Oil Rolling Over

I have made some terrific calls over the years, but making
calls in markets is not my strong suit. So any call I make
requires a disclaimer as to veracity.

That said, oil looks like it's put in a top up at $70 and
change per barrel. There's support at $60 and again in the
mid-50s, but I think it will drop to $45-50 per barrel before
year's end.

Globally, conservation efforts should be taking hold. Household
budgets will also be trimmed some as well. OPEC may well push up
production in the weeks ahead. The US will gradually add back 1
million bd. It is not hard to see surplus at the wellhead move
up to 3 million bd. for a while before the end of this year.
That should be enough to assuage the shortage mentality that has
gripped a market yet to experience any shortages.

To me, natural gas over $10 per mcf is also hyper-extended, and it
would not surprise me to see gas down under $10 before long either.

Rita Readies To Go To Work

In the end, trading is about booking profits. You do not
have to be first on the right side of the market and there
is no sin to leaving a little money on the table.

Rita is going to hit land full force about 24 hours from now.
It will be a major event and forecasters say that with the
jet stream way north, the storm will linger and not dissipate
as quickly as did Katrina.

Next week will be soon enough for me to look at opportunities.
I am particularly interested in seeing what the total bill
might be for reconstruction / redevelopment in the wake of
both storms and how economic policy will respond.

Two Tough Broads

First, Katrina rolled in and did phenomenal damage
in Miss. and Louisiana. Now Rita is humming through the
Gulf, building strength as it is nurtured by the warm waters.
It reached Cat. 4 quickly and could easily attain Cat.5.
The tightening of the storm's bands and rapid build up in
wind speed now suggest a smaller but more concentrated and
powerful storm than Katrina.

If it makes landfall in Texas as a Cat. 4 or 5, it will
do tremendous economic damage, particularly in coastal
and nearby residential areas. It is too early yet to tell
whether the storm will pass close enough to the Houston
Channel to damage up to 1 million bd. of potentially
exposed oil refining capacity. The storm needs to make
a Northward turn first before specific target areas
can be singled out.

If the storm stays strong and slams coastal Texas, the
resultant damage, coupled with the destruction wrought by
Katrina, could well throw economic policy into a cocked
hat, as legislators and the Fed struggle to come to grips
with a suitable reconstruction plan.

Rita, unlike Katrina, has the President's attention and
you can bet that Rita's damagees would have considerable
clout with GWB.

Traders are looking for an opening to grab a rally
along the lines of "sell the rumor (Rita's spectre), and
buy the fact (Rita's arrival)". Not my cup of tea unless
Rita somehow weakens and or misses the US.

I plan to see just what this broad winds up doing before
I take a serious look.

Fuels Conservation

Over the last several weeks, I have been thinking about
easy ways to conserve on fuel use without making any
substantial $ investment. And, as I thought about it,
I realized there were indeed a number of ways to cut down
on both gasoline and heating expenditure without greatly
crimping lifestyle. I have been doing so with the car
as have the wife and kids with theirs.

I bring it up because I suspect that many in the US, Canada
and Europe are thinking similarly. What is interesting,
I believe, is that fuels demand may still be quite a bit more
elastic than many of the fuel demand models and projections
I see. I do not think it is that difficult to knock 2% off
my demand or that of most others. Globally, that would restore
about 1.6 mil. bls a day to supply, a sizable increment.

I suspect it may be worthwhile to begin to incorporate
allowances for conservation into one's thinking about oil
and gas, because I doubt the price channels for both that
have been in place for the past year or two reflect it.

Post Bush Speech Impressions

People are reviewing how they can cut their fuel bills and whether
to trim or defer spending on the most discretionary items. So, maybe
oil/gas demand growth will decelerate for a while in the US at least.
Ditto for Europe.

The massive mid-Gulf redevelopment program will favor heavy industry,
construction, technology and industrial and commercial services.

Rotation should be pro-cyclical in the stock market.

As orders flow in to production sites, operating rates should rise,
and inflation pressures will broaden.

The bond market viewed rising oil and gas prices as a tax on consumption,
not an inflationary development. It will be vulnerable to rising operating
rates and higher sensitive materials prices.

Gold is a mug's game. It was safe enough to buy it in recent years
when it was selling below its commercial value, but it has just
moved above that level and the gold bugs and hucksters will be
coming out of the woodwork to tout it.

The economy is slowing now, but looks to pick up speed in 2006
as the big project down south unfolds. I do not know what the Fed
will do Sep. 20, but if the redevelopment program is as large as it
now looks to be, short rates could eventually go quite a bit higher.

There should be no dollar dumping from abroad, not when the US is
working out of an emergency situation. US retaliation would be swift.

You know George, he is going to try and borrow all he needs to
run the war, redevelopment and other programs that may be on
his short list. That could be a negative for the bond market.

The mis-handling of the rescue efforts in the Gulf in the
early going gutted Bush's presidency. If this inept man drops the
ball on the redevelopment program, his Party could be badly mauled
in 2006.

Stock Market -- Technical

S&P 500: 1234

The rally underway since the end of 4/05 has served to extend
the second leg of the cyclical bull market.

There are cycle factors which suggest the broad market should be
in a topping mode over the course of most of this month. Curiously
enough, most of the short and intermediate term indicators I follow
suggest the market turned up around the beginning of the month.
However, what is most striking to me is the substantial compression
in the proprietary momentum and internal demand / supply indicators
I follow. I have never been able to figure a sound method to tell
how extended compression periods will be resolved (topping out vs.
consolidation). It is clear there has been an ongoing battle between
the bears and the bulls since early July, 2005. My charts suggest
this battle could go on for up to four to six weeks before it is
resolved. When extended compression periods are resolved, the move
in the market, be it up or down, is usually sure and powerful.

I am a discretionary trader and a trend follower, but I have hesitated
to go long so far this month because of the compression I see in
the market. So, I may just wait until that issue is resolved before
deciding what to do.

Stock Market -- P/E ratio Recovers

The sharp spike in the price of crude led the stock
market to shade the multiple in anticipation of higher
inflation readings for August and perhaps September.
The fast erosion in the price of crude since Katrina
struck and oil market fears were finally realized has
produced a sharp relief rally which restores the p/e ratio
back up close to 17x, and leaves the market content with
a 3.0% inflation expectation. Currently the market reflects
a consensus that the worst in oil's steep price rise has
ended and that Katrina will not produce long
lasting economic damage. Note again though how sensitive
the market continues to be to the price of crude.

Curiously enough, the stock market remains the most
reasonbly priced sector of the capital market.

Monetary Liquidity Indicators

Uncle Al talked tough the other week out at Jackson Hole, WY.
But, in vintage style, the Fed has removed its foot from the
brake. It has been buying bonds for its own portfolio, and its
version of the monetary base has started to grow. I think this
development commenced to meet seasonal "add" needs to cover
back to school shopping and then the holiday season down the
road. It remains to be seen whether post-Katrina economic
developments will promote further easing. Note that the Fed,
by jiggling reserves day-to-day, can push short rates higher
even as it adds liquidity to the system.

I bring this up not only because it is worth watching to help
glean the intent of monetary policy, but also because the large
primary dealers, who are also big players in the currency,
commodity, and stock markets, use their knowledge of changes
by the FOMC to trade. These advance notice liquidity indicators
are FALLIBLE markets guides, but players need to pay attention.

When the Fed is adding to its portfolio, it tends to benefit
stocks and gold, and to hurt the dollar. This easing can
also lift the commodities markets and bond prices, but given
the peculiarities of this cycle, the bond market might grow
uncertain since the bulls have been counting on tight money.

The Fed can run this type of easing for a few months without
compromising its longer term intent, which based on the longer run
growth trends of Fed Bank Credit and it monetary base, continue
to support a restrictive policy approach.

Short Term Interest Rate Fundamentals

Based on economic data available through today, 9/01, the
cyclical case for boosting the FFR% at the 9/20 FOMC meeting
remains in place. Moreover, with inflation at 3.1% and
accelerating, an FFR of 3.5% as a short rate anchor is a
savings dis-incentive, which continues to weaken the
internal or domestic purchasing power of the dollar.

Now, as indicated yesterday by Phila. Fed Gov. Santomero,
the Fed will have to take in a thorough briefing of the
likely economic effects of Katrina's punch to the system
in deciding whether to move ahead with another rate increase.

A key factor in deliberations should be the rapid rise in
fuel costs relative to consumer disposable income. The fuel
bill is rising rapidly from a very low base and is hardly
high relative to DPI historically. Even so, the momentum of
change, being very rapid, could disrupt household budgets
in the months ahead. Secondly, the Fed will have to gauge
direct output and income losses from Katrina since these
losses will be consequential, at least for the short term.

I have never found it helpful to probe the collective
psyche of FOMC prior to a meeting. So, I am just guessing
they will go ahead with a FFR% boost if there is no
major red flag in the data available to them on 9/20.