“…UP FROM THE GROUND COME A BUBBLIN’ CRUDE…”

3/6/09

I don’t often like to put up posts dealing with pure investment or trading strategies; I don’t like to talk my positions and see the first parenthetical remark in the third paragraph of this post. However, more general observations that metamorphosize into specific trades might be of interest to my readers, so I’ve put up this post. These are not recommendations, only thoughts.

I’m liking oil at these levels for several reasons:

First, either the economy is going to recover (Loyal readers know that I think such a recovery is highly unlikely in any but the longest of terms, but, unlike my (usually) younger, much more highly paid, far more expert, and obviously more sagacious colleagues who ply their trade as financial geniuses on Wall Street or its more far geographically far flung approximations, I recognize that my, or anyone’s, chances of being right on any macro call approximate my chances of being wrong on that call.) or the dollar is going to get trashed as part of the ill-fated government efforts to revive the moribund economy and capital markets. (Loyal readers know that I think this outcome is the far more likely one, with the same caveats featured in my earlier parenthetical digression.) Either way, oil, priced in dollars, benefits.

Second, oil has fallen a long way in a short time. This is, of course, no reason to buy anything. Remember the experts (not this one) who told people to buy GM at $15, $10, and $5 for the very same reason. I also know that oil has been much lower, around $10, in relatively recent memory. However, such lows were reached before China was a factor in the world oil markets. In fact, when oil was at $10, most “experts” thought that China would be a next exporter of oil in the 21st century. Now that China and India are in the market, their secular bid, even considering the poor state of their cyclical bid at present, should prevent the return of such cheap oil. We have to be near the floor here.

Third, a bullish bet on oil could serve as a hedge against my continuing overall bearish outlook on the stock market, manifested by my continuing, but shrinking, position in QQQQ puts.

USO=27.96 at this writing.