Specious Argument

I highly encourage you to visit James Nachtwey over at I, Shootist blog by James DiGiorgio, also known as JimmyD.

Photographer James Nachtwey is considered, by many, the greatest photojournalist of the past three decades. Many of his images--disturbing, poetic, often haunting--shame us. Leastwise, they should shame us. They should shame us because the moments they so artfully capture depict the worst of humanity: From the human toll of war to the ravages of disease and famine to the misery of poverty and the atrocious consequences of intolerance.

JimmyD has posted a terrific video that lasts for about twenty minutes and that leaves us with a question as to what James Nachtwey will announce on 3 October 2008.

I would post that video in my article, but then you might not visit his blog to read his article. That would be wrong. JimmyD is both a gifted writer and photographer, and I urge you to visit his blog and make it part of your normal reading experience.

Below are today's amazing stock market statistics:

• Dow Jones 10,365.45 down 777.68 down 6.98%;
• Nasdaq 1,983.73 down 199.61 down 9.14%;
• S&P 500 1,106.39 down 106.62 down 8.79%; and
• TSX (Canada) 11,285.07 down 840.93 down 6.93%.

As I write this article, the Nikkei 225 is down 4.81%. What an amazing and historic day.

I was absolutely positive that the $700 billion bailout plan would pass—because it had to pass. How could it not? Obviously, I was wrong. What happens next is left to your imagination. I am not sure what to think about this whole mess, other than it is a huge mess.

Many pundits told everyone that would listen that mid July was the absolute low point for the year. So much for that theory. We are well beyond the mid July low point of about 1,200 on 15 July 2008. And no one is sure if we are going lower still, perhaps much lower.

Here are some stories from major news sources:

• Wall Street Journal Bailout Plan Rejected, Markets Plunge, Forcing New Scramble to Solve Crisis (subscription required);
• New York Times Lawmakers Defy Bush and Party Leaders, Rejecting Bailout (free registration required); and
• Financial Times House rejects US bail-out bill (subscription might be required).

Buckle up your chinstraps because the rest of the week promises to be volatile and rocky.

My photograph of Jasper National Park is hosted at Flickr. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.

Wowsers! What else can you say about this amazing past week?

I am sure you have all read about Freddie Mac (FRE), Fannie Mae (FNM), Lehman Brothers Inc., Merrill Lynch & Co., Inc., American International Group, Inc. (AIG), whacko rules against short selling certain financial stocks, $700 billion bailout package, and probably several other newsworthy events that I have missed. I wish I had something meaningful or insightful to add to the recent developments.

If you want an excellent primer on the developments that led to the current crisis, I urge you to read Bill Fleckenstein's book: Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve.

Like most people, I am overwhelmed by the severity of the financial crisis. For the most part, I have been sitting and observing. I did, however, get longer some oil related securities, which have enjoyed a nice rebound.

My decision to get longer on oil was based on recent low oil prices of less than $100 per barrel with a shallow drop in consumption in the United States. Oil consumption has only fallen by about three percent. Please see Energy Information Administration – Short-Term Energy Outlook quote below. While three percent at the margin is a large amount, a three percent reduction in consumption is not large for oil. Almost all oil fields have decline rates in excess of three percent. That means, most oil wells will be producing at least three percent less oil next year.

Consumption. Total U.S. petroleum and other liquids consumption is projected to decline by 610,000 bbl/d, or about 3 percent, in 2008 based on prospects for a weaker economy and high crude oil and product prices continuing into 2009 (U.S. Petroleum Products Consumption Growth). Preliminary July and August 2008 weekly survey data indicate that year-over-year declines in total consumption, which began in August 2007, have narrowed since earlier this year. During the first 6 months of 2008, total petroleum consumption fell by an average of 930,000 bbl/d compared with consumption during the same period in 2007. During July and August, the year-over-year declines averaged 660,000 bbl/d. For the rest of the year (September through December), the year-to-year decline in consumption is projected to narrow to an average of about 130,000 bbl/d.

Many people believe that the commodity bull run, especially in oil, is over. I am not one of those. Most major oil fields are aging and will produce less oil next year. The world economy will continue to grow and demand more oil. Thus, I believe we are experiencing a lull in oil prices. Looking at the Bloomberg site, I see the latest WTI price was $104.55. While some might hope or believe that oil prices will be sustained at a much lower levels, I continue to believe that oil prices will continue to trend higher. That is not to say prices cannot or will not dip, even for months at a time. Rather, unless we suddenly find a new energy source or are able to change our habits in a dramatic fashion, the demand is likely to grow faster than the supply.

This coming week promises to be an exciting week as the markets digest and react to the government bailout. Will there be more surpises? Will volatility increase or subside? The answers to the last two questions are likely yes and yes.

My photograph of Angel Glacier, located in Jasper National Park, is hosted at Flickr. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.

I have upgraded to Movable Type 4.21. I am still exploring all its new features and functionality. With every upgrade, Movable Type (MT) becomes much more powerful and yet more streamlined. For example, the user interface is much more intuitive and easier to navigate. And, so far I am very impressed with its increased speed and efficiency. The upgrade process was amazingly straightforward.

As part of my upgrade, I have turned on the comments and trackbacks once again. Although I do not get many of comments, I certainly do welcome your thoughts.

You can click on the screen capture above or on the Bloomberg Marketdata Commodities link to see the latest results.

The selloff in commodities since early July is simply stunning. The same can be said for the current sell off and turbulence in the broader markets.

While I wish I had something insightful or helpful to write, at this point, I do not. Like everyone else, I am just watching the action. Those who claim that we have already reached the bottom or that they know how things will unfold during the next couple of weeks are lying to you. At this point, everyone is groping his way forward, hoping to latch on to something familiar once again.

If you are well diversified and unlevered (read, no or little margin), you should be able to watch this volatility with bemused detachment. You should start making your list of stock or commodities that you would like to buy more. And if you have some short positions, think of when you want to cover your shorts.

If you are not diversified or are levered or both and are feeling anxious, then you should consider taking action to relieve the stress in your portfolio. Be careful, though, because people often sell at the very worst time. So if you are going to lighten your positions, try think calmly and clearly and act opportunistically. Consider staging your sales over time. And if we get a rally, use that opportunity to reduce your positions.

As Doug Kass, general partner of Seabreeze Partners Management, Inc. and commentator for The Edge Column on RealMoney Silver (subscription required—part of TheStreet.com family), often writes, markets have no memory from day to day. Even though today the markets fell heavily, tomorrow's action could be the polar opposite. So make sure you are comfortable with your positions and have thought through potential scenarios.