RealMoney's Best of Blogs

As always, RealMoney's bloggers were all over the market action this week, and we'd like to share the best of their recent commentary with readers of TheStreet.com. These posts best capture the intent of these blogs, which is to provide intelligent discussion on the issues each writer sees as most pressing that day.

Let's take a look at Rev Shark on uncertainty and the markets, Steve Smith on this week's volatility and Tony Crescenzi on the price of oil and the U.S. consumer.

Click here for information on RealMoney.com, where you can see all the blogs -- and readers' comments -- in real time.

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Rev Shark's Blog: Uncertainty Can Gum Up the Works
Originally published on 8/3/2007 at 8:40 a.m. EDT

We are continually faced with a series of great opportunities brilliantly disguised as insoluble problems.
-- John W. Gardner

The market is faced with what seems like an insoluble problem, as the problems with subprime mortgages start to infect mortgage lending, housing, hedge funds and private equity. The biggest hurdle for the market is that the extent of the problem is unknown and unknowable at this point. We just don't know how extensive it is and how long it will last.

The one thing that the market hates about all else is uncertainty. When a problem is fully known and understood, the market can deal with it by pricing it into the market. When a problem is open-ended -- like the subprime mess -- we simply can't discount it effectively. It may end up that we overact to the issue, but we won't know that for quite a while. In the interim, the uncertainty will keep many people on the sidelines.

Our job at this point is to do the best we can to not be damaged by this issue and to try to find some ways to make money. If the subprime issue is a real one and is likely to produce further fallout, we obviously have to be very defensive in the way we manage our stocks. We can't let losses get out of hand, and we need to protect our capital so we don't have to make up a bunch of losses when things improve. Making up losses is highly unproductive; it is always better to avoid that task by erring on the side of defensive money management.

The market has fallen so far so fast that it has been difficult to do much in the way of shorting. Now that we have had a bounce, that is going to change. I believe that some of the best opportunities in the next month or so are going to be on the short side in individual stocks. I'm stepping up my hunt for plays and will be starting some initial positions soon.

Keep in mind that shorting is not simply the inverse of going long. Stocks go down in price differently than they go up. Usually they fall faster or more suddenly, which means you need to be a tad quicker if you are going to play the shorting game. We'll discuss shorts more as this difficult market unfolds.

We have the jobs report coming up, and my inclination is to short some index plays on any strength that may produce. I don't think jobs matter much when we have this subprime issue hanging over us.

Overseas, Europe has been weak on mortgage concerns, and Asia flat to slightly positive. Gold and oil are trading up, and early market indications are flat.

No positions.

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Steven Smith's Blog: Dude, Where's My Rebound
Originally published on 7/31/2007 at 12:47 p.m. EDT

It seemed unlikely that the market would be able to form a "v" bottom, and this morning's rally was likely to be met with selling as the S&P 500 approached the 1500 level. So right now we are seeing another round of selling, as investors raise capital to avoid margin calls; sell 'em when you can, not when you are forced to.

The VIX, which dipped briefly below 20 early this morning, is now back up 2% to 21.10, keeping the uptrend in volatility in place. As I've said, I'd look for a close below 18 before considering the VIX having spiked and a reliable and buyable bottom having been formed. I don't see that happening until the S&P 500 breaches its 200-day moving average, which now stands at the 1449 level.

This brings me back to a follow-up on the post of how volatility is double-edged sword, in that it helps produce opportunities for outsized returns, but comes with increased risk.

Several commentators, including Bernie Schaefer, have noted that as hedge funds increasingly dominate market activity, they accumulate more money under management and are applying increasingly similar and conservative strategies. The goal? Earn your 2% fees and maybe produce some trading profits along the way.

The problem is this piling into similar trades, which have essentially been based on selling option premium to collect some incremental income, not only squishes the profit margins associated with discovering short-term price anomalies, but it creates a tinderbox in which everyone is on the same side of the trade.

Schaefer contends that the last week amounted to someone yelling "fire" in a crowded movie theater. His theory, and he is not alone in this, is that hedge funds have been buying small and mid-cap stocks and "hedging" them by shorting S&P 500 index products, such as the SPX options or Spyder Trust (SPY Quote), which helps explain why the calls for the rotation into big-caps, and the end of outperformance of small-caps, took two long years before those predictions began.

Well, now that is occurring, and guess what -- the hedge funds find themselves all heading for the exits and in a bind. Their first choice of action was to protect losses by rushing to buy Russell 2000 iShares(IWM Quote) puts, which traded a record 1.7 million puts on Monday and over 1.3 million put contracts on Friday. Now they must decide how to avoid -- and how hard do they press to avoid -- underperforming the market.

If they choose to start unwinding their IWM put protection, or maybe a strategic switch to buying S&P index products, or a combination of the two, that will create huge firepower for a move to the upside. But it is not one I would trust. I'm counting on these guys getting whipsawed and fading moves of 1% as stocks and sector products approach resistance levels.

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Tony Crescenzi's Blog: Oil's Impact on the Consumer
Originally published on 7/31/2007 at 2:14 p.m. EDT

Household expenditures on gasoline, fuel oil and other energy goods ran at a $375 billion annual rate in the second quarter, an increase of $92 billion above the same quarter two years earlier (expenditures on electricity and gas ran at a $220 billion annual rate, an increase of $31 billion). While large figures, they are best put in the context of changes in personal income, especially when trying to assess the impact of $3 gasoline.

I noted earlier that personal income advanced $807 billion over the past year, $93 billion faster than the long-term average (based on the difference between the average yearly change of 5.3% and the past year's 6.1% gain).

It should also be noted that over the past two years, incomes have advanced $1.5 trillion, which makes the $92 billion increase in the cost of gasoline, fuel oil and other energy goods seem rather small, helping to explain why $3 gasoline has had very little impact on spending than what would have been expected two years ago, when incomes were much lower.

Although energy price gains have been absorbed over the past few years, the second quarter's increase in energy expenditures was rapid, accounting for half of the increase in energy expenditures occurring over the past two years. Rapid changes in the price of energy are not as easily absorbed in the short-run, which is one reason why consumer spending was weak during the second quarter, running at a slow 1.3% pace.