Wednesday, October 8, 2008

The 4 + 1 Market List

This is my second installment of the 4+1 Market List. It discusses the four things affecting the market, and one thing that doesn't matter at all. Things that matter:

1) The credit markets.
Until banks trust each other again, economic progress in this country will be halted. No development by business, no consumption by the retail sector. And until trust and confidence are restored throughout the world, oil will fall. This is bearish for energy prices.

2) Bank de-leveraging and hedge fund redemption.
Investment banks were leveraged 30 to 1 in some cases. Even commercial banks have deployed borrowed money into commodities in massive amounts. Now, as banks try to hold cash (cash is king), financial positions throughout the universe of available investments are being unwound. Until 6 weeks ago, money was pouring INTO hedge funds. Now, folks can't get their money out fast enough. Will the last one on wall Street please turn out the lights? This is bearish for energy prices.

3) Growth in China and India.
It was assumed even up to 6 weeks ago that China and India would continue on their torrid growth rate in oil demand. Now, it is common thinking that continuing that rate of growth is impossible. This is bearish for energy prices.

4) The value of the dollar
The fed keeps minting money. They will stop the market's hemorrhaging at some point, and everyone will take a deep breath when this crazy time is over. But the injection of that much money into the economy sets us up for significant inflation, and might devalue our currency with respect to other sovereign currencies worldwide. This is bullish for energy prices.

+1) The thing that doesn't matter?
Inventories. The domestic inventories are adequate, and the market is concerned about other stuff right now. There is a low likelihood that the market will make much fuss over the inventory report.

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