What silliness in the Global markets this morning.
The Hang Seng opened up nicely at 22,206 and fell 250 points to 21,952 just after lunch and came back to 22,062 – essentially flat for the day. The Shanghai Composite opened flat at 2,760, also fell 1% by lunch to 2,736 and then rallied back to flat for the day. The Nikkei, on the other hand – gapped so far up at the open (100 points) that even the all-day sell off left them up 70 points for the day at 9,648. India, on the other other hand (and they have Gods with many hands so it’s OK), was pretty flat but they are up 5% for the week so all seems well over there.
Europe is mixed (up) as well with the CAC and FTSE up about half a point but down from being up a full point in early trading, while the DAX opened at 7,167 and now failed to hold 7,100 and are down 0.2% at 7,093 (7:30 am). What is Germany’s problem? German consumer confidence is still high and the economic expectations index is up to 50.3, up from 46.1 in May – maybe too much as there’s simply no reason for Germany to maintain an easy-money policy and, of course, it’s their bailout money the rest of the EU is counting on
"The pace of activity is set to moderate in the coming quarters but today’s survey shows some resilience for consumer spending," the GfK said. The income-expectations index leapt to 44.6 from 25.9, GfK said, adding that this "very positive development" is further boosted by the fact that price pressure on consumers hasn’t intensified any further of late. The propensity to buy index increased to 35.1 from 31.5. "Positive economic results and extremely pleasing labor-market figures are improving consumers’ planning security, which plays an important role, particularly where larger purchases are concerned."
I already sent out an Email Alert to Members this morning pointing out that, last Tuesday, we had the same Greek uncertainty with the same protesters outside of Parliament with the same critical vote looming that was too close to call – and we had a huge rally. We’ve been bullish since last Friday and we obviously had no reason to change our minds yesterday as we moved nicely over our 2.5% line on the Nasdaq and ran the NYSE right up for it’s test of 8,073 this morning – which will probably be our most critical pass/fail test of the week.
At the time (6am) we were at the lows of the pre-market trading as an EU official said "There is no plan B," which sent the Dollar flying to it’s highs of the session and knocked down everything else. Nonetheless, we maintained our faith in the manipulators to turn things around and we looked for a bullish play off the Russell 800 line in the futures (/TF) along with our standing play on Gold (/YG), which took us back down to $1,500 but bounced back nicely as the Dollar calmed down.
Gasoline futures should be the most exciting play of the day as the new August contracts became the front-month this morning (/RBQ1) and I simply don’t see gasoline staying down at $2.764 so we were loving that for an upside play since last night’s Member Chat. Our expectations are simple – the Dollar topped out at 75.90 in overnight trading and we don’t expect it to get back over there (other than a brief spike) and, probably shortly before we open for trading – we expect some kind of announcement that will take the Dollar down and goose the markets – JUST LIKE LAST WEEK! Why change the play when it worked so well before?
What will it be? What will they say? Who will say it? It’s very exciting waiting to see who puts the knife in the Dollar’s back. CNBC has Meredith Whitney scheduled for 8am and you know she’s going to go all doom and gloom on the Municipal Bond situation – that’s going to hurt Dollar confidence. At 9 am we have what is widely expected to be another terrible Case-Shiller Report, followed at 10 by Consumer Confidence (or lack thereof), the Richmond Fed and the State Street Investors Confidence Report. At 1pm, Fed Governor Fisher gives us "A Report on the Economy" at the same time as Treasury is selling $35Bn worth of 5-year notes so it’s going to be fun, Fun, FUN ’till Bernanke takes our T-Bills away!
The goal for the day is to take the Dollar below the 75.50 line (now 75.85) and that should give the markets at least a half-point lift, which puts us in striking distance of our goal lines at the "must hold" levels we expected to hit this week (at least). We’re not expecting last Tuesday’s 150-point pop in the Dow (12,200 was the top, which we shorted then) but a more subdued move that lasts through Friday and takes us, very likely, over that line. Failure to break over that line by Friday will make us MORE bearish over the weekend (we already plan to be bearish, no matter what).
Speaking of bears – I know someone who will not be happy that oil is moving back up as SOMEONE (not us, we’re long this week) made a MASSIVE short bet on XOP (Oil and Gas Exploration ETF) on September $54 puts (now $3.25) yesterday, purchasing about 20,000 in a ratio spread where 10,000 $59 puts (now $6.30) were sold to cover it. This trade is very bearish as it takes quite a while for the gains on 2x the $54 puts to outpace the loss on the $59 puts that were sold (about $48 is break-even) so this guy needs a 12% sell-off just to get even. Perhaps this bet was based on the poor report on the viability of shale drilling but we found it easier to go long on oil and natural gas ($4.20 yesterday) than mess around with an annoying bet like this one is likely to be. On the bright side – if the player is SO WRONG that XOP ends up OVER $59 – at least he gets out even.
I doubt the seller was Harry Hamm, who claims there are 24 BILLION barrels of oil in the Bakken Fields of North Dakota and Montana – that would be enough oil to supply the entire US for 1,200 days or about 6.5 years of imports or, even more important, about 21 years of what we import from countries besides Canada and Mexico (who’s asses we could kick any time and take all their oil!). Hamm’s CLR is the largest owner of that land so perhaps his statement is a bit self-serving but, then again, he is the CEO of CLR and not likely to purposely make blatantly false statements either. Extraction costs at Bakken are high – $50, so exploitation depends on either drilling costs coming down or oil prices going up but, long-term, CLR does make for an interesting play (now $60.50).
You can sell the CLR Dec $55 puts for $4 for a net $51 entry – that’s a nice way to establish a foothold in Bakken and makes a nice hedge against long-term energy inflation. If, for example, you spend $3,000 a year on gas for your family, you can sell 3 contracts for $1,200 to cut 40% off your fuel bill and if oil goes up, you have a nice upside buffer as the puts are very likely to expire worthless.
If oil were to go down far enough to knock CLR under $51 (last time it was that low was last October, when oil was $75 and gasoline was $2.10) – then you would be saving (most likely) about $1,000 of your fuel bill and obligated to buy 300 shares for net $51 ($15,300) and then you could sell 2013 $50 puts and calls for (about) $8 and you put another $2,400 in your pocket and now you’re paying for (at $2.10 a gallon) your ENTIRE annual fuel bill with the proceeds from your CLR option sales. Isn’t this a nice idea?
Keep in mind your collection of $2,400 would be pretty much simultaneous with your assignment (if you don’t just roll the short puts) and you already had $1,200 in your pocket that you didn’t need because gas prices came down, not up – so your net on 300 shares of CLR at $55 – $12 collected is just $12,900 ($43 per share) and you short 2013 $50 puts could land you with 600 shares at an average of $46.50. As I often say to Members – if you don’t REALLY WANT to own 600 shares of CLR at $46.50 (23% off the current price) then DON’T sell 3 $55 puts for $1,200 but, if the "downside" sounds appealing to you as a long-term investment – then this is an easy decision, isn’t it?
Anyway, it’s time to work now: Greece, Greece, Greece and maybe Housing will drive the day but then back to Greece this evening so we’re just going to watch our levels and have some fun while we wait for things to sort themselves out. It’s all about the 75.50 line on the Dollar – over is bad for the markets, under is good!