The mainstream financial press has two obsessions... which make its utterances largely useless to long-term, value-oriented investors. The vast herd of investors shares these obsessions (hence their popularity with the press that serves it). I (Dan Ferris) will tell you about one of them today, and I'll show you the other one in Thursday's Digest...
The financial press' first defining obsession is watching price quotes. It then compounds the activity by pretending to know the meaning of every tiny change in the price of every asset on the planet. Minute by minute, CNBC talking heads and "reporters" for financial websites around the world indulge the average person's desire to know the "meaning" of every price quote.
There's one little problem with assigning meaning to every price quote... Most of them don't have any meaning (at least, none you can glean). Sure, when Best Buy's stock price craters because it can't stop losing money, it's not hard to figure out what's going on. But every single day, prices of thousands of stocks, bonds, and commodities rise and fall by small amounts... prompting the financial press to swing into action and assign meaning to the meaningless.
For example, take crude oil...
The Wall Street Journal reported that crude oil futures prices rose about 0.2% this morning.
That's an insignificant move in the price of one of the most widely traded commodities in the world. But it doesn't stop the Wall Street Journal from suggesting oil is up by a miniscule amount because Hurricane Isaac is bearing down on the Gulf Coast. Hurricanes come and go every year. It's stupid to go long oil because the weather might be lousy for a day or two.
And if you focus on the underlying long-term fundamentals at work in the crude oil market, it's hard to come to any conclusion but this... It's time to be bearish on oil...
Our founder, Porter Stansberry, has been leading the charge on the call... He made his opinion clear at Casey Research's Recovery Reality Check Summit.
Several factors are bearish for oil today. China is slowing down (which we discussed last Friday). And Europe is crumbling. With these two major economies slowing down, they'll require less oil.
In addition... Porter believes the huge oil reserves in shale rock formation – in places like North Dakota's Bakken shale and Texas' Eagle Ford shale – will create a glut of domestic supplies and result in a longer-term downturn in oil prices.
Drilling is going on right now in shale formations across the country. And what it produces could cause the price of oil to languish for years... as we're seeing with natural gas right now.
Our natural resource expert, Matt Badiali, is also bearish on oil... and points to the soaring U.S. oil reserves. On August 1, the U.S. Energy Information Administration showed the largest-ever annual reserve increase since it began publishing the data in 1977. The U.S. added 3 billion barrels of oil... in 2010. Matt said this reserve increase is "just the beginning."
Matt also notes the "dumb money" – or big speculators, like hedge funds – are buying oil. In the August 15 Growth Stock Wire, he wrote:
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Right now, the dumb money is flowing into oil. You can see it in the chart below. The blue line is the net long oil contracts held by non-commercial traders. Right now, the blue line is nearing the peaks it saw in March 2011 and February 2012... just before oil prices crashed. |
Matt gave his S&A Resource Report subscribers a full analysis of why he believes oil prices are headed down in his July issue.
It's worth noting that both Retirement Millionaire editor Dr. David "Doc" Eifrig and Dan Ferris have recommended shares of Big Oil companies – notably ExxonMobil – to subscribers as long-term holdings. However, both have pointed out that these monolithic, blue-chip enterprises have proven histories of generating cash and rewarding shareholders during periods of both high and low oil prices.
Our options-trading guru, Jeff Clark, is also bearish on oil. He's been following the situation for weeks. And today, he jumped in on the short side. Here's what he wrote to S&A Short Report subscribers...
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We've been on high alert for the past couple weeks... waiting for the energy sector bullish percent index (BPENER) to trigger a sell signal. It finally happened yesterday. Take a look... |
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Here's how the AMEX Oil Index (the "XOI") behaved after each of those sell signals... |
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Each time, oil stocks dropped 11%-29% over the next five weeks. It wasn't always a straight shot lower, of course. Sometimes the oil sector chopped around for a few days before the selling pressure finally took hold. But in each case, shorting the oil stocks following a BPENER sell signal would have been a profitable trade. |
To see exactly how Jeff is trading oil, you need to subscribe to the S&A Short Report. You can do so here...
Also, don't miss the excellent feedback we received about Jeff's trading results in the mailbag below.
As bearish as we are on oil... several of our editors are equally bullish on housing – notably, True Wealth editor Steve Sjuggerud and Doc Eifrig...
We have more bullish news to add today... Home prices rose more than expected in June – the fifth monthly gain in a row. The S&P/Case Shiller index of 20 cities gained 0.9% on a seasonally adjusted basis in June, beating expectations of 0.5%.
"We seem to be witnessing exactly what we needed for a sustained recovery; monthly increases coupled with improving annual rates of change," David Blitzer, chairman of the index committee at Standard & Poor's, said in a statement. "The market may have finally turned around."
And for the first time in 21 months, the index is up year-over-year. The last time this happened was in 2010, though that recovery was short-lived.
New 52-week highs (as of 8/27/12): ProShares Ultra Health Care Fund (RXL), Eli Lilly (LLY), Hershey (HSY), and Two Harbors (TWO).
Loads of good feedback in the mailbag today... Must have been a good weekend. Send your notes to feedback@stansberryresearch.com.
"I just want to say that Harold J's letter today was the best I have read in a long time... Thanks, Harold and good luck!" – Paid-up subscriber Joe
"I bought Jeff Clark's S&A Short Report last month and put the charge on my credit card. The payment is due September 6 and my account has already made the amount of letter. I'll be taking his advice and using house money for the rest of the year. Jeff is the greatest and I expect to expand my account using his tested method of option trading." – Paid-up subscriber Julian Spratt
"I've been a subscriber for awhile, and have been trying 'new things' slowly. Started off doing naked puts & covered calls... and as of right now I'm 10/10 with them.
"I also recently tried buying my first call option on Jeff's SLV play, JUST to get the experience of actually doing it, and sold it today (6 days later) for a 104.44% gain.
"Can't thank you enough for continuing to pound the tables to start trading options. I've been averaging 1.5%–2% profit per trade, AFTER commissions, and my average holding time is only 3-4 weeks." – Paid-up subscriber Jeremy Reeves
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and New York, New York
August 28, 2012
The financial press' two obsessions... Porter's bearish oil call... Badiali: 'Just the beginning'... What the 'dumb money' is doing... Jeff Clark's bearish oil trade... Doc and Sjug's bullish housing call... Home prices are up...