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Light Ike Not The Problem

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A revised estimate of damage in the gulf showed that 10 platforms were either destroyed or severely damaged and several underwater pipelines were damaged. Virtually all oil production from the gulf was still offline along with 92% of natural gas. That was not enough to keep the price of oil from imploding on Monday.

The challenge is not really the damage from Ike or the many refineries offline due to lack of power. The challenge is the market. With unprecedented events happening in the financial sector thousands of stocks funds, hedge funds, banks and institutional investors are scrambling for something to sell in an effort to meet margin calls on their investments in the financial sector. If you absolutely have to have cash to meet margin calls or investor redemptions then you sell whatever you have that is highly liquid.

This is also a quadruple witching week and it is typically the worst week in September and September is the worst month of the year for the markets. For the financial events of the past few days to climax in this week is like a nuclear explosion in the market community. Normal rules don't apply and funds are no longer fighting to save profits but to raise cash quick enough to remain in business.

There are rumors that Lehman has over $1 TRILLION in outstanding derivatives. That means the rest of the financial system, funds, hedge funds, banks, etc, are now holding paper that could be worthless. You can't bury a trillion dollars of losses and thousands of firms are trying to figure out how to get out of this mess. The short-term solution is to raise cash as quickly as possible by selling anything of value.

Do you really think the coal sector fundamentals changed so dramatically overnight that coal stocks were down -$10 on Monday? No, it is simply damage control.

If AIG ends up going the same way as Lehman before the week is out the damage is going to be 3-4 times as bad. Just the potential for AIG and/or WaMu to follow Lehman down has the market running scared.

Until the smoke clears the direction of energy prices is likely to remain down simply because of the liquidity factor. Once "normal" returns to the market there will be some great buys in the energy sector.

Jim Brown

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