Charting Oil: Breaking Down - Raise Rates, and Break Its Back

This is THE chart with the sensitive inverse relationship to my last note (rising US interest rates and the US Dollar). Crude Oil is in a bearish "Trade" position under the $127.20 line, and a bullish one above that.

If Bernanke raises rates he can break the back of the futures market, which continues to flag contango in expected prices. I don't see any credible support for crude oil until $102.65. C'mon big Ben, let's get on with it!


(chart courtesy of

Show Me A Stronger US$, I'll Show You A Stronger US Market

Now that Ben Bernanke's Fed has explicitly changed their rhetoric to a hawkish one, we need to see a rate hike. The US Dollar is starting to pick its head out of the mud again, and will be wack-a-moled if Bernanke doesn't deliver on this expectation.

As the US$ has strengthened in the last few weeks, commodities have sold off, and global stock markets have risen. My quantitative models have 72.67 as the critical line that needs to hold. Currently the US$ Index is trading up again today at 73.44. This is the driving factor behind an inflation sensitive stock market.

There is still a lot of hay to bail here. But the momentum "Trade" is finally at the US Dollar's back, rather than in its face.

(chart courtesy of
(chart courtesy of

VIX + Sentiment Math Get Short Term "Trade" Bullish Here...

Volatility (VIX) is trading down another -3.3% here, and if it can close below the 21.53 line, that's bullish, on balance for the US stock market. Conversely, a close and breakout above that line, would be bearish.

Sentiment has turned ragingly negative in recent weeks. If you don't believe me, believe the math. The Institional Investor weekly survey is as lop sided to the bear side of the trade as it has been all year. Bulls are at 30% and Bears ticked up again to 50% this week. The spread here is what I care about. From a contrarian point of view you want to be long the US stock market on a weekly data point like this.



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Respect The Math

“One reason why mathematics enjoys special esteem, above all other sciences, is that its laws are absolutely certain and indisputable… while those of other sciences are to some extent debatable and in constant danger of being overthrown by newly discovered facts.” –Albert Einstein

On Friday I cited Einstein as well. When things get whippy out there, he’s a safe harbor to anchor down to. In that “Early Look”, I said “everything counts in my macro model… my new S&P 500 target range is 1212 on the low end, and 1277 on the high end. Look for shark jumping at the top, and bedlam at the bottom.” And, amidst the past 48 hours of whip lash, that’s pretty much what’s occurred here.

From fertilizers to financials, the Street has had to dance with the Bear in multiple camps this month. As a result, from a volatility perspective, the most positive factor I see for the US stock market is that this month ends tomorrow. Looking ahead always requires the ability to look back – as I look ahead to Friday’s unemployment report, I am reminded of the bear market case that remains in the land of “growth” expectations. When I look ahead two weeks to the pending July inflation reports (CPI and PPI), I am ultra respectful that inflation will finally look like it is deflating. These are two different fundamental points, with two different short term durations.

The volatility that you are having to deal this week is simply a function of expectations on what will matter most, and when. “Growth” investors could freak out again on Friday, then have to deal with a hawkish Bernanke and FOMC meeting verbiage next week. “Value” investors who are long the deflation trade have the timing of reported July data in sight, but can’t ignore the short term storm forecast that lies in between now and then.

You don’t need Einstein’s models to come to the realization that the CRB Commodities Index and crude oil have dropped -13% and -17% respectively in 3 weeks. Virtually every region of the world has been fighting inflation with rate hikes for the numbed US Federal Reserve. Let others fight the good fight for America might be a positive way to spin it. Regardless, the output has been a recovering US Dollar, and spears in the back of commodities futures market contangos. Finding backwardation in those futures curves is what Bernanke needs to see, and if he chooses to back up some rhetoric with action next week, I would not rule out a US rate hike. Regional Fed Head speak in the last 3 weeks certainly supports that idea.

John Thain was willing roll the integrity dice by saying one thing and doing the other, but the reaction to his marking to market yesterday has to be realized for what it was. Merrill (MER) closed up on the day, and the US Financials rose up from the dead again, closing +3.5%. On a close above my short term momentum line of 20.38, the Financials (XLF index) has +14.7% of shark jumping upside. I am not short the financials here. I think it pays to wait until we see Friday’s employment data, and Bernanke’s river card next week. Sometimes doing nothing is the best investment strategy I can choose.

Despite another horrendous factory output number out of Japan last night (down -2% year over year), Asia continues to trade best amongst the world’s geographic regions. Commodity levered country indices from Saudi Arabia to Russia trade the worst. As a leading indicator, this signals that “Deflating Inflation” may very well be the most relevant new investment theme on my sheets.

Trying to get this tape right every day is not an exercise for the faint of heart. Be patient, respect the math, and you’ll do just fine.

Best of luck out there today,


The Form 4s related to SHFL's 17.6 million share offering were filed today. While it was nice to see buy side participation by the Board, the CEO, and some other senior executives, there was one notable asbsence. President and Chief Operating Officer Paul Meyer did not buy any stock on the deal. I also heard from some investors that Mr. Meyer was not involved in the deal roadshow. Hmmmmmm.
In the interest of full disclosure, I own shares of SHFL.


Those of you who know me and/or read my portal, you know I like math. I’ve pulled out my old textbooks and broken some chalk but I still can’t figure out how the analysts’ math works on ROI when “I” goes up by 20%. Somehow, with no scope change, projected ROI remains unchanged and is always 15%. Analysts are young these days so they may not be aware that we used to get away with 20% in the good old days. I guess with a low cost of capital, 15% sounds good enough. Oh wait, cost of capital is likely to bust the budget too.

The following chart displays the estimated cost overruns of some of the major casino projects over the last decade. We tried to adjust budgets for EBITDA enhancing scope changes to be fair. The conclusion is obvious. Casino projects rarely come in at, near, or under budget. Possible explanations are numerous: materials inflation – certainly, unfettered optimism – maybe, aggressive guidance – possibly. In any case, remember to make that adjustment in your ROI calculation the next time a new project is announced.

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