|The Hump Day Hash Out|
By Todd Harrison SEP 13, 2006 8:58 AM
Humility is a common theme on Wall Street, particularly for those of us who put it out there daily, and it's a lesson I've learned quite well.
I think it's time we stop, children
What's that sound?
Everybody look what's going down
"Falling Oil Prices May Help Spell Relief for Consumers." - Wall Street Journal,
"Stocks Rise as Oil Prices Keep Falling" -
"Falling Oil Prices Fuel Blue Chips to Jump 101.25." - Wall Street Journal,
"Buying Frenzy! Dow up 101 on Sinking Oil, Strong Earnings."
"The notion that lower oil prices are bad for the equity market is 'rubbish'...the decline in commodity prices is bullish for stocks." Dick Green, president of Briefing.com.
"Yesterday I heard on television that anyone who thinks commodities are going to lead stocks lower is 'stupid.' Well, I guess I'm with stupid. So is Australia. And much of the Asia-Pacific region." -Pepe Depew in yesterday's Five Things.
"The rub, for lack of a better word, is that the long-held and universally accepted notion that lower energy prices would bode well for the consumer and, as an extension, the stock market is entirely misplaced. If the commodity complex begins to spin lower, the odds on bet is that equities will follow their lead."
Alright, let's cut to the heart of the matter. For the last three weeks, we've been warily eyeing the five-year trendline in the CRB index, which is an arithmetic average of nineteen commodities futures prices. The thought and thesis was (is) that the rising tide of liquidity has lifted all asset class boats at the expense of the US dollar, which has declined almost 30% in the same time frame. Nobody was talking about this dynamic at the time and, if it wasn't for Minyanville, there's a chance that many wouldn't be talking about it now. That's both a good thing and a bad thing, I suppose, depending on which way the chips play.
As I carefully monitored this nasty break in commodities, it was--and continues to be--my belief that a synchronized swim lower could have ominous implications for stocks. Liquidity doesn't discriminate, as evidenced by the group hug in gold, crude, equities, real estate and agricultural products during the post-bubble reflation efforts. It stands to reason that a splintered spigot---or, perhaps, a slower velocity of money--would have a uniform effect in a perfect storm.
Humility is a common theme on Wall Street, particularly for those of us who put it out there daily, and it's a lesson I've learned quite well. While I've mapped out the bull case daily--there are two sides to every trade--I'll offer that it would be myopic and potentially dangerous to blindly subscribe to what you read, hear and see in the popular press. I'm not smart enough to know if this break in commodities will 1) last, 2) matter or 3) manifest, but there is a probability, at some level that it will and, as risk managers, we need to assimilate that into our risk profiles.
For my part, I've been patiently waiting, keeping my (directional) deltas "flattish" and accumulating a slew of (cheap and cheaper) gamma (the VXO was down 10% yesterday). With expiration looming on Friday, I know that we could see more swings than a Hedonism vacation and I was playing it close to the vest. Late yesterday, I began to open up my war chest, accumulating March puts in a handful of financials for both my trading and investment accounts. Against that, and lest Snapper appears in the CRB, I bought some upside hedges in the form of January calls in the metal and energy space (I already owned some metals in my investment account).
Minyanville isn't an advice site and our mission is to help folks find their way by sharing what we're seeing, what we're doing and why we're doing it. I can't say for certain if I'll be right or if, for that matter, this entire stream of thought is misplaced, misguided or mistimed. I've learned, through sixteen years of trading, to respect the process and appreciate the other side of the trade. And judging by the feedback and headlines we've received in the 'Ville, the other side of this particular trade seems to be awfully crowded.
Good luck today.