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Thursday, July 17, 2008


oil down $17 in three days

tim sykes passes on an article from 1440 wall street regarding the widom of legendary macro trader paul tudor jones.

Commodities have been the worst-performing asset class behind stocks, bonds and real estate for the past 200 years, but Wall Street doesn’t highlight that long history when selling commodity index instruments today. Instead, it shows a chart of the bull market of the past 12 years to rationalize why some pensioner should be long cattle futures in the derivatives markets as part of a basket.

I am sure they were using similar logic about tulips three centuries ago. Oil is a huge mania, and it’s going to end badly. We’ve seen it play out hundreds of times over the centuries, and this is no different. It’s just the nature of a rip-roaring bull market. Fundamentals might be good for the first third or first 50 or 60 percent of a move, but the last third of a great bull market is typically a blow-off, whereas the mania runs wild and prices go parabolic.

august oil futures were crushed again today, and have fallen from a peak of $146.65 back to $129.29 as of this writing. to be sure, i can't say if the bubble has broken -- i just have to follow my analysis day by day. but signs are encouraging in my opinion. in a healthy bull there's simply no way oil trades down through iranian missile tests in the gulf; in retrospect i think many will think of that as a watershed moment. the mechanics of how oil prices are discovered, which propelled prices higher in a leveraging of the market, are likely to work in reverse as speculative credit gets harder to come by -- particularly once aggressive participants have taken, say, a 12% bath in four days and face margin calls. bulls will also face rapidly deteriorating demand fundamentals, which should manifest as persistent upside surprises in inventories.

we'll have to wait and see, of course -- bulls will likely be stubborn and probably not give up the entrenched supply pessimism of peak oil quickly, given that the dynamic is basically true if playing out on a different scale and timeframe from what they believe -- but for now, DUG @ 27 looks to have been a very good entry. there's certainly a chance for a bull stand here, though, with oil sitting on resistance at $130 and DUG right up against resistance at $36-37.

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