Sushi Money

The dynamics we’re seeing in capital markets is astounding considering how confident we are of the economic fundamentals underlying the complex structures of finance throughout the world today.  And for all our knowledge and expertise, we have politicians, economists and business leaders grappling with the same questions over what to do next. 

And it’s amazing the difference a week makes in the price of oil.  Is it due to Senator McCain’s implication that President Bush’s lifting of the executive ban on oil drilling influenced world markets?   Or just weaker U.S. demand?  Here’s a thought:  Could it be related to hedge funds exiting long positions becasue of the SEC’s rule-making and investigative actions?  Or the Senate’s votes that may require the Commodoties Futures Trading Commission (CFTC) to implement oil trading rules for hedge funds and other large investors?

Can the SEC (or a few hedge funds) even influence a market so large and complex such as oil?  Possibly.  Based on initial data for example, the SEC’s recent rules stopping naked shorting of select financial firms has led to a 90% drop of shorting in key financial stocks.  Maybe it’s time to take profits in oil before the herd moves in that direction.

Many experts continue to argue about the SEC’s actions, but if naked shorting is technically illegal anyway, why does the SEC allow it in the broader markets?  Maybe the party is winding down for key hedge funds in securities markets, and many believe it’s about time.  The idea of equity firms profiting through naked shorting, or conducting bear raids on U.S. companies during challenging economic times doesn’t sit well with a lot of Americans.

And naked shorting doesn’t sit well with Cramer either.

It’s become common — even though it’s illegal — for traders to sell stock short without first locating shares for the transaction. This gives power players such as hedge funds virtual free reign to bring down a company’s share price.

“The regulators, frankly, are very naive about what really goes on,” Cramer said.

Cramer also criticized the SEC’s repeal of the uptick rule, which requires a trader to wait for an increase in a stock’s share price, an uptick, before he can sell it short. Cox said he only implemented the rule after rigorous analysis, but Cramer questioned the validity of that study.

“It was done during the greatest bull market in history,” Cramer said. “Perhaps we ought to reevaluate it in the greatest bear market in 25 years.”

This “laissez–faire” approach to regulation allows hedge funds to create “a level of fear that you can create a panic” because they can sell short and damage a stock with impunity. And it wasn’t until the near death of Fannie Mae and Freddie Mac that the Bush administration felt it necessary to step in.

While the SEC wrestles with market dynamics, the price of oil has continued to fall.  Whatever the reason for the oil price drop, it may not be that way for long.  Without expanded supplies for U.S. demand, the price of oil will be subject to shocks in the system in the form of hurricanes and other supply interruptions such as refinery outages  Even famed oilman T. Boone Pickens has said the price of oil may reach $300 per barrel within 10 years if the U.S. does not increase domestic oil production. 

“We have walked into a trap and we are the ones that put ourselves there,” he said. “I’m not pointing the finger at anybody because it isn’t going to help, but we have to work together to get out of it.”

The nation imports nearly 70% of its oil, Pickens said, spending $700 billion a year on those imports. Many of the countries supplying that oil are “not friendly” to the United States, he added.

“I am convinced that we are paying for both sides of the Iraqi war,” Pickens testified.

If the nation fails to adapt to the changing energy landscape the crisis will only worsen, he added.

“If we continue to drift the way we have been, you’re going to be importing 80% of your oil and it’s going to be $300 a barrel,” over the next 10 years, Pickens told [Senator] Lieberman.

 Yet Pickens sees increased oil production as only part of the plan, and advocates a greatly expanded alternative energy plan that involves wind farms throughout the country, especially in Texas and the southwest.

Wind energy can be used as a replacement for energy derived from natural gas, which is currently used for heating purposes, Pickens said.

The plight of the economy has become the defining issue for the election this year, and perhaps for a generation or more of middle class Americans. Not since the 1970’s, and some say 1930’s, have we seen such economic challenges.

But while the journey to economic growth may seem far off, some experts see opportunity in bear markets.  

…do not fall into despair. Bear markets last on average less than two years. The recovery is often very abrupt. This one will end, too.

If you have the money to buy, now is the time to buy the broad indexes (links associated with the top ETF for each index) - the S&P 500 (SPY), the Dow Jones Industrial Average (DIA), the MSCI Emerging Markets Index (EEM) and the MSCI EAFE Index (EFA) for developed foreign markets.

Don’t denude yourself of cash, but if you can spare it, buy now and in ten years you will be glad you did. The sun will come out tomorrow. It always does. And as the saying goes, “the darkest hour is just before dawn.”

Other experts advocate treading carefully with your nest egg, especially for those close to or living in retirement. 

While we undergo the gyrations of the markets from day-to-day, some think it’s time to challenge many of the beliefs we hold as economic realities.  Economists and legislators will certainly re-examine many of the economic ideas and practices that have been implemented in recent years. 

Regardless of the news, the reality is that we are adrift on this great economic ship, and we’re hoping we don’t become grounded for long before getting underway again.   

But how do we get underway again on the journey toward economic growth?  That is perhaps the central question that many of us will ask ourselves as we decide who is better positioned to lead the nation in the years ahead.

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