Yesterday was a very good day!
We had oil fall all the way to $125 as NYMEX hostage takers cannot dump enough barrels to stop yet another net inventory build, this time with 2.4Mb of distillates and 2.8Mb of gasoline being added to the stockpiles despite refineries running at just 87% of capacity. Predictably there was a 1.5Mb draw in crude – that's what happens when you don't order any but we weren't buying it for a minute and laughed off the post-inventory pump as we were able to clean up on the XLE, XME and USO bets that we discussed in Tuesday's wrap-up. We had a lot of nice plays yesterday and I did a virtual portfolio review last night in lieu of the wrap-up. We're very pleased with the move in commodities and the dollar is close to breaking the 50 dma at 73 – a great combination.
The market was held back by the bloated energy sector, which dropped 3.8% on the day and other commodities took a 1.7% hit while airlines rose 8.5%, builders rose 4% (woo-hoo on HOV) and consumer discretionary rose 2% and financials added yet another 1.9%. The Nasdaq outperformed and looks to repeat today with good reports from AMZN (profits doubled), BIDU (crushed numbers) and QCOM (great earnings, settled lawsuit) while Apple continued to fly along with Google, who tested $500 early in the morning.
The housing bill continues to progress through Congress with veto-proof majority and Bush has thrown in the towel and stated he will sign it already. See, you can work with this guy if you put the screws to him! The screws are about to be put to the AAPL shorts as the company is getting more aggressive in its defense of Steve Jobs' health and the UK Guardian has a very nice article today explaining the situation. Apple was way oversold on Tuesday morning and we jumped on it and this morning we'll have a chance to buy WFR, who had a 10% gain in profits and a 12% gain in revenue but missed the quarter and guided down 10%. Somehow, that led after hours traders to knock the company down 25% despite the fact that they are still growing at 30% a year and have an effective p/e of 10 in the low $40s. Ideally, we're looking to sell $45 puts or Sept $40 puts for $5 in our Stocks Virtual Portfolio as we're very happy to buy them long-term at that price.
One stock that is tough to bottom fish is F, who posted an $8.7Bn loss on a massive asset write-down as the plants and equipment they have for making trucks and SUVs look like they won't be coming back to life anytime soon. This is another auto miss for Captain Kirk Kerkorian, who picked up 140.8M shares in June. The options have very low premiums so we'll be looking for a strangle at the open just for fun after a 10% pre-market drop.
GS has decided that "inflation expectations are well-contained" and expectations for inflation a decade from now are still below average but their logic is a little suspect as they cling to "core inflation" statistics. Also on the inflation front, Brazil's Central Bank is RAISING rates by 3/4 of a point to 13% in an effort to stamp out the inflation that GS doesn't see, which is running at 6.5% in the Real world. PBR has also said that, should oil remain at current levels, the state-run oil company will have to raise fuel prices, currently subsidized by 30%. Speaking of oil, there's 90Bn barrels of it in the arctic, which explains where Santa gets all the money he blows on toys. Speaking of blown commodities – check out platinum, falling 15% in 8 brutal sessions this month. Half of all platinum demand is for emissions-control components of car and truck engines, see how these things all circle back on each other?
Speaking of circling, Congress is circling the wagons around the oil traders and may "outlaw elements of oil futures trading that lawmakers found distorted demand and contributed to the 69% surge in prices in the past year. U.S. legislators are considering limits on the number of oil contracts an investor can hold and may increase disclosure requirements. Speculators such as Goldman Sachs Group Inc. use the practices to bet on price swings, which may drive up prices, though they have no intention of taking delivery of underlying goods, lawmakers say." Excluding the effect of speculation, oil would be around $80 a barrel, 38 percent lower than yesterday's price, according to Jesus Reyes Heroles, the chief executive officer of Petroleos Mexicanos.
“Americans are being taken advantage of not only by OPEC but by speculators right here in our own country,'' says Senator Ted Stevens, an Alaska Republican, referring to the Organization of Petroleum Exporting Countries. “Historically, this has not been a bad problem. Only recently has speculation reached these unsustainable levels.'' WOW – when Ted Stevens joins my camp you know the oil crooks are on the ropes! Much thanks to all who sent my rantings and ravings to Congresspeople and thanks to those Congresspeople for taking up this cause!
Asia was mixed this morning with the Nikkei running up another 2% as TM had some good news and the Yen dropped to 1-month lows against the dollar. The Hang Seng was flat but the Shanghai Composite picked up 3%, back at 321 again as China's airline industry followed the US up, up and away. China's auto industry, whose growth is one of the pillars of the bull argument for high oil prices, is experiencing a considerable growth slowdown – so fast, in fact, that there are concerns about excess capactiy in the industry which will lead to layoffs, which will slow the economy and make less people able to afford to buy cars (isn't economics fun?!?). "The high-growth period for China's auto industry has already passed, and will not return," says Yao Hongguang, an analyst for United Securities in Shenzhen.
Europe is trading off about a point this morning but CS had a nice beat with a profit of $1.17Bn, close to 1/3 of last year but double the low, low expectations of analysts (who shall remain nameless). Credit Suisse reported net write-downs of 22 million francs in the quarter in its leveraged finance and structured product businesses, and said it significantly reduced exposure compared with previous quarters. 22M francs? I've watched guys lose more than that at Monte Carlo – perhaps we are coming out of the woods on these write-downs… Daimler (big cars) had a 25% fall in net income and lowered guidance while Renault (small cars) had a 37% rise in profits and reaffirmed guidance. Factory orders in Europe were off 4.4% in May, the biggest drop in 5 years.
Our Jobless Claims came in high at 406,000, but oil is staying under $125 and that's the game changer we are looking for. We get Existing Home Sales at 10, which should come in higher than the 4.97M expected and tomorrow we have Durable Goods orders, which look like a beat of the -0.3% expected but Michigan sentiment is unlikely to be a winner (last month 56.6). TASR had a big miss and is getting punished for it (includes $5.2M lawsuit charge) but NCC had a huge miss (-$2.45 vs. -$0.26 expected) and no one seems to be bothered which means the Financials may be back to stay!
