OffShoreOilRig_PublicDomain_30011I am back from one wonderfully mad crowd – the Brits (and others) at the Olympics and came away from my conversations with business executives in many industries with the impression the investing trading crowd has it right and has it wrong.

Business in Europe is terrible in some countries (Greece and Spain), very weak in others (Italy, Portugal, Ireland), lousy in many others and beginning to be quite lousy in Germany. This is already having a spillover effect on the U.S. and China. We all know this – and one-half of traders believe this will prompt the European Central Bank (ECB) and the Fed to crate more liquidity – yeah! say the traders – and one-half say economic reality is what it is, earnings are coming down and the market must come down with falling earnings.

Historically, those saying the market must come down are correct. But history provides no parallel to our current environment: 0% interest rates, a massive credit contraction, massive injections of liquidity by central banks into markets and floating exchange rates. Translation: who knows?

We do. The ECB may mess things up some more before it gets I right — count on that to happen — but the Fed is going to act. And you cannot fight the Fed. Its actions will not help the economy but will motivate traders to go to the bullish side.

Waiting for the Fed

The trading crowd has already priced in Fed action; the question is how much. If it is too little, the traders will hit the market hard. If it is just right, the market continues a climb to 1500 on the S&P by yearend. If it is a big program, well, 1500 before the election. What constitutes too little or a lot? More on that next week as we get ready to hear what Dr. Bernanke has to say in his speech at Jackson Hole on the Aug. 19.

One thing we do know: More liquidity will be created. The inflation traders are using out-of-date textbooks but they can help us make money by trading as if they are afraid of inflation – these traders are the crowd to follow. They are going to hedge against currency debasement with gold, silver, gold miners and oil.

The oil complex has been beaten down and there are some great names out there that are quite cheap. Many have dividends or if you really want to generate some cash, sell puts, weeklies or monthlies on names like Transocean (RIG). Among the dividend plays, I like two unknowns, Calumet Specialty Products (CLMT, 9.3% yield) and Enerplus (ERF, 7.6% yield). And given what is going on in Syria (Iran just announced it is going to actively support the regime, like we did not know this already but it is an escalation and a provocation) there is also the possibility of getting a pop in these stocks due to geopolitical issues.

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