Oil falls $6 and all we get is a 50% recovery off a 200-point drop?

I guess sentiment is even worse than I thought!  Seagate missed (and shows up as a beat in Briefing so now I’m concerned about their data) along with FHN and HCSG today BUT ADTN, CBSH, ETN, JNJ, PII, RLRN, STT, USB, GWW, ALTR, CTAS, CPSS, CSGP, CSX, INTC, PHHM, PNFP, SPSN and VFC ALL beat estimates and almost all of them went up despite generally conservative guidance (only ALTR and CSGP raised guidance, none lowered).  So I will say once again - Show me the misses!

If you run the charts on these you’ll see that the truth of earnings is indeed setting these stocks free, at least for a day and this means my crazy plan to buy into earnings is working, albeit badly so far - as anyone not actually reporting good news is taken out and shot.  I will put it to you that the guidance given by these companies is wrong - if oil keeps going down then $21M per day per $1 per barrel of price comes back to this country and goes back into the hands of American consumers.  Yesterday’s $6 drop paid paid for 630,000 IPhones at $200 each and over a year represents $44Bn in savings, not even accounting for refining mark-ups or food and other inflationary dominos.

We’ve been hoping and praying for a break in oil for months and it can and will save the economy when it happens.  I’m sure tomorrows CPI report will be just as awful as the PPI report with oil jumping from an average of $123 in May to $135 in June, taking $7.5Bn out of the pockets of US consumers.  That ($7.5Bn x 12 months = $90Bn) is 1/2 of Bush’s stimulus checks stimulating nothing but the price of oil with the other half going out the window as oil climbed another $10 this month.  Perhaps if Bush and Ben helicopter-drop some more cash we can afford $150 barrels of oil this summer…

Oil prices officially finished down 4.5% which, according to our 5% rule, indicates more downside to come.  Off the $145 top, we see $137.75 as our critical resistance and oil bounced off there a couple of times mid-day before traders pulled it together at 1 pm and jacked oil back up to $139.37 in the last 90 minutes in much lighter trading than they had in the morning.  Over 50M barrels worth of contracts were rolled away from August, canceling the delivery of 50M barrels into US inventory.  There is still a "demand" for 154,516,000 barrels in August but, by Monday, at least 110M of these barrels will be dumped, much like a perverse Boston Tea Party, denying US citizens the delivery of barrels we already paid for.

In our NYMEX Tea Party, the traders are the ones dressed up as Indians, preventing oil from coming to American shores and causing chaos in the markets, as they have done every single month for 4 years - Yet no arrests are made!  For the record, the barrel count (and these are barrels that are under contract for delivery) for this year’s strip is 154M for August, 280M for September, 93M in October, 68M in November and 179M in December.  Let’s track the fun as 500 NYMEX traders spend this week dumping 110M barrels of oil back into the sea, once again denying 300M Americans the fuel they need and driving prices to levels that are easily twice what they would be if this shell game were put to an end.

Don’t blame the dollar for the drop in oil, it tested 71 today and finished down at 71.79 as Bush, Ben and Hank inspired negative confidence in the markets.  I say it often and I’ll say it again, we do not have an economic crisis - all these things are fixable - what we have is a crisis of leadership, possibly the worst in US history and never before have so many been led so badly by so few.

Of course tomorrow we are expecting a 5Mb draw in inventory as the NYMEX crooks shorted Cushing 20M barrels at the close of last month’s trading and, as I’ve pointed out before, it immediately showed up in a daily decline of 700,000 barrels of imports.  So now we are importing 700,000 barrels a day less and we are sending 1,444,000 barrels of product a day out of the country (see yesterday’s post) and still, there is a build in refined products because demand has fallen off the table in the US but it’s all deny, deny, deny by the oil apologists at GE/CNBC.

As with housing, which was also pumped to extremes by GE/CNBC as the parent company raked in Billions in profits in it’s home lending division and was on the hook for billions in losses when that bubble popped, a bubble can only be kept alive for so long, no matter how much the pumpers wish it were otherwise and this oil bubble is indeed ready to pop.  We have to remember though, that the housing bubble was "over" for almost a year before it finally showed up in the numbers and, while the current commodity bubble is twice as ridiculous as the housing bubble was (because, at least there were people who wanted expensive homes), it is also being rabidly supported by a lot of powerful people.

So let’s not jump the gun but let’s look for another negative or lame reaction to another big draw in crude tomorrow, the crooks know it’s BS, just like they knew last week when cude fell $1.50 after announcing a 5M barrel draw we had predicted on June 22nd but seemed to baffle "analysts" who were expecting a build and no one in the media seemed to understand how oil could go down on that report.  Tomorrow is Grand Theft Oil II and we’ll see how that goes but another sell-off, especially one that isn’t followed by mega-pump into the weekend like last week, will give us some real hope.

Best case scenario:  Lots of earnings beats, oil falls and money rotates out of the sector back into Tech and Transports, which retested the 2,300 mark yesterday for the 3rd time since March.   We came off the March lows to jump 20% in the transports and the Dow gained 1,200 points (10%) DESPITE oil rising from $100 to $135 over the same period.  If we can get oil from $135 back to $100 - we can expect a very, very nice recovery.

Today’s tickers: KRE, WB, M, VIX, XLF, WM, AMZN, CCE, PGB, CMG

KRE- With much of today’s selloff in the markets rooted in the regional banks, the KBW Regional Banking ETF sustained its share of downside, closing 9% lower at $23.16. Our option scanners detected a 10-fold increase in option trading volume, with traders turning to more economical put spreads as opposed to naked puts to express a defensive view. This occurred in the August and December contracts, implying a long-term bearish view on the sector, particularly in the latter spread, where a 4,000-lot position was opened between strikes 17.50 and 22.50. This appears to have been a long spread, with the trader buying the upper strike at $3.30 and selling the lower at $1.30 for a position that breaks even at $20.50 – another 12% to the downside from current levels. This compares to the 18% decline that would have been required to break even had the trader bought a 4,000-lot position at the 22.50 puts outright – deploying spreads can mitigate some of the cost burden here, especially when premiums are high due to elevated implied volatility.

WB- Shares in Wachovia shed more than 13.8% of their value to $9.95 today amid broader anxieties in the banking sector and conjecture about which banks, if any, might be next to collapse. Implied volatility is ticking in at more than 193% today, this against a historic reading of 98% on the underlying stock – which suggests to us that the options market is currently pricing in 96% added risk to its options over the next 30 days than Wachovia shares have shown historically. With twice as many puts trading as calls the consensus today appeared to favor vulnerability to the downside, with heavy buying pressure in August puts as low as 5.00 – the 60-cent premium on this position indicates about a 9% chance of Wachovia shares trading below $5 by August 15, but the elevated implied volatility on this position (286% on this contract versus 189% for all Wachovia options) suggests keen demand for these protective positions nonetheless.

M- In somewhat cheerier news, Macy’s shares advanced 74.5% to $16.28 on an analyst upgrade from JP Morgan Chase. This panned out in an 8-fold increase in option trading volume that showed calls trading more frequently than puts by a factor of 2.5. Traffic was most crowded in the August contract between strikes of 15 and 20, though we noted some selling interest at the upper strikes, and combined with a 3,000-lot position that sold to the bid in the November 20 calls, indicates to us that some traders may be writing covered calls to enhance yield. Calls still outnumber puts by more than 2-to-1 in Macy’s.

VIX- This weekend’s announcement by Treasury Secretary Hank Paulson of sweeping measures to instill faith (and funding) in the country’s cornerstone mortgage financers, Fannie Mae and Freddie Mac, was expected by many to un-ruffle some of the fraught mood in the financial space…at least in the short term. Reaction in the market this Monday morning has been largely dispirited – financial stocks have dragged the S&P lower, implied volatility in most financials remains well above the fever pitch of March 17, and the CBOE Volatility Index closed with a marginal 3.6% increase to 28.48. All of the above would suggest that the “stricken” mood of investors that seemed to reach crisis levels early Friday afternoon has scarcely been abated in the short-term, much less resolved for the long-term.

The market’s behavior for much of today showed that the effect of Fed backstop has been effectively discounted –yet still the financials traded lower. Earnings are on tap for most financial issues, an end to the write-downs is still to be discerned, and one fine day, the regulation of much of the U.S. financial system will have to be re-jiggered in such a way as to prevent these calamitous bleed-outs from ever happening again. One can hardly fault the market for its fatigued indifference at the prospect of more road to travel on this despicable journey.

VIX option activity earlier today showed heavy call-side volume in strikes as high as 37.50, but selling pressure in these upper strikes (without corresponding volumes in August puts that might imply the rollover of existing positions ahead of tomorrow’s expiration), coupled with buying pressure in strikes of 25 and 27.50 suggests that many traders may be using call spreads to predict VIX action remaining above 25 but stopping short of any cataclysmic move higher, even with the nervous backdrop in financials still intact.

XLF- Financial Select Sector SPDR - Despite opening higher on news of the Fannie Mae and Freddie Mac lifeline, the financial sector ETF quickly turned tail to close on a 4.6% downtick at $17.82. Implied volatility on all XLF options remains extremely elevated at 68.3% against a historic reading of 39.4% on the stock – that’s still in excess of March 17 highs. The more than 1 million options trading by day’s end showed almost twice as many puts trading as calls - earlier today we noted heavy buying pressure in July 17 and 18 strike puts, which would imply further declines for the remainder of the week.

WM- Option implied volatility in Washington Mutual rose 120% today to 310.6% - more than any other ticker on our platform today –on concerns following the collapse of IndyMac Bancorp that its own exposures may be troublesome. Compared to the 103% historic volatility reading on the stock, this implied reading suggests 3 times the price risk to Washington Mutual shares over the next month. While the sentiment surrounding WashingtonMutual is undoubtedly grim, earlier today we observed many traders are playing the volatility angle to take advantage of high-calorie front-month volatility – earlier today by selling July 5.00 calls at 9 cents apiece to bet against a recovery rally in the stock, and since by deploying calendar put spreads, selling a 25,000-lot position in July 4.00 puts for 89 cents and buying the same position in the August contract for 99 cents. In this case the trader wants to avail himself of the more rapid time decay of the July put and the likelihood that the August contract will increase in value (if Washington Mutual shares continue to suffer), so that the position can be closed at a profit.

AMZN- Amazon.com - A 2.7% decline in shares of Amazon.com to $66.65 corresponded with option trading volume of about 129,500, qualifying it earlier today for our scan of top-50 movers. This showed up in exorbitant put trading in the front month at strikes as low as 62.50, where the volume of this position has risen 205% overnight. It is useful to note that Amazon is due to report earnings on July 23, corresponding with the August options contract, but this morning’s volume seems to indicate some expectation of downside movement before that report. Implied volatility at 83% compares to a historic reading of 43% on the stock – that’s a 19% increase from Friday’s closing levels on no apparent news catalyst, and suggests nearly twice as much risk to Amazon.com shares over the next 30 days.

CCE- Shares in Coca-Cola Enterprises tracked .37% higher at $16.42 following on from an increase in option trading volume to 52 times the normal level, owing to what looked like a 25,000-lot put spread in the November contract between strikes 15 and 20. Both of these transactions were booked to the middle of the market, making directionality hard to clinch either way, but a bear would have gone long of the spread at a $3.00 debit that would first break even at $17.00, while a bull would take the $3 as a credit in anticipation of a pull above $20. Implied volatility on all Coca-Cola Enterprises options weighs in at 41.4%, comparing to a historical reading of 25.8% on the underlying stock.

PBG- Option activity in the major cola bottlers tracked together today, as shares in Pepsi Bottling Group showed a .41% gain to $26.62, and its options traded at 5.4 times the normal level. Here it looked like a trader may have rolled a 5,000 lot position in September 30 puts to the December contract at the 25 put line, showing a keen sense of timing in doing so. It looks like the 5,000-lot September position may have been opened for $2.05 back on June 16 – by cashing out at $3.70 today the trader would have realized an 80% profit per contract, which it looks like he then rolled into a new 5,000-lot position at the even lower December 25 strike for $1.75. This suggests an outlook for continued downside action – even below the $26.32 52-week low – heading into year’s end.

CMG - Finally, shares in Tex-Mex-inspired eatery Chipotle Mexican Grill have taken a beating this year – down 52% since January alone – and the extreme elevation in the implied volatility of its options (75.6% versus a historic reading of 44.4% on the stock) suggest even more turbulence to come ahead of its July 23 earnings announcement. Today, with shares closing 4.3% lower at $69.46, it looked like one trader may have picked this moment to wager on a comedown in implied volatility by week’s end by selling a 6,000-lot out-of-the-money straddle at the July 80 line for $9.10. The positioning here is well in excess of open interest on both sides, and given the risk of exercise on the July 80 put, it seems that the trader wants to capitalize on rapid time decay in this position – depleting the value of the premium sold so that the position can be closed out at a lower combined price.

Taking a deep breath… holding it…. and exhale.

Nope, doesn’t make me feel one bit better.  I’m still pissed off and I haven’t calmed down from yesterday’s rant yet but I’ll try to calm down and just be analytical now….  THIS TOTALLY SUCKS!  What the hell is wrong with this market?  All of a sudden everyone is running screaming for the exits on the exact same issues we’ve been having for several years.  EVERYTHING matters now and the more hysterical the viewpoint, the more media time people seem to get so I guess it’s time to go a little crazy if we want our viewpoint heard.

There is a point at which we cannot fight the tide.  I remember back in January of 2000, when Dow fell from 11,800 to 10,700 in two weeks we said "surely this must be the bottom" and we were so wrong.  It seemed that industrials wouldn’t suffer the same fate as the Nasdaq’s tech stocks but by Feb 14th we had dropped another 500 points.  Sure we recovered and by March 29th (my birthday so I remember) we were back over 11,000 and business was back to normal but we sure could have done without that extra 500-point drop!

Of course the Bush tax cuts and 9/11 caused a much bigger market disaster when from 2001 to 2003 the market fell from pre-election levels of 11,200 all the way down to 7,500 (33%) as we began Iraq War II in March of 2003.  That turned out to be a "buy on the news" event and the market nearly doubled to 14,200 four years later but now we are being told that over half of that run-up was unfounded.  That US industry has gained no value at all since 1999 and you would think from the way things are going and what you are hearing on TV that we are heading back to pre-Clinton levels of 3,000 or less.

Is it really possible to destroy that much market value that quickly?  I suppose that begs the question of what is the value of a stock.  I’m a really old-fashioned EPS kind of guy.  I look at a stock as an investment that makes money.  Whether I get a dividend or not, I do believe that if I give Google $521 and they make $20 per share, that I am getting a 4% return on my investment.  Then I have to factor in growth potential (very good) and the risk of owning Google versus owning say, a Treasury note or a CD at 3.5%.   There are, of course, also tax considerations but, overall, money is fairly fluid and will gravitate to where it finds the best returns.

So what is going wrong?  Well, for one thing, the supply of money is getting tight.  While there is plenty of money out there, it is being hoarded by banks, corporations and Sovereign Wealth Funds as well as nations like China, who are sitting on $1.5Tn.  This is money that is NOT being put back to work.  Money is fuel for the economy and what has been going on for the past few years is the Fed is printing record amounts of it and we are sending $375Bn PER MONTH of them (globally) to the oil producing nations and very few of those dollars are coming back to this country.  So there are lots and lots of dollars in the world - just not in America and certainly not in the hands of the American people, who personally dig in every day to send $1.6Bn out of the country to buy 11.5Mb that we import.

There are "only" 100M housholds in this country, that’s $16 per day, per family spent on exports.  Another $16 is paid for the domestic crude and, rather than spend the money we send our local cartel, they use the money to buy back their own stock, bonus executives and maintain outrageous compensation programs.  This too, does nothing for our economy.  So we have the average American taxpayer shelling out $32 a day (without refining markups) for 21Mb of oil that we consume.  That’s $11,680 a year on oil alone. 

Today’s PPI report shows a 1.8% rise in July alone, with the year over year average now up 9.2% as inflation creeps across the nation but don’t worry - the "core" PPI, taking out food and energy, is only up 0.2% for the month and up 2.6% for the year.  This allows the government to avoid giving cost of living adjustments to workers or social security recipients or welfare recipients or unemployment recipients as certainly those people have no need for food or energy.

So, betwen food and energy alone, the average US houshold that earns $48,000 a year is spending $18,000 of it on food and energy.  That’s $12,000 more than they spent when Bush took office in 2001 and, sadly, that median wage has not grown in all that time and has, in fact fallen 7.5% from $51,910 in 2000.  Suffice to say then, that there are very legitimate reasons to believe that US consumers cannot support US corporations to the same extent they could back in 2000.

But corporations are global entities, especially the Dow components and, last we checked, the global economy is much stronger than ours so let’s keep an open mind that the drop in the markets, especially in our industrials, is already overdone.  As I’ve mentioned often enough, despite the assault on the middle class that we’ve endured these past 7 years and despite the millions of people who have been thrown into poverty during that same time and despite the millions of Americans who have lost their jobs under this administration - MOST of the damage that has been done to our economy can be very quickly undone if we can bring oil prices under control.  Obviously, that’s not happening so I wrote a post last night that I hope you can read and hopefully pass on to others as there are very quick and very effective things we can be doing to reverse this crisis, we just need the will to act.

How can we be told that global growth is driving commodity prices while at the same time believing that the global markets should be selling off like mad due to slowing economies.  Something is wrong with this story yet the environment we are currently in is completely divorced from supply and demand fundamentals and amounts to nothing more than an excessive tax on necessities that is siphoning money away from the rest of the economy.  As I predicted when the stimulus was first announced, consumer spending was up 0.8% last month but 0.7% of it was spent on gas.  All the stimulus checks ended up being was a $168Bn check to the oil companies, the Saudis and, oh yes, Iran written by GWB to keep the bubble floating a few more months.

Asia doesn’t see how they are going to go on without us and the Hang Seng fell 839 points, a real shame for the FXI caller we sold to yesterday (despite the Dow failing 11,300, we took a spread).  The Nikkei fell 255 points and that took them below 13,000, all the way to 12,754 and the Hang Seng broke below 22,000 today as well, both key levels we were hoping would be support.  Banks around the world are crashing and the dollar hit new lows against the Euro (they tighten, we don’t) as oil soared to $148 in overnight trading despite the BOJ downgrading their economic outlook as "surging energy and raw material prices take a larger toll on business investment and private spending."

Europe is also looking dreadful this morning, down around the 2.5% rule with Germany’s DAX dangerously close to the 6,000 mark. UK inflation rose to a record high in June, something that should force the BOE to raise rates.   The chart on the left is what our inflation picture would look like if the US government published real data - we all buy the same commodities and other goods in a global market, the UK simply reports the straight numbers while the US has dozens of "modifiers" added in to make the administration’s policies look less horrific than they actually are.

BOE Governor King said that to attempt to bring the inflation rate back to the Monetary Policy Committee’s 2% target quickly would require large increases in interest rates that could push the economy into a sharp slowdown and result in an inflation rate below 2% over the medium term.  The Monetary Policy Committee is also worried that a persistently high level of inflation will lead workers to seek pay increases to match, which, if granted by employers, would set off a second round of price rises. So it is unlikely to cut its key interest rate this year, even though Mr. King said there is a "very clear" risk that the U.K. economy will slow sharply.

USB took a kitchen sink loss (but beat estimates) and gave fuel to the bank bears but we had a beat from NVLS last night, DNA missed but raised guidance, ADTN, ETN, JNJ, PII, STT and GWW ALL beat expectations this morning.  So let’s remember why we buy stocks - we invest in companies that are going to make a good return on our investment.  While there certainly are factors out there that we can legitimately worry about - the fact of the matter is that US equities continue to be the least sucky place to put our money as they have the best chance of giving us a return that beats inflation and I am still buying.