Let’s not all run out and start wasting oil and commodities already.  All commodities from oil to natural gas to corn to copper has dropped precipitously the last month or so.  Now we are hearing some people recommended natural gas under $9 but there seems to still be a huge bearish on oil.  There is also seemingly some noise about agriculture and metals.

Ok let’s look at oil first.  Do we still need oil?  Yes.  Are there alternatives?  Absolutely.  Actually there are tons of alternatives.  The list is endless.  Did anyone ever hear of the electric cars?  What about natural gas vehicles?  What about hydrogen cars?  What about just electric cars powered from power from wind or solar?  Oh wait what about ethanol based cars?  Ok it seems there are a lot of options but gas is no longer king.  It may run for one last march but it’s days are over.  Keep in mind that this will not be a quick transition.  Long term, the growth of other energy such as coal, natural gas, ethanol, solar, and wind will come at the expensive of petroleum.

Ok let’s look at agricultural commodities.  Do we still need food?  Yes.  Are the alternatives to food?  Well, no food is food.  With the growing population, food will be more and more in demand.  In fact in many parts of the world, there is a shortage.  Is food becoming more difficult to obtain?  Well no and yes.  Technologically, we’ll grow more but global warming is changing the game as areas that used to be good for certain foods are no longer available.  The growing preference for better foods and meat will drive food demand all over the world.  The world is fast becoming middle class.  So is the story for corns, soybeans and pork bellies over.  Not by a long shot.

Ok let’s look at metals.  All the steel, copper, and metals stocks were devastated the last few days.  Cleveland Cliff hit $88 and Freeport McMomoran hit $76, resulting in PEs of under 6!!!!  Of course the market realized the errors of it’s ways because now CLF is at $95 and FCX is at $87.  But is demand for metals really dropping?  Let’s take a real life example.  Steel price contract were renewed at more than 60% higher prices.  That doesn’t sound like demand destruction.  In fact that is a real life justification of higher demand.  Is finding oil easier or mining a precious metal.  For oil, we can just drill deeper but for mines, we can’t dig much deeper because unlike a liquid, it’s difficult to bring to the top.  Huts and shacks are out, condos and buildings are in!!!!  So long term, it seems that we still need metals.

There are two drives for the market right now – oil and financials.  Keep those in mind while trying.

Disclosure: Long: CHK, MON   Short: MAN, COF

It seems that the popular kids on the block are no longer popular.  There seems to be a shifting of favoritism toward other industries such as healthcare and financial stocks in the last two days.  This seems to be in the determent of commodity stocks such as energy and metal names.  My entry into CHK was ill timed as gas prices dropped the most it ever has bring most oil and energy related stocks down to break even for the year.  We have to admit that the trade is over and it’s time to migrate out of the names because the bigger mass exodus occurs.  Every institution is heavily weighted in most of these names and the exits will be huge as some of these names break support levels at capitulation proportions.  With growing sentiment of a slowing global economy (I would try not to dispute this because look at all the global markets – China is now the worse performing market just behind Vietnam – both of which were high flyers a mere eight months ago), the demand for commodities will slow but definitely it’s a long term trade if you are in it.  But it’s better to say safe until the smoke clears.  Nucor came out with earnings and they were forecasting some negative numbers.  This is perhaps a forewarning because expectations are high for them while expectations for financials are rather low so most will beat.

The restriction of “naked” shorting on financials will allow the financials to move up as the restriction starts on Monday so most funds will have to unwind these naked shorts (which means shorts that have no stock basis or they haven’t borrowed the stock to sell which can generate artificial selling because they are selling more stock than available and trust me traders will attempt to sell anything they can into a bear market).  So as the 19 financials are off the list, short covering will prop the market for the short term, at least till Monday.  So rally rally rally.  Much of the rally may almost be over but the bears are at least on edge until the next problems arise.

Market sentiment is overwhelmingly positive at this time because even with the negative inflation data, the market rose yesterday.  So it’s clear, the short trade is temporary over.  But this is not the bottom.