This note was originally published at 8am on February 27, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“You should know that correcting your intuitions may complicate your life.”
That’s just a great risk management quote from Chapter 18 of “Thinking, Fast and Slow” – Taming Your Intuitions. While the Storytelling about oil prices, what caused them, and what they mean to your portfolios can be creative, it can also complicate your life.
Complicating Life for the small some of us whose life will not change by prices at the pump is not what I mean. I’m talking about the most obvious of obvious of life’s complications – what’s in your wallet versus what you need to buy to feed your family.
While that may be the most intuitive statement of the year for the rest of the world’s consumer population, on Wall Street we are often numbed to believe that making the most obvious of obvious calls on markets and economies isn’t “smart” enough.
Back to the Global Macro Grind…
One obvious call that we pounded on last week is that Global Consumption Growth has never not slowed with oil prices running north of $100/barrel. We’ll reiterate that very simple fact this morning. I couldn’t have repeated it enough in February of 2008.
Barron’s Mike Santoli did a nice job of bringing back those 2008 memories this weekend when he pointed out that the price of Brent Oil has not traded below $100/barrel for 269 days. Make that 270 days now. The longest streak (ever) prior to this was 110 days in 2008.
2008 and 2011 are the years that the willfully blind at both the Fed and Sell-Side groupthink-tanks would like to just forget. That’s why we like to remember them. When Growth Slowing happens every few years after the price of oil ramps, there’s something obvious Complicating Life for those of us who don’t hang our hats about being “dead” in the long-run.
To review the Dollar Debauchery, Oil Up trade last week:
- US Dollar Index was down -1.3% to $78.35
- Brent Oil price was up +4.9% to $125.47
- WTIC Oil price was up +6.4% to $109.77
And, of course, the headlines into the weekend were that Oil was rising because the “economic recovery” was picking up steam…
Then, a not so funny thing happened on the way to the pre-market US Futures forum this morning. Stocks fell down … because of “rising oil prices” … but, uh… oil prices this morning are falling…
The sad fact of the matter is that many market participants need oil prices to rise to get paid. That’s just a sad fact for the country, not for absolute returns. At +25.2% and +21.8%, respectively, Russian and Venezuelan Equities are 2 of the Top 3 performing Stock Markets in the world for 2012 YTD. These are called Petro-Dollar markets – awesome, right?
It really is awesome if you are long Inflation Expectations Rising. The problem with that is 2 fold:
- That, ultimately, leads to Growth Expectations Slowing
- Most people on this earth are short inflation in their wallets
The other thing here Complicating Life is that our industry chases prices at tops and sells bottoms:
- CFTC data for last week shows bullish Commodity Options contracts up +7.3% week-over-week
- At 1.03 Million call options on commodity inflation, that’s the biggest number since the week of September 13, 2011
- From the CRB Index’s September 2011 high to its October 2011 low (292) we saw a -14% crash in commodities
Yes, Commodities Crashed. That was last year, remember?
Last year, post Qe2, expectations continued to build for a Stronger Dollar. So commodities crashed. Period. Commodities didn’t fall because growth expectations were slowing. US GDP Consumption Growth rose steadily as the price of oil fell with US GDP going from 0.36% in Q1 to +2.8% in Q4 of 2011.
I’m not saying it’s easy being a Macro man trying to navigate the whip-saw of Big Government Interventions. If I have written this 100 times I have said it 1,000 times over – cheap money Dollar Debauchery policies A) shorten economic cycles and B) amplify market volatility.
What I am saying is Ben Bernanke’s Policy To Inflate to 2014 is Complicating Life for the rest of the world’s consumption.
My immediate-term support and resistance ranges for Gold, Oil (Brent), Oil (WTIC), US Dollar Index, and the SP500 are now $1749-1797, $120.78-126.21, $105.44-110.66, $78.38-79.11, and 1357-1370, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer