Financials vs. Oil - Part II

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by Larry Levin

Yesterday's non-Olympic pugilists went toe to toe again for the right to make Mr. Market do the winners bidding. Unlike yesterday, however, both financials and oil ganged up on Mr. Market and beat him down. But Mr. Market had other ideas; he decided to ignore them both and staged a powerful but fleeting rally.

Oil prices ended higher for the first time in four sessions after the Department of Energy (DOE) reported declines in crude and gasoline supplies for last week. This unexpected turn of events led to a $5-rally, which eventually settled up about $3.00-barrel. In its weekly inventory report, the DOE said gasoline supplies fell by 6.4-million barrels to 202.8 million barrels for the week ended Aug. 8, nearly three times more than the 2.2 million barrel drop analysts surveyed by energy research firm Platts had expected. Of course, this led to strong buying in both gasoline and oil contracts.

The government reported this morning that retail sales fell 0.1% last month, the first decline since a 0.5% drop in February. It was worse than the flat reading economists had been expecting and followed a revised but still weak 0.3% reading for June. Of course, these are nominal numbers so if one subtracts inflation it is much worse. But why would the media do that for you? Real retail sales are actually closer to -.3% for July and a revised -.1% for June.

Now that the Income Redistribution Plan has pretty much run its course, economists are nervous about the future. Cautious and uncertain consumers are watching their wallets and with the back-to-school shopping season under way, that does not bode well for retailers, said Joel Naroff, chief economist at Naroff Economic Advisors.

General Motors was slammed today, closing down -7.6% after Moody's Investors Service lowered the company's corporate family rating to Caa1 from B3 with a negative outlook. I can hear it now, a bailout for GM is on the horizon.

Although GM didn't help Mr. Market today, the financials were the real problem. Merrill Lynch analyst Guy Moszkowski downgraded on Wednesday Citigroup, Goldman Sachs Group and Lehman Brothers to underperform, according to media reports. Moszkowski also lowered Morgan Stanley's rating to neutral.

But Merrill Lynch wasn't done yet. Richard Bernstein, chief investment strategist at Merrill Lynch, said in a research report that the credit crisis is broad, deep and global, and it is not likely to end soon. The problems in the financial sector appear to us to be far from over, and we are skeptical that trying to bottom-fish will prove to be profitable.

Real Time Trading Signals*for

Trade Date: 8/13/08

E-Mini S&P Trades*
(before fees and commissions):

1) IDVA sell @ 11:00am at 1277.50 = b/e (1 lot)

2) OTF buy @ 1:30pm at 1284.25 = +1.00 (1 lot)

3) 80% buy @ 2:00pm at 1292.00 = -2.00*2

4) OTF buy @ 2:30pm at 1287.75 = -1.75*2

5) Algorithm trades (7)...combined total...-9.25


ZB (30 Year Bond) Trades*
(before fees and commissions):

1) Buy @ 7:17am at 116.210 = -2.0*3

2) Buy @ 9:41am at 116.205 = b/e*2...combined total...-6.0


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