Today's Sneak Peak for August 05, 2008 - Excerpt from the Bedford's Tradecraft Newsletter
Once upon a
time there was a theory that falling energy prices would help the stock
market. The idea is simply, consumers have been weighed down by rising
energy costs and a reversal of that trend would improve the economy. It's a
very simple theory and it makes a great deal of sense. Yesterday oil
prices collapsed, falling briefly below $120 before rebounding modestly into the
close. Stocks should have rallied, right? It did not happen, in
fact, the stock market got clocked as traders bailed out of everything remotely
tied to the health of the economy. And that is the key point, it's the
economy that has traders worried. If economic growth slows, and that is
becoming the growing consensus, there is less need for energy. Of course,
energy grabbed the headline but the truth is commodity issues in general were
very well offered yesterday. When I see commodities getting clocked I
immediately begin to think about problems in hedge fund land. A great many
hedge funds have been long the same trade for the better part of five
years. That trade is essentially long commodities -- and energy in
particular -- and short the US Dollar. To be honest, that is not a
"hedge" at all as it is both sides of the same trade. The trade
is the idea that the US Dollar will decline thereby driving up commodity
prices. Still, it has been profitable. In the past several days we
have seen massive unwinding of that trade. Not only has oil fallen from
$148 to $121 but copper and the agricultural commodities have also been under
pressure. And, if all of that was not bad enough, Meredith Whitney at
Oppenheimer, the celebrated analyst who correctly called the implosion at
Citigroup (C), told Fortune magazine that the financial tumult is very far from
over. Whitney prefaced these views on the idea that the engine of the
financial crisis, home prices, are likely to fall much more than most people now
expect. Of course, many have been suggesting, incorrectly in my view, that
the housing decline is near completion. Against that sour backdrop bulls
never could get out of their own way. Every rally attempt was
thwarted. Stocks closed very near the worst levels of the day despite the
big decline for oil. I have been suggesting for some time that the real
problem faced by stock market bulls is the growing perception that the economy
is in ruin and the Federal Reserve is now more concerned with inflation than
growth. If this perception becomes consensus, no stock sectors will be
immune from the selling. In a weak economy, all sectors eventually work
lower. Perhaps we began to see that unfold yesterday. Tuesday the
only thing of note on the docket is the Federal Open Market Committee (FOMC)
meeting. While the Federal Reserve is expected to keep the Federal Funds
rate at 2.00-percent, much will be made about the wording of the policy
statement. My expectation is that the market will not like what it hears
as the Federal Reserve begins to talk less about growth and more about the
growing inflation problem. Of course, the Federal Reserve is primarily
responsible for that problem.
