Wednesday Wrap-Up

Geeeeeeeenspaaaaaaan!!!

I thought we got rid of that guy but there he goes again, pointing out the obvious and taking away our punch bowl again…

The notorious Alan G, ever the master of timing told the Senate Banking Committee on Tuesday that China was "overheating as a consequence of fairly rapid increases in the money supply, which has been going up approximately 20 percent a year" which seemed innocuous at the time but he followed that up addressing a conference in Madrid saying  that the recent boom in Chinese stocks was "clearly unsustainable".

Gee, ya think?  The Shanghai Composite is up 55% this year and 278% in the past two year, at that pace it would outstrip the Dow in 2009 so the song I now have stuck in my head is "Tiny Bubbles."

China “is another one of these classic hot and speculative markets that will end in tears,” said Hugh Young, who oversees $35 billion as managing director at Aberdeen Asset Management Asia Ltd. in Singapore. “It’s hard to be bullish about anything at the moment because everything has done so well.”

“Chinese shares are grossly overvalued, which is a concern for many investors in Asia,” said Tom Murphy, who manages about $1 billion in Asian assets at Deutsche Bank AG in Sydney.  Investors must sign "caveat emptor" declarations when they open brokerage accounts to acknowledge their awareness of the risks in buying stocks, the China Securities Regulatory Commission said in a notice on its Web site.

Oh, now everyone decides to say something!  Ah well, it didn’t bother us today as we lost our enthusiasm for the rally by 10:11 when I called for setting stops on all our positions after noting that "AMD doesn’t see a rally" and moving to reposition our DIA and QQQQ puts buy selling into the rally and rebuying later in the day.  This was a good call so far as both positions are doing well with our QQQQ $48 puts already up 34% with 1/3 already pulled off the table (as we don’t like to make 30% in a day without cashing in a little).  Mega kudos to OPtrader, who called it at 10:22, saying: "I know it’s dangerous to try and call a top, but I just sold all calls and I am slowly starting to buy puts here."

Unlike the rest of the World, at Phil’s Stock World we don’t need Uncle Alan to tell us the markets are overbought!

Market corrections don’t stop us from making money, we hit our Daily Double with an intra-day trade on BIIB and the very obviously (to me and ZMan, but not to Criminal Narrators Boosting Crude) bearish oil inventory reports were not obvious to anyone else for 3 hours so we had a field day loading up on puts until

The signs for the drop presaged Greenspan by a mile, it was almost as if people knew what he was going to say and ran up the markets in order to generate a buying frenzy they could sell into, that’s what a funny coincidence it all was! 

• At 11:13 I said: "Watch the Homeys, if they fall off then everything the rally was based on is BS."
• At 11:14: "Not a Dow rejection unless we fail 13,570 (have to expect some consolidation ahead of 13,600)."
• At 11:25 DDay97 said: "??????????" and there was some debate as to whether he said "We’re not in China" or "We’re not in Ceramics" but we know what he meant!
•  At 11:30 I noted that "CNBC is trying to say that our .45 gasoline tax does not encourage wasting gas (europe’s tax is $4, Asia’s is $3)." and "LOL – floor trader on CNBC said they are holding back supplies and driving prices up and they cut the interview immediately – Classic!"
• At 11:33 I called the top with "DIA – finger on the trigger of $136 puts at $1.50 – bouncing right off my target here… "
• At 11:42: "No SOX today. Transports ignoring oil but using that as my primary canary." (the Dow Transports turned down at 1:57, just ahead of Greenspan’s comments but the $TRANQ that we follow turned down at 1:10!).
• At 12:12 Rockaintdeadyet pointed out that treasuries were weakening further.
• Oil pumping continued at 12:46 when I noted: "Now CNBC is going to explain how lack of competition in Big Oil is not contributing to higher prices – I’d love to know who pulls the strings on this PR machine…XLE $68 puts for $1.20 with a .20 tstop XXX"
• At 1:02 the angels sang when we got our first Valero Rule downturn in ages.

There was, of course much more but needless to say that a simultaneous drop in oil and a drop in Transports left us with a big yawn by the time Greenspan tried to explain the situation to the rest of the world.

On the whole, the day was not too damaging but it’s a hole in the dyke and I don’t see anyone stepping up to put their finger on it since oil is pouring out and the roaches are scrambling to exit their positions where stocks like TSO have had a run of 333% in 2 years and 58% so far this year.  One might even say that this was "clearly unsustainable."

We lost the SOX as they sank back into our "comfort zone" but I may put the letters "Dis" ahead of that if more of our indices fall in that range!  The dollar had a rough day at the 50 dma and closed back at 82.30 but don’t worry, if China starts looking unstable the dollar is a much cheaper "safe haven" than the Euro.  Unfortunately, this will test my theory that a good portion of our rally was based on the devaluation of the dollar.  Interestingly, China cannot raise their interest rates without attracting even more foreign capital, which is the last thing they need in a bubble(ish) economy…

It only just occurred to me this evening (sorry) that the $200Bn that flooded into China since Thanksgiving represents a MUCH larger percentage of their $2.5T economy than it does our $13.2T economy.  That’s the equivalent of foreigners dropping $1T on our economy in 6 months – think they might blow a little bubble?

Speaking of bubbles, the July crude contract had a rough first day, finishing up just .26 despite an all day pumpathon on our favorite financial station.  If that was the best they could do with BP shutting down another pipeline, Iran rattling the nuclear saber and Bush sending ships into the gulf (always on an inventory day by coincidence) – then they may be in BIG TROUBLE!

Tomorrow should be very interesting…