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Gasoline, Washington and Pundits

February 12, 2009

gaspump1Rocky wrote last month that he was buying the Gasoline crack spread because he thought it was a good investment both technically and fundamentally. Since he entered the trade, Rocky’s investment has returned 550% (unleveraged). Rocky never gives investment advice, he just “calls them as he sees them.” Hence the purpose of this update is not to gloat or celebrate, but rather to point out the inconsistency of an article in this morning’s Wall Street Journal.

Mark Gongloff writes a modestly gloomy piece, “Falling Gas May be Gone as a Stimulus:”
“Falling gasoline prices were for months a rare and welcome bright side to the economic meltdown. They aren’t falling anymore….Gas has risen even as crude oil prices have tumbled…and demand for gasoline has fallen amid a deep recession. Higher gasoline prices sometimes crowd out consumer spending on other suff, but they will bolster January retail sales numbers due Thursday.”

He concludes: “…if gasoline has found its floor, it will be one less support for any economic recovery.”

Rocky notes that this is a textbook example of glass-half-empty syndrome — reminiscent of a frightened blind man looking in a mirror. (Rocky frequently mixes his metaphors. Always shaken, not stirred.)

As gasoline prices reached $5 last summer, doomsday pundits wrung their hands and politicians spoke about intervention in the markets. Newspaper columnists predicted the end of the American way of life. Fortunately, Washington did not intervene, and high prices increased production and curbed consumption.

Last fall as gasoline prices collapsed, the same doomsday pundits pointed to the deflationary collapse of the economy — and all the evils the collapse will wrought. As commodity prices ticked lower, more people jumped on the bandwagon and viewed this as a coincident indicator of economic implosion. Eventually gasoline prices overshot to the downside late December (when Rocky entered his bullish trade); other industrial commodity prices are groping for a similar floor.

An algebraic representation of this phenomenon:
Prices high = pundits are bearish. Prices low = pundits are bearish.

Both when gasoline reached $5 and when the crack spread went negative, supply and demand came back into balance, and a new equilibrium was reached.

To conclude: Rocky believes that gasoline’s ticking up a bit is a POSITIVE sign for the economy. It also shows that markets, when left to their own, eventually find a sensible equilibrium.

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