1 Comment Written by Anthony Truong on May 24, 2008 – 12:39 am

Question: Everyone is talking about $200 crude oil, and apparently this price will not be due to just speculators, or fundamentals or demand; it’s all of it. The Daily Reckoning believe it’s related to a resources bull market unique to Australia (at least we are in the best position to profit from it) and nothing is going to stop it unless the US dollar rallies like crazy or some supernatural disaster hits China. I believe that with the Olympics around the corner, your forecasts for “doom and gloom” should be postponed; please comment.

Answer: Crude oil at this current price has nothing to do with fundamentals, period! I mean, how can you justify a $5 jump in price on Tuesday night due to “demand concerns” or something along those ‘fundamental’ lines? Read this article; although it’s the mainstream media, there is great wisdom in its words:

http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article3980797.ece

You should also look up his reference to China’s stagnating oil demand; year on year for the past couple of years, China’s demand for crude has decreased – YES, decreased! So how can the media say that demand from China is causing this massive boom in crude prices? They can’t; it’s not justified even with fundamental analysis. It’s pure heresay. But as we saw in gold and silver, commodities always have a final blow off rally (due to speculation) towards the end of a long running bull market. This is what’s occurring right now in crude, and when it tops, the decline is going to be just as violent to the downside. $200 crude per barrel is not going to derail the global economy, as some pundits are purporting; it won’t be a sustainable price, therefore it’ll drop as people sell like crazy.

Hmmm…Australia CAN’T be immune to the global issue of the credit crunch. Why? Because even though we have massive supplies of resources and fundamentally you can see that resource companies are in “good” shape and will always have a product to sell, the credit problem permeates all sectors of industry. Just look at B&B Power and Epsilon in the last few days. Speculation drives their share prices all over the place, but it’s the underlying fear of credit that is causing the falls. Every company borrows money to finance its business; in lean times, this credit availability shrinks. What’s the problem with this? Well, companies only ever plan to pay interest on their loans (perhaps a little principal if you’re lucky), because they think that capital appreciation will continue in their assets and stock price, thus allowing them use this asset appreciation to refinance and gain MORE credit in the future. This has been the case for years, during the bull market. But when banks stop lending, there is no money to refinance with. Then these companies get stuck; they can’t get the money to finance their loans and can’t expand. What happens? When they publicly declare that they are having issues getting credit, investors freak out and think that they are the next Bear Stearns, so they dump the stock. Dumping the stock drives prices down, thus decreasing market capitalisation. In doing so, the company is worth less, can offer less in collateral for more loans, so can’t get loans. Vicious cycle…That’s the process of deflation. And it’s driven by fear, not fundamentals.

This is occurring everywhere, globally; just read the business sections of NY times or Times online and you’ll find articles on companies struggling to get financing and there stock prices being punished as a result.

I can’t believe you’re telling me to postpone my “doom and gloom” forecast til after the Olympic games. 1) the Olympic games is an event, and as you should know by now, I would NEVER base my forecasts on events; I always base them on the technical analysis. 2) The Dow is currently at 12,511 as we speak and the S&P500 is at 1380. The Dow is down from 13,140 top (19 May), so approximately 600 points; the S&P500 is down from 1440 (19 May), so approximately 60 points. The All Ordinaries, after nearing 6100 last week, closed today at 5866, or approx 200 from its peak. Not as significant as US indices, but still, you’re not taking this drop very seriously, are you? In the long run, maybe Aussie indices won’t be punished as badly as US and other global ones, but it will experience a hefty fall, as credit contracts worldwide, and thus money flows out of assets of all kinds. Be wary; right now is NOT the time to increase your positions. I’ve been calling an intermediate top for some time, which is probably why you’re totally discounting my view or have grown tolerant to my bearish calls. Keep in mind that Elliott wave analysis has little “timing” ability to it; it’s all about structure. The recent run up to the highs of 19 May was immensely difficult to read, but the fall of the last few days is pretty text book Elliott, and the patterns suggest some interesting times next week. Note that we have a public holiday in UK and US on Monday; remember the public holiday (Martin Luther King day) in January and what happened with stocks then? I’m not saying it’ll happen again, but tension has been building for some time, and there are multiple indicators that have now confirmed AT THE VERY LEAST an intermediate decline, if not a severe one.

Honestly, I recommend that you protect the downside by purchasing put options on your stocks (if they are available). You may as well be cautious, if not an outright doomsayer like myself.