Email – #450

Our US Air position is finally showing a lot more life as oil prices decline, which is exactly the reason we bought in to begin with. You may recall that we made the call more than a couple of months ago that oil prices would fall. It’s the reason why we took two other positions, MGM and Valero, both of which are beneficiaries of lower oil prices.

Unfortunately, MGM shares are currently under immense pressure as the economy has weakened substantially even in the face of lower oil prices. If the economy turns, as it should in the next six months or so – monetary policy and lower oil prices in combination should stimulate spending barring any further decline in confidence – we should see a rally in MGM. Of course the opposite is also true that low consumer confidence can outlast all types of economic stimulus.

Valero should be minting money right now. Their input costs have fallen by 50% while gasoline prices haven’t yet followed this fall on a percentage basis. Last week another refiner, Tesoro, reported blow-out earnings. I expect that Valero will begin to show its strength in upcoming releases.

Keeping Eyes On The Prize

We have a lot of time left on all of our plays, and we can’t lose sight of the fact that economic stimuli take time to filter down into the economy. The market is a forward looking indicator that should move well before the recession is over. In the next few months we will have several huge winners from USAir, Motorola and Tenet Healthcare, all positions where we have taken much of our money off the table.

Right now the market’s volatility is doing nobody any favors. An indicator to watch is the VIX, a measure of volatility, which has spiked to the highest levels in history recently: over 80, though right now it’s sitting at 61. In good times this indicator is below 20 – so we have seen more than 4 times normal volatility in the past few days. When we see the VIX settle back down to levels below 40, we may see the market focus on fundamentals rather than fear again.

Karim