(USO) Archives

Why I?m Keeping My Oil Short

Let?s call this the weekend of love. On Friday morning, we were looking forward to a long weekend of missiles raining down on Syria and the regional conflagration that would follow. The price of oil reflected as much, with west Texas intermediate trading all the way up to $112.50.

Then the British Parliament voted against their country?s participation under any circumstances. President Obama then dropped a bombshell of his own, asking congress for a resolution approving military action. He made this request of the least productive congress in history, one that rarely approves anything, whose sole mission is to oppose and embarrass Obama in all circumstances. Flocks of doves were seen circling the capitol dome. The next print for oil was $106.

Obama?s move is entirely political and very clever. He has put the Republicans in the uncomfortable position have having to vote against military action, something they have been clamoring for over the last two years. The sole exception here is the libertarian wing of the party lead by Senator Rand Paul of Kentucky, who opposes all wars for cost reasons.

More importantly, constitutional law professor Obama is setting an important legal precedent here, requiring a congressional declaration of war on this, and all future, military actions. The United States has not declared war on anyone since it did so against Japan in December, 1941 in the wake of the Pearl Harbor surprise attack. Every war since then, and there have been more than 20, has been solely at the discretion under the cover of the War Powers Act. Of the last 23 years, America has been at war for 14 years without any official declaration. The president is not only asking for belt and braces support for an attack on Syria, but also placing the legal handcuffs on all future warlike presidents.

My short position in oil through my bear put spread on the United States Oil Fund (USO) has certainly given me a roller coaster that I had not bargained for. I sold it expecting that the turmoil in Egypt has peaked for the short term. That assessment turned out to be correct. Then we got confirmation of the poison gas attack, something you don?t want to hear about when you are short oil. Only Israel?s missile test today is preventing oil from falling further, fast. Welcome to the oil market.

After the weekend?s action, the oil market has entirely backed out the Syria gas attack. I was sure we were in for a quiet weekend, as there was no way that the US would attack with UN inspectors still in Syria. That would be rude beyond belief. I was definitely paid for my beliefs. My loss on my oil short was pared back from hair raising to moderate. Better news was the gains I scored in my yen and euro shorts, which both collapsed on the dovish news.

So what to do about the (USO) from here? I think that congress will eventually vote for an attack, providing Obama with the fig leaf he is demanding. Oil will spike again when the missiles eventually fly. But with the congressional sand now in the works, that could take weeks, or even months. In the meantime, my options position in the (USO) expires in 13 trading days. So at this point, I am inclined to hang on, run out the clock, and sing anti war ballads until then.

When we do get the next spike in prices, I will sell short again in double the size. Now that the summer is over, the actual supply/demand picture for oil is terrible (click here for ?Why I Sold Oil). Wall Street is holding a record long in the futures market, which will soon come to grief, once the news flow from the Middle East slows.

I am inclined to do so with outright puts only, instead of a put spread to maximize my short-term profits. I may also buy some of the ProShares UltraShort DJ-UBS Crude Oil ETF (SCO), a 200% short fund that profits from falling oil prices (click for the link for the website http://www.proshares.com/funds/sco.html ). I think that the final end game here is for Texas Tea to grind down to $92 over coming months, a prolonged move that an ETF is better disposed to profit from. A 20% drop from the top is certainly something worth taking a bite out of.

Battle Testing Your Portfolio

Newsletter

The great thing about the sudden $5 pop is the price of oil since Monday is that it battle tests your portfolio. You really don't know what you own and the risks it entails until something like this comes along. I'll explain why.

For a start, you get a very clear idea of which of your assets are of the "RISK ON" variety, and which are of the "RISK OFF" persuasion. This is easier said than done because asset classes often change gender, flipping from "RISK ON" to "RISK OFF" without warning. Knowing which is which is crucial in hedging portfolios and measuring your risk. It is not unusual for a trader to believe he has a safe bet on, only to watch his portfolio completely blow up because the cross asset relationships have changed.

Look at Tuesday's market action. Traditional "RISK ON" assets, like stocks (SPY), got pounded. The traditional flight to safety assets, such as bonds (TLT) and gold, did well. This is where a typical balanced portfolio does well. Oil (USO) is usually a "RISK ON" asset, but not this time. Fears of a supply interruption, no matter how unfounded they may be, sent prices for Texas tea through the roof. On this round, oil clearly fell out of the "RISK ON"/"RISK OFF" model.

Not only do assets show their true colors in conditions like this. They also demonstrate their character. Look at the gold/silver ratio. Historically, silver (SLV) moves twice as fast has gold (GLD), with double the beta. Since the last low, it has doubled gold's move. When the barbarous relic gained 17% from the recent $1,175 low, silver roared some 36%. Thus the relationships have been maintained.

How did my own model trading portfolio do? I took it on the nose with my oil short, moving from a profit to a loss. But my short positions in the yen and the euro did well, nearly offsetting those losses. So overall, my 35% year to date performance has been protected, and the volatility kept down. This is whyy I always try to run a book of counterbalancing "RISK ON" and "RISK OFF" positions, or stay very small. You should do the same.

Oil Has Suddenly Become Hot

Which One Did You Say I Should Buy?

Newsletter

Wow! That was some speech! Secretary of State, John Kerry, was certainly rattling the saber last night when he laid out the irrefutable evidence confirming the use of chemical weapons in Syria. Defense Secretary, Chuck Hagel, then upped the ante by asserting that US military forces are ?ready to go.? Oil (USO) hit a two and a half year high at $109, and gold (GLD) finally resumed its ?flight to safety? character by spiking up $30.

I happened to know that the Joint Chiefs of Staff have been war gaming for Syria for over a year now, and have presented President Obama with a list of graduated levels of response. What is new is the movement off assets to the immediate area, like a major carrier task force, which will park 100 miles offshore in the Eastern Mediterranean for the foreseeable future.

My pick is for a no-fly-zone, which the administration should have executed a long time ago. It is cheap and can be implemented remotely, with no risk of casualties. Drones will come in useful too. F-16 fighters now carry smart missiles with a 70 range. If a pilot in Syria takes off, then poof, they?re gone in 30 seconds.

Although the financial markets are expecting immediate action, we may not get it. When traders started speculating about military strikes, you want to run a mile. Obama is first and foremost a pacifist and needs more than overwhelming evidence to fire a single shot. He even hesitated over taking out Osama bin Laden. He also is a lawyer, so he won?t move until the needed international legal framework is in place, such as a United Nations resolution.

The great irony in all this is that the current crisis has absolutely no impact on the actual supply and demand of oil. Syria doesn?t produce any. It is a net importer of oil. All of the other major crude producers in the Middle East are backing US action, except for Iran, a marginal producer at best. Pure emotion is driving the price here. That is why oil and gold have been going up in tandem, until recently a rare event.

If anything, there is a severe imbalance developing in the crude markets that will soon send prices sharply southward. Thanks to a triple barrel push of improving economic data, Egypt, and then Syria, Wall Street has built up a record long in the oil futures market of some 1.9 million contracts. That works out to an incredible 95 days of daily US consumption, or 256 days of imports. That is a lot of Texas tea sloshing around the books of hot handed traders.

We are just coming to the close of the strongest driving season in 31 years, and demand will soon ebb. And guess what? The economic data is now softening. Unwind just a portion of the speculative long position in oil, and we could quickly return to the $92-$95 range that prevailed before the multiple crisis.

Don?t just stop at oil. Syria?s president, Bashar al-Assad is setting up a buying opportunity for the entire range of risk assets, including longs in US stocks and short positions in bonds, yen, and the euro.? If we get no Fed taper in September, as I expect, it could be off to the races once again.

Meet Your New Trading Strategy

Meet You New Market Timer

Why I Sold Oil

Newsletter

I think that oil peaked last week with the Egyptian Army?s ferocious and bloody attack on the Muslim Brotherhood. I hate to sound cynical here, but count the daily bodies in the street, which has been trending down sharply since Thursday?s, 1,000 plus tally. Fewer bodies mean lower oil prices.
This has most likely broken the back of the fundamentalist opposition movement for at least the time being, which has accounted for the $20 spike in oil prices over the last two months.

This returns us to the longer term fundamental trend for oil, which is sideways at best, and down at worst. The US is flooding the world?s oil markets with energy in all its many forms. The driver here is American fracking technology, which will continue to upend the traditional energy markets for decades to come. It?s just a matter of time before fracking goes mainstream in Europe, especially in the big coal countries of Germany, Poland, and England. Then they can thumb their noses at Russia, a major gas supplier over the last thirty years. China will follow.

In a crucial news item that wasn?t reported nationally, the California legislature voted down a measure to ban hydraulic fracturing in their state. It was defeated in a democratically controlled body. As the Golden State is the most anti energy state in the country, this gives the state a flashing green light to move forward against environmentalist opposition. There is a ton more of new supply coming. This is what the weakness in the price of natural gas is telling you (UNG).

We also received a new negative for oil this month, the collapse of the emerging market currencies, stock markets, and bonds, especially the Indian rupee. This reduces their international purchasing power in US dollar terms, thus raising the cost of oil in local currency terms. You see, oil is priced in dollars. As the emerging markets have seen the largest growth in demand for oil in recent years, this can only be bad for prices.

In terms of my own trading portfolio, I want to have a ?RISK OFF? position, like an oil short, to hedge my two existing ?RISK ON? positions in the Euro (FXE) and the yen (FXY) shorts. US stock markets could be weak into September, and they will take oil down with them.

The energy inventory figures released on Wednesday were another tell. Oil came in line with a 1.5 million barrel weekly draw down. But gasoline showed a precipitous 4 million barrel drop in supplies, meaning that more people are driving to their summer vacations than expected. Texas tea should have rallied at least $1 on the news. Instead it fell $1.50. It is an old trading nostrum that if a contract can?t rally on surprisingly positive developments, you sell the daylights out of it.

Below, you will find another chart that you should wake up and take notice of, the Powershares DB US Dollar Bullish Index Fund (UUP). Commodities traditionally are weak when the dollar is strong. Both the chart and the fundamentals suggest that we are close to a multiyear low for the greenback and are about to enter a prolonged period of dollar strength. This is also grim tidings for oil.

Finally, there is that last resort, the charts. Check out those for the (USO) and oil and it very much looks like we have a triple top in place. That is the straw that breaks the camel?s back. Time to sell.

The only way I am wrong on my oil call is if the Chinese economy is about to take off like a rocket. They are the marginal big swing player in this market. But there is absolutely no sign of that happening in the economic data. If anything, the collapse in emerging markets suggest that conditions in the Middle Kingdom are about to get worse before they get better.

Ouch! That Hurt!

The High Oil Mystery

Newsletter

American oil imports from the Middle East are in free fall, down 35% in two years. They are quickly being replaced by tar sands imports from Canada, which are ballooning to 2 million barrels a day and at all time highs. American energy production is surging, thanks to new finds of natural gas showing up in everyone?s back yard, taking the country rapidly on its way to energy independence.

So why is the price of oil so damn high?

Everywhere you go to seek a shortage, you find a glut. Storage facilities at the Cushing, Oklahoma hub are practically overflowing. The Strategic Petroleum Reserve is close to its 727 million barrel maximum capacity, or 36 days of national consumption.

Traditionally, the beginning of the summer driving season heralded higher crude prices. But gasoline consumption has been sliding for five years, thanks to the widespread adoption of hybrids and electric cars, and the improved mileage of conventional automobiles.

Even the Iranian election results auger poorly for the price of oil. The win by moderate Hassan Rohani, who boasts a doctorate from a Scottish university, promises to ease tensions with the United States over the nuclear issue.

More mysterious is the fact that the price of oil has been levitating in the face of the utter collapse of virtually every other commodity. Dr. Copper is handing out ?F?s? these days, the red metal down 30% this year. Iron ore is close to 50% down from its peak, to the deep distress of many Australians and their beleaguered dollar. Even the barbarous relic is off, gold falling 31% from its high. How come the Chinese economic slowdown is dragging down the price of everything except the one it needs the most?

The US decision to send weapons to Syria is, no doubt, positive for oil prices, but it is only worth a bump for a day. America has also announced joint military maneuvers with Jordan. How much do you want to bet that they accidentally leave their weapons behind?

Iran responded by sending 4,000 troops into the battered country to join Hezbollah from Lebanon, who are already there. Syria is turning into the Spanish Civil War of our age. But as it produces no oil, it shouldn?t materially impact prices.

Looking at speculative long positions held by hedge funds, I find them at multiyear highs. My guess is that investment demand, not consumption, accounts for up to $30 of the current $98 price of black gold.

Maybe we should just write all this off to another instance of prices moving the opposite direction of fundamentals, which has become so common this year. Or perhaps President Obama is right? Is it the work of evil speculators?

How To Get a Price Rise From a Global Glut?

Here Comes the Next Peace Dividend

Diary, Newsletter

When communications between intelligence agencies suddenly spike, as has recently been the case, I sit up and take note. Hey, you don?t think I talk to all of those generals because I like their snappy uniforms, do you?

The word is that the despotic, authoritarian regime in Syria is on the verge of collapse, and is unlikely to survive more than a few more months. The body count is mounting, and the only question now is whether Bashar al-Assad will flee to an undisclosed African country or get dragged out of a storm drain to take a bullet in his head. It couldn?t happen to a nicer guy.

The geopolitical implications for the US are enormous.? With Syria gone, Iran will be the last rogue state hostile to the US in the Middle East, and it is teetering. The next and final domino of the Arab spring falls squarely at the gates of Tehran.

Remember that the first real revolution in the region was the street uprising there in 2009. That revolt was successfully suppressed with an iron fist by fanatical and pitiless Revolutionary Guards. The true death toll will never be known, but is thought to be in the thousands. The antigovernment sentiments that provided the spark never went away and they continue to percolate just under the surface.

At the end of the day, the majority of the Persian population wants to join the tide of globalization. They want to buy IPods and blue jeans, communicate freely through their Facebook pages and Twitter accounts, and have the jobs to pay for it all. Since 1979, when the Shah was deposed, a succession of extremist, ultraconservative governments ruled by a religious minority, have failed to cater to these desires

When Syria collapses, the Iranian ?street? will figure out that if they spill enough of their own blood that regime change is possible and the revolution there will reignite. The Obama administration is now pulling out all the stops to accelerate the process. Secretary of State Hillary Clinton has stiffened her rhetoric and worked tirelessly behind the scenes to bring about the collapse of the Iranian economy.

The oil embargo she organized is steadily tightening the noose, with heating oil and gasoline becoming hard to obtain. Yes, Russia and China are doing what they can to slow the process, but conducting international trade through the back door is expensive, and prices are rocketing. The unemployment rate is 25%.? Iranian banks are about to get kicked out of the SWIFT international settlements system, which would be a deathblow to their trade.

Let?s see how docile these people remain when the air conditioning quits running this summer because of power shortages. Iran is a rotten piece of fruit ready to fall of its own accord and go splat. Hillary is doing everything she can to shake the tree. No military action of any kind is required on America?s part.

The geopolitical payoff of such an event for the US would be almost incalculable. A successful revolution will almost certainly produce a secular, pro-Western regime whose first priority will be to rejoin the international community and use its oil wealth to rebuild an economy now in tatters.

Oil will lose its risk premium, now believed by the oil industry to be $30 a barrel. A looming supply could cause prices to drop to as low as $30 a barrel. This would amount to a gigantic tax $1.43 trillion tax cut for not just the US, but the entire global economy as well (87 million barrels a day X 365 days a year X $90 dollars a barrel X 50%). Almost all funding of terrorist organizations will immediately dry up. I might point out here that this has always been the oil industry?s worst nightmare.

At that point, the US will be without enemies, save for North Korea, and even the Hermit Kingdom could change with a new leader in place. A long Pax Americana will settle over the planet.

The implications for the financial markets will be enormous. The US will reap a peace dividend as large or larger than the one we enjoyed after the fall of the Soviet Union in 1992. As you may recall, that black swan caused the Dow Average to soar from 2,000 to 10,000 in less than eight years, also partly fueled by the technology boom. A collapse in oil imports will cause the US dollar to rocket.? An immediate halving of our defense spending to $400 billion or less and burgeoning new tax revenues would cause the budget deficit to collapse. With the US government gone as a major new borrower, interest rates across the yield curve will fall further.

A peace dividend will also cause US GDP growth to reaccelerate from 2% to 4%. Risk assets of every description will soar to multiples of their current levels, including stocks, bonds, commodities, precious metals, and food. The Dow will soar to 20,000, the Euro collapses to parity, gold rockets to $2,300 and ounce, silver flies to $100 an ounce, copper leaps to $6 a pound, and corn recovers $8 a bushel. The 60-year bull market in bonds ends.

Some 1.5 million of the armed forces will get dumped on the job market as our manpower requirements shrink to peacetime levels. But a strong economy should be able to soak these well-trained and motivated people right up. We will enter a new Golden Age, not just at home, but for civilization as a whole.

Wait, you ask, what if Iran develops an atomic bomb and holds the US at bay? Don?t worry. There is no Iranian nuclear device. There is no Iranian nuclear program. The entire concept is an invention of American intelligence agencies as a means to put pressure on the regime. The head of the miniscule effort they have was assassinated by Israeli intelligence two weeks ago (a magnetic bomb, placed on a moving car, by a team on a motorcycle, nice!).

If Iran had anything substantial in the works, the Israeli planes would have taken off a long time ago. There is no plan to close the Straits of Hormuz, either. The training exercises we have seen are done for CNN?s benefit, and comprise no credible threat.

I am a firm believer in the wisdom of markets, and that the marketplace becomes aware of major history changing events well before we mere individual mortals do. The Dow began a 25-year bull market the day after American forces defeated the Japanese in the Battle of Midway in May of 1942, even though the true outcome of that confrontation was kept top secret for years.

If the collapse of Iran was going to lead to a global multi decade economic boom and the end of history, how would the stock markets behave now? They would rise virtually every day, led by the technology sector and banks, offering no pullbacks for latecomers to get in. That is exactly what they have been doing since mid-December. If you think I?m ?Mad?, just check out the big relative underperformance of oil on the chart below.

Here?s The Next Big Short

Why You Should Care About the Iran Rial Collapse

Diary, Newsletter

The Iranian Rial (IRR) has just suffered one of the most cataclysmic crashes in the history of the foreign exchange markets. It is off a mind numbing 75% since the beginning of 2011. One dollar now buys 12,200 Rials. Watch out Zimbabwe!

When communications between intelligence agencies suddenly spike, as has recently been the case, I sit up and take note. Hey, do you think I talk to all of those generals because I like their snappy uniforms, do you?

The word is that the despotic, authoritarian regime in Syria is on the verge of collapse, and is unlikely to survive more than a few more months. The body count is mounting, and the only question now is whether Bashar al-Assad will flee to an undisclosed African country or get dragged out of a storm drain to take a bullet in his head a la Gaddafi. It couldn?t happen to a nicer guy.

The geopolitical implications for the US are enormous.? With Syria gone, Iran will be the last rogue state hostile to the US in the Middle East, and it is teetering. The next and final domino of the Arab spring falls squarely at the gates of Tehran.

Remember that the first real revolution in the region was the street uprising there in 2009. That revolt was successfully suppressed with an iron fist by fanatical and pitiless Revolutionary Guards. The true death toll will never be known, but is thought to be in the thousands. The anti-government sentiments that provided the spark never went away and they continue to percolate just under the surface.

At the end of the day, the majority of the Persian population wants to join the tide of globalization. They want to buy IPods and blue jeans, communicate freely through their Facebook pages and Twitter accounts, and have the jobs to pay for it all. Since 1979, when the Shah was deposed, a succession of extremist, ultraconservative governments ruled by a religious minority, have failed to cater to these desires.

When Syria collapses, the Iranian ?street? will figure out that if they spill enough of their own blood that regime change is possible and the revolution there will reignite. The Obama administration is now pulling out all the stops to accelerate the process. The new Secretary of State, John Kerry, will stiffened his rhetoric and work tirelessly behind the scenes to bring about the collapse of the Iranian economy.

The oil embargo is steadily tightening the noose, with heating oil and gasoline becoming hard to obtain in this oil producing country. Yes, Russia and China are doing what they can to slow the process, but conducting international trade through the back door is expensive, and prices are rocketing. The unemployment rate is 25%.

Iranian banks have been kicked out of the SWIFT international settlements system, a death blow to their trade. That is what the Standard Chartered money laundering scandal last year was all about. Sure, you can sell oil one truckload at a time for cash. Try doing that with 3 million barrels a day of which should fetch $270 million. That?s a lot of Benjamins. Forget the fives and tens.

Let?s see how docile these people remain when the air conditioning quits running because of power shortages. With their currency now worthless, it has become impossible to import anything. This is causing severe shortages of everything under the sun, especially foodstuffs, which in some cases have more than doubled in price in months.

What does the government in Tehran say about all of this? Blame it on the speculators. Sound familiar?

Iran is a rotten piece of fruit ready to fall of its own accord and go splat. The Obama administration is doing everything it can to shake the tree. No military action of any kind is required on America?s part. Think of it as victory on the cheap.

The geopolitical payoff of such an event for the US would be almost incalculable. A successful Iranian revolution will almost certainly produce a secular, pro-Western regime whose first priority will be to rejoin the international community and use its oil wealth to rebuild an economy now in tatters.

Oil will lose its risk premium, now believed by the oil industry to be $30 a barrel. A looming oversupply could cause prices to drop to as low as $30 a barrel. This would amount to a gigantic $1.66 trillion tax cut for not just the US, but the entire global economy as well (87 million barrels a day X 365 days a year X $100 dollars a barrel X 50%).

Almost all funding of terrorist organizations will immediately dry up. I might point out here that this has always been the oil industry?s worst nightmare. Commercial office space in Houston may not do so well either, as imports account for 80% of the oil majors? profits.

At that point, the US will be without enemies, save for North Korea, and even the Hermit Kingdom could change with a new leader in place. A long Pax Americana will settle over the planet.

The implications for the financial markets will be enormous. The US will reap a peace dividend as large, or larger, than the one we enjoyed after the fall of the Soviet Union in 1992. As you may recall, that black swan caused the Dow Average to soar from 2,000 to 10,000 in less than eight years, also partly fueled by the technology boom.

A collapse in oil imports will cause the US dollar to rocket.? An immediate halving of our defense spending to $400 billion or less and burgeoning new tax revenues would cause the budget deficit to collapse. With the US government gone as a major new borrower, interest rates across the yield curve will fall further.

A peace dividend will also cause US GDP growth to reaccelerate from a tepid 2% rate to a more robust 4%. Risk assets of every description will soar to multiples of their current levels, including stocks, junk bonds, commodities, precious metals, and food. The Dow will soar to 30,000, the Euro collapses to parity, gold rockets to $3,000 an ounce, silver flies to $100 an ounce, copper leaps to $6 a pound, and corn recovers $8 a bushel. The 60-year bull market in bonds ends in a crash.

Some 1 million of the armed forces will get dumped on the job market as our manpower requirements shrink to peacetime levels. But a strong economy should be able to soak right up these well-trained and motivated. We will enter a new Golden Age, not just at home, but for civilization as a whole.

Wait, you ask, what if Iran develops an atomic bomb and holds the US at bay? Don?t worry. There is no Iranian nuclear device. There is no real Iranian nuclear program. The entire concept is an invention of Israeli and American intelligence agencies as a means to put pressure on the regime and boost their own budget allocations. The head of the miniscule effort they have was assassinated by Israeli intelligence last year (a magnetic bomb, placed on a moving car, by a team on a motorcycle, nice!). What nuclear infrastructure they have is being decimated by computer viruses as I write this.

If Iran had anything substantial in the works, the Israeli planes would have taken off a long time ago. There is no plan to close the Straits of Hormuz, either. The training exercises in small rubber boats we have seen are done for CNN?s benefit, and comprise no credible threat.

I am a firm believer in the wisdom of markets, and that the marketplace becomes aware of major history changing events well before we mere individual mortals do. The Dow began a 25-year bull market the day after American forces defeated the Japanese in the Battle of Midway in May of 1942, even though the true outcome of that confrontation was kept top secret for years.

If the collapse of Iran was going to lead to a global multi decade economic boom and the end of history, how would the stock markets behave now? They would rise virtually every day, offering no substantial pullbacks for latecomers to get in. That is exactly what they have been doing since mid-November.

Here?s The Next Big Short

Not Worth So Much Today

Get Ready to Buy the Bond Market

Newsletter

The Treasury bond market has just suffered one of the most horrific selloffs in recent memory, taking the yield on ten year paper up from 1.38% to an eye popping 1.83% in weeks, a three month high.

Yields have just risen by an amazing 38%. This has dragged the principal Treasury bond ETF (TLT) down from $132 to $120. Those who were pining to get into this safe haven at a better entry point now have their chance.

Rumors for the plunge have been as numerous as bikinis on an Italian beach. Some have pointed to a suspected unwind of China?s massive $1 trillion in Treasury bond holdings. Others point to the incredibly thin summer market trading conditions. Add to that a relentlessly heavy new issue calendar by the government. After all, they have a $1.4 trillion budget deficit to finance this year. That works out to $4 billion a day.

Long term strategists point to more fundamental reasons. The spread between the ten year yield and the S&P 500 dividend yield is the narrowest in history. Even after the recent slump, equity yields still beat bonds by 20 basis points. This has never happened before. The smarter money began shifting money out of bonds into stocks months ago.

However, I think that an excellent trading opportunity is setting up here for the brave and the nimble. There is a method to my madness. Here are my reasons:

*US corporate earnings are slowing at a dramatic pace. Some 40% of those reporting in Q2 delivered revenues misses. They made up the bottom line by firing more people. This is the worst performance since early 2008. Remember how equity ownership worked out after that?

*The high price of oil is now starting to become a problem and will inflict its own deflationary effects. If we maintain the 24% price hike we have seen in recent months, that will start to present a serious drag on the economy.

*Fiscal Cliff? Has anyone heard about the fiscal cliff? This 4% drag on GDP growth, another name for a recession, is looming large.

*Don?t forget that the rest of the world economy is going to hell in a hand basket. The China slowdown continues unabated, and a hard landing is still on the table. Europe is in the toilet. Japan?s growth is on life support.

*The Chinese aren?t selling. They told me so. They are merely reallocating a larger portion of their monthly cash flow to Europe where yields are a multiple higher. They are doing this because I told them to. This helps support the Euro. Keeping the currency of its largest trading partner strong to preserve exports is in its best interest.

*QE3? Remember QE3? Even if the Federal Reserve doesn?t implement this expansionary monetary policy, Europe will. And the Fed will probably join in 2013 when we head into the next recession.

*Paul Ryan for VP? If elected, his death wish for the Federal Reserve will send asset prices everywhere plummeting, including stocks and bonds. Since Romney?s fumbled announcement, Treasury bond yields have soared by 25 basis points.

There are many ways to play this game. Just pick your poison. The obvious pick here is to buy the (TLT) just over the 200 day moving average at $119. You could buy an October $120-$125 (TLT) call spread in the options market for a quick bounce. If you really want to get clever, you can sell short the $110-$115 call spread, which has a breakeven in terms of the ten year Treasury yield of 2.10%.

The safe haven trade is not gone for good. It?s just enjoying a brief summer vacation.

Those Treasury Bond Yields Were Getting Mighty Thin

The Slippery Slope for Oil

Newsletter

If volatility and lack of direction in the equity market are driving you nuts these days, thank your lucky stars you?re not in the oil market. Only last night, a Japanese supertanker plowed into a US Navy destroyer, causing prices to spike. That?s assuming that you had time to notice while sifting through numerous, contradictory leaks from Israeli intelligence about whether they will, or will not, imminently attack Iran. Oh, and don?t forget, demand from Europe is disappearing up its own tailpipe.

My take is that the administration is pursuing the correct policy on Iran. With Europe joining the embargo on June 30, and its major means of trade financed with the dispatch of Standard Chartered, Iran?s economy is now caught in a vice. With minimal domestic refining capacity, the country is drowning in its own oil, but facing several gasoline shortages. Some essential foodstuffs have doubled in price. These are key ingredients needed for the Arab Spring to spill into Iran. Then the country falls into our lap like an overripe piece of fruit, without a shot fired.

It could well be that none of this makes any difference to the price of crude. Like every other asset class, it has become hostage to the likelihood of another round of quantitative easing from the Federal Reserve. West Texas Intermediate has moved an impressive $18 off of its $77 low on the prospect of QE3 alone. All that is left is for Ben Bernanke to pull the trigger.

Our first chance at a hint will be at the Jackson Hole confab of central bankers on August 26. After that, we have to wait until the September 18-19 Open Market Committee Meeting for relief. It is safe to say that if Ben delivers, oil could be trading at triple digits very quickly. If he doesn?t, then we could be plumbing new lows shortly.

That put us in the same risk/reward dilemma for oil as with the equity markets. Note the imbalance. If we get QE3, then we can entertain $6 of upside. If we don?t, you are looking at $25 of downside. Hint: strapping on risk/reward trades like this is not how hedge fund managers get rich.

That makes me a happier buyer on the next big dip than a chaser up here. Names to focus on? ExxonMobile (XOM), Occidental Petroleum (OXY), and Cabot Oil & Gas (COG), as well as the master limited partnerships like Kinder Morgan (KMP), Enbridge Energy Partners (EEP), Trans Montaigne Partners (TLP), Linn Energy (LINE).

That?s all for today. It is hard to write brilliant, seamless prose when you?re brain dead and mindless from nine hours of jet lag. Besides, the whales are still on vacation at Southampton and the South of France, so my traditional sources of hot tips will remain dry for another week or so. Damn! I should have taken an extra week off to investigate economic conditions in the Greek Islands. With a Depression on, I hear that hotels that normally go for $2,000 a day can be had for $2,000 a week.

Obama?s Unintended Oil Consequences

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Back in March, oil broke the $110/barrel level and gasoline was rapidly approaching the $5/gallon level, threatening to derail Obama?s reelection campaign. The administration enlisted Europe to join it in a boycott of Iranian oil in an effort to get the Islamic republic to retreat from is program to develop a nuclear weapon. Iranian president, Mahmoud Ahmadinejad, responded by threatening to close the Straits of Hormuz, thus blocking exports to the west. It all had the makings of a first class crises that could have taken oil up to $125 or higher.

There was no way that the president was going to let Texas Tea to pee on his parade, so he took quick action to cut the knees out from under it. He threatened to release supplies from the Strategic Petroleum Reserve in Louisiana, which was chocked full. He browbeat the CFTC into substantially raising margin requirements for oil and other commodities with his attack on ?speculators?.

He then convinced Saudi Arabia to ramp up its production to the max, over 12 million barrels a day, to head off any ill-timed price spikes. The Saudis, believing it was time to discipline recalcitrant minor producing OPEC members, like Iran, with the threat of lower prices, happily complied.

Crude gave back $5 in the bat of an eyelash, and then launched a $33 downslide that had oil trading at the $77 handle on Monday. What Obama didn?t expect was an assist in his strategy to cripple oil prices from a flock of ?black swans?.

The next chapter in the European sovereign debt debacle pushed the continent into a more severe recession, cooling energy demand there. Libya has been bringing production on line faster than expected. Every downtick in China?s anticipated GDP growth rate shaves a few more dollars off oil. A shortage of pipeline capacity is causing oil to pile up at the massive storage facilities Cushing, Oklahoma, slowing export deliveries. It all adds up to a rare perfect storm for oil. To Obama?s delight, gasoline may be selling for the high $2 range in much of the country by the November election.

As I regularly harangue readers and attendees at my strategy luncheons, imminent America energy independence is the least understood but most important factor that will impact financial markets in the years ahead. Over the last two years, domestic production has soared from 8.5 million barrels a day to 10.5 million, thanks to the miracle of fracking technology, which I helped pioneer a decade ago. That?s more that we buy from Saudi Arabia annually.

North Dakota has just replaced Alaska as the second largest oil producing state. The boom there has been so rapid that massive RV camps of itinerate roustabouts now litter the Northern plains. In the meantime, imports have plummeted from 13 million barrels a day to only 9 million.

But I think the current crash in oil will be a temporary one. For a start, the Seaway pipeline reverses next week, breaking the Cushing bottleneck, enabling North Dakota oil to reach the Gulf ports. The current $78 oil price is already below the cost of the most important sources of supply, such as Canadian oil sands and deep offshore wells.

I think that financial markets will enjoy a ?RISK ON? rally starting from this summer as they start to discount the conclusion of the presidential election, the next European LTRO quantitative easing, and possibly a QE3 from the Federal Reserve. This could all pave the way for a rebound in oil to $90 or more.

So there is an attractive trade setting up here. You can buy the oil major ETF (DIG). Interesting single stock plays at these levels include ExxonMobile (XOM), Occidental Petroleum (OXY), and Cabot Oil & Gas (COG). You can also buy call spreads in the oil ETF (USO). A more cautious strategy might be to sell short out of the money puts on the (USO). Sure, the tracking error on this horrible ETF is huge, thanks to the contango, but at least you can take in the time premium.

My long term view on oil is that we spike one more time to $150-$200. Having spent 45 years studying the industry closely and knowing principals like Armand Hammer and Boone Pickens, I can tell you the one simple rule of thumb to observe with this industry. Doing anything costs extraordinary amounts of money and takes a really long time. The calloused men who run the oil majors don?t hesitate to spending tens of billions of dollars to finance projects in the most inhospitable parts of the world with 40 year payouts. No matter what we do today, it will be impossible to head off another severe oil shortage.

After that, we will fall to $10 as oil is removed from the global economy and is only used as a petrochemical feedstock for plastics, pharmaceuticals, asphalt, and jet fuel. This will happen because of the rise of cheap natural gas, alternative energy sources, more efficient building designs, a better power grid, the advent of low end nuclear power plants, and cars that get 100 miles per gallon or use no gasoline at all.

Of course the CEO?s of the oil majors laugh when I tell them this. I?m sure that the hay industry similarly laughed in 1900 if you told them about the coming demise of the horse as a mode of transportation. But it may take 40 year for us to get there. I hope I live to see it.

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