Kaeppels Corner: Things Arent Always What They Seem
June 18, 2008
Things Aren’t Always What They Seem: Example #1
There is an old joke about a guy who gets caught cheating on his wife. Despite being caught red handed (or whatever), he denies everything. When the wife finally blurts out “but I saw you with my own two eyes,” he calmly replies, “Well, who are you going to believe, me or your lying eyes?”
This is not that far off from being an appropriate analogy for the financial markets. Very often the headlines will blurt out one thing and everyone will stand in stunned amazement without looking at what is going on “behind the curtain." When crude oil shoots higher $10 a barrel in a day everyone simply assumes that all prognostications of $150 or $200 a barrel are destined to become true. And in fact they might. Still, any number of momentum indicators have rolled over.
Chart 1 displays Crude Oil as of 6/11/08. While prices are attempting to push higher note the weakness in the indicators that appear in the lower part of the chart. Likewise, as you can see in Chart 2 energy stocks have been nowhere near as strong as crude oil during the recent spike up in crude.
This is not meant to serve as “proof positive” of anything. By the time you read this oil may already have hit $150 regardless of any “bearish divergences” in the indicators. This information is simply presented to alert you to the fact that there are at times things that go on in the markets that cannot be discerned simply by reading headlines.
Chart 1 – Crude Oil: Prices up, indicators down
Chart 2 – Energy Stocks not exactly “surging”, despite the Armageddon headlines
Given the near consensus that rising oil prices are a foregone conclusion, a contrarian investor has to stop and wonder. Nevertheless, it would require a tremendous act of courage to stand athwart the parabolic rise in the price of oil and contemplate a short position at the present time.
Things Aren’t Always What They Seem: Example #2
Old Adage: The bigger they are the hard they fall.
Everyone accepts this age old adage based on one guy (David) getting in a lucky shot with a slingshot - of all things - against a bigger opponent (Goliath).
The Reality: The bigger they are the harder they hit.
Let’s be honest. If you added up the results of all skirmishes between big guys and little guys, on the whole – Goliath notwithstanding – the big guys typically kick the snot out of the little guys.
The media and the investing public have finally started to make notice of the sharp advances that have occurred in commodity prices in recent years. And there is a growing consensus that this trend may continue for a number of years as supply and demand factors relating to commodities play out. I have no strong feeling for this either way (let’s just say “predictions aren''t my long suit”). Still I do find it interesting that this new growing consensus that commodities are inevitably going higher is coming at a time when the metals and grains, meats, softs and some grains have backed off of their recent highs and crude oil is forming the aforementioned potential divergences.
Once again, I wish to reiterate that I am not attempting to “call the top” in commodity prices (which I couldn’t do anyway since most the aforementioned markets are already off of their highs) nor am I advocating selling short all commodities. I personally sort of buy the theory that the burgeoning economies of China and India may continue to put upward pressure on the prices of physical commodities for years to come. My primary point is simply to caution investors to “look before they leap”, rather than reacting emotionally to blaring headlines. Bottom line: if you’re going to buy commodities at least buy them on a pullback.
Things Aren’t Always What They Seem: Example #3
Old adage: If you give a man a fish, he eats for a day. If you teach a man to fish, he eats for a life time.
I have always loved this saying and believe that it contains an immense amount of wisdom. That being said, there is another – slightly more cynical - way to look at this ancient pearl of wisdom.
The Reality: If you give a man a fish you create a pain in the rear who is going to want you to give him fish all the time and will ultimately complain that he’s getting sick of eating fish. On the other hand, if you teach a man to fish you create a potentially endless stream of revenue via bait sales.
So take your pick. From a purely humanitarian point of view, the choice seems fairly clear. From a more capitalistic point of view, however, the second choice seems to be the obviously better of the two (Okay, I suppose that this is how capitalism gets a bad name in certain circles. At the same time my wife has a cousin who spends a great deal of money each year to be dropped off in the middle of nowhere to go fishing for a week and is happy to do so. So never forget that one man’s “greedy capitalist” is another man’s “service provider”).
Things Aren’t Always What They Seem: Example #4
Old news adage: We Report, You Decide
New Reality: Shut Up and Listen You Moron, while we tell you what to think.
In the old days, news reporters gathered facts and put them down in print. The reader was then free to decide for him or herself how to interpret the news. Those days are long gone, especially during an election year. Writers who support one candidate over another reactively slant the majority of news that they report to favor their candidate and/or to make the other candidate look bad. Whenever reading any type of political or business analysis it is also now necessary to consider the person writing the article to be able to identify any built in or systematic biases in their reporting.
For example, on the one hand you can – and many have – made the argument that the economy is presently a disaster shaping up as a tragedy. Rising inflation, rising energy prices, rising food prices, rising unemployment, rising home foreclosures, declining home prices, etc., certainly do not point to an economy that is on the upswing. At the same time, if you step back and consider a little long term perspective, today’s economy – even with all of the major concerns – has yet to post a single decline in GDP, and the overall standard of living is far beyond what it was not too many years ago. And in fact if a person were to truly study life in America during the Depression he or she would likely be a bit embarrassed to complain about today’s “economic uncertainties."
In a recent nationwide survey over 70% of respondents reported that they were doing all right financially, yet over 80% of those same respondents indicated that they felt the nation was “on the wrong track” economically speaking. So which is it? If 70% of the population feels it’s doing OK, then wouldn’t it be fair to say that things are OK? Apparently not. Is it possible that the news and business reports are overhyping the negative news – in turn scaring the bejabbers out of everyone? Or are we in fact standing on the edge of the precipice waiting for the final push over the edge?
My best advice is to take a calm studied look around and form your own objective opinions.
Handy Conversation Starter
In a mood to argue? Consider the handy “conversation starter” below. Go up to anyone and ask him or her their answer to the following multiple-choice question:
In your opinion, today’s high energy prices are the fault of:
a) OPEC
b) China and India
c) George W. Bush
d) The U.S. Congress
e) Big Oil
f) a, b and d
g) c and e
h) all of the above
Hint: Republicans and conservative will typically answer f, Democrats and liberals will almost always answer c or g, and a rollicking good time will be had by all – at least until the fistfight breaks out…
Enjoy.
To search for previous articles written by Jay Kaeppel, please click here.
Jay Kaeppel
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site
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