Monday, May 19, 2008

What are the Transports Saying ?

I want to address the apparent dichotomy developing in the markets between the transports and energy. Some may disagree and argue that it is perfectly natural that the transports should be moving as the market is always a discounting mechanism. The problem I have is this argue is used most often when it supports the users market position stance.

In my simpleton view of things one would surmise that with energy trading as it is, north of $126/bbl, that the transports would be in much worse shape. Now I realise fighting the tape will lead to financial ruin and it is always the final arbiter of all things financial (ask your margin clerk for clarification of this if necessary), but this must be balance with the real world. Quite often, usually at major inflection or turning points the market can and has gotten it quite wrong and for extended time frames to boot!

Now this does nor mean one is to ignore what the tape is saying but you do need to be cognizant of the fundamentals that underpin the technicals. I prefer to marry both the fundamentals and technicals into a marriage of art and science. By marrying the 2 you can avoid some of these market bouts of temporary insanity. How else can one explain the ridiculous lending standards of the recent credit orgy? No verification of income? Nothing down? This is a joke, right Buying the paper of a mortgate orginator that had gone bankrupt due to lousy lending after they had already gone belly up? 20,30,40 times leverage on investment portfolios? Bonds issued that let issuer pay interest due with more bonds also known as payment in kind bonds.

The transports, in my humble opinion, are telling us one of four things;

  1. Energy is in a temporary bubble and will be dropping swiftly in the near future.
  2. Energy prices are manageable as the increases can be passed on the customer.
  3. A new replacement/enhancement technology is around the corner which will save the day.
  4. The economy(global in particular) will be so robust $125/150/200/bbl energy won't matter.

Many are claiming that the transports are signalling the all clear sign. The transports, in my opinion, are being driven by the rails, plain and simple. Not airlines, not trucking, but the rails. The market, by the action of the transports, is making a heavy duty bet on #1 which I simply do not see given the global supply/demand equation. The market has done this before when it priced telecom and dot com outfits with billion dollar market caps which in reality had negligible or non existent sales, not to mention profits! Now we all know how that turned out, the market had it very, very wrong. Lets call it temporary insanity. We just need be careful the transports today are not dancing to the same insanity song Chuck Prince was dancing to at Citigroup .

The point hereis that said market discounting mechanism discounted something that never happened, or at least never happened to the extent it was disounted!

Housekeeping notes, on Friday I was stopped out of half my Daimler position (1unit) at $81.45 for a profit of just over 4.5 pts.

Good speculating to you all !

Open Positions:
Long 6 units Currencyshares Japanese Yen ticker FXY @ $88.55 stop at $91.40
Long 1 unit Allis-Chalmers ticker ALY @ $14.45 stop at $16.64
Short 2 units Daimler AG ticker DAI @ $86.20 stops at $82.48
Short 1 unit Brinker Int'al ticker EAT @ $21.25 stop at $24.14
Short 3 units Retail Holders ticker RTH @ $96.72 stop at $98.56
Short 1 unit Goldman Sachs ticker GS @ $197.95 stop at $197.68
Short 1 unit Darden ticker DRI @ $37.30 stop at $40.27
Short 2 units Lehman ticker LEH @ $43.70 stop at $47.46
Short 1 unit Deutsche Bank ticker DB @ $117.80 stop at $120.18

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