Tame Trading an easier way to trade

Editor’s Rant:

Over the past few weeks I have made references to a couple of somewhat disappointing period in US history, 1931 and 1973, suggesting current conditions are likely to play out similar to one or the other. It is not an attractive outlook, but my job is to call it like I see it. I can offer some good news. The reality of the current 1.25 month inventory to sales ratio is a huge obstacle to significant and or sustained economic collapse. The economy can’t slow down too much or we will run out of everything.

That is the good news. The problem of energy prices remains and their undeniable link to inflation remains a tectonic constant. When energy prices jump big time, as they have, inflation follows. The Saudis rebuffed Bush on oil talks. It seems they like the higher prices, and seem content to be the authors of another chapter of global inflation. The last time they drove oil prices higher was 1973 – 1974, and it wasn’t pretty. The point I am driving towards we appear a lot closer to 1973 than 1931. Bernanke won’t make the mistakes the Fed made in the 30’s, but energy, the Saudis, and oil “Investors” seem content to let things play out that are  well beyond Bernanke’s control.

A possibility:

The next 18 – 24 months: (This is what I see, not what I want.)

I see Barack Obama as the next President with John Edwards as his running mate. With that the Democrats will have the Whitehouse, House, and Senate.
The stimulus package will help the economy creating a well embraced illusion of improvement going into the fourth quarter. By the time the election is over the consensus will be the recession risk is behind us. Everyone will buy into this expectation including the Fed, which will quickly shift to a rate raising mode to strengthen the dollar and curtail a by then persistent inflation worry. Obama & the Democrats will allow the Bush Tax Cuts to expire.
In 2009 it will become obvious the perception of economic strength over the second half of 2008 was premature. But it is too late. The Fed will already be raising interest rates while the Government is raising taxes against a much weaker than believed economy. Historically a proven combination that is toxic to economic health.
To make matters worse, while oil prices should peak and break before the end of 2008, consumers will see little relief at the pump as refiners allow crack spreads to overshoot to the upside thus balancing out their current deficit.
The Spring-Summer home selling season will create an illusion of recovery in home sales, which will quickly be embraced as signaling “the bottom.” But it will prove only to be a seasonal uptick.
These factors will conspire to make people feel like things have improved significantly when they haven’t.

With a little luck, I will be wrong on this one, but for now, this is my forward looking path.  

Here is the Deal:

Oil Prices still rule. The run higher persists and it is killing the consumer.

Energy and Tech are the only sectors leading the market higher. When energy breaks, where will the money go next?

The Technical story.

Last, a little seasonality.

With expiration behind us, the potential for the current rally effort to stall is wide open. The current apathetic strength can persist for a while longer. The problem is that when rallies of poor technical quality fail, they tend to fail with measurable spectacle. This one should be no different.

June 7 remains a key longer-term cycle date. If prices turn lower this week, focus on the 7^th for a low.

I have also included a set of charts that show the Dow’s performance on a 10-year Decade cycle basis for the past 100 years.

Have a great week.

Jim Patterson

Editor’s Rant:

Happy Mother’s Day,

Saturday I took the family to see, ‘Speed Racer,’ which should be an early summer block buster. It was great entertainment, and the fact that we were about the only ones in the movie theater (12:50 PM showing) made it a wonderful experience. Evidence of a shift of consumer dollars from other stuff to gas and food service (up to ~24% from 17% average) grows more obvious on a daily basis.

I have been reading a multitude of reports on Oil, why it is going higher $200 by one report) and why it can’t go any higher. Conventional arguments for oil simply do not apply, we’re not in Kansas anymore. The run up in oil has nothing to do with supply. OPEC won’t boost production because they don’t see a need for it from a supply stand point. It has nothing to do with demand. Gas usage in the US has fallen year over year for the first time in a decade and a half. Oh wait; demand in China more than offsets the drop here, NOT!
If higher prices are constraining consumption in the US where we have lots of extra spending money, then in China, where prices are going up just as much, it has to hurt even more. Sorry, I just don’t buy that argument.

Some say it is fear of shortages, disruptions, and so on and so forth. Those conditions will abate and therefore the advance can’t / won’t continue much longer. Look at the early 1990’s, that oil spike was unsustainable. The 1990’s energy spike was fear (war) driven, not exactly a similar circumstance. This move has pushed well beyond any sort of fear like condition.

Oil prices are going higher because Investors are making money buying it, and the market is so small that it just doesn’t take much to keep it going higher. Think of it this way, if 1% of the assets in stocks and 1% of the assets in bonds flowed into the Oil market, Oil prices would at least double, possibly triple, from current levels, and it could happen quickly. That would push oil well above $250 and gas over $8 at the pump. And all investors need is a whimsical reason to believe they will be rewarded financially for taking such a minor step.