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Fuel a Four-Letter Word

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Financials also an F-Bomb.

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In boxing there are rules that go way back to the Marquess of Queensberry but the one-two punch that continues to pound the market could have only come from the mind of the Marquis de Sade. I'm talking fuel and financials, the former a four-letter word that has the ability to put anyone in a fighting mood and the latter is doing anything but fighting back. Of course maybe the tortuous action at the gas pump is the kind of self-inflicted result that comes from a certain kind of arrogance. The same, too, for the financials, which continue to pay the price for unacceptable mismanagement.

Fuel

I thought we were using less crude oil, not more. Sure, in the latest reading gas consumption edged lower to 20.4 million barrels a day or 1.3% for the four week period that ended on June 6. Crude, on the other hand, saw a drawdown of 4.6 million barrels: The estimate called for a drawdown of only 1.4 million barrels.

This isn't an anomaly. In the last four weeks crude inventories are off 23.6 million barrels, a whopping 7.2%. The thing is, this is happening even with restraints on refining, which saw capacity decline 1.1% in the latest weekly tally. I guess the results from the Energy Information Agency were telegraphed because crude oil was surging even before the equity markets opened, but the reaction to the news seemed exaggerated. Sure, the data was unnerving. Sure, the resolve of crude oil is something to behold. But there is an element of drama in what's going on that only a sadist like the Marquis de Sade could really appreciate.

The crude rally isn't going away soon and as we have found out the hard way it goes up with a lot more ease than it comes down. At this point there would seem to be a lot of logical reasons for crude to pullback.

  • U.S. interest rates will began to rise.
  • U.S. dollar will increase. (Presumably after the last rate hike by the ECB next month- what is that all about anyway?)
  • Global demand has peaked.
  • Ralph Nader is going to vault to the lead in Presidential polls.

Okay, I know that is a little ridiculous: the ECB will never stop raising rates. The problem with any scenario that shows lower crude is that it's a long way off. And forget solar, wind and fuel cells, as they've been in the mix for a couple of decades and one day will make a meaningful impact.

By the way I wonder if Jean Claude Trichet has ever considered a different route to alleviating inflation. I would like to somehow ask him about a four-step route that also would make European products more competitive in the world.

Step 1: Jean Claude Trichet leaves Euro zone rates alone or actually cuts them.
Step 2: This moves makes the U.S. dollar stronger.
Step 3: The strong U.S. dollar sends crude lower.
Step 4: Cheaper crude alleviates inflationary pressures in Europe and the rest of the world.

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Interestingly, oil-related stocks have only fared so-so of late. I'm not sure why that is other than thinking this embarrassment of riches can't last much longer or be projected longer term. I think we know that's a mistake, even if there is a correction at some point crude has to move much higher. Granted coming into the year I figured the top for crude would be $110.00. Of the integrated oil companies I think Chevron (CVX) is the best investment, although integrated oil companies don't get the pure benefit that other niches of the industry enjoy, they are passing on higher crude prices through the howling of consumer outrage. The company beat the consensus by $0.07 last quarter after missing in the previous three. The stock is on the verge of a breakout and could climb to $114.00.

I love service and drillers like Ensco (ESV) which has bested the Street's expectations in each of the last four quarters should rally to $100.00, and Weatherford (WFT) has room to $55.00. Then there is Apache (APA) which actually missed the street by $0.07 last time it reported earnings results but has seen FY'08 earnings expectations climb to $14.74 from $11.45 three months earlier. In storage I like a small company called Blackwater Midstream (BWMS), which has nabbed incredible space in Louisiana and has the ability to store everything from ethanol to molasses. The company is putting together a solid management team (read the news from the last 30 days) and should make money hand over fist. I think this could be a $7.00 stock.

Financials

The rumors got wilder and scarier yesterday with Goldman Sachs (GS) placed in the crosshairs. The scuttlebutt spread like wildfire about massive write downs at what has been the smartest firm on Wall Street throughout the entire crisis period. Washington Mutual (WM), which inexplicably rallied on Tuesday, was hammered to a 16-year low yesterday on talk regulators were prepared to take action against the beleaguered bank. Talk about a bunch of long-tailed cats in a room full of rocking chairs: This next round of earnings from financials will be spooky stuff.

Am I worried? You bet! The financial ETF is at a double bottom, which means these stocks must make a stand, now. Generally, a double bottom is a bullish chart formation but it is hard to understand how it would hold before the next round of earnings. One has to wonder when the industry will begin to do what it can to regain integrity.

Things wouldn't be so awful if there was more honesty. I know the space evolves almost minute to minute but the lack of transparency and candor is the intangible that amplifies the negative rumors. I'm very worried about the volume over the past week, which has screamed higher as the group has screamed lower. If the Street is wrong on this one, which is weird to say because they are betting against themselves, it will be a long time before they can regain credibility.


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No positions in stocks mentioned.
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