Jim Cramer is a former hedge fund manager and best-selling author. He’s the host of CNBC’s Mad Money TV show and a co-founder of TheStreet, Inc.
According to CNBC, with oil prices on the rise, Cramer recently used technician Carolyn Boroden’s charts to try to determine,
“[W]hether the uptick in crude oil prices is just a one-off [an aberration or anomaly] or if it’s time to get bullish.”
Note that when it comes to investing in crude oil, Cramer apparently sees just two choices:
1) Stand pat since the rising price is a “one-off” and nothing major is really happening; or,
2) Jump in with both feet since the oil market is really changing to become significantly bullish.
However, there’s a third possibility that Cramer has ignored but others who invest in crude oil should consider: while crude oil’s near-term price is volatile and might go up or down, crude oil’s mid- to long-term price might be falling.
1) The world is reportedly awash in an actual or potential supply glut of crude oil that exceeds current global demand;
2) The technologies used to find and recover new and existing sources of crude oil are constantly advancing, increasing the supply of crude oil and reducing its cost;
3) Many oil-producing nations are desperate for more revenue, will sell every drop of crude oil they can—and will therefore not act in concert to cut the supply and thereby increase the cost of crude oil;
4) Global demand for crude oil won’t increase significantly until the global economy strengthens. Thus, global demand is unlikely to increase sufficiently to exceed the global supply over the next three or more years; and,
5) If the previous four points concerning crude oil’s supply and demand fundamentals are correct, then the price of crude oil is more likely to fall than to hold steady or rise until the global economy is restored.
Oddly, Cramer and CNBC didn’t report on that third possibility. I wonder why?
• According to CNBC:
“On Tuesday (April 4th), oil prices closed just shy of a one-month high on news of a decline in U.S. crude and product inventories, with U.S. light crude settling at $51.03 a barrel.
“Boroden noticed that oil prices have been seeing both higher highs and higher lows, a healthy trend that could mean near-term upside if the pattern repeats itself.”
Yes, that’s true. Higher highs and higher lows could signal a “near-term upside” (near-term being a function of volatility rather than fundamentals) if, if, if “the pattern repeats itself”.
Higher highs and higher lows could also signal that I might finally get that pony next Christmas if, if, if Santa watches Cramer’s TV show. However, the chances of me getting a Christmas pony and “near-term upsides” for the price of crude both have little to do with the fundamentals of crude oil supply and demand.
In the sense that “anything is possible,” my expected pony and the chartist’s predicted “near-term upsides” certainly could occur. But if they do, will those occurrences be based primarily on fundamentals (including reports that: 1) I have finally made it onto Santa’s list of good little boys and girls; and, 2) crude oil’s supply and demand)? Or will those events result primarily from subjective public belief and random chance?
• Cramer said.
“As long as oil can stay above its floor of support at the $45 to $47 area, Boroden believes it can go higher, and if it clears just a few more hurdles of resistance, then she wouldn’t be surprised to see if crude ends up rallying from $50 and change all the way up to $57.”
Given the potential for volatility in the crude oil market, I, too, “wouldn’t be surprised” if the price of crude rose “all the way up to $57.” But, given the reported fundamentals of excessive supply and insufficient demand, I would be surprised if the price of crude rose to $57 per barrel and stayed there. Given, the fundamentals of supply and demand, I’d expect that if the price reached $57, it would quickly fall back towards $50 or even below.
“But if either Exxon or Chevron break under their lowest floors of support, Cramer said Boroden’s points are negated, and all bets are off.”
Q: What, exactly, provides reliable “floors of support” to Exxon’s or Chevron’s “lowest levels” of stock prices? The investors’ herd mentality? Reading charts of manipulated numbers as if they were mystical tea leaves? Sales pitches by economic gurus? Or objective fundamentals?
A: Whatever the answer to that question may be, it’s apparent that in our brave, new economy, prices for most stocks and commodities won’t be determined by objective fundamentals—at least not in the near or perhaps medium term. Long-term, fundamentals prevail. Short-term, charts and subjective beliefs bamboozle.
“Boroden noticed that each of Pioneer Natural Resources’ recent moves down were more or less symmetrical, and were each followed by a nudge upward.”
How cool. Recent price declines were “more or less symmetrical”.
“Symmetrical”? Is that a good omen, like ancient soothsayers might find when exploring the entrails of a sacrificial sheep?
“More or less”? What’s that mean? How much “more” symmetrical must something be before it takes on significance? A little bit “more”? A lot “more”? A teensy bit “more”?
What about a “little bit less,” “lot less” or “teensy bit less”? Are any of those terms defined in modern economics texts?
What about the “nudge” factor? Was that a big “nudge” or a small “nudge”?
Is economics primarily objective or subjective? A science or a séance?
“Cramer’s bottom line? ‘The charts … suggest that many of these oil stocks could be ready to take off given the recent rebound in the price of crude,” he said. “If you believe oil can hold here or even keep rallying, then you’ve got to do some buying, and Boroden will turn out to be absolutely right.”
Now, I get it!
I finally understand economics.
See, if we really, really believe in Boroden’s charts and invest enough money in crude oil to back that belief–then Boroden’s predicted rise in the price of crude oil will turn out to be correct!
Apparently, market prices have little or nothing to do with objective fundamentals. Instead, prices are primarily based on the public’s subjective “beliefs”.
The Power of Positive Investing, hmm?
Similarly, if I really, really believe that I’ll get that pony this Christmas—I will!!!
Do I believe in Santa Claus? Do I believe I’ll (finally) get that pony? Yessss! Yessss! Ah belieeeve!!!!
(Of course, if I don’t get the pony, it’ll be my own fault for not believing as much as I should. It’ll have nothing to do with fundamentals like Santa Claus doesn’t really exist or deliver ponies on Christmas Eve.)
Likewise, if you “bet” that the price of crude is going up and will stay up, it’ll happen if you really, really believe and really invest a lot (perhaps, more than you can afford, but enough to make the market move) in crude oil. However, as with my Christmas pony, if the price of crude doesn’t rise to and stay at $57, it’ll only be because you and your buddies failed to “believe” as much (invest as much currency) as you should’ve.
(The fault, dear Brutus, is not in our charts—it’s in ourselves.)
Given the need for all this “belief” in our charts, it appears that economics may be more of a religion than a science and Cramer and Boroden may be (false?) prophets for that faith.
I, however, reject that faith. When it comes to religion, I’m more of a “fundamentalist”.
When it comes to economics, I believe in supply and demand. As long as the supply exceeds the demand is relatively low, the price of crude will tend to fall.