The Rude Awakening
Wall Street, New York
Monday, April 5, 2005 ------------------------- The Rude Awakening PRESENTS: On December 16, 1998, an
unknown stock analyst named Henry Blodget predicted that
Amazon shares would soar to $400 over the ensuing 12
months. That very day, the stock jumped 46 points to $289.
Less than one month later, Amazon shares did indeed hit
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------------------------- FADING GOLDMAN SACHS
By Eric J. Fry On December 16, 1998, an unknown stock analyst named Henry
Blodget predicted that Amazon shares would soar to $400
over the ensuing 12 months. That very day, the stock jumped
46 points to $289. Less than one month later, Amazon shares
did indeed hit $400, and Blodget became an overnight,
Internet-era "rock star." On March 30, 2005, a Goldman Sachs analyst named Arjun
Murti predicted that crude oil would spike to $105 a
barrel. The price of crude jumped dramatically over the
next three trading days to reach an all-time high of $58.20
a barrel. Is history repeating itself…or merely rhyming? We favor the latter interpretation. In short, we doubt
crude oil will achieve Murti's "price target" any time
within the next three weeks…although we wouldn't rule out
$105 within the next three YEARS. The Goldman analyst's audacious prediction - along with a
bevy of other worrisome indicators and omens - suggests a
short-term top in the crude market may be fast approaching.
To summarize, we would be "fading" Goldman Sachs - that is,
we'd be tiptoeing away from the very same crude oil market
into which Goldman Sachs and many latter-day oil bulls are
now charging. But we would not tiptoe very far away. As faithful Rude
Awakening readers should be well aware, your New York
editor has been a resolute oil bull over the last many
months. Even so, he cannot escape his growing sense of
unease over the signs of short-term speculative excess that
are appearing in, and around, the crude oil market. Only last week, doom and gloom seemed to hang all over the
energy stock sector like an XL T-shirt on Mary Kate Olsen.
We observed as much in last Tuesday's column, entitled
"Backwardated." http://www.dailyreckoning.com/RudeAwake/Articles/RA032905.html Why, we wondered aloud, were Wall Street analysts expecting
ExxonMobil's earnings to fall every year between now and
2008, despite the fact that oil prices hovered near all-
time highs. Conversely, why were Wall Street analysts
expecting Citigroup's earnings to increase every year
between now and 2008, "even though interest rates are
rising almost as fast as crude oil…If forced to choose,"
we concluded, "we think we'd take the other side of that
trade." The following day, thanks partly to Goldman's now-infamous
research report, energy stocks launched an explosive rally.
And in the span of a few short trading days, bearish
sentiment toward energy stocks has vanished completely. In
its place stands an extreme bullish sentiment…too extreme
for the oil sector's own good. Let's consider the signs… 1) Any discussion of sentiment indicators in the energy
markets must begin with the Goldman report predicting a
"super spike" to $105 a barrel. Such audacious predictions
have a way of tempting fate, and of eliciting the exact
opposite result…as least initially. "We believe oil
markets may have entered the early stages of what we have
referred to as a 'super spike' period," analyst Arjun
Murti's report asserts, "a multi-year trading band of oil
prices high enough to meaningfully reduce energy
consumption and recreate a spare capacity cushion only
after which will lower energy prices return. Resilient
demand has caused us to revise up our super-spike range to
$50- $105 per bbl up from $50-$80 per bbl previously." The substance of the Goldman report presents a well-
reasoned argument in favor of buying oil stocks. But the
outlandish headline verily begs for punishment from the
stock market furies. 2) Oil stocks have been lagging conspicuously behind the
thing itself. Last October 26th, we presented the chart
below and suggested that the "bearish divergence between
oil stocks and crude oil" was a worrisome development.
Shortly thereafter, crude oil tumbled below $50 en route to
its mid-December low near $40. 
A nearly identical bearish divergence is developing once
again. During the crude rally of the last few days, most
oil stocks have failed to keep pace with their kindred
commodity. Although oil has soared to a new all-time high,
benchmark oil stock indexes like the XOI and the OXH remain
well below the highs they hit in late February. Typically,
the most durable rallies in a given commodity market
feature sympathetic simultaneous rallies in the stocks of
companies that produce said commodity. By contrast, a
"bearish divergence" between commodity stocks and the
commodity itself is rarely a promising sign. 3) The signals from the Commodity Futures Trading
Corporations' Commitment of Traders Report are even more
disturbing. Throughout the energy complex, the "large
speculators" - also known as the "dumb money" - hold their
largest long positions in a year or more. In the unleaded
gasoline market, for example, the large speculators have
amassed a whopping 176,000-contract net long position.  On the opposite side of this trade, we find the "commercial
traders" - thought to be the "smart money" - holding one of
their largest net short positions ever. To be sure, dumb
can seem smart for a while, just as smart can appear very,
very dumb. But in general, an investor would rather rub
shoulders with the commercial traders than with the large
speculators. 4) Yesterday's $16 billion takeover of Unocal by
ChevronTexaco also seems a slightly negative omen,
especially given the dismal market reaction to the merger.
Chevron shares fell more than two points, while Unocal's
tumbled nearly five points. Big, high profile takeovers
often mark short-term peaks. Net-net, we suspect oil bulls can afford to take the week
off, and maybe the entire month…but we would not dare to
walk away completely from the bull market in crude oil. We doubt, for example, that Goldman analyst Arjun Murti has
"pulled a Blodget" by issuing a shocking prediction that
comes to fruition within three weeks. Neither do we fear
that he has "pulled a Newman." As few investors will
recall, Internet analyst Arthur Newman greeted the second
trading day of 2000 with a gutsy - or idiotic - forecast
that Yahoo! shares would hit $600 within the next six-to-
twelve months. The stock soared 25 points on the morning of
January 4, 2000, to touch an all-time high of $500 1/8. But
by the close of trading, it had plummeted 32 points to
$443. Yahoo! shares never again reclaimed the highs of that
day. Crude oil is no Yahoo! The all-time highs in crude oil have
not yet been seen, we boldly predict. And so we remain
staunch - if somewhat nervous - bulls. Long-term crude oil
investors, therefore, may wish to ignore the prior 1,074
words. But investors who operate on a shorter timeframe
might want to familiarize themselves with some of the
bearish signals emanating from the market, and then decide
for themselves if these signals portend any serious harm
for the energy stock sector. "My position on oil and the energies and other commodities
is clear," Kevin Kerr emphasized last Friday, "These
markets are finite, demand is extremely high and, quite
simply, prices are going much, much higher…LONG TERM." We agree, but maybe not tomorrow. [Ed. Note: Trade crude like a pro…Kevin Kerr is widely
quoted in the financial press as a top energy trader. But
we know him best for his amazing knack for trading. His
results speak for themselves… Resource Trader Alert
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------------------------- Did You Notice…?
By Eric J. Fry On January 18th, the Rude Awakening presented the chart
below and observed, "The 'forward strip' of crude oil
contracts on the Nymex are in backwardation - meaning that
the nearby months cost more than the distant months. In
this case, the spot price of crude oil is $48.38 a barrel,
while the contract for delivery in 2010 is only $38.17 a
barrel. In other words, an investor may buy today a barrel
of crude oil for $38.17 and take delivery of that barrel
(or sell the contract) in 2010. (Actually, one futures
contract on the Nymex covers 1,000 barrels of oil. So the
investor buying one contract would pay $38,170). 
"If the oil price does not change between now and 2010," we
continued, "the far-sighted oil investor would bag a profit
of $10.21, or 27% over 6 years." As it has turned out, however, the far-sighted investor who
executed this trade has reaped a hefty short-term profit.
The December 2010 crude oil contract now changes hands for
$50.23, a tidy $12.06 higher - or 32% in only 2.5 months!
Our advice: Accept Mr. Market's gift. [Ed. Note: Our special report titled "Backstabbed" incited
the rage of our Canadian readers. The message was very much
misunderstood…we wanted to show readers an example of the
bone-headed thinking so pervasive in Washington and amongst
the general American populace…and how you can profit from
it…we wholeheartedly apologize for the any confusion: Backstabbed
http://www.agora-inc.com/reports/OST/WOSTF316 ------------------------- And the Markets…
| Monday | Friday | This week | Year-to-Date | DOW | 10,421 | 10,404 | 17 | -3.4% | S&P | 1,176 | 1,173 | 3 | -3.0% | NASDAQ | 1,991 | 1,985 | 6 | -8.5% | 10-year Treasury | 4.46% | 4.45% | 0.01 | 0.24 | 30-year Treasury | 4.73% | 4.72% | 0.01 | -0.09 | Russell 2000 | 614 | 612 | 2 | -5.8% | Gold | $424.35 | $426.55 | -$2.20 | -3.0% | Silver | $7.02 | $7.01 | $0.01 | 3.0% | CRB | 310.10 | 311.88 | -1.78 | 9.2% | WTI NYMEX CRUDE | $57.01 | $57.27 | -$0.26 | 31.2% | Yen (YEN/USD) | JPY 108.26 | JPY 107.62 | -0.65 | -5.5% | Dollar (USD/EUR) | $1.2852 | $1.2905 | 53 | 5.2% | Dollar (USD/GBP) | $1.8757 | $1.8803 | 47 | 2.2% |
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