Amaranth Has Gas

Well, what do you know; we didn’t lose money on Monday. The stock market tried to open down on Monday morning but five minutes into the session we saw green, again. The rally has tried to stay alive long enough to test the May highs in the SP 500 and the Dow too. Friday’s high in the Dow was just over 11,610 getting very close to May’s closing high of 11,642, while the SP 500 traded right up to 1325 on Friday and Monday a whisper away from its May closing high of 1325.76. When we said these May highs would last a long time we meant more than a couple of weeks but here we are back up here testing them.

Last post, when we mentioned some of the news items for the market to deal with this week, we failed to mention the Fed’s FOMC meeting on Wednesday. That could be a pivotal point for the trading week as the Fed firmly states that it is not raising rates right now—and, of course, they are being very vigilant on inflation. Meanwhile…on the inflation front, let’s check on…

Amaranth Advisors had a bad week trading natural gas, they might need some antacids. The WSJ should have the article on page one, Tuesday’s edition under the title How Giant Bets on Natural Gas Sank Brash Hedge-Fund Trader which is under a little heading of “Blue Flameout”. The article says that the fund was up about $2 billion for the year at the end of August but lost about $5 billion in September in about a week. (That’s more than we lost last week, but not by much.) The article comes with a little natural gas chart showing the drop in prices in the past month or so. We recommend this article for those of you who like the energy complex which has not fared very well for little while.

Tonight, we see that the Japan stock market is having a pretty good go of it up over a percent last we checked. It seems that a report indicated that land prices finally showed an increase in the average land prices in Japan’s top three cities Rose for the First time in 16 years. 16 years!!! You may recall that the Japan stock market peaked in 1989 with the Nikkei Dow near the 40,000 level. After dropping from there to 7,600 in early 2003, it has now rallied back to the 16,000 level, still quite a ways from its 1989 peak.

Tuesday brings us the August housing starts and the August PPI, a couple of numbers we like to see every month: the first, because we need to know just what is going on in the housing market especially as rates were topping and coming back down, and the second because we are waiting patiently for the little inflation monster to disappear. We have been talking about inflation/deflation for a couple of years now and at some point, we will need to polish off the deflation talk and bring it back. We think the housing and the inflation numbers are tied very tight together so these numbers are important to our continuing view of the stock market. (One reason given for the drop in the market on Monday afternoon was the drop in homebuilder sentiment to the lowest level since...you guessed it, 1991, the eight month in a row to drop. Inventories of new homes have gone up 40% over the past year to a 7.3 month supply given today's sales pace. Before that report, homebuilders were faring well in the early morning advance. After, they ended down on the day.)

So, what’s going on? The stock market is running into a price ceiling and will now see if it’s at all possible to break through. We wish it wouldn’t because we think it shouldn’t due to what the market has already told us. This rally is a couple of months old now and it is time to be done. The Fed meeting gives the market a chance to look around to see if the belief in a soft landing is still viable or if others are now starting to think the Fed has already gone too far in raising rates. We will discuss this more in tomorrow’s post, you won’t want to miss that.

Dow Industrials: 11,555.00 -5.77
QQQQ: 40.11
RYVNX: 20.22
RYAIX: 23.33
RYCWX: 40.40
TLT: 87.40
BEGBX: 13.62