I decided I really didn't like how the market was setting up. It is becoming increasingly clear that the spike in energy costs has increased the risk that the US recession will be longer and deeper than previously was likely. The consumer is tapped out and signs of pullback are everywhere I look.
In addition the fact that the US recession may be deeper and energy costs are going higher have begun to critically jeopardize the global growth scenario that I have supported. Why? Because countries like India and China subsidize gasoline for their consumers. China has oil currently pegged at $87/bbl. They are eating the difference. Money necessary to subsidize gasoline is less money for infrastructure investment in the short-term. I see virtually no chance that China will reduce the subsidy and risk public wrath before the Olympics.
As Bythe jokingly posted this time the PPT may not have an easy antidote for the soaring energy prices and mauled consumer. Energy pricing is a global phenomenon and even a release of reserves from the SPR is not likely to have sustained effect. My best guess is what we need is demand destruction and that means the consumer gets hammered painfully.
Until recently the primary impact on the consumer was the cost of gasoline and electricity. But now whether it is AMR charging airline passenger $15 for the first checked bag or the fact that two of my regular contractors tacked on a "fuel surcharge" this week for the first time ever, it is clear that the cost of energy is beginning to impact everything a consumer is buying because businesses can no longer absorb the higher cost of fuel.
"You don't have to be a weatherman to know which way the wind is blowing" -- Bob Dylan.
Once again Oil and oil stocks went in opposite directions. Perhaps the oil stocks are saying by their declines that the increased oil price is either not sustainable or would not be profitable or is a political disaster. Even energy services declined. Alt. Energy had a small gain today.
It was ugly out there. The .SPX fell but its 50 sma held at the close. .SPX However the more front end weighted 50 ema was broken and has turned down. Don't look down but it is still a long long way down to the March and January lows from Friday's close and that is not impossible at present. (see chart.)
The good news is unlike yesterday today the safe havens in this Bear phase actually worked. Gold rose again. GLD Interest rates which had a nasty spike yesterday erased all of the spike and fell some more. $TNX TIPs recovered yesterday's loss. TIP Bonds were once again a safe have for investors. So at least for one day defensive stuff provided some defense.
I chose to back away from the global growth theme a bit and take some profits. My biggest trades were I sold my large industrial sector commitment but added part of the proceeds to the defensive consumer staples sector and closed out my alt energy position. Consumer staples tend to have decent defensive characteristics at a time like this as consumer necessities tend to generate superior earnings visibilty than more cyclical sectors. These further decreased the already low overall volatility of my portfolio to about .3X the .SPX which is somewhere near my absolute defensive low.
This market is nowhere near as oversold as it needs to be for me to add new long positions -- not close to levels seen at the January and March lows. Until better pricing appears or energy prices break to the downside I will stay hunkered down in my quasi-fetal position holding tons of cash and defensive positions. Capital Preservation is the order of the day and perhaps for quite a while.
