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Weekend Reading – Oil’s Not Well

Wow, we covered a lot of stuff in Member Chat this weekend.  

After a really fun Friday where we had another couple of massive index puts pay off in the morning and on Saturday we reviewed our October's Overbought 8 list, with half our trade ideas already past our 50% targets and 3 of the 4 remaining spreads on track.  In Member Chat, we discussed the possibility of a pullback in oil next week as the barrel count on the NYMEX is dangerously high with over 600M barrels currently scheduled to deliver to Cushing in the next 90 days.  Cushing has a capacity of about 40M barrels a month and they are full but, even if they weren't, 480M barrels need to be dumped and rolled into Feb, March and April contracts between now and the year's end.  

The November contracts settle on Wednesday, the 20th and any traders caught holding those "hot potato" contracts have to figure out what they will actually do with millions of barrels of oil.  Right now, there are 141M barrels earmarked for November delivery and, if this month is typical, only about 20M are actually needed.  141,000 contracts (1,000 barrels each) were traded 210,000 times on Friday as prices fell from $84.12 at 3am (Asia trading) to $80.75 into the NYMEX close.  It is easier for a NYMEX trader to drink a barrel of oil than fob off his contracts to some other sucker during a glut – or something like that is the old biblical saying…  


What I love about investors and the MSM in this country is their ability to completely ignore the fact that, ultimately, someone must consume the oil that is leading the inflationary drive in the economy.  Actually, we shouldn't blame oil (I said as much last week) but, as I also said last week, QE is the wrong kind of inflation because we are not giving any money to the workers.  Ultimately, it's the workers who have to buy food and fuel you know….

One thing people don't realize from a global perspective is that gasoline prices are subsidized for India and China to the tune of nearly $40 per barrel so China's 11Mbd of fuel subsidies is bleeding Beijing by $13Bn a month and that goes up $3Bn a month for every $10 increase in the price of oil over $80.  India uses less than 1/3 the amount of oil China does but still, subsidizing $3Bn a month does sting just a little.  In the US, the consumer bears the full brunt of the 140% increase in the price of crude since Jan '09 and that $50 a barrel is whacking US consumers for $1Bn PER DAY!  A $365Bn annual habit of money we literally burn up in smoke!  

It's easy to see the damage that is caused by rising energy prices because we use X number of gallons of gas every day.  Corn is up 35%, wheat 50%, cotton 40% – as if you can arbitrarily just ratchet up the prices and consumers will magically keep paying.  Last week we noted a trend in which 10% (ten percent) of prescription renewals are being left at the pharmacy because people simply can't afford them any more.  Even with insurance, the co-pay alone is too much for 4.4% of the people to come up with.  These are the choices the bottom 90% are being forced to make while the top 10% party in the markets like it's 1999.  

But it isn't 1999.  In 1999 tech companies were hiring Americans and American factories were humming as we produced computer chips and sock puppets.  People got jobs with dot com companies and bought 3-pound portable phones and fancy cars and our government was running a huge surplus as the demand for homes was on a roll.  11 years later – this is NOT 1999 – we've gone straight to hell since then and you can blame 9/11 or you can blame Bush or you can blame Bush for 9/11 or you can blame the tax cuts or Greenspan's overreaction on rates (the one Bernanke is repeating now) or you can blame an overall lack of foresight for not putting our surplus in some sort of "lock box" when we had the chance.

George W. Bush, Henry Paulson, recession, great depression, economic crisisWhatever you think caused it, I'm hard pressed to see how suddenly we are repeating the run from Feb 1998 to March of 1999 when the market flew up 50% (S&P 1,200) and then continued on 20% more, all the way to 1,550 before we began our 45% pullback.  9/11 didn't cause the crash, we were down at 1,100 on September 4th.  In fact, it was kind of a "flash crash" as we zoomed back to 1,150 by Thanksgiving but the next year we dropped all the way to 800.  

Like the 2008 Financials, many of the 1999 dot com profits were false and empty, based on smoke and mirrors so the jobs quickly disappeared when reality hit the fan.  The government spent TRILLIONS bailing out the banks and bailed our our auto companies only enough so they could sell their assets overseas – if any jobs were created or even saved, we're hard pressed to find them.  Obama came in promising to have his own shovel ready and the only thing that's been shoveling in Washington for the last two years is the same exact BS they've been feeding us for the previous 8.  This is no way to rebuild an economy folks!

What we have going on right now is what I predicted would happen on December 27th of 2009, when I wrote my "2010 Outlook – A Tale of Two Economies."  We have a clueless top 10% partying on as if the World revolves only around their net worth while the bottom 90% of the people tumble into the abyss – getting a little poorer and a little madder every day.  So far, the Republicans love it as the "throw the bums out" mentality looks to spell victory in the upcoming elections but this is not the sort of anger that is likely to abate when a few more empty promises are made on the campaign trail – as John F. Kennedy once warned: "Those who make a peaceful revolution impossible, make violent revolution inevitable."

As I said in December, the plan was going to be to do NOTHING to fix unemployment or housing or the deficit.  Just business as usual to start the new decade off.  My cynical comment regarding not "wasting" money on helping the poor was:

If we give money to the world’s 6Bn poor people, they’re only going to go and buy bread (or dare I say cake) and maybe shoes or clean shirt and mostly they will buy them at Wal-Mart or, even worse, make it themselves and there’s little profit for us in that. By keeping the vast global wealth "in the family," so to speak, we can sell IPods and Hummers and luxury homes and diamonds and gold and other high-margin, unnecessary items to each other that allow the corporations we invest in to make obscene profits which, in turn, makes us EVEN RICHER!

So let’s not kid ourselves that anything in this country is being done for the benefit of the 90% who serve us. We provide the basics and there are even many fine companies who can make money selling those basics like KO, MCD, JNJ, WMT… that we can invest in.   

We rode the wave up through April, got short and then went long again in July and now we are short again but I promised that I'd try to kill a few brain cells this weekend and see if I could get into more of a party mood but I am telling you IT IS HARD.  There is just so much reality out there, it's very hard to get bullish up at our 10% lines.  Sure, as I said in the October Eight post, we could flash up to 11,500 to complete the Beta 5 pattern that Lloyd seems to be running this quarter but what about earnings?  What about the Financial mess with the Foreclosures?  What about the Dollar?  What about rising commodities and what about the possibility of terrorism?  

Are these all things we are prepared to ignore as if it were, in fact, 1999 and we lived in blissful ignorance of potential market dangers?   Older is not wiser for stock traders as we tend to repeat the same mistakes over and over again until we learn to be a little cynical.  As I said to Members on Friday afternoon: "That’s what scares me though. Another global shock and people panic into the dollar and the market collapses.  

It might happen, it might not but, at the top of a 15% market run in just 6 weeks – don't you think it's wise to error on the side of caution?  1999 was NOTHING like 2010.  Russia defaulted on their debt in 1998 making the dollar strong and sending oil down to $20 a barrel, that put hundreds of Billions of dollars INTO the hands of consumers.  Asia's economy was melting down in 1998 and in 1999 Brazil also floated their currency to boost the dollar.  Unemployment was under 4.5% and America had just passed a balanced-budget amendment and THAT's What sent the Dow up 50%.  THIS IS THE OPPOSITE!!!! 

So we are still hedging our upside plays and we are spent a great deal of time in Member Chat this weekend talking about scaling into positions and setting stops.  There are now brakes on the market and, in theory, that can let us invest with a bit more confidence but, in practice, they haven't been tested so we'd like to see how they perform under pressure before we start investing without a net.  

We also talked about the Dollar, Inflation, gold, China and, of course, the foreclosure situation, which Barry continues to cover in great detail as well.  We got really bad consumer confidence numbers last week and Rasmussen Reports that 32% of homeowners now expect home prices to drop next year.  This is the most pessimistic Americans have been – EVER – and Charles Hugh Smith predicts "The Coming Collapse of the Real Estate Market."  I find this interesting as, in theory, if inflation is in the cards, then THE BEST thing to invest in is real estate although, maybe not.  

Even if you lock in a 5% loan on a $300,000 home with $60,000 of cash and carry a $240,000 mortgage for less than $2,000 a month and 7 years of 10% house inflation/reflation doubles the price of the house, you only get net $340,000 back for your $60,000 deposit plus $24,000 x 7 years ($168,000) in payments clears $112,000 less taxes fees and expenses.  At the rate they are running inflation now – that's a pretty crappy rate of return!  How much will, say $80,000 be worth in 7 years?  Probably a lot less than $60,000 is worth right now.  

I touched on this in "Interest Scams and How to Avoid them – Mortgage Madness" where I also outlined 3 techniques for knocking $100,000 in payments off a $200,000 mortgage so PLEASE – read this article if you have a mortgage!  That leaves us though, with the burning question of what the heck should we do to stay ahead of inflation?  I don't know.  I wish I did but this is a tricky topic and there are a lot of variables and we'll have to study the situation closely over the next few weeks.  One member suggested revisiting our list of Dividend paying stocks but I was not joking when I said last week that the dollar has been dropping at a rate of 2.5% PER MONTH – dividends don't help you there.

By the way, in case you weren't motivated to click the picture – this is a very funny video of Donald Duck cartoons spliced to follow the rantings of Glenn Beck!   


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  1. Russia defaulted on their debt in 2008 

    noo not again! :)

  2. Phil- You are correct in your respect for Cashin- anyone who has paid the dues he has deserves our respect- that is why it bothers me greatly to have him say we have a market that is broken but perhaps easier to profit from a broken dishonest market than a fixed honest one as long as you understand people at your poker game are cheating!

  3. Phil= PS The only man who seems to have a better grip is you- do not let it go to your head- we need your commentary too much. You obviously grew up in the school of hard knocks. Is it not wonderful that all the answers are before us if we will only read and use the collective thought of the learned?

  4.  Trading AAPL:
    Here are my trades for tomorrow.
    Premises:   AAPL will go up with earnings, not down.  I expect it to open at around 315-320 and go up to 330, possibly 340  before Nov 1.   
    High-risk trade:  Buy Oct 22 320 weekly calls at the open.  Plan to sell them on Tuesday.
    Medium-risk trade:  Buy Nov 22 320 monthly calls at the open.  Plan to sell them before Nov. 1.
    Low-risk trade:  Buy Jan 22, 2011  320 monthly calls at the open.  Plan to sell calls against them for several months.
    If you believe AAPL will drop with earnings then all of these are high risk.   I have seen nothing anywhere which would predict a ‘miss’ for AAPL.    
     I plan to put 10% of the "AAPL portfolio" on the high-risk trade and 40% on the low-risk trade.  To keep this trade in perspective, remember that the "AAPL portfolio" is already up significantly.  For me this trade is all "house money".   I am not suggesting to anyone that you make any of these trades.  I’m simply telling you what I plan to do.
    Be careful out there!

  5.  IRA trading – I just posted my October results and November strategy on my blog for writing covered calls in my IRA.  I have been really struggling with how to handle earnings, elections and a overbought market.  I finally decided to go with a collar strategy, including more weekly collars.  Click on the user ID and let me know what you think.  

  6. iflan…. Thanks for your AAPL plays. I have scoped out the many alternatives, and I think buying calls is not my play, as they are so damned expensive – the reward is not comensurate with the risk. I am going to sell the January 310 puts, and see some nice income, not much risk, and feel if I get assigned, then that is OK, as I want the stock anyway, and the premium is decent….. Good luck with your long calls!

  7. lflan
    Very nice "mini analysis" of the situation.
    We will see if you turn out to be right.
    You probably saw the AAPL analyst Gene munster’s analysis that he expects AAPL to ‘come inline with expectations’ and therefore the stock to take a hit!
    He obviously has been following the channels …what do you say?
    What are you planning to do if AAPL disappoints/does not BEAT expectations?
    I am trying to figure out how to mitigate the last scenario!

  8. Gel- currency trades- you highlighted two trades last week and I have been looking at the charts. Can you flesh out your thinking on these?
    NZD/USD- year to date, this one has been rise since early summer. I see your limit target of .7235 corresponds to a Fib 38% retracement of the run up. So I get the technical angle but what about the fundamental issues?
    USD/SGD- this one has been in a steady decline for almost 2 yrs. with an accelerated decline more recently. From a tech perspective, why enter this trade now? Just following the trend? Also, what is the fundamental story? I think I recall reading somewhere that Singapore is about to or has raised interest rates?
    I am following along on these on paper – just trying to get a bit more feel for these trades.