As the great Dr. Smith used to say: "Oh the pain, the pain!"
Of course, it was a simpler time back then, when it was OK for a grown man to hold a young boy with only robotic supervision… These days we have robots placing trades and young boys speculating in oil while grown men still cry oh, the pain, the pain!
We were very lucky that we got a nice exit on our QID puts early in the morning and extremely lucky that we made a few good directional calls. Yesterday at 11:11, with the Dow at 11,346 I said "So the bottom line is I didn’t like the way our leaders are trading, running into too much profit taking. Adding out of the money covers in general and waiting to see which way we break. XXX" then at 12:59, with the Dow down to 11,217, I called for 1/2 covers on our DIA puts by selling the $112 puts for $2.30 – those gave us a quick $1 this morning.
Even with the Dow climbing to 11,379 as oil fell back to $140ish in the afternoon, at 2:54 Cramer was on CNBC and I said: "Wow, Cramer just came on telling us how bullish we should be about this. Am I crazy or did he just tell us to sell everything and crawl into a hole yesterday?" We noted it was, of all things, a GM-driven rally and I said at 3:19 "GM’s sales were only off 8.3% because they had 0% 72-month financing and $7,000 rebates. Ford, who didn’t have those incentives was off 18%. This is even dumber than Bush’s money giveaway because the GM management will still be there when this bill comes due (or maybe they don’t plan on it!)." And what are the rumors today? That GM may be going bankrupt – they are NOT planning on being around to pay the bill!
That is fundamental logic in action. Outside of energy trading, the universe often makes sense and the markets can be predicted with better than average results by a person paying attention. We had an extensive after-hours discussion about the oil con and I urge you to read it but I am getting tired of discussing it. The bottom line is, the scam will go on as long as it does and only when it stops will we be able to get bullish on the markets (unless we enter into general hyper-inflation, including wages, to help pay for it).
As I said at 3:40 yesterday: "Keep in perspective what a weak, pathetic bounce this is coming off a 500-point drop since last Wednesday. As with yesterday, we need to close over 11,450 for it to mean anything and that doesn’t look likely. Also how many days in a row can oil hit $140 and then get pumped back to $142.50 the next day?" Well, after today, it turns out the answer is – at least one more!
In yesterday's wrap-up I said: "While we remain a little weary of any rally that is led by GM, we did hold our levels and that’s all we aimed to do this morning. Tomorrow we get the always random ADP report and the market closes early on Thursday so we’re still going to have to be well covered into the weekend, no matter what the markets do tomorrow. I’ll be happy if we can just hold 11,400 for the week as it might just look like we’re forming a bottom." This morning I reminded members that the Dow has been moving in perfect counter-step to crude for weeks and that was all we could expect from the market. Take a look at this day chart you decide if oil is driving this market or not.
THAT IS WHY I AM STILL IN A GOOD MOOD! These chart people are idiots (not you, Tom, the other chart people!). There is no "secular bear market" here. There is a single, identifyable thing that is affecting the markets for 6 months as oil has skyrocketed from $80 to $145 a gallon (up 80%). It has driven up food prices and robbed global consumers of $45 x 86M = $3.9Bn PER DAY in spending power. How much money do you think corporations make? That's $1.4Tn a year that can't be used to buy IPhones or repay home loans or… EAT!
As Curly says, the secret to life (and this market) is ONE THING and that one thing is oil. Oil is, of course, pushing other commodities higher and devaluing the dollar as $12Bn of them are burned each day to pay for something of no lasting value. And that is the key, this is not demand driven price increases, there is no economic growth being fueled by fuel consumption that is driving prices higher. Quite the opposite – rising fuel prices have begun to curb spending and production and is grinding the global economy to a halt and decreasing the demand for crude but, unlike anything in the history of supply and demand – this only spurs speculators to run oil to even higher levels. I said last week that something has to give at $142.50 and what gave yesterday was the market and what gives next is the global economy but IT IS ALL DUE TO JUST ONE THING!
Here's where our investing premise gets tricky then. If your car is great but it doesn't work because of a spark-plug, you buy a spark plug, If it needs brakes, you buy breaks or a fuel line or whatever it needs but, if your car works perfectly well but you can't afford the gas to drive it, it's going to go nowhere. That is the state of our economy now and it will continue to be the state until the administration takes action. What drives me nuts is the action is easy to take:
Lower the price of oil by:
- Releasing oil from the SPR. We have 710Mb stored and 5Mb a week will flood the US market with crude and bring us to the highest commercial inventory levels in 5 years within 6 weeks. That uses 5% of the SPR and would force oil longs to "get real" about their contracts. The US can even purchase 5Mb of futures contracts per week to refill the SPR at a certain date. Let's say I release 5Mb a week and buy 5Mb of oil for Aug deliver and 5Mb for Sept etc. I can release 5Mb for 24 weeks in a row (that's 6 months for you laymen) and already be contracted to have the SPR fully refilled in 18 months at ZERO net cost (the long contracts are cheaper than what I can sell it for today).
- Reign in speculation. There are many ways being discussed in Congress to do this – Just do it!
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Have an energy policy. Something like:
- Accelerating the raising of mileage requirements to get from 20 to 30 mpg by 2014. That means we will require the US fleet to have 10% better mileage in the 2010 model year.
- Reach a drilling compromise with Congress and award new drilling sites only to companies who bring on new production from the sites they already have under contract. That seems simple enough, if you want the rights to drill 10% more land/sea than you now have, I just want to see you producing on 10% of the land/sea that we already gave you – sort of a replacement only program.
- Require all government and commercial building to use CFLs within 12 months. Aside from using 75% less energy, they also throw off less heat and lower air conditioning bills considerably (as well as peak load power requirements).
- Fund alternate energy – for real! Concentrate on things that will have a concrete impact within 24 months, like making solar installations very affordable, which boosts US industry, creates US jobs and has an immediate impact on energy costs and usage.
- Call for a mulligan on ethanol. Admit it was a mistake and revamp the program by guaranteeing to buy NEW acreage that is planted (again, the government can sell futures to offset it) and designate it for ethanol. This will allow investors to be assured of fuel supplies at a fixed cost and the government could spur processing investment with incentives as well. There are millions of unplanted acres in this country, if we have a coherent policy, everybody could make better plans.
- Create a bi-partisan task force on Energy that will have wide powers to take action on anything from planting corn to trading futures and set a deadline for a sweeping report in January. We did this for Iraq and 9/11, this is a crisis too.
So I'm bullish because all this can be brought quickly under control and I'm pissed off at Bush because it isn't happening. Call it a conspiracy or call it gross incompetency, either way the buck stops dead on his desk and, according to a recent poll, even 74% of the "Republicans" are now as angry as I am about this. This whole economy can be fixed by taking action, ALMOST ANY ACTION WOULD DO, to bring down the price of oil. The average American family is spending $200 a month more this year than last year on food and energy and $400 a month more than they paid in 2005. $400 a month is $65,000 worth of mortgage payments over 30 years at 7% – there's your housing crisis solved right there as a bi-product of bringing down the oil price – PEOPLE CAN AFFORD THEIR MORTGAGE!
One thing I will say about Bush is that he is the most reliable market killer I've ever seen. At 10:40, with the Dow up at 11,425 and oil at $141, the President decided it would be a good time to say he will send more troops (not less) into Afghanistan and then Paulson faced a lot of tough questions from European reporters, who weren't pushovers for his BS like the White House Press Corps usually is as he once again denied that speculation is driving the oil markets, giving the green light for oil speculators to take crude to new levels.
We shorted crude into those levels, looking for $150 (sick as it is) to hold. Let MS/GS have their July 4th target and we'll be the ones selling what all these sheep are buying, very much like my favorite movie scene in trading places. As I mentioned, our logic is extensively detailed in last night's chat and you are either a believer or you aren't. The fact that coal was diving while oil was rising didn't strike anyone in the media as strange so we'll just ignore it as well (other than our hugely profitable PCX and FDG puts).
All in all, it was another terrible day on the markets but so what? It's all about one thing and that one thing won't last. The dollar won't go to zero and oil won't go to $200, I'm not even sure they can make $150 but we'll see...
