%.

Two reasons: 1/ there are in fact two publicly listed entities whose job it is to provide liquidity to the mortgage markets and 2/ people looking to Fed statement today to see if they've notice/care about market turmoil.

Fannie Mae executives have asked the company's regulator to raise the maximum amount of home mortgages and related securities Fannie can hold in its investment portfolio as a way to provide more liquidity in the market, people familiar with the situation said. The regulator, the Office of Federal Housing Enterprise Oversight, last year ordered Fannie and its rival, Freddie Mac, not to increase their mortgage holdings because of problems with accounting and financial controls at the two government-sponsored providers of mortgage funding. But Fannie officials have argued that raising the ceiling on their mortgage purchases could help calm turmoil in the mortgage market, caused by investor jitters over rising defaults, and avoid disruptions in the flow of credit, these people said.

So Fannie Mae (FNM US, $60bn) & Freddie (FRE US, $40bn) were, curiously, +10% and +8% respectively.


2/ And sub-prime won't go away - another low loan growth country!!

Aug. 7 (Bloomberg) -- Shinsei Bank Ltd (8303 JP, $6bn), the first Japanese bank bought by overseas investors, said losses on subprime loans reached $30 million and it has more than six times that amount of U.S. mortgage-backed securities that may be affected. The holdings are more than double Shinsei's first-quarter net income after one-time gains, underscoring the risks Japanese lenders face trying to boost revenue amid lacklustre lending and low interest rates at home. A quarter of the Tokyo-based bank's investments in the securities are of the riskiest type, it said.

[MrBill]

Not much happening in crude. Three days sideways, but with a downward bias in place despite what ML thinks. Energy cos. bounce in line with gains in the S&P500. My feeling is a slight correction within a downward correction, which is good because it keeps it out of over-sold territory.

$this->bbcode_second_pass_quote('', 'U')nexpected gasoline and crude oil draws bullish for market

The DOE reported a 4.1MMBbls draw from crude oil stocks, a 1.7MMBbls draw from gasoline stocks, and a 1.0MMBbls build in distillate stocks. Refining utilization fell 2.4% to 91.3% wiping out last week's 2.0% jump. The report pushed E&P and refiner stocks and commodities up immediately after the release.

Gasoline draw due to 2.4% drop in refining utilization

In contrast to expectations, gasoline inventories fell last week by 1.7MMBbls largely caused by a 2.4% drop in refining utilization that let to a 2.9% drop in gasoline production. Gasoline imports increased 0.2MMBbls/d over the prior week but didn't offset lost production. Implied demand of 9.6MMBbls/d was 1% below the prior week's statistic, and flat with last year according to the 4-week MA.

We'd also like to mention that MasterCard published a new weekly report yesterday containing its estimate for weekly gasoline demand based upon credit card receipts and its own modeling. We think many on the Street and elsewhere will pay attention to this statistic in the future. According to MasterCard, gasoline demand was 9.99MMBbls/d last week, up 3.7% versus last year.

Crude oil draw higher than expected given drop in imports

Crude oil stocks fell 4.1MMBbls, with the largest drops occurring in PADDs 3 (Gulf Coast) and 5 (West Coast), areas that saw the most significant week-over-week declines in imports. PADD 3 inventories fell 2.3MMBbls and PADD 5 inventories fell 1.3MMBbls. In total, imports declined 1.6% versus the prior week and were down 2.1% versus last year according to the 4-week MA. Inputs to refineries fell 2.5% overall with the largest decreases seen in PADD 1 (East Coast), which declined 8.9%, and PADD 3, which declined 2.9%. The precipitous drop in utilization in PADD 1 explains, in our view, why that was the only region to see a build in crude oil stocks last week. Crude oil stocks have fallen 13.6MMBbls over the past five weeks, but were still 10.9% above the 5-year average as of the end of last week.

Cushing inventories ended last week at 19.3MMBbls down 1.4MMBbls versus the prior week.

Distillate stock build below expectations given utilization

Distillate stocks increased 1.0MMBbls last week, which was below consensus expectations for a build of 1.8MMBbls. Heating oil inventories increased 1.9MMBbls and diesel decreased 0.9MMBbls. We attribute the lower-than-expected build to 5.3% lower distillate production caused by lower refining utilization. Implied demand remained flat at 4.1MMBbls/d.

[MrBill]

Five days of sideways corrective action in the crude after the large move lower, but still a weaker bias with no significant bounce or reversal on the daily charts yet discernable.

The S&P Energy Index ended the week on a stronger note, so overall oil company stocks have held-up well versus other sectors of the S&P500 that were more adversely affected by turmoil.

China reported higher than expected inflation at 10-year high, while Japan posted better than forecasted growth. This should lead to the BOJ to raise rates in August/September, but they may use the turmoil in the financial markets as reason to delay raising rates yet once again. Amid rumors making the rounds on weekend that the Fed and the ECB may be forced to do an about face and cut rates to save financial markets this is all very inflationary if central banks do not muster the courage to collectively tackle run away growth and inflation in the global economy.

If the CBs are not up to the inflation fight then there is only one place to be, as much as I hate to say it, and that is in gold. Many of the mining majors ended the week lower, and gold is well off its highs, so it may be time to trawl this sector looking for under-valued producers that might benefit from higher inflationary expectations going forward. All this is, of course, speculative and would depend on the Fed and ECB riding to the rescue of financial markets while the BOJ and PBOC happily go along with monetary accomodation to smooth financial markets (temporarily).

I think it is madness. Loose monetary policies are at the very heart of the financial problems and global imbalances we are currently seeing. If the CBs cannot grasp the nettle now then say goodbye to inflation as she be going higher. Easy money now means an even harder landing in the future. Earth calling Paul Volcker. Come in Paul Volcker.
$this->bbcode_second_pass_quote('', '
')Energy Weekly

Funds liquidate, but fundamentals tighten

Sell-off continues amid financial market turmoil

The sell-off continued this week with WTI prices down $5.27/bbl from last Thursday's close and $6.62/bbl from the July 31 peak. The sharp decline was likely driven by liquidation of substantial speculative long positions in the face of the continuing financial market turmoil generated by the loss in liquidity in the credit markets.

July data release confirmed ongoing tightening of fundamentals

While the fund liquidation continued to drive WTI prices lower this week, the fundamental news flow confirmed the continuation of a deficit market as we move into the second half of the year. Preliminary July OECD stock data show an 11 million barrel build in total petroleum inventories, which is less than one-half the 5-year average build and less than one-fourth of the 46 million barrel build of last year.

Current market represents a buying opportunity

Although we are maintaining our current 12-month ahead WTI price forecast at $73.50/bbl, we believe that the WTI price risk has become even more sharply skewed to the upside as it has become increasingly clear that the current market deficit will likely persist. The increasing likelihood of tight forward fundamentals suggests that the recent price declines driven by the liquidation of speculative positions will prove to be short-lived. As a result, we believe that the current market represents a buying opportunity.

[MrBill]

Somewhat range bound for the time being. Negative price bias in place. Nat gas gives up some gains as direct hurricane strike in Gulf receeds.
$this->bbcode_second_pass_quote('', 'O')il prices have tumbled from a record high of $78.77 on August 1, as traders took profit or liquidated positions to meet margin calls in other falling markets, and as some dealers feared worsening credit conditions would take a wider economic toll.

But the losses halted late last week, with analysts saying oil supplies could have trouble keeping up with demand growth later this year, unless the Organization of the Petroleum Exporting Countries ups production when it meets next month.

Lehman Brothers said last week it expected oil prices to remain above $60 this year, while Goldman Sachs said the 9 percent fall from record highs represented a chance to buy.

Oil markets were also watching Tropical Depression 4 in the Atlantic Ocean, as well as another potential depression that could form in the Gulf of Mexico over the next day or so, for signs they could disrupt energy facilities in the region.

[MrBill]

Despite crude being higher than yesterday, the technicals are still negative. Reflected in WTI gaining more over Brent as Tropical Depression 5 threatens to turn into Hurricane Erin. And so it goes during the hurricane season. It is not a lot of fun to trade, and especially not from the short-side.

Nat gas popped back above $7.0700 on just a hint of a storm. It was over-sold to begin with, having hit its lows back on July 25th, so some jump was inevitable, but now is not the time of year for naked shorts left unattended in the market.

OPEC raised their demand expectations with lots of caveats. Subprime fall-out or not we are likely to use 86 mbpd in 2008 unless we are truly entering a real US recession that sufficiently knocks global demand. That is a big if. Low, slow, no growth is not the same as negative growth, and Asia is still growing on the back of pent up internal demand and addressing long-standing infrastructure bottlenecks. Just as a date you can pencil in the Beijing Olympics in one year in importance for markets like the Millenium and the Y2K scare.

As pretty much expected the correction in the EUR/JPY on the back of unwinding the yen carry trade is adding support to the USD. Unfortunately, I had to buy EUR last week at $1.3800, so it hurts me to see it now below $1.3500. Nah, dems da breaks!

I have not really targeted a downside, but if this continues and we see a flight to safety, as Asian stock markets also correct lower, then perhaps we will see $1.3265 again. That is not a prediction. The dollar's attraction as a deep, liquid port in a storm will be tempered in my opinion by doubts over the US' current account deficit even though the trade deficit sank somewhat last month despite high oil imports on the back of record US exports.

Never the less, having topped out near 169 EUR/JPY stopped briefly at its 50% retracement at 160 before dropping overnight to its 61.8% retracement target of 157.65. Should the yen carry trade continue to unwind we might expect a 100% correction to 150.70 from where this rally started. Even then the yen would be over-valued, but such a move, along with recent market volatility, may induce the BOJ from raising rates as soon as it might like in light of stronger growth. To be honest they always seem to find a reason not to do the right thing.

CPI is out today in the USA as well as Germany (my proxy for the eurozone because they account for the bulk of production, most of the exports and are the EU's paymaster). US CPI was 2.7% and is expected to fall to 2.4%. I doubt it, but that is the forecast. German CPI is forecast at 1.9% at the upper end of the ECB's 1-2% band.

Central banks around the world still need to be in a tightening mode despite turmoil in the financial markets (see The Economist article on money supply in yesterday's Trader's Corner). Unfortunately, emerging stock markets are taking some hits at the moment and this will test the resolve of their not so indepent central banks. With the BOJ wavering it is up to the ECB and the Fed to show leadership.

Idiots like this do not help...
$this->bbcode_second_pass_quote('', 'R')oger Nightingale, a global strategist at Millennium Global Investments, which oversees $4.3 billion, commented on European Central Bank interest rates. Nightingale spoke in an interview yesterday in London.

On the ECB's existing rate:
``If you are a fund manager and you make a great mistake about what you buy, about your strategy, the thing to do is not to pretend it was right all along but to acknowledge it was wrong and to reverse it.''

``We need a cut. We need it very urgently indeed.''

[BigTex]

Times like this makes me want to put all my money in the Permanent Portfolio fund (PRPFX). 25% bonds, 25% stocks, 25% gold, 25% cash (mostly short term Swiss bonds, I believe). Not great returns, but very consistent year in and year out.

The tricky thing to play right now is how "awake" the markets are going to get. It's like they have been in a long deep slumber about too much debt, too fast growth, looming peak oil, and unchecked population growth, and they are sort of stirring like they might wake up. If they fully wake up to these problems everyone would turn horribly pessimistic and it would be hard to find a bottom. On the other hand, they may go back to sleep and be reassured by injections of liquidity (like a tranquilizer) and continue on as if things are fine.

I would love to read a newspaper from one year in the future right now. Very interesting times.

[MrBill]

I have been through this so many times that it feels like de je vu all over again at times, but we must never be complacent because this time it could be different.

Whenever I struggle to understand the whole, I turn back to the data and the numbers to try to get a better focus.

Let's start with yesterday's DOE/EIA numbers.

crude -5.2 mio to 335.2 mio bbls vs -2.3 mio f/c
gasoline -1.1 mio to 201.9 mio bbls vs -0.9 mio f/c
distillates +200k to 127.7 mio bbls vs +1.2 mio f/c
blend stocks -600k to 92 mio bbls

a net draw of -6.1 mio bbls vs -4.4 mio f/c
excluding blend stocks

refinery useage +0.5% to 91.8%

imports -125k to 9.87 mbpd
product imports -397k to 3.25 mpbd

a net decrease of -522k bpd

gasoline demand -0.4% to 9.62 mbpd
distillate demand (incl. diesel) +2.5% to 4.11 mbpd
total demand +1% to 21.03 mpbd

It seems that a combination of net draws from inventories, lower imports, higher demand and Hurricane Erin in the Gulf should have had a more bullish effect on prices, but WTI has been unable to hold onto its gains. Therefore, with the negative technicals in place, and a stronger US dollar, the next move is still likely lower, unless another named storm pops up on the radar soon.

On the other hand cracks margins have recovered slightly to $11-12 per barrel and improving to $15 by year-end. That should help to underpin prices given strong demand, and I think we will see a pull back in the EUR now. EUR/USD dropped to $1.3425 on the unwinding of EUR/JPY, but now looks over-sold below its trade envelope support at $1.3480 and with an RSI of 31.38. Given falling stock markets it is hard to say we will now see a reversal in sentiment. Mine is just a technical opinion that when markets get over-sold there is usually a correction even if it is only a dead cat bounce.

EUR/JPY has dropped from almost 169 to 155. Its 61.8% retracement was 157.67 and we passed through that area easily. But again it now looks over-sold with an RSI of 27.23, so I might expect this move lower (stronger yen) to now take a breather. Even if it is only shorts stopping to take profit.

European money market rates are higher now. EURIBOR shifted to the right and now looks like it is pricing in two rate hikes from the ECB in the next 12-months. 3-month EURIBOR is 4.52% versus 12-months at 4.63%. German CPI is out today and is forecast to be 1.9% at the top end of the ECB's 1-2% preferred range. Sorry that was my mistake that I said it was due out yesterday. US CPI came in yesterday at 2.4% versus 2.7% previously. I was a little surprised by that drop. Where's the beef?

The S&P500 has hit 1408 as expected. It closed yesterday at 1406.70. Asian markets were down in early morning trading. The S. Korean exchange is down 7%. It had been on the biggest gainers, especially heavy industry and ship building names, so given the P/E ratios were so fantastically high on the global growth story, it is not surprisingly that they have the furthest to fall. Given that Asian markets were down I expect US markets to also open up lower. If we cannot climb back above 1465 in the S&P500 now then I do expect 1362 next.

Oil stocks have been holding up quite well, but the trend is unfortunately still lower. There is nominal support for the S&P Energy Index (GSPE) at 500 which was the 50% retracement of this year's move higher to 576 from 423, but really I am targeting 480 still. The 61.8% retracement.

Encouragingly, Soros increased his bets in Q2'07 in mines, metals and oil. Like Buffet he is a pretty sly investor, and in any case it fits with our world view on commodities and energy. But I am not rushing in. I am still over-weight cash and waiting for markets to stop falling before buying. Some of the best names that I would like to own are still too expensive. I stuck some extra cash into a fixed term money market deposit just so that I could not jump the gun and start buying prematurely. This is when one needs discipline the most.

The areas I want to be in long-term are railways, shipping, oil service cos., refiners, oil & gas producers, coal, energy distribution, some diversified miners, solid manufacturers like GE, engineering firms like ABB, and financials once they get cheap enough again. There is a lot of correlation between those assets and they are cyclical as well. So there is definitely downside risk. The only way to balance that portfolio is to also look some defensive stocks, high grade corporate debt (minimum single A) and currency hedged cash. Also to go global to take advantage of growth elsewhere while minimizing exposure to any one region.

UPDATE: Asian Markets Continue Slump in Thursday Trading
and
Remembering a Classic Investing Theory

[BigTex]

The only stock on my shopping list right now is CVX. With a P/E under 10 and a dividend nearing 3% I like it a lot. It looks like one of the safest places to park right now. XOM suddenly isn't nearly as much fun, since being in the Dow Jones index is not good when everyone is selling their index funds.

I'm looking to build my CVX position slowly, since it may have some more room to fall, but this looks like about as safe as it gets in stocks right now.

I also still like CAT and VLO. The drillers may have some more negative sentiment to work out, since the market seems convinced that we will stop drilling for oil in a recession.

[Mechler]

Looks like it may be a rough day with Asia and Europe down big. There should be some good buying opportunities when the dust finally settles. I'm going with MrBill's call of 480 on the GSPE before I think about adding to any position.

[MrBill]

Of course, I like CAT, CVX as well as VLO. I have some, but won't add at these levels.

I also really like John Deere. They announced excellent results, but their stock is already quite high. Even though it fits with my strategy. Benefiting from the commodity sphere and good overseas sales. Maybe at $105 per share.

All at the right price. That is one thing about these markets at the moment, you sure are not worried about missing a bargain.

Crude collapsed again as Erin downgraded to an afternoon sun shower.

If you have a chance look at a EUR/JPY daily chart. Use it as a proxy for global risk taking. Oops!

I am starting to have to make margin calls now. If I am then everyone else is as well. Let's see how well capitalized they are and how nervous the banks become when a few margin calls are missed?

There is very little chance that this week is ending on an uptick! ; - )

[BigTex]

I remembered this morning a passage from a book I read on stock trading one time and it went something like this:

"An early sign of a bear market is when good news no longer makes a stock go up and/or a stock goes down when there is no obvious reason."

It's a little like remembering something from a combat field manual when you find yourself on the battlefield being shot at.

It will be very interesting to see what the big integrateds 3rd quarter numbers look like and how the market will interpret them. The story seems to be right now that there will be economic slowdown, lower energy consumption and thus lower energy profits, but I will be very surprised if it actually plays out this way.

RE CAT vs. John Deere, I started watching the spread between the two companies back in January and wondered why there was such a gap when they were in a similar space. That got me to buying CAT and I was lucky that I was only a few months ahead of a lot of other buyers who may have been using the same reasoning. I just think CAT is a great long term play with the international and domestic infrastructure needs in the short, medium and long term. With that said, it's getting the crap kicked out of it today.

As for VLO, that's a weird stock. Must be a favorite of traders, especially shorts. I made $7.00 a share almost by accident in the last couple of weeks. I bought in the low $60s and watched it go to near $70 over a few days and decided to sell. Now it's back near $60. I'm certain it's a good long term play, but it's just insane for a stock with that quality of earnings and a P/E of 6 to be trading like that. It's crazy.

It's interesting to see how much different the ride down feels than the ride up. People are forgetting that many of the gains they are giving back in the stock market they have only had for 12 months or so. It's like a homeowner who sees his house appreciate slowly, 5% a year, for several years, then one year sees a 40% appreciation and then sees a quick 25% decline. He's despondent because of all the money he has "lost" in the 25% decline, but forgets to remind himself that he is still way ahead of what he paid and has still seen pretty strong appreciation year over year.

[eastbay]

I'm certain it's a good long term play, but it's just insane for a stock with that quality of earnings and a P/E of 6 to be trading like that. It's crazy.

... which is the primary reason many are holding on and riding out this bear storm. Well, that plus, of course, the simple fact that without oil everything grinds to a halt and the odds of that happening on a worldwide scale at this time is exactly nil making energy an excellent mid-term play regardless of market swings.