Ouch, ouch and ouch again!

Oil moved higher for the first time since last Wednesday, moving up 1.5% to close at $114.53 a barrel.  We noted the strength in the sector at 10:36, when I commented that OIH was holding up well against the drop, then we saw the airlines heading down at 11:18 along with travel stocks.  The Ags started making a move along with gold stocks too and, as I commented at the time "not the groups we’re rooting for."  At 11:45 we caught the front end of the rally when I said to members: "Oils making a comeback despite flat crude, I think a lot of people are betting on inventory tomorrow.  Only 65M Sept barrels remaining to get dumped at the NYMEX."  So the conditions were there for a rally and oil exploded up $1.50, just after that comment.

Talk about the writing being on the wall!  One thing we missed was that the dollar had bounced off resistance at 77.50, which is just about the 5% rule above the 50 dma at 73.52 so the stars were properly aligned for a commodity comeback.  Fed Governor Fisher was no help as he made comments in the morning that he "expects economic growth to “decelerate to a snail’s pace, if not completely grind to a halt” in the second half of this year, with a slowdown that may extend into 2009."  Fisher is the Fed’s dissenter, who favors easing rates and is out "talkng his book" to the media but someone should put a muzzle on this guy as his ill-timed statements amount to nothing more than a temper tantrum, thrown by a kid who didn’t get the rate cut he wanted at the last meeting.  Fisher did save himself by quoting my "manic-depressive" veiw of the markets and related the concept to the commodity markets, saying that we may still see valleys in pricing that were as dramatic as the peaks…

Anything that even smacks of a rate cut is death to the dollar so it’s going to be up to Bernanke to show us a strong hand and respond with some strong dollar comments.  While this is a natural place for the dollar to pause and consolidate, as the rally was getting a little out of control and beginning to worry US exporters, it’s a very fine line between keeping US goods cheap and bleeding consumers for gas and food prices.  As I said on the weekend, it’s up to the non-commodity 80% of the Fortune 500 to use their political influence to let the Fed and the administration know that there are voters and (more importantly) contributors out there who do want lower commodity prices and a strong dollar. 

We didn’t totally miss out on the rally, we grabbed some BHP calls in that same 11:47 comment as we’ve been watching that one for days and were ready to pounce.  Goldman Sachs was also ready to pounce and decided this afternoon would be a good time to downgrade LEH, MER, MS and JPM. This was the second analyst on Tuesday to issue a report warning of big losses at Lehman. JPMorgan analyst Kenneth Worthington said before the market opened in New York that he expects a $4 billion loss for Lehman during the current quarter.  Do you really still think this is not a coordinated effort to bring down the financials?

We did not hold our morning levels and oil did not break below $110.  GOOG had another terrible day but AAPL held it together.  HPQ had nice earnings and raised guidance, that might be good for something in the morning but the real test now comes on the financials as GS dropped the big one, usually marking the end of a round of hyena attacks.  Meanwhile, all this nonsense about financial troubles is sending money flying into treasuries and the 10-year note is back at a key support level of 3.8 (Bespoke chart).

Perhaps the Fed had an alternate goal in talking down the markets as money flying into treasuries reduces borrowing costs and allows the Fed to raise their lending rates without impacting consumer borrowing costs - if so, well played boys!   While people were happy to give the government their money for 10 years in exchange for 3.8% interest, they were not so thrilled to give it to FRE, who had to pay 4.16% to investors who bought $3Bn worth of 5-year notes. 

All in all, a rotten day but the volume was low, the VIX was rejected at 22, HPQ had nice earnings so maybe, maybe, maybe GS is the final attack on the financial sector and we can get back to business tomorrow, hopefully along with a disappointing inventory report for the energy bulls.  Speaking of energy, we’re doing an experimental bullish play on Russia with the RSX $41s, which are still $1.07.  It’s a good way to play oil up or an end to the Georgia conflict, not a bad risk/reward with 4+ weeks to expiration.

And another hurricane bites the dust!

This is turning into another disaster for natural gas traders, who ran up the price up to $14 just 4 weeks ago from $7 at the beginning of the year and now, 30 days later, it’s back to $7.  Of course, as Secretary Paulson will tell you, this is due entirely to fluctuations in supply and demand as speculators play only a very small part in the futures market but I’m not even sure we’re done going down yet.

The "demand" for natural gas futures at this time of year is based on the "supply" of people who believe there is going to be a hurricane or a war or something to cut off the very plentiful actual supply of natural gas, which we do not import from overseas and is (see Zman’s chart) drifting along at the upper end of the 5-year average storage levels, a little below last year, when we were bursting at the seems with natural gas in the US.

We won’t get into the scam that is LNG here, other than to remind you that this is a scheme to INCREASE imports of energy into the US of one of the only things we have plenty of.  The key to the drive to build LNG terminals is that energy companies can store months’ worth of natural gas in the ground, rather than be forced to sell it at market prices as it’s produced.  Recent failures to get a plant under construction on the Taunton river in MA were the last straw for traders, and gas prices fell almost 20% from the point the plant was essentially blocked (July 18th).  CHK, who routinely have had to cut back production the past two years to prevent US storage from overflowing, have been in free-fall, dropping from $74 on July 1st to $44.92 yesterday.

Natural gas averaged $12 in Q2 and is already averaging less than 9 this quarter.  Coupled with a mild summer, this goes hand in hand with falling oil prices to give consumers a huge break so far in Q3.  I mentioned in last night’s post, most of the data we’ve been looking at is backward looking and we’re hitting the reports that show our economy with oil at $145 and natural gas at $14.  It will take more than a month for us to get a picture any sort of recovery, but let’s look for early signs and take them seriously.

Meanwhile the market is, as I predicted yesterday morning, back in it’s depressive state and we’ll need to watch our levels to see how low we can go.  I’ll be bottom fishing in the banking sector and GOOG is getting very attractive under $500 as will AAPL be if they can test and hold $170 (the 50 dma).  I’m expecting AAPL to test $170 as news is out of Japan that IPod Nanos are overheating while they are recharging.

We’ll be watching to see if the Dow can retake it’s 50 dma at 11,578 and we need a 100 point gain just to get there.  The S&P is closer to the target at 1,286 but anything over 1,275 will make me happy.  The Nasdaq finally gave up the 200 dma yesterday at 2,425 and has a big drop to the 50 dma at 2,350 if things turn sour in Techland.    2,410 is going to be the line in the sand for the Nas, if we don’t get a bullish bounce there, we are very likely to head to the lower test. 

The NYSE never did get it together and has been drifting along between 8,300 and 8,500 for a month and it’s the NYSE I’ll be looking to for a clue on which way we go.  That 8,300 mark is critical for the 2,764 companies the index tracks (Nas is bigger with 3,200) as we are looking for that sector rotation to drive us up through the 8,500 mark this month.  Semis also face a critical test at 365 as do transports at 2,450.  Losing these levels will be a very bad sign and very likely lead to a retest of the July lows.

Our PPI came in at a tragic 1.2% and is the same joke as last week’s CPI so I won’t waste time here telling you what idiots the "economists" were who were forecasting 0.6% for July as these are the same idiots with the same clueless forecasts.  For those of you keeping score, PPI was 1.4% in May (oil averaged $127), 1.8% in June (oil averaged $135) and now 1.2% in July (oil averaged $130).  Let’s see if clever econonomist will be able to figure out what will happen to the PPI with oil averaging $117 so far in August…  They say the market is a forward looking mechanism and last Thursday we looked at the CPI numbers and decided to move past a very bad open and BUYBUYBUY into a 250-point rally.  This morning the Dow is likely to open at the same 11,450 we tested on Thursday but today we also have anemic Housing Starts and Building Permits to also weigh down sentiment even though lack of new housing allows us to burn off inventory, which is actually a good thing…

Nothing was good in Asia this morning as markets there fell to a 2-year low with the Nikkei falling 3000 points as the BOJ held rates steady at 0.5% but downgraded their assessment of the economy.  The Hang Seng dropping 446 and  Australia also hit the 2.5% rule to the downside and the Shanghai was a bright spot for a change with a 1.5% gain but really just a bounce off yesterday’s 5.3% drop.  China Merchants Bank jumped 3.2% as first-half profits more than doubled and led a rally in the financials over there.  Miners continued to fall, even BHP, who had very good earnings just yesterday. 

Europe is down 2% ahead of our open, spooked by the financial sector but German Investor Sentiment finally improved, rising from -63.9 to -55.5 (still awful) and was, of course, nowhere near "economists" expectations of -62 points.  Current conditions hit a new low in the survey at -9.2, the worst level since February 2006, when it stood at -19.5 - the beginning of a year where the DAX climbed 25% so I’m actually more encouraged by the turn in outlook than I am discouraged by the drop in sentiment.

Like last Thursday, we’ll have to play this one by ear but I’ll be a little quicker to remove covers and jump on some momentum plays today if it looks like we’re heading higher - if we can shake off today’s data, we should be looking more forward to a retest of 11,700 than backward to 11,450.