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Let's look at what happened after the first cut of RRR on Nov 30, 2011. Shanghai Composite rejoiced the next trading session making a high at 2423 on Dec 1. It has not seen that price ever since. Even with a 10% rally from January 5th low, index closed at 2357 on Friday. The rally was in anticipation of second RRR cut. How long will investors celebrate this time? One is to be cautious, knowing what happened after the first time.
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Look for market to start punishing "me too" EZ struggling peripheral countries' debt not a minute later after the Greek bailout is announced. Euro short-covering rally (on the bailout announcement) will be brief and will be met with new wave of selling. There are way too many shorts now though, so the rally is much needed to reduce that amount. Use 20 dma as a guide and be patient.
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click on chart to enlarge |
A few months ago I had a heated discussion (at a local bar) with another gentleman (not an investor) about America's sources of oil imports. While seemingly smart individual, he was completely ignorant to my arguments. So I finally pulled out my iPhone4 and showed him the facts, which immediately quieted him down (thank Gore for wireless internet). He was astonished to find out that U.S. gets more than half of its oil from Western Hemisphere, and a much smaller share from the Middle East. It is mind-boggling how misinformed the public is about this subject. So next time you want to win a bar bet, bring this subject up. Or better yet, the next time your elected politician says how "America relies on its enemies for oil", send him/her this chart.
But now on more serious note. With the above in mind, you have to wonder what Mr. Obama was thinking when he axed the Keystone XL pipeline. Canada is our closest ally, the friendliest of all oil sources. How many American jobs were not created because of the lost project? And finally the most important, what will we do when our gasoline possibly hits $4 and $5 per gallon this summer? Granted, that pipeline would have not helped this year, as it would take a while to complete, but the time to start was in 2010, when it was on the President's desk first! Endless delays are finally prompting Canada to ink the oil deal with China. Great!! Speaking of China, it is getting most of its oil from the Middle East and other "hot spots" around the world. It is recognizing the stability of Canadian oil supply and is ceasing the opportunity.
Today newswires are reporting that Iran is suspending its oil exports to UK and France. This will put even more strain on crude oil and gasoline supplies and boost the prices, just as Saudi Arabia reportedly reduced its oil exports.
So let's discuss the trade. I believe that this may become the best trade of the year. It actually already started for me, on December 29th, as I discussed in my post that day. But it gets better, or worse, depending on whether you are a trader or the consumer, which I am both. As the price of the gasoline hits $4 and $5 per gallon, retail sales are going to take a serious hit. So adding XRT short, as the price of gasoline continues to rise, makes this a more powerful trade. Interestingly, the two are usually moving opposite to each other, but have correlated in the same direction since depressed levels at the end of 2008. Look for that to break down as we near the $4 mark on retail gasoline. Obviously, the U.S. economy is going to slow down tremendously due to that development, because consumer spending is 70% of U.S. GDP. Hence SPX short would also work in this case. One important thing to remember is that at above $4 and surely at $5 per gallon the demand destraction will take care of gasoline price, and it will eventually start heading down, like in July of 2008 - by then retail sales were toast. So as soon as I start riding my bicycle and not my SUV to the grocery store, I will immediately announce the end of long RBOB trade here.
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