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Technical Tuesday – Twelve Thousand Two Hundred or Bust!

Our winning streak continues! 

With 335M barrels of oil still on fake order at the NYMEX, yesterday’s early morning short play at $100.60 gave us a ride back to $99 and that was good for as much as $536M pre-market.   In the morning post, I said "hopefully we’ll get another crack at shorting oil at $100 or higher" and we did – right at the open – and that was good for a ride back to $99 for another $335M of potential gains (just following through with last Thursday’s plan to break the NYMEX speculators).  

We took the money and ran on those USO June $40 puts at $1.40 (up 22%) in Member Chat at 10:53 but the next rebound in oil didn’t quite get to $100 ($99.88) and we missed the run down to $98.50, which is where it’s sitting this morning.  

Of course, we don’t only short oil…  In my 9:58 Alert to Members I, of course, reminded them that oil was at $100 and shortable again but we also grabbed the QQQ weekly $56 puts for .33 and those finished the day at .55 for a 66.6% gain (the mark of the Blankfein), which is not bad for 6 hour’s work (or so I am told).  We also had a more complicated spread with DDM offsetting SPY as a sort of arbitrage on two spreads.  

Thanks to David Ristau’s guest appearance in Member Chat pre-market, where he mentioned he was jumping on our short oil bandwagon, we selected HAL for a short trade in Member Chat at 10:10 along with our planned PCLN short play (mentioned pre-market in the morning post) and both of those were, of course, huge winners already so thanks for HAL David!  

It wasn’t ALL bearish, we went long on XLF as it hit $14.90 with some short put sales along with a very long-term bull play on HOV but we took a loss bottom-fishing on IWM as the June $79 calls stopped us out after falling from $2.07 to $1.95 (down 5.8%) but we had to try something long to get a little balance or risk being too bearish.  Our bullish sentiment didn’t last long though and we decided to short the Nasdaq futures at the 2,300 line at 11:42, those gave us a spectacular run down to 2,270 and, at $5 per .25 per contract, that’s up $600 per contract – also not bad for an afternoon’s work

We cashed our Friday’s NFLX shorts with 80% gains as that wasn’t worth risking into expiration but we’ll be happy to short them again if they get back to $275.  At 12:25, I did put up a list of 10 stocks I liked long for our Members as our first bottom-fishing expedition, laying our our long-term strategy for CSCO as an example at 1:25.  AAPL got silly cheap at 1:37 so we sold the July $340 puts for $10 and we finished our day’s trading going long on the Dow with the DIA June $123 calls at .45, which we’ll probably sell on the morning pop as we look for something else to sell on this BS pre-market pump-job.  

How’s that for a summary of our day?  We’re not always so active in Member Chat but, when the market swings both wildly and predictably, why not take advantage of it?  The short-term trade ideas get all the attention, of course, but we did slip in a dozen longs in that mix but those are duller, long-term trade ideas which reflects our attitude of being long-term bullish but short-term bearish although this chop forces us to flip-flop our short-term stance with great regularity.  

Today, 12,200 is the magic number for the Dow and 1,300 on the S&P.  I did the above, detailed S&P chart for Members last night to illustrate why we felt it was a good idea to play yesterday’s close for a bounce but also to illustrate the bigger picture within our 5% rule but we got that bounce pre-market already and that caused us to short the Dow futures off the 12,150 line in this morning’s Member Chat as the run-up was based on jamming the Dollar back to 74 and that’s never a good way to start a proper rally.    

Our other "Must Hold" lines were originally 2.5% pullbacks off the 100% moves in the market off the March ’09 bottoms that we had hoped would hold in order for us to keep a bullish stance (it would have indicated we were merely consolidating at the top of our range).  Well, they didn’t hold and now we have to contemplate a far greater drop – quite possibly back to the 5% line on the S&P at 1,235 along with 11,600 on the Dow, 2,600 on the Nasdaq, 7,866 on the NYSE and 775 on the Russell.  

On the bigger S&P chart, we’re looking at the longer-term 5% lines and the rising 200 dma at 1,250 will hopefully put in a floor on the S&P but, if that fails – then look out below!  We don’t think this will happen until after option expiration day next Friday and maybe not until the end of the month as we expect they want to end the quarter on a high not but, if "they" can’t keep it together now – we could be in for a long, wet slide back to reality.

It’s all up to the Bernanke, who gets the ball at 3:45 this afternoon as he gives his "Economic Outlook" speech at the International Monetary Conference in Atlanta and if you think it’s a coincidence that he scheduled his speech for 15 minutes before the markets close – then you need to do about a year of remedial reading in our archives!

It’s not just Uncle Ben we’ll be hearing from today, Lockhart gives his Economic Outlook to the Charlotte City Club at noon – sort of a test-drive for Ben’s speech later in the day.  At 3pm we get the Consumer Credit numbers and then Ben at 3:45 and tomorrow, at 2pm, we get the Beige Book, which is probably going to be awful so it’s no wonder they are spinning their asses off today.  All of this is a prelude to what may be the LAST POMO schedule, scheduled to be released Monday at 2pm so get ready for a wild week of rumors and speculation – we love it!  

8:30 Update:  Woops!  Fed’s Fisher is on CNBC saying ABSOLUTELY no QE3 and QE2 will wind down as scheduled in June (that’s this month, you know!).  This makes me very glad we shorted the Dow futures off that 12,150 line and we’ll see how the markets absorb this bit of news but I’m thinking – not well…  On the other hand, Fisher is handing out carrots with his stick – forecasting "robust second half growth."  Also, let’s keep in mind that Fisher tends to talk a tough game but hasn’t voted against the doveish majority yet.  

Conditions are ripe for a sell-off after whatever pop they manage at the open as we had a silly, 0.5% run-up in the futures for no good reason and the Yen has once again been shoved down to the 80 line (too strong) so the BOJ has an interest in not letting the Dollar fail the 74 line, where it is at the moment.  The Euro has already been shoved up half a point to the $1.465 line and the Pound hit $1.645, which are both levels we discussed in Member Chat as being shortable in the Forex market.  So a little pullback in the Pound and Euro (and there are umpteen reasons for that to happen) and a little drop in the Yen (the BOJ will make reasons for that) and a little bounce off the 74 line for the Dollar and suddenly this little pre-market rally can vanish in a puff of smoke – just like the "ta-da" in any magic trick – it was all an illusion, yet the audience of retail investors fall for it every time….

Moody’s joins Fitch on the "voluntary" rollover of Greek paper, saying it’s hard to see how it would be truly voluntary, and would likely be a "credit event," i.e. default. EU and IMF officials have gone into "Orwell" mode, insisting just the opposite.

European Banks’ Capital Shortfall Means Greece Debt Default Not an OptionA failure by European regulators to make banks raise enough capital to withstand a sovereign default is complicating efforts to resolve Greece’s debt crisis. The “fragilities” of Europe’s banking industry mean a Greek default isn’t an option, European Union Economic and Monetary Affairs Commissioner Olli Rehn said in New York last week. By delaying a decision some investors consider inevitable, policy makers risk increasing the cost to European taxpayers and prolonging Greece’s economic pain.

European officials are trying to buy time for the troubled economies to get their house in order and the banks to be strengthened,” said Guy de Blonay, who helps manage about $41 billion at Jupiter Asset Management Ltd. in London. While estimates of the capital shortfall vary, the vulnerability of European banks to a sovereign shock isn’t disputed. Independent Credit View, a Swiss rating company that predicted Ireland’s banks would need another bailout last year, found in a study to be published tomorrow that 33 of Europe’s biggest banks would need $347 billion of additional capital by the end of 2012 to boost their tangible common equity to 10 percent, even before any sovereign default

The IMF indicates it is open to an extension of maturities for Greek paper in order to avoid a restructuring. "This is a technical issue we can think about," says Bob Traa, the IMF’s man in Greece.  ECB chief Trichet signals he could support encouraging investors to roll existing Greek debt into new paper. Previously taking a hard line against anything that reeked of restructuring, Trichet says of the new plan, "that is not a default."  That may not be the ECB president’s call to make

Meanwhile, Spain’s provinces are rebelling, led by Catalonia, who refuses to meet Spain’s deficit target risks encouraging other regions to join in rebellion just as Prime Minister Jose Luis Rodriguez Zapatero’s authority may be weakened by the approach of general elections.  Catalonia is Spain’s largest region with an economy the size of Portugal.  Their 2011 deficit is twice as wide as its target, in a move Moody’s Investors Service said yesterday was "credit negative" for Spain in general. Zapatero will have to decide between allowing Catalonia to sell enough debt to fund the shortfall or antagonizing a state that has traditionally backed Socialists in national voting.

According to the London Telegraph: "European Central Bank Risks Being ‘Wiped Out’ by Bail-Outs. The European Central Bank is "looking increasingly vulnerable" and may face "hefty losses" as a result of propping up indebted eurozone countries, a leading think-tank has warned.  The International Monetary Fund’s partner in the recent international bail-out missions is itself in danger of becoming a liability, Open Europe has argued. In a report published on Monday entitled A House Built on Sand?  Open Europe has calculated that the ECB has a total exposure of about €444Bn ($640Bn) to "struggling Eurozone economies".

The bank is now "23 to 24 times levered" as a result of bailing out Greece, Ireland, Portugal and Spain.  The London-based think tank argued: "Should the ECB see its assets fall by just 4.23pc in value . . . its entire capital base would be wiped out." Open Europe said: "Hefty losses for the ECB are no longer a remote risk." It added: "The ECB is ultimately underwritten by taxpayers which means there is a hidden – and potentially huge – cost of the eurozone crisis to taxpayers buried in the ECB’s books."

Needless to say – let’s be careful out there.  Any rally based on a strong Euro and a weak dollar should be considered highly suspect to say the least!  


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  1. Phil,
      Thank you for your very thorough and comprehensive reply to my question regarding RIMM puts. Sorry if I didn’t make it clear that I sold the JUN $50 puts for $1.45 originally. Your reference to comfort level, coupled with Apple’s announcement and an incident yesterday at work got me to thinking. I’m in IT and at a meeting yesterday the Assistant Director brought up an agenda item regarding the intention of the IT group of another agency with which we recently integrated to switch from Blackberrys to iPhone/iPads, supposedly because the management application for the iPhone is better, but our manager of mobile services immediately endorsed the Blackberry management app as far superior and the business ready ability of the Blackberry as superior to the iPhone/Pad as well.
      As perception often trumps reality, it makes me wonder if RIMM is going to be beaten down a lot as people perceive the business platform baton to have been passed to Apple, as I have already seen articles indicating.
      Would you still endorse RIMM as a long term hold? Would you still consider the $37.50 level good support? I probably overdid it with 5 Puts sold, as the 2X strategy below $35 that you outlined seems daunting to me in light of current events. Would a strategy to sell a put on Apple, Google or ISRG, all of which I like better,  to effectively replace the RIMM put make any sense to you? I certainly like Apple better; I’m sorry I sold my shares long ago.
      As always, your help is greatly appreciated. BTW, 1 Terabyte of music sounds like an eminently enviable collection!

  2. Morning Phil! Yes, I’m still around.. just been terribly busy. I have a B/W on WFR, stock at 11.74, put and calls sold for $2.70. I wouldn’t normally touch this yet, but call premium is down to $.02 and feel it prudent to roll. I was thinking of rolling to the Jan 12.50 puts and calls. Not a lot of premium but I can always sell again down the road. Any comments would be appreciated. Thx and have a good day.

  3. TOS defaulting /dx to Sept. this morning /dxu1.   /dxm1 if you want to look at June. 
    I’m always a little confused about resistance and support levels as we default to the new future. TOS keeps my drawings on the chart so I figure they do any adjustment.

  4. PP for today.  I should be around until 9ish, and then sparce through out the day.  Oh, boy oh boy oh boy I hope it is not a tease…..keep UR fingers crossed!

    With yesterday’s close beneath the last higher-low (blue line), it is difficult to think the market won’t cut through the limited support noted on the chart, and trade down to the next prior low (black line).

    Even so, the market is never obligated to fulfill our predictions and with the last four consecutive closes being lower, the possibility of a sudden reversal is a legitimate possibility.

    As a result, our stance is simple. The current price pattern on the SPY chart above provides no greater measure of certainty for short term price movement to either the long or short side. For now, we will stay on the sidelines until a higher probability setup takes shape

  5. I guess people bought all the guns they needed a few years ago…or they moved to bigger caliber?

  6. Pharm,
    Have a report on CIGX from John Faessel that you might find interesting.  I don’t really follow drug companies but figured you’d like it if you haven’t seen it already.  Don’t know how to post it on here as just a link since I have it in email form but can forward it over to you.

  7. Oil Lines
    R3 – 101.71
    R2 – 101
    R1 – 99.75
    PP – 99
    S1 – 97.77
    S2 – 97
    S3 – 95.80 

  8. and Phil, awesome call on the DIA calls yesterday.  Looking to get out early this morning and switch back to Puts.  You have continued a magical 2 month run for me so far.

  9. what week is USO rools-over their oil futures? This or next one?

  10. Pharm, yeah they bought all the guns when Obama was elected… My aunt owns a pawn shop in a rural community (mainly deals with guns) and her business tripled after O won….

  11. Phil / Michael Hudson     John Maudlin’s ‘Outside the box’ print today features a penetrating piece by Michael Hudson essentially explaining why Greece would be mad not to follow the Icelandic style repudiation of the debts and that this event will likely give the Irish some backbone.  Makes me very pessimistic about the Euro and therefore the mkt.

  12. rustle – pharmboy123 at gmail.  Very interested in what others are saying, thx.  They were spun out of Tobacco row and their nicotinic compounds for CNS diseases (bipolar, etc) are interesting. 

  13. You know I analyze ALL SPY and VIX options trades daily. Reviewing the last days I can’t see that there’s something big cooking. At least nothing obvious to me. Volumes weren’t very high and the direction seems to be "on hold". I would say 60% bullish 40% bearish, regarding the bad technical picture I find this figures rather high and personally I tend to go long.

  14. How does the no QE3 announcement affect your next week predictions?
    "…really expect at least 12,200 to hold by expiration." Does rolling DIA short puts look more probable?

  15. @pharmboy
    Sent it.

  16. pentax – how about the black pools of stock out there that are shorted that no one can see…..That is where they hide what ‘they’ are doing.  Also, like JRW, ‘they’ do it over various strikes. 

  17. Morx/QE3
    Did I miss something? 
    Did they announce no QE3?

  18. Phil/Puts
    Your recommended 10… you favor going out to the Jan 2012 for all of these?

  19. Good morning!  

    Dow had the silliest run up so they make the best short too with the DIA $123 June 30th $120 puts at $1.45 – that gives us 2 extra weeks but they still have a nice, .41 delta.  

    Let’s also take the loss and buy back to 16 short DIA June $123 puts for $2.40 in the $25KP – so I’m pretty bearish!  

    Of course done with the DIA $123 calls at a disappointing .50.

    Levels don’t matter much unless we retake those Must Hold lines and I doubt we’ll get a pop until Ben speaks this afternoon so it’s going to be the same playbook as yesterday, shorting things off the morning pop and maybe a little bottom-fishing this afternoon.  

  20. Cu is such a strange ETF… It goes down when copper is up and vice versa…. I guess it just follows the broader market???

  21. see phil’s 8:30 update above. nothing official i guess

  22. Phil / RUT    Would you buy TZA on this bs move this morning?  I just bought back EDZ at 18.10    The Euro is going to choke.

  23. Phil How about setting up a QID play for downside protection ?? thanks

  24. i have been trying to grab the TZA bcs from Friday but the price wont come back to $3. What would you recommend Phil. My SDS will be expiring next week and i need to add something else.

  25. Let’s watch that 800 line on the RUT – if they take that back, the bulls have hope.  Also, of course, the 74 line on the Dollar is critical but I don’t see what they can say to push the Dollar lower in a way that will stick.  

    RIMM/Kevin – I think they are unjustly beaten down but I will warn you I felt that way about MOT too when they lost their Razr franchise and never recovered.  Of course MOT didn’t have subscription revenues and I feel like RIMM is being priced like it was MOT – which is very unfair…  So I like RIMM but I would also treat it as speculative, not something you want to own too much of without a very good plan to scale in and roll down.  As to the Terabyte of music – I love classical as well as rock so it’s kind of like 2 different collection except then I like to mix them together, which really annoys people at parties…

    WFR/Jbur – Sure, it’s always good to roll when the Premium is gone.  I think it is a good idea to give them room to come back, you can always roll the callers lower later.  

    Screw this, let’s sell 40 FAS this week $25 calls for .75 in the $25KP and roll our July $26 calls to the July $25 calls for .40 so it will cost us .05 x 80 ($400) to roll the whole set down $1.  

  26. AAPL down 3$ any comments?

  27. Pharm,
    Sure I know that it’s just a piece of the mosaic. I can’t look into the dark pools, but I’ve spent a lot of time in analyzing theses option trades and I found that it is the most reliable indicator that I can calculate. I tried to express this in my posting. It’s just a piece of the whole picture, but maybe the only one that I can contribute here.

  28. Hmmmmm…….no QE3…….Lloyd’s not going to like that. 
    He might just throw another pissy fit like he did back in 2008!!!

  29. You man this week 24C? on FAS

  30. Phil / EDZ – i have the Oct. 18/25 bull call spread.  would you sell the Oct. $16 puts?  $15.78 is all time low.  Thx.

  31. FAS – is it the 24s that are .75?

  32. FAS/$25KP – this week 25 calls for .75? currently at .30..

  33.  Phil / CINF
    what do you think about sell some Dec.25s puts?
    they are dividend champions and probably will do what ever they can to stay in that club

  34. SWHC/Pharm – That’s quite a drop off, I hadn’t noticed them doing so badly.  

    Thanks Rustle!  We’ll see if I’m right today.  The bulls are trying REALLY hard not to let this one go.  

    Dollar right at 73.995 but RUT broke 800 so that gives the ball back to the Bulls for the moment.  Oil holding the $98 mark but now they have to prove they can retake $98.50 or this is just a weak bounce for them.  

    USO/Lol – Usually the Tuesday/Wednesday after expirations.  Someone posted the NYMEX schedule last week.  

    Hudson/Tusca – Yeah, he writes for us too, isn’t that the article on our main page from last night?

    Maybe the calm before the storm Pentax.  

    Oh yeah, OPEC meeting tomorrow and the Saudis have already raised production by close to 1Mbd and the others will want to catch up so almost a certainty that official production numbers are lifted (not that they don’t cheat anyway). 

  35. Unfortunately got rid of my calls a little too early but held off on the puts so far.  Want to see if they can bring the market to 12200.

  36. Pentax – got it, thx. 

    FXE/Toph – if you are in the July $40s still, now is the time to sell for the roll, as that gap looks like it wants to get filled (5/4 to 5/5)  I would do the June $44s at 45c or better.

  37. MoMos back in rally mode..Dangit!

  38. Pharm, gaps on FXE are irrelevant.  It just tracks euro, which trades 24/7 obviously, FXE trades only in NY, hence gaps.  They have no meaning.   But, yes, they can jam it even higher.  Chart is still bullish.

  39. Phil,
    would the RUT be a short if it fails to hold 800?

  40. No QE3/Morx – If it’s real, then it’s market bearish but there’s a good chance that Bernanke and Lockhart will somehow negate Fisher or, MAYBE, Fisher floated a trial balloon to see how the markets would take a no QE3 announcement and the bulls are making a tactical error right now by not ditching the market as the Fed may take this bounce as a sign that it’s OK to end QE3 speculation officially today.  In other words – we’ll have to wait and see how this plays out but I think it’s VERY dangerous to play bullish right now.  


    Puts/Exec – What are you talking about?  

    CU/Jrom – That happened last week too, very strange. 

    TZA/Tusca – I like the Jan spread as a disaster hedge but not a fan of them short-term as we’re not clear on market direction. 

    QID/Yodi – The Nas is not particularly high and was taken down by silly sell-off in AAPL so I don’t like shorting them right now.  I like the Dow for a close short (DIA puts above) and the TZAs for a longer-term protection.  

    TZA/Morx – I’d say next time JRW calls bearish on the RUT you buy the calls first and wait on selling the caller for the turn, that should drop the net if we get the timing right.  They are pretty thinly traded so you have to wait to get your price but if you can get the $35 calls for $10, that’s a good start and then you just have to sell SOMETHING for $7, right?  

    Oil may give us another crack at shorting the $99 line.  Dollar at 73.96.  Dow not quite back to our 12,150 shorting target but we had a nice first run down so no need to force it.

    AAPL/Yod – Yes, my comment is:  That’s pretty cheap!  Also note that it’s holding down the Nasdaq and a glowing report from Piper or someone could rocket them and boost the Nas at some point – maybe at 3:45 while Bernanke is speaking if they time it all properly.  

    Lloyd/Exec – A little harder now with investigators crawling up his ass and no man in the White House to guarantee favorable outcomes for him.

    FAS/$25KP, Lol – Sorry that was selling 40 $24 calls for .75 in the $25KP, not the $25s, which are much cheaper.  

  41. Some scary thoughts from Barry’s site:
    Key passage about Europe:
    In a letter 50 years ago to President John Kennedy, economist John Galbreath wrote, “Politics is not the art of the possible. It consists in choosing between the disastrous and the unpalatable”. This certainly applies to the sovereign debt problems plaguing the European Union. The fundamental problem is that Greece, Ireland, Portugal, and Spain have too much debt, and too little economic growth to service their debt loads. The European banking system could collapse if their banks were forced to acknowledge this reality. German and French banks have $541 billion of exposure to these weak countries. If the ECB allows any restructuring of Greece’s debt, banks in Portugal and Spain will wobble. This event will spill over into Italy, and from there move on to Paris and Berlin. 

  42. Phil
    Can OPEC still move the oil markets significantly? They seem rather fractured.
    Is there a way to play a longer term short on oil? Is USO still the instrument of choice or is there a better ETF for an eventual drop in oil. (say 2-3 months out)

  43. Hi Phil — GMCR — the June short 75 call — take money and run or wait till next week since you mention that you are bearish.  thx

  44. Phil, wrote the Jun 18 $24 puts on FAS yesterday.  Up only about .20 on them (didn’t write them at the very low).  Would you hold till the end of day or dump them now?

  45. The machines are taking over:
    Scary what could happen with another flash crash…. 

  46. EDZ/Terra – There you are getting into the zone where inflation may kick in and lift all markets so I wouldn’t want to be stuck with EDZ long-term if they do get put to you.  It’s just $2, surely there’s something you REALLY want to own that you can sell for $2 so that, if the markets go up, you don’t get anything put to you and it just offsets the loss on EDZ.  WMT Jan $50 puts can be sold for $1.60, KO Nov $62.50 puts are $2, MO Jan $26 puts are $1.50, DIS Jan $37 puts are $2.05, HD Nov $34 puts are $1.95….

    CINF/Tcha – They are expected to have a bad Q and, if they interrupt the dividend, they will sink like a rock so be careful with them.  They go ex-dividend for .40 right after expiration on June 20th selling the June $30 puts for $1 isn’t very but if you can get $2.40 for the Dec $30 puts then that’s not a bad net but plan on being disappointed and go light.  


    AMZN having a big day.  INTC up 2.5%, TM up 2% – crazy strong, VLO whipping back from yesterday’s loss, 


    RUT/Peedle – I’m not a fan of short-term RUT shorts because they get jacked up so fast (and so often).  Long-term, I like TZA because RUT stocks tend not to be international and don’t benefit from a weak Dollar and are hurt by inflation which, one would suppose, would eventually turn up in their earnings.  


    OPEC/DC – Well if they up output by more than 1Mb then yes, speculators will have to be concerned about maintaining the facade while another 7Mb/week pile up somewhere in the World.  I prefer USO because it’s nice and liquid and, also, the stupid rollover decay means the shorts have a significant advantage over the longs.  

    Hopefully that’s it and we can short oil at $99 and the Dow futures at 12,150 on the button!  


  47.  Phil / CINF
    I planned to sell Dec.25s puts, I don’t mind to own them long term for $25 to set up B/W

  48. Phil/Puts,
    Yesterdays 12:25 post you highlighted 10 stocks that would be considered for long term buys. 
    The question is, if you were going to sell puts to acquire these stocks, would you typically go out to the Jan 2012 or go with a shorter duration option.

  49. Biotech news.

    EXEL – Cabozantinib is the star-crossed lead of the Exelixis pipeline. The compound twice abandoned by big pharma partners and now riding high on encouraging phase II data in advanced prostate cancer has been overshadowed by phase III results from likely competitor Alpharadin  (Algeta receives major and unexpected Alpharadin boost, June 6, 2011).

    Emerging evidence of unprecedented activity in shrinking bone metastasis helped drive Exelixis shares to a nine-year high in April – the stock doubled in value in the last six months – so yesterday’s sell off in the wake of the Alpharadin news is perhaps understandable; shares plunged 20% to $8.69. The company’s newly revealed plans to seek approval without demonstrating survival benefit could have also contributed to nervousness. However, regardless of the heightened competition cabozantinib remains a very promising new targeted agent that is being watched closely in numerous tumour types – the recovery in the shares today, to $9.36 in early trade, suggests enthusiasm is likely to return.

    UTHR – There appears to be a bit of a disconnect between United Therapeutics claiming that it had succeed in its holy grail quest to come up with an oral formulation of treprostinil, a drug for pulmonary arterial hypertension that had the same efficacy as its IV drip formulation, and the 6% fall in shares in the group yesterday.

    The fall seemed even stranger given assertions by Martine Rothblatt, chief executive of the Maryland-based group, that not only did he believe that the phase III Freedom-M data for the drug is significant and makes the drug approvable, but that the pill form of Tyvaso could lift group revenues to $2bn.

  50. Too funny – CNBC questioning "whether OPEC has the power to reduce prices at the pump" yet, when OPEC wants to raise prices – CNBC will tell you how you can’t fight the pricing power of the cartel.  Don’t blame OPEC, they are not the crooks manipulating this market.  Has there been a day in the past 40 years that we’ve run out of oil?  That’s OPEC’s job – to make sure the World is adequately supplied.  


    Italy/StJ – I think about equal but both equally scary.  Spain’s problem is their structure allows provinces individually to screw up the process so they are more likely not to play ball with the EU.  

    GMCR/Gucci – Tempting to cash out but I have a strong, fundamental belief in this one.  I think the possibility of seeing $65 makes the risk/reward worthwhile.  

    TZOO having another bad day – good call by someone yesterday.  

    FAS/Rustle – I wouldn’t trust FAS puts for an hour, let alone a day so unless you REALLY want to own FAS at $24 – I’d take the money and run.  

    ETFs/StJ – That’s a good, technical article on ETFs. 


    And wheeeeeee!!! 

    Tuesday’s economic calendar:
    7:45 ICSC Retail Store Sales
    8:55 Redbook Chain Store Sales
    10:00 IBD/TIPP Economic Optimism
    12:30 PM Fed’s Lockhart: Economic Outlook
    1:00 PM Results of $32B, 3-Year Note Auction
    3:00 PM Consumer Credit
    3:45 PM Bernanke: Economic Outlook

    At the open: Dow +0.4% to 12138. S&P +0.47% to 1292. Nasdaq +0.42% to 2714.
    Treasurys: 30-year -0.4%. 10-yr -0.19%. 5-yr -0.07%.
    Commodities: Crude -0.35% to $98.66. Gold -0.26% to $1546.30.
    Currencies: Euro +0.56% vs. dollar. Yen -0.16%. Pound +0.48%.

    10:00 AM On the hour: Dow +0.33%. 10-yr -0.16%. Euro +0.49% vs. dollar. Crude -1.21% to $97.81. Gold -0.26% to $1543.50.

    11:00 AM On the hour: Dow +0.67%. 10-yr -0.3%. Euro +0.72% vs. dollar. Crude -0.4% to $98.61. Gold -0.32% to $1,542.30.

    Job openings dropped to 3.97M open positions in April from 4.07M, the Labor Department reports, and the hiring rate down to 3% from 3.1%. Private-sector hires fell to 3.71M from 3.81M. The economy’s now above the 3.6M low point in October 2009, but a ways from prerecession numbers like 5M positions. 

    A full 38% of borrowers who took out second mortgages areunderwater on the loans, reports CoreLogic, vs. an 18% underwater rate for first mortgages. Borrowers with second mortgages also have deeper levels of negative equity, facing an average of $83K vs. $52K for other borrowers.  Keep in mind these are all loans the banks refuse to mark to market.  Just 1M of those loans going bad is an $80Bn loss waiting in the wings!  

    Ahead of the company’s first post-bankruptcy shareholder meeting, GM CEO Akerson questions the strength of the economy’s recovery, noting the headwinds of weak employment gains and high oil prices. GM’s shares continue to trade with a large weight on top – the Treasury’s 32% stake, which it plans to unload.

    Pep Boys (PBY -16.3%) gets clobbered after Q1 earnings come up short. The company blames the usual suspects – poor weather and higher fuel costs – for crimping spending. 

    Redbook Chain Store Sales: +4.2% Y/Y vs. +3.6% last week. A sales boost from warm weather in the weeks ahead will be crucial for retailers, who otherwise will have to clear out inventory with promotions. 

    ICSC Retail Store Sales: +0.4% W/W, same as last week.+2.5% Y/Y, vs. +2.8% last week. Warmer temperatures boosted demand for seasonal goods, but the Y/Y rate still dropped to one of the lowest readings of the year so far

    German April factory orders bounce hard from March’s unexpected drop, rising 2.8% vs. expectations of a 2.0% increase. Year-over-year, orders rose 10.5%.

    Eurozone April retail sales come in fast, rising 0.9% vs. expectations of 0.3%. Economists warn recent numbers have been affected by this year’s Easter. The euro is solidly higher, +0.6% at $1.4665. 

    The European Commission warns on Spain, saying the country is likely to fall short of its goals of 1.3% economic growth and a budget deficit of 6% of GDP. The EC expects continued deterioration in the labor market, with the unemployment rate expected to peak at around 20.5%.

    "The spin doctors will work on this … in reality, the big thing is just coming up in 2013," says an analyst waving off the latest plan to rescue Greece as little more than pushing the denouement into the next election cycle. "A year ago (bailouts) were illegal," says another, "the (endgame) is for some of these economies to leave."

    No better, really:  "We need drastic measures," says PBOC advisor Zhou Qiren, contending China’s policy of printing yuan with which to mop up excess greenbacks is fueling inflation. "We must reform … (or) our economy will always be in turmoil."

    "The U.S. may find it hard to resist the policy temptation of weakening the dollar abroad," writes Guan Tao, a senior official of China’s SAFE, who warns his country against the risks of excessive dollar holdings. The article, published on a Beijing think-tank website, was later removed. 

    The big rumor today in London is that Tiffany (TIFis being sought by Cartier owner Richemont (CFRUY.PK) for something like $130/share. TIF has been on a tear since sparkling Q4 results on March 21 followed by an equally strong Q1 on May 26. TIF +2.7% premarket to $74.70. 

    Citrix Systems (CTXS) gets cut to Underweight from Neutral at both Jefferies and JPMorgan. Says Jefferies: "…current valuations assume overly optimistic market adoption rates of desktop virtualization technology… we think the intrinsic value of CTXS shares is well below what is implied in the current share price." Shares -2.6%.

    Fitch cuts Nokia’s (NOK) rating to BBB-, the lowest investment-grade, with a negative outlook. Fitch says the long wait for the Windows Phone lineup "places an uncomfortably long phase of pressure on the existing handset business and raises the spectre of further cash flow deterioration and increased leverage metrics beyond the end of 2011."  A negative outlook from their lowest grade?  That can’t be good

  51. Phil -

    If Bernanke was to say something about QE3 today…even hint at it…is there a TBT play that you like?

  52. Nice dip in oil back to $98.50, hopefully we can get to $98 again before stopping out.  


    Puts/Exec – Generally I want at least a 10% discount on the initial net entry so it depends where I see a good net offer.  Short-term, of course, we are bearish so Jan is a little more comfortable and you should choose an amount that you can see rolling down to 2x a lower strike for a more serious entry at 20% off.  Keep in mind we are 0.5% off the bottom and the VIX is down 10% so I really don’t like them as much at the moment as I did yesterday and I think it’s worth being patient for better entries now.  

    EXEL/Pharm – This is getting kind of exciting with all these developments coming fast and furious.  Of course, if they do actually cure cancer, the global economy is completely F’d….

    Speaking of F’d – Check out CMED, another ADR finally realizing it’s proper value.  


  53. TBT/David – Well, if we get QE3, then TBT is a short off $34 but, if not, then it’s a long so it’s a craps roll ahead of the Fedspeak.  

    And did I say Wheeeeeeee recently?  

  54. AAPL down 1.5% and AMZN up 2.2% – It’s like they are on different planets.  


    11:12 AM The Fed buys $1.44B in TIPS, of $7.768B offered by dealers, though Treasurys have stayed down today as stocks have rebounded from recent losses. The 30-year yield +0.03 to 4.29%; 10-year +0.05 to 3.04%; five-year +0.04 to 1.63%. Just two more days and about $15B left on the current Fed purchase schedule; later: three-year note auction.

  55. Just bought 120 DIA 122 puts in 6 lots and got filled on the bid immediately each time.  Don’t know if that’s a good sign.

  56. Phil,
      I have 20 Jun FAS $27 calls that cost $5.23 to this point, near as I can tell. What , if anything, could you suggest to attempt to salvage something from the position?

  57. CSCO down 1.5% !!!!

  58. hers’s our rally so yeah we caught …whole spx decline has aggressive dip buyers on every downleg…that price action isn’t healthy in my opinion…shows too much underlying bullish sentiment…we should get maybe three days…i don’t could stretch longer dailies are turning up..i am not going to play this bounce as i said last night i will add gradullay to short tf spu and nazz shorts..i am getting crushed in my euro short fyi

  59. chine ntes down big again

  60. CSCO has just hit a decades long diagonal support @ around $15.75 FWIW.

  61. DIA/Rustle – That my friend, is the pleasure of making your entires at the top of a channel (when people think it’s a break-out) instead of waiting for a turn and chasing.  

    FAS/Kevin – If you’ve been selling to get to this point and total up all the sales, you’ll see that those calls actually cost almost net zero, the trick is salvaging more than $1 from them and we just keep rolling and repositioning until we find a bottom – maybe this evening if The Bernank blesses the markets.  With just 20, I would sell 20 of the weekly $24 calls for ,75 and roll the July $27s down to the July $25s for .70 and double down at $1.38 for net $3.28 on 40 July $25s with the 20 short weekly $24s to work off.  Doesn’t that sound better than sitting in the $27s at a $4.60 loss?  


    The euro continues to move ahead, up 7 handles in 2 weeks and flirting with $1.47 for the first time since dovish comments following the ECB’s May meeting sent it plunging downwards. The ECB meets again on Thursday and is expected to signal another rate hike to come in July.FXE +0.7%.

    Not playing the bounce/Angel – Good man!  Any rally based on killing the Dollar at this level, without CONFIRMATION of QE3 (ie. the Fed guaranteeing it will slaughter the Dollar for another 6 months) is not going to last.  

    Notice CNBC is pumping that "Greece is fixed" crap over and over again and now Obama and Merkel are going to tell us Greece is fixed too so stay on your toes!  


  62. Phil/Rolling,
    I see members constantly talking about rolling options but I don’t understand how that works.  When you have some time can you please explain what you mean by your 11:16 post.

  63. AFL..   any thoughts at theses levels??,,  down 11 points  in a month to 45 ish…. almost at it’s lows from last August..  worth a play for a bounce?  ty

  64. between buying and selling dia puts yesterday then buying the dia calls then selling the calls today and buying the puts back while getting out of oil today to get back in a little later, my head is spinning but in a good way.  And also took profits on FAS puts (thanks for advice Phil, perfect timing in your response also even though that wasn’t planned), and trading TZA.  How the average guy or broker tries to trade without all the info constantly on the macro and micro events and the moves on currencies and so forth boggles the mind.  That’s why most are not successful and try to stick someone in a fund.

  65.  Not that y’all can’t read Bloomberg for yourselves, but there’s been some betting on shipping mentioned on this site, and John Frederiksen of Frontline is betting on a collapse.

  66. Pawlenty Calls for Deep Tax Cuts - Pawlenty proposed big reductions in the corporate and individual tax rates while calling for deep spending cuts that could see the federal government abandon its role delivering  

    SEC Suspends 17 ‘Penny Stocks’

    U.N. Says Food Prices to Stay High

    Portugal Winner Vows to Act Fast

    Portugal’s prime minister-elect said he will immediately cut public spending and start privatizing companies to meet requirements under the country’s €78 billion 

    U.K. Retail Sales Slump

    Former Credit Suisse Staff Indicted

  67. Later folks.  Buying FXE July 145 Ps

  68. CSCO Jan 12 P at $1.08 for a net entry of $14.60 on a company that claims internet traffic will quadruple by 2015.  CSCO is still the largest provider by far of infrastructure equipment. 

  69. button / CSCO — that’s more like a 15 year trend (back to April ’97) and maybe longer. TOS has the data but I can’t appear to draw a trend line on their charts. I select the trendline tool (I get the pencil pointer) but when I try to drag between points, it just zooms the chart? Anyone know what I’m doing wrong?

  70. rain / CSCO yeah its tough to draw that long of a line and be accurate when the stock was once at $82.  I might be off by $.20 – $.25 but it is close if not hitting the diagonal.

  71. Deep Tax Cuts……..Deep spending cuts……Yawwwwwwn………these politicians are so full of shit.
    I’m surprised they he didn’t say…..more money for education….better care for the elderly…..job program for the unemployed……immigration reform…..cleaner water…….safer communities….yada yada yada…….all in the same breath.

  72. Rolling/Exec – There is a whole post on it somewhere, remind me later and I’ll dig up a link unless someone already has or maybe it’s in the Wiki by now.  

    AFL/Topher – I really like them but I’d wait for the market to sort itself out first.  Hard to say which insurance companies were hardest hit by Japan and the various floods.  

    Brokers/Rustle – You are right, if you intend to actively trade you have to REALLY actively trade, as in make a commitment to immersing yourself in the markets otherwise how will you know when the currents are shifting.  This is what goes wrong with Cramer and countless other analysts – you can be the best at what you do but once you start spending your trading hours shaking peoples hands and going to lunch meetings and sitting in make-up chairs to prepare for your TV appearance then you are no longer doing what you used to do when you were successful.  The problem is all these guys develop huge egos and start believing they don’t need to do the work anymore and, since guessing is 50/50 – there are all sorts of ways to rationalize performance that falls from 60% accurate to 50% even though 60% is what makes money and 50% is anyone’s coin flip.   You have to work really hard for that extra 10%…

    Shipping/ZZ – I saw that but at the same time the BDI is making a nice comeback.  

    73.985 – Obama and Merkel had no official statement on EU situation but at least someone asked a question on it.  

    CSCO/Button – I like that trade.  Look at what AAPL just rolled out – cloud storage for half a Billion devices.  You would think that will boost traffic a bit..

    Irish Finance Minister Noonan insists in a "worst case scenario," Ireland has enough access to cash to last until mid-2013. Was it around Halloween 2010 when Ireland said it had enough cash to get through to 2012, only to require a bailout within weeks?

    In more of the murmur of Fedspeak presaging Bernanke’s afternoon speech, Chicago Fed’s Charles Evans responds to weak numbers by trimming his growth forecast from 4%: to 3-3.25% for 2011, and 3.5-3.75% in 2012. He stops short of calling for new Fed action, though. Disinflationary forces "have largely been taken off the table."

    $98.25 on oil!  

    Back to testing 800 on the RUT with the Dollar at 73.985.  

  73. rain/ TOS trendline
    left click where you want to start the line and then move your mouse, click again when finished

  74. FAS – taking into account short sales – may personal result is not about zero at all. It’s close to $2 without fees (and about $3 – when I add fees – we did a lot of rolls).
    I didn’t always follow your exact rolls though.
    But before may be somebody can go to 25K and track it down?

  75. Phil,
      The problem is that due to circumstances, I haven’t been selling, so my cost on the June (not July) FAS $27 calls is probably actually around $5.23. That being the case, would the sale of the current week $24 calls to finance a $1.25 roll to the $25 July calls still make sense? Double down as well?

  76. Can’t believe OPEN is 76.  Only 50 more points to go to be fairly valued.

  77. have to be VERY careful with large-cap tech stocks…not to get stuck in value traps….rarely is a large-cap tech a good buy and hold…aapl is exception due to small market penatration and ability to create new markets on top of crazy low valuation…just my take

  78. Phil--what do you think of  buying puts  on the Chinese internet cos like RENN, VNET etc? If so do do you think the way to go is put spreads?

  79. aapl…macs small % of pcs…iphones still have room to grow with smartphone growth…ipads will be huge growth driver adopting ipad at accelerating rate, which is trojan horse…then new products like interactive tvs, gaming devices, etc…i wouldn’t be surprised if somehow they get built into backs of car seats, etc.

  80.  Angel:  Assuming we have a market drop at some point, is there a "must buy" price you would put on AAPL?

  81. Interesting Apple-Intel fodder:
    This relates to the chips used by Apple in the iPad and such.
    There is some explanation on Intel roadmap and I have to say that right now I am quite bullish on Intel for the long run. I was worried that they had missed the tablet wave a while back, but they are demonstrating some new interesting technologies. Same on the desktop and server space! The only problem with Intel is that they don’t trade like a tech company anymore, but like a utility! They get no respect!

  82. Hi, pstas,
    How are you doing with SPX strangles?  I saw you had a comment last week asking for Peter D.  Did he reply?  I have the same question.  How do you play SPX strangles in such a low VIX market?
    I’ve been really busy on many things lately.  So, I haven’t been able to post for quite a while.

  83. Phil, exec – I think I added the rolling section to the Wiki. If not please let me know and I will update it tonight.

  84. This could end up as a very nasty negotiation:
    In essence, European banks hold the money bag for the PIGS but US institutions hold the CDS bag. The difference between a soft and hard restructuring is who pays the piper… That will  not end well!

  85. Nicha,
    I looked earlier and couldn’t find it.

  86. Cwan- strangles- No, did not see anything from Peter D- he is probably on the same beach with JRW- both counting up their profits. :)
    I have only been selling 1/2 my usual allocation of shorts on SPX waiting for the pop in the VIX which doesn’t come. I have has good success in selling one or two short strangles on individual stocks (CMG: PCLN: OPEN) but as you know that is a riskier proposition. These were more lucrative as I sold the call side when they were topping out. Some of these are still attractive but not as much.
    I have done very well with Income Trader’s Iron Condors which makes up for the poor premiums available on the SPX strangles.
    Still would like to hear from Peter on what he is up to. What have you been doing on strangles, etc.?

  87. Same breath/Exec – Don’t be silly, he’s a Republican!  

    Well that little press conference didn’t seem to help things.  Oil still going down but indexes are faking their way back up so yet another crack at the Dow futures shorts at 12,150.  Watch the RUT of course but, when they break below 800, it’s safe to short.


    FAS/LOL – That’s a lot of fees, it’s very important to use a broker that gives you a flat or cheap way to sell contracts if possible.  

    FAS/Kevin – If you intend to stick with them at all you need to make that roll but if you are not going to continue to sell and roll – it doesn’t make sense to do so now.  

    OPEN/Angel – I’m not sure I’d pay $26…  On CSCO, I look at them from a call-selling perspective.  If I can be in CSCO for net $15ish and I can sell a July $16 call for .37 then I’m looking at about $2 worth of sales a year for a 13% return plus 1.5% interest and it’s a nice little long-term position.  Add to that the sale of the 2013 $15 puts for $2 if I’m still willing to DD and now my 18 month return on $15 is $3 from selling calls, $2 from selling puts and .36 in dividend is $5.36 against $15 for 35% in 18 months and I can do that on $10-50M worth of stock with little difficulty, laying off up to 33,000 call sales a month.  You let me know where you would allocate $25M (as I have to allow for the DD) that’s going to perform better and we’ll compare them over the next year…

    Yes – $98 oil – Mission accomplished! 

    73.97 so don’t blame the Dollar for oil’s weakness today.  

    RENN/Savi – The problem is they don’t all suck, just that you never know if yours is good or not.  Ask me on the weekend when I have time to look them over better but keep in mind I simply stay away from Chinese stocks – I don’t bother evaluating which ones are worse than the others for the most part.  

    I still like selling the AAPL 2013 $270 puts for $24 for a net $246 entry.  That money can be used to fund all kinds of things and has a net $26 margin requirement so a nice 92% return on margin over 19 months.  If you want to play AAPL bullish off of that, you can take the 2013 $325/400 bull call spread at $29.50 and you’re in the $75 spread for net $5.50 that’s over 100% in the money and the worst thing that can happen is you own AAPL for net $251.50 (24% off).  Upside is a net $69.50 profit (up 1,263% on cash!).  

    INTC/StJ – Another one worth of a large, long-term allocation.  

    Rolling/Nicha – Thanks!  

    CDS/StJ – Scary as always.  I’m trying to think positive today so I don’t want to dwell. 

    12:00 PM On the hour: Dow +0.47%. 10-yr -0.24%. Euro +0.66% vs. dollar. Crude -0.8% to $98.26. Gold -0.49% to $1,539.60. 

    "When parliament is blackmailed, then democracy is blackmailed," says a leading member of Greek PM Papandreou’s own party, channeling French revolutionary Mirabeau as legislators are expected to pass, en masse, measures necessary to receive another bailout.

    Handelsblatt Reports Second Greek Bailout Package to be Delayed.

    And with just two days left on the POMO schedule, the Fed again starts showing a weapon in its vest for draining liquidity, announcing small reverse repurchases to start tomorrow, though it expects "no material impact" on reserves or market rates at this size. This one’s just for the new counterparties, 32 money market funds.

    The greenback bounces off record lows vs. the franc following benign CPI data from Switzerland. With inflation rising at a 0.4% Y/Y pace and the franc at nosebleed levels, analysts expect the SNB to remain on hold, despite recent faint hawkish grumblings. FXF -0.2%.

    8 Reasons Why Bank Stocks Are Getting Crushed Again.

    China’s central bank may raise interest rates by 25 basis points this weekend and may increase banks’ reserve requirement ratios by 50 basis points next week after inflation, investment and some of the other economic indicators for May are released, citing analysts.

    In the most up-to-date numbers that OPEC ministers will consider before their production meeting tomorrow, the EIA says it still expects tightening in oil markets through 2012, due in part to slowing non-OPEC production. It’s a bit of a surprise to some observers who expected a soft patch. NYMEX crude futures -0.94% to $98.08.

    Saudis Raise Oil Production to Curb PricesSaudi Arabia has been quietly increasing its crude oil production ahead of Wednesday’s meeting of the Opec oil cartel, in a sign that Riyadh is trying to bring oil prices down to more comfortable levels for consumers in the US, Europe and China. The kingdom boosted production in May by about 200,000 barrels a day and it is on course to increase it by another 200,000-300,000 b/d this month, taking its output above the critical 9m b/d level for the first time since mid-2008.

    Three lunchtime reads:
    1) What to listen for in Bernanke’s speech
    2) Sorting out Apple’s valuation metrics
    3) Five down weeks stir crash whispers

  88. rain – thanks.

    I hope all you guys are checking the Wiki. If there is something wrong please correct it. We gotta make this a success.

  89. RALLY I have concerns developing… I’m not seeing the volume buildup that one normally sees at decent bottoms….i’ll get a chart together for you.
    AAPL/ rememebr i am a futres trader who does trade equities but i do money management placement for most equities exposure.. i believe it will be largest company in world…no idea on entry …considering i think a market/economy collapse is coming unless we dramatically change our maybe you can buy it at 90 one day

  90. Would like to see if SODA can break 60, think that might be a good spot to write calls against them.  Getting close to short term overbought.

  91. Tx Phil--will do

  92. FXE - if you like Pharm’s FXE puts idea, look also at EUO calls, the JUL 17s are pretty cheap.

  93. Phil--do you really think the Fed wants to drain liquidity?

  94. Good morning,


    I will miss your contributions !!

    Here is my chart from last week:

    Here it is on SPY:

    AND we are OVERSOLD !! So, I’m taking half of my puts from last month off the table (not to be greedy as they are almost triples) !!

    Just in case the following happens (from Gatorbay) :

    Good hunting;now I have to make a phone call !!  8-)

  95. CLOSED/PHIL…what hondelling already!!?
    this is stupid on many different levels

  96. BTW, it appears that QE 3 will take the form of "The Marshall Plan" 2 !!  We get to save Europe AGAIN, AND further devalue the dollar at the same time, BRILLIANT !!

  97. OIL/PETER O’TOOLE.. i think that opec raising production quotas is BIG change in strategy for them and market missing it so far….in the past…they would use weak dollar as excuse to keep production down…i think they are really worried about global demand….already

  98. CLARIFIY… meaning i think they realize demand destruction is large at current prices and they want lower prices to stabilize demand and global economies.

  99. look at that action in tech index at 12:45..right when i was seeing signs of dam breaking…we just soar for no apparent reason…classic msb.

  100. Phil / Bernanke     Lloyd must already has a copy of the speech.  So, based  on the mkt movement Ben must be going to say "If the employment trend continues to weaken, then further monetary support may become necessary in the absence of new fiscal inititiatives". ie "I’m not going to tolerate a Depression on my watch".  Play for a bounce?

  101. $90/Angel – Sign me up for a 20% allocation then….

    SODA/Rustle – That would be nice if we can get it.  July $60 calls are already fetching $4 so figure $5 would be a nice sale but you can sell the current $6s for $2 on a small bump (now $1.70) so I’d start with the short June $60s at $2, let the premium die and then roll for the next $3-5 .  

    SODA also works as a backspread, selling 5 July $60s for $4 ($2,000) and buying 3 Oct $70s for $4.50 ($1,350) for a net $650 credit and, of course, if they pop $60, you buy another long call and another at $62.50 to even it out.  

    Fed/Jabob – Yes, banks don’t want inflation.  They are playing a very tricky game of dumping $2Tn into the money supply to goose the markets and now they need to pull at least half of it before it leaks out into the economy and starts to cause massive inflation.  When a bank lends you $200,000 for a home at 6%, they expect you to pay them about $420,000 back over 30 years.  That doesn’t do them any good at all if we have a decade of 7% inflation and the salary of the clerk who filed your loan papers goes up from $30,000 to $60,000, right?  Inflation is the dreaded enemy of bankers, they only like it while they are in debt to someone else – as soon as they have money in the vault, they want it back to zero asap so that, when you do give them $420,000 back, they can afford 14 secretaries instead of 6 – that’s how the rich get richer while the poor just work for them. 

    Caution is a good plan, JRW.  

    GM/Angel – That makes sense, he wants to force people to give up old cars.  No one is buying cars, they are riding whatever they have into the ground.  Raising gas prices will help push people to new cars (worked in Europe and Japan).  I have been pushing for a $1 a gallon gas tax since gas was $1.  That would put (assuming the government didn’t swipe it) about $300Bn a year into alt energy research.  If we had done that, or even Al Gore’s proposed .25 tax back in 1990, we’d all be driving Back to the Future fusion-powered cars by now…

    Marshall Plan/JRW – That whole plan cost us about $25Bn over a decade, which was about 1% of our GDP per year at the time – these guys need at least a Trillion!  

    Oil/Angel – It will be a slow grind down but look at oil ($98.20) despite the 73.97 Dollar.  It’s going down…  They may want to stabilize demand but, like 2008, probably too little too late.  

    Bounce/Tusca – That’s what’s holding UP the market now – hope springs eternal…

    1:00 PM On the hour: Dow +0.55%. 10-yr -0.2%. Euro +0.69% vs. dollar. Crude -0.65% to $98.37. Gold -0.25% to $1,543.30

    The Treasury sells $32B in three-year notes at 0.765% (.pdf). Bid-to-cover ratio of 3.28, vs. a recent 3.18; indirect bidders take 35.6%, vs. a recent 32.1%. Direct bidders take 9.2%, vs. a recent 11.7%.

    Treasurys get no boost after an auction of three-year notes at the lowest yield in seven months. The 30-year yield +0.04 to 4.3%; 10-year +0.05 to 3.04%; five-year +0.03 to 1.62%.

    Of China’s barely noticed $463B bailout of its local governments last week, Dylan Grice notes it’s 1.5X the size of TARP when adjusted for GDP.  "The world should be worried … suppression buys only short-run stability at the cost of long-run fragility

    China ends certain subsidies to domestic wind turbine makers in response to D.C.’s filing of a complaint with the WTO last December. "Subsidies requiring the use of local content are particularly harmful and are expressly prohibited under WTO rules," says U.S. Trade Rep Kirk.

    An OPEC output hike tomorrow moves from split-decision territory to more of a sure thing after its committee calls for a boost of 1-1.5M barrels per day. The next challenge: where the increase comes from, with everyone but Saudi Arabia, Kuwait and the UAE at capacity. And Iraq’s still against an increase. Crude -0.6%

  102. Lockhart very doveish – the opposite of Fisher:

    CHARLOTTE, NC (MNI) – Atlanta Federal Reserve Bank President Dennis Lockhart Tuesday said he would be reluctant to back a tightening of monetary policy in America’s uncertain economic climate unless it became "absolutely necessary" to curb inflation.

    Lockhart, who will be voting on the Fed’s policymaking Federal Open Market Committee next year, said he would support a monetary tightening if the recent more rapid pace of inflation persists, but said that is not likely.

    Meanwhile, he said the economy is in "quite ambiguous" circumstances in wake of a May employment report which he called "clearly disappointing."

    At the same, though, he expressed confidence in the economy’s longer term prognosis and reminded his luncheon audience that recoveries are rarely smooth.

    Lockhart also came out for an explicit inflation target to aid Fed communication of its objectives in remarks prepared for delivery to the Charlotte Economics Club.

    After observing that overall inflation has been running at a 5% annualized rate, Lockhart said, "I would not hesitate to support an exit from our current policy stance if I believed that the headline inflation number of the past six months is really indicative of the underlying trend inflation rate."

    But he said, "I don’t believe this to be the case."

    "And I am wary of tightening monetary policy in the face of quite ambiguous economic circumstances unless doing so is absolutely necessary to meet the FOMC’s price stability mandate," he added.

  103. Phil / Fed — I thought the whole idea of flooding the market with cash was to shore up the banks and make them solvent. Won’t the cash just staty on the banks books to keep from having another failure? I.e. deleverage?

  104. RCL is also very weak.  Does anyone follow them?  Wonder what the reason is for them going down besides possibly bad earnings for the quarter.

  105. SODA flying, must be because it’s going to get into the 90′s in NJ over the next few days.  Plenty of thirsty people wanting to spend the time to make their own crappy tasting soda to drink.

  106. GE Jan $19 puts can be sold for $1.92 and net’s just $3.70 in margin.  

    Banks/Rain – Yes, but the banks have been using that free money to backfill their holes for 2 years now.  Once they are done with that it’s critical to get the cash back before some of the banks get greedy and start lending it out to people who might put it to work in the economy and create jobs or build something of lasting value…  That’s why they only lend through their "primary dealers" – you want to keep a scam like this close-knit in a small group so no one cracks and messes it up for the rest.    You know, normal mob stuff.  

    RCL/Rustle – They use a lot of fuel and they get paid mainly in US Dollars but have to buy supplies overseas – bad combination.  

    From Bespoke:  

    Keep in mind that those percentages were MUCH higher well before we stopped falling (same arrows, different interpretation).  

  107. Hi, Pstas,
    Just like you, I’ve been reducing my SPX strangles to 1/2 or even 1/3 of my usual volume.  On the put side, I like to sell weeklies.  The premiums are relatively high.  And they expire in a week.  So, I got a little more fun and not get bored to death.  On the call side, I have to sell front month or next month calls in order to keep the strikes far away from market.
    I refrain from playing those hot stocks like PCLN.  Sometimes I can’t log in at all (due to other obligations).  Those hot stocks jump up and down way too much for me to manage.

  108. Soda/Rustle – It’s up because someone sold a bunch of $60 short calls and now they are trying to make them regret it, that’s all.  

  109. TBT dropping hard.

  110.  Does it make sense to sell OIH on falling oil?  It’s up over a point.

  111.  Odd activity on XLF July 16 Calls: 155,000 calls traded today

  112. @ Phil, do you still see todays rally as BS? havent been watching the news, no sure if the fed gave us some hints of a sort of QE3…. as of now we stand on the days highs… do you still like the dia $123 puts you recommended on the morning? thanks!

  113. Please stop slamming SODA all those who didn’t get any. It’s been……..

  114. Soda/Phil
    Wasn’t me with the calls yet, lol.
    I know they paid for oil at lower prices for a year on a fixed contract.

  115. Dollar 73.91, oil back to $99 for a another crack at shorting.  Getting a little dangerous as we get closer to Bernanke.  

    OIH/ZZ – Sure, if oil stays low then loss worthwhile to explore.  Also, OPEC upping capacity can cut into business a bit so I’d feel good about shorting from $150 on OIH.  

    XLF/Aug – Maybe people taking a pot-shot on Bernanke giving some good news?  

    Rally/Asaenz – It’s based on the Dollar dropping from 74.44 to 73.90 – so a 0.5% market pop on a 0.6% Dollar drop.  You could say it isn’t BS, just the PRICE of stocks rising to reflect the PRICE of the money they are exchanged for dropping today but that means EVERYTHING you see on charts, etc is meaningless as there has been no real improvement at all in the lines if you take out the effect of the falling Dollar – that is what I choose to call BS.  So yes, I still like the DIA 6/30 $120 puts, now $1.30.  The $123 puts from this morning were the puts we had sold which I wanted to buy back.  

  116. Interesting article about tax rates and health care costs as % of GDP:

  117. My guess is market is going up on buy on the rumor/sell on the news mentality.  I still don’t think they can do a full QE3.  We’ve seen the impact it’s had on inflation and oil would be more than $100 a barrel for another few months which would guarantee a crippling of the economy.  Not too mention inflation in other areas, all without wage inflation or increase in unemployment.

  118. I don’t think the May sell-off and the weakness of economic reports are significant enough to cause the Fed to change any of their plans or outlook, other than perhaps lowering their expectation for H2 growth.   Any expectation that Bernanke or the others will indicate their openess to further easing will be dashed, in my view.  Actually, I think they wouldn’t mind commodities to drop (stronger $) as long as the market doesn’t enter "crisis" mode again.  
    Of course, the Fed  doesn’t expect an organic cause for a crisis mode, or else they wouldn’t cease easing.  The wild card, extrinsically, is the collapse of the euro due to sovereign debt.  Amazing that economists are expecting trichet to raise rates in their July meeting, given the impact on their sick PIIGS economies.   More ammunition for a weak dollar, although I would think traders would have one foot in the euro exit door should the next rumour of PIIGS trouble surface.

  119. Phil, 
    I haven’t made the FAS roll as I was on traveling this AM. Still close at .70 and .40 for the roll down. You still think we are heading down? or shoud I stay with the 26′s naked for Bernanke’s (supposed pump)?

  120. Hitting $1.47 on Euro, $1.645 on Pound and 80.12 Yen to the Dollar – all stressing their limits to get the Dollar down to 70.90 so I’m thinking this might be it unless Ben gives us a really good reason to dump them further (which would just screw the BOJ over completely).  

    SODA – This is why we ALWAYS scale in.  If you start with a 1/4 position at $2 and add another 1/4 at $2.70 (after the first spike) then you are in 2x at $2.35 avg and then it does the next leg to $3.70 and you DD again and now 4x at $3 avg and then they drop to $3 and you are 1/2 out and back to 2x (or 1x) at net $3, way better off than you started.  If you EXPECT that they will try to force you out, you can use it to your advantage but the key is to never overcommit.  

    RCL/Rustle – Yes but what about next year.  Investors are always looking forward.

    Health Care/StJ – Good point but they don’t mention the fact that their pensions are also funded or that there are no deductables and stuff once you actually do get sick.  It’s lovely to pay 4.7% less tax + healthcare but that’s not true for the bottom 90%, who pay a highly disproportionate burden of US taxes, nor does it do you any good when your insurance "runs out" and they drain your life savings for whatever the private insurance didn’t cover on page 37, paragraph 5…  Oh yes, how about college costing the average family $250,000 less?  How many years of 4% is that?  

    Oil Rustle – Look at it fly into the NYMEX close – they are really counting on Ben to save them.  

    The Greek bailout is sure to be a success if success is defined as "delaying an eventual solution … until 2012 or 2013," says George Magnus of UBS. By doing so, however, "the restructuring, when it happens, is going to be even messier."

    The Association of American Railroads reports carload traffic in May increased 0.5% Y/Y, and intermodal traffic gained 7.5% from the year-ago period. Intermodal traffic (using intermodal or shipping containers) is approaching its 2006 peak, but carload traffic (commodities and autos) is only about halfway back. (charts)

  121. @Phil, if oil keeps going up, should we buy June USO $40 Puts?? lets say at about $1.15 (currently at $1.23) Thanks!

  122. I am salivating at the thought of buying back oil again at possibly a cheaper entry than before.

  123. meant shorting not buying

  124. Phil based on GMCR moving down and your feeling they are heading towards 65 would you roll down the short (10) June 80 Calls to July 75′s (sold for $2.10) ? to gain 5 for $1.50 (I am long (20) July 70 Puts (net $1.15) and short (7) 72.50 (Sold for $6.00) June Calls). 
    So having the 3 unequal positions is giving me a bit of a hard time calculating what’s the best way to go here…
    I think you guys have almost the same but sold the 70 Calls, 

  125. FAS/$25KP, Amatta – What if it’s a dump?  I thought this was the best risk/reward move.  You may want to put a stop on 20 of the short calls at .85, in case we do pop it makes the short calls more manageable but if you can roll 8,000 option contracts down $1 for $400 – isn’t that probably a good thing.  Keep in mind we have 5 weeks to roll the caller if XLF does head up.  

    As I’ve been saying today, this is a "rally" based on the Dollar going lower.  The key premise is that something may happen in either Europe or Japan to make the Dollar look stronger by comparison.  Also, if Ben does not PROMISE a SPECIFIC QE3 program – then why would the Dollar get weaker.  Once the future supply of Dollars becomes fixed, they begin to go up in value.  

    Meanwhile, they did just break below 73.90 on the Dollar and oil flew up to $99.65.  I don’t see how Ben can sit there, with $99.65 oil, and make a speech that will be directly responsible for pushing oil back over $100 – unless his plan is to make sure everyone hates the Fed….

    USO/Asaenz – Yes, good call, now that we got that bonus move up, we can go back to USO (as well as shorting the Futures below the $99.50 line).  We have to assume Ben can pop us back to $100.60 though so the July $38 puts at .97 with a plan to either DD or roll, depending on how high oil pops between now and tomorrow’s inventories.  If oil doesn’t pop, then they have a nice .35 delta so you should gain about 10% for each $1 drop in oil below $99.60. 

  126. Phil/ PCLN
    Where are we with our PCLN puts? any change in initial thoughts?

  127. JRW, thanks – my subscription ends in a few week. Just getting to the point of diminishing returns – been on here since the beginning. JRW, i will miss your charts and market calls. thanks a bunch.

  128.  And wheeeee!

  129. Phil:
    Just wondering why the finviz has a lower value of the dollar than the ones you quoted here?

  130. Phil/Banks
    With all the foreclosure activity and and increasing bad inventory of new foreclosures….. how much of the "hole" in the banks books have been filled where they could begin "getting the back"….. "Normal Mob Stuff"…. Priceless…

  131. if we can’t transcend intraday noise of the written variety then trading is a bad amalgamation of delicate sensibilities and intolerence sorry but suck it up and renew!..this board has its issues but it has the rest of you and isnt the whole supposed to be greater than the whatever the cliche is?

  132. ricktao/dollar
    My exact thought all day… today….    /

  133. CHK/Phil – candidate for offsetting put sales (strike/month?) or wait until energy volatility settles out?

  134.  Dollar: price depends on what futures contract you are looking at. The June expiry is about 73.53, the Sept contract is at 73.90

  135. Anybody else get called out on FTR? Every time I load up they call it away. :)

  136. GMCR/Amatta – Well we don’t know for sure that’s going to happen so if you SOLD 10 June $80 calls that seems pretty safe so it’s kind of a bird in the hand thing and if you have 20 puts – you should just be happy if they hit and leave it alone.  The same can be said about the short June calls – you sold them for $6 and they are now $5 so keep a trailing .50 stop on them to lock in a 10% gain at least or take 4 off at $5 and now you’ve sold 3 for net $7.33 and you can put a stop at $6 ($1 trailing) to lock in a $400 gain at least.  

    PCLN/Clarence – Which puts?  We’ve had several trade ideas on them in the past few weeks.  

    Finviz/Rick – I only quote the contract on TOS’s screen which is the /DX contract.  You would have to check with their technical support issues or the people at Finviz but, frankly, whatever the number is – it starts at X and moves to Y so I don’t care much what numbers X and Y are, I just care about the move in the Dollar relative to the market.  

    Banks/Acobra – I figured they’d build a huge inventory of foreclosed properties and then kick off housing inflation but it seems that all are giving up on housing coming back in the first half of this decade at least.  So now the banks are back to fighting inflation and I’m sure some Fed or Government program will take those foreclosed properties off their hands at face value and then – PROBLEM SOLVED!  

    UN/Rain – They said that yesterday.  Totally ignored, which shows you how de-powered the UN is these days.  

    CHK/Brook – I love them long-term.  Shorting the Jan $28 puts pays $2.40 for a net $25.60 entry – that’s a great way to raise cash. 

    3:00 PM On the hour: Dow +0.42%. 10-yr -0.01%. Euro +0.76% vs. dollar. Crude +0.36% to $99.37. Gold -0.11% to $1545.50

    Goldman Sachs sees an end to the rally in Treasurys, saying that 10-year yields have stabilized near 3% on both sides of the Atlantic and below the bank’s measures of "fair value." Sticking with its year-end call of a 3.75% yield on the 10-year, Goldman believes the rally is near its end, “barring a meaningful downgrade to the 2012-13 growth outlook.

    Waiting for the Fed:

  137. Did I say WHEEEEEEE lately?  

    FTR/Willsons – That’s because today is dividend day.  As long as you are selling .10 in premium, may as well do it 10 or 20 times…

  138. Health Care / Phil – Not entirely true (in many countries). Retirement funds are running out of money in Europe too and they will soon have to face either a) higher withdrawal or b) lower payout – pick your poison. Demographics are not their friends there in the long run and this will have a serious impact on these economies (not factored in all our current projections). The retirement fund in France is supposed to run out around 2020 much sooner than Social Security here.
    Regarding health care, in France, many prescriptions are not reimbursed depending on perceived efficiency and as for doctors, if they decide to go out of the state system (which more do now as they want more money), they can charge what they want and you get reimbursed only the standard fare. Same for dentist and others. My parents are paying a lot of money to get "better" devices (dental or hearing aids for example). A lot of businesses now offer supplemental insurance for their employees and subsidize them based on income to make up the difference. One of my friends who is an executive in a French company in Paris told me that he pays 1000 euros per month for the supplemental insurance for his family. It’s a great plan that covers everything not picked up by the state system (even bottles of aspiring for cryin’ out loud)…  but not cheap. In Spain, where my sister lives, many people also get private insurance when they can as you get better services and go to private clinics for example. So, I would argue that their systems are better in general as they cover more people, but it  is not a bed of roses either.  

  139. FTR has been great. Buy it, sell calls/puts as far out as you can. Wash rinse repeat 4 times a year
    Thanks for recommending them, Phil

  140. France/StJ – 2020?  That won’t be good!  I think the French will have a bit more of a sense of entitlement than US citizens although they haven’t actually tried to take anything away from us yet either.  1,000 Euros a month better be some program – that’s about what we pay without the Government backstopping the basics.  I have family in the UK, they don’t seem to have trouble with the health system there but I imagine they will all fall apart under the cost pressures over time if something isn’t done about it.  

    FTR/Willsons – Yes, once you get with the program on those dividend payers, it’s a nice little way to put some cash to work in your portfolio.  

    6 Minutes to Bernanke….  


  141. Phil, 
    GMCR, sorry the 80′s are PUTS not calls that I sold… (as per the 25K)

  142.  Phil / FTR
    will you recommend to buy them now? I would like to add to my position I have 500 shares @8.0 and sold 5x Jan13 $7.5s puts and calls

  143. GMCR/Amatta – So how about giving me what positions you do have and what the basis is on each? 

    FTR/Tcha – Sure, they are great at $8.05, already reflecting ex-dividend and a good time to sell long puts (I would wait on selling calls).  

    Bernanke Speech:

    The U.S. Economic Outlook


    I would like to thank the organizers for inviting me to participate once again in the International Monetary Conference. I will begin with a brief update on the outlook for the U.S. economy, then discuss recent developments in global commodity markets that are significantly affecting both the U.S. and world economies, and conclude with some thoughts on the prospects for monetary policy.

    The Outlook for Growth
    U.S. economic growth so far this year looks to have been somewhat slower than expected. Aggregate output increased at only 1.8 percent at an annual rate in the first quarter, and supply chain disruptions associated with the earthquake and tsunami in Japan are hampering economic activity this quarter. A number of indicators also suggest some loss of momentum in the labor market in recent weeks. We are, of course, monitoring these developments. That said, with the effects of the Japanese disaster on manufacturing output likely to dissipate in coming months, and with some moderation in gasoline prices in prospect, growth seems likely to pick up somewhat in the second half of the year. Overall, the economic recovery appears to be continuing at a moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers.

    As is often the case, the ability and willingness of households to spend will be an important determinant of the pace at which the economy expands in coming quarters. A range of positive and negative forces is currently influencing both household finances and attitudes. On the positive side, household incomes have been boosted by the net improvement in job market conditions since earlier this year as well as from the reduction in payroll taxes that the Congress passed in December. Increases in household wealth--largely reflecting gains in equity values--and lower debt burdens have also increased consumers’ willingness to spend. On the negative side, households are facing some significant headwinds, including increases in food and energy prices, declining home values, continued tightness in some credit markets, and still-high unemployment, all of which have taken a toll on consumer confidence.

    Developments in the labor market will be of particular importance in setting the course for household spending. As you know, the jobs situation remains far from normal. For example, aggregate hours of production workers--a comprehensive measure of labor input that reflects the extent of part-time employment and opportunities for overtime as well as the number of people employed--fell, remarkably, by nearly 10 percent from the beginning of the recent recession through October 2009. Although hours of work have increased during the expansion, this measure still remains about 6-1/2 percent below its pre-recession level. For comparison, the maximum decline in aggregate hours worked in the deep 1981-82 recession was less than 6 percent. Other indicators, such as total payroll employment, the ratio of employment to population, and the unemployment rate, paint a similar picture. Particularly concerning is the very high level of long-term unemployment--nearly half of the unemployed have been jobless for more than six months. People without work for long periods can find it increasingly difficult to obtain a job comparable to their previous one, as their skills tend to deteriorate over time and as employers are often reluctant to hire the long-term unemployed.

    Although the jobs market remains quite weak and progress has been uneven, overall we have seen signs of gradual improvement. For example, private-sector payrolls increased at an average rate of about 180,000 per month over the first five months of this year, compared with less than 140,000 during the last four months of 2010 and less than 80,000 per month in the four months prior to that. As I noted, however, recent indicators suggest some loss of momentum, with last Friday’s jobs market report showing an increase in private payrolls of just 83,000 in May. I expect hiring to pick up from last month’s pace as growth strengthens in the second half of the year, but, again, the recent data highlight the need to continue monitoring the jobs situation carefully.

    The business sector generally presents a more upbeat picture. Capital spending on equipment and software has continued to expand, reflecting an improving sales outlook and the need to replace aging capital. Many U.S. firms, notably in manufacturing but also in services, have benefited from the strong growth of demand in foreign markets. Going forward, investment and hiring in the private sector should be facilitated by the ongoing improvement in credit conditions. Larger businesses remain able to finance themselves at historically low interest rates, and corporate balance sheets are strong. Smaller businesses still face difficulties in obtaining credit, but surveys of both banks and borrowers indicate that conditions are slowly improving for those firms as well.

    In contrast, virtually all segments of the construction industry remain troubled. In the residential sector, low home prices and mortgage rates imply that housing is quite affordable by historical standards; yet, with underwriting standards for home mortgages having tightened considerably, many potential homebuyers are unable to qualify for loans. Uncertainties about job prospects and the future course of house prices have also deterred potential buyers. Given these constraints on the demand for housing, and with a large inventory of vacant and foreclosed properties overhanging the market, construction of new single-family homes has remained at very low levels, and house prices have continued to fall. The housing sector typically plays an important role in economic recoveries; the depressed state of housing in the United States is a big reason that the current recovery is less vigorous than we would like.

    Developments in the public sector also help determine the pace of recovery. Here, too, the picture is one of relative weakness. Fiscally constrained state and local governments continue to cut spending and employment. Moreover, the impetus provided to the growth of final demand by federal fiscal policies continues to wane.

    The prospect of increasing fiscal drag on the recovery highlights one of the many difficult tradeoffs faced by fiscal policymakers: If the nation is to have a healthy economic future, policymakers urgently need to put the federal government’s finances on a sustainable trajectory. But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery. The solution to this dilemma, I believe, lies in recognizing that our nation’s fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation. By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk. At the same time, establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence.

    The Outlook for Inflation
    Let me turn to the outlook for inflation. As you all know, over the past year, prices for many commodities have risen sharply, resulting in significantly higher consumer prices for gasoline and other energy products and, to a somewhat lesser extent, for food. Overall inflation measures reflect these price increases: For example, over the six months through April, the price index for personal consumption expenditures has risen at an annual rate of about 3-1/2 percent, compared with an average of less than 1 percent over the preceding two years.

    Although the recent increase in inflation is a concern, the appropriate diagnosis and policy response depend on whether the rise in inflation is likely to persist. So far at least, there is not much evidence that inflation is becoming broad-based or ingrained in our economy; indeed, increases in the price of a single product--gasoline--account for the bulk of the recent increase in consumer price inflation.1 Of course, gasoline prices are exceptionally important for both family finances and the broader economy; but the fact that gasoline price increases alone account for so much of the overall increase in inflation suggests that developments in the global market for crude oil and related products, as well as in other commodities markets, are the principal factors behind the recent movements in inflation, rather than factors specific to the U.S. economy. An important implication is that if the prices of energy and other commodities stabilize in ranges near current levels, as futures markets and many forecasters predict, the upward impetus to overall price inflation will wane and the recent increase in inflation will prove transitory. Indeed, the declines in many commodity prices seen over the past few weeks may be an indication that such moderation is occurring. I will discuss commodity prices further momentarily.

    Besides the prospect of more-stable commodity prices, two other factors suggest that inflation is likely to return to more subdued levels in the medium term. First, the still-substantial slack in U.S. labor and product markets should continue to have a moderating effect on inflationary pressures. Notably, because of the weak demand for labor, wage increases have not kept pace with productivity gains. Thus the level of unit labor costs in the business sector is lower than it was before the recession. Given the large share of labor costs in the production costs of most firms (typically, a share far larger than that of raw materials costs), subdued unit labor costs should remain a restraining influence on inflation. To be clear, I am not arguing that healthy increases in real wages are inconsistent with low inflation; the two are perfectly consistent so long as productivity growth is reasonably strong.

    The second additional factor restraining inflation is the stability of longer-term inflation expectations. Despite the recent pickup in overall inflation, measures of households’ longer-term inflation expectations from the Michigan survey, the 10-year inflation projections of professional economists, the 5-year-forward measure of inflation compensation derived from yields on inflation-protected securities, and other measures of longer-term inflation expectations have all remained reasonably stable.2 As long as longer-term inflation expectations are stable, increases in global commodity prices are unlikely to be built into domestic wage- and price-setting processes, and they should therefore have only transitory effects on the rate of inflation. That said, the stability of inflation expectations is ensured only as long as the commitment of the central bank to low and stable inflation remains credible. Thus, the Federal Reserve will continue to closely monitor the evolution of inflation and inflation expectations and will take whatever actions are necessary to keep inflation well controlled.

    Commodity Prices
    As I noted earlier, the rise in commodity prices has directly increased the rate of inflation while also adversely affecting consumer confidence and consumer spending. Let’s look at these price increases in closer detail.

    The basic facts are familiar. Oil prices have risen significantly, with the spot price of West Texas Intermediate crude oil near $100 per barrel as of the end of last week, up nearly 40 percent from a year ago. Proportionally, prices of corn and wheat have risen even more, roughly doubling over the past year. And prices of industrial metals have increased notably as well, with aluminum and copper prices up about one-third over the past 12 months. When the price of any product moves sharply, the economist’s first instinct is to look for changes in the supply of or demand for that product. And indeed, the recent increase in commodity prices appears largely to be the result of the same factors that drove commodity prices higher throughout much of the past decade: strong gains in global demand that have not been met with commensurate increases in supply.

    From 2002 to 2008, a period of sustained increases in commodity prices, world economic activity registered its fastest pace of expansion in decades, rising at an average rate of about 4-1/2 percent per year. This impressive performance was led by the emerging and developing economies, where real activity expanded at a remarkable 7 percent per annum. The emerging market economies have likewise led the way in the recovery from the global financial crisis: From 2008 to 2010, real gross domestic product (GDP) rose cumulatively by about 10 percent in the emerging market economies even as GDP was essentially unchanged, on net, in the advanced economies.3 

    Naturally, increased economic activity in emerging market economies has increased global demand for raw materials. Moreover, the heavy emphasis on industrial development in many emerging market economies has led their growth to be particularly intensive in the use of commodities, even as the consumption of commodities in advanced economies has stabilized or declined. For example, world oil consumption rose by 14 percent from 2000 to 2010; underlying this overall trend, however, was a 40 percent increase in oil use in emerging market economies and an outright decline of 4-1/2 percent in the advanced economies. In particular, U.S. oil consumption was about 2-1/2 percent lower in 2010 than in 2000, with net imports of oil down nearly 10 percent, even though U.S. real GDP rose by nearly 20 percent over that period.

    This dramatic shift in the sources of demand for commodities is not unique to oil. If anything, the pattern is even more striking for industrial metals, where double-digit percentage rates of decline in consumption by the advanced economies over the past decade have been overwhelmed by triple-digit percentage increases in consumption by the emerging market economies.4 Likewise, improving diets in the emerging market economies have significantly increased their demand for agricultural commodities. Importantly, in noting these facts, I intend no criticism of emerging markets; growth in those economies has conferred substantial economic benefits both within those countries and globally, and in any case, the consumption of raw materials relative to population in emerging-market countries remains substantially lower than in the United States and other advanced economies. Nevertheless, it is undeniable that the tremendous growth in emerging market economies has considerably increased global demand for commodities in recent years.

    Against this backdrop of extremely robust growth in demand, the supply of many commodities has lagged behind. For example, world oil production has increased less than 1 percent per year since 2004, compared with nearly 2 percent per year in the prior decade. In part, the slower increase in the supply of oil reflected disappointing rates of production in countries that are not part of the Organization of the Petroleum Exporting Countries (OPEC). However, OPEC has not shown much willingness to ramp up production, either. Most recently, OPEC production fell 1.3 million barrels per day from January to April of this year, reflecting the disruption to Libyan supplies and the lack of any significant offset from other OPEC producers. Indeed, OPEC’s production of oil today remains about 3 million barrels per day below the peak level of mid-2008. With the demand for oil rising rapidly and the supply of crude stagnant, increases in oil prices are hardly a puzzle.

    Production shortfalls have plagued many other commodities as well. Agricultural output has been hard hit by a spate of bad weather around the globe. For example, last summer’s drought in Russia severely reduced that country’s wheat crop. In the United States, high temperatures significantly impaired the U.S. corn crop last fall, and dry conditions are currently hurting the wheat crop in Kansas. Over the past year, droughts have also afflicted Argentina, China, and France. Fortunately, the lag between planting and harvesting for many crops is relatively short; thus, if more-typical weather patterns resume, supplies of agricultural commodities should rebound, thereby reducing the pressure on prices.

    Not all commodity prices have increased, illustrating the point that supply and demand conditions can vary across markets. For example, prices for both lumber and natural gas are currently near their levels of the early 2000s. The demand for lumber has been curtailed by weakness in the U.S. construction sector, while the supply of natural gas in the United States has been increased by significant innovations in extraction techniques.5 Among agricultural commodities, rice prices have remained relatively subdued, reflecting favorable growing conditions.

    In all, these cases reinforce the view that the fundamentals of global supply and demand have been playing a central role in recent swings in commodity prices. That said, there is usually significant uncertainty about current and prospective supply and demand. Accordingly, commodity prices, like the prices of financial assets, can be volatile as market participants react to incoming news. Recently, commodity prices seem to have been particularly responsive to news bearing on the prospects for global economic growth as well as geopolitical developments.

    As the rapid growth of emerging market economies seems likely to continue, should we therefore expect continued rapid increases in the prices of globally-traded commodities? While it is certainly possible that we will see further increases, there are good reasons to believe that commodity prices will not continue to rise at the rapid rates we have seen recently. In the short run, unexpected shortfalls in the supplies of key commodities result in sharp price increases, as usage patterns and available supplies are difficult to change quickly. Over longer periods, however, high levels of commodity prices curtail demand as households and firms adjust their spending and production patterns. Indeed, as I noted earlier, we have already seen significant reductions in commodity use in the advanced economies. Likewise, over time, high prices should elicit meaningful increases in supply, both as temporary factors, such as adverse weather, abate and as investments in productive capacity come to fruition. Finally, because expectations of higher prices lead financial market participants to bid up the spot prices of commodities, predictable future developments bearing on the demands for and supplies of commodities tend already to be reflected in current prices. For these reasons, although unexpected developments could certainly lead to continued volatility in global commodity prices, it is reasonable to expect the effects of commodity prices on overall inflation to be relatively moderate in the medium term.

    While supply and demand fundamentals surely account for most of the recent movements in commodity prices, some observers have attributed a significant portion of the run-up in prices to Federal Reserve policies, over and above the effects of those policies on U.S. economic growth. For example, some have argued that accommodative U.S. monetary policy has driven down the foreign exchange value of the dollar, thereby boosting the dollar price of commodities. Indeed, since February 2009, the trade-weighted dollar has fallen by about 15 percent. However, since February 2009, oil prices have risen 160 percent and nonfuel commodity prices are up by about 80 percent, implying that the dollar’s decline can explain, at most, only a small part of the rise in oil and other commodity prices; indeed, commodity prices have risen dramatically when measured in terms of any of the world’s major currencies, not just the dollar. But even this calculation overstates the role of monetary policy, as many factors other than monetary policy affect the value of the dollar. For example, the decline in the dollar since February 2009 that I just noted followed a comparable increase in the dollar, which largely reflected flight-to-safety flows triggered by the financial crisis in the latter half of 2008; the dollar’s decline since then in substantial part reflects the reversal of those flows as the crisis eased. Slow growth in the United States and a persistent trade deficit are additional, more fundamental sources of recent declines in the dollar’s value; in particular, as the United States is a major oil importer, any geopolitical or other shock that increases the global price of oil will worsen our trade balance and economic outlook, which tends to depress the dollar. In this case, the direction of causality runs from commodity prices to the dollar rather than the other way around. The best way for the Federal Reserve to support the fundamental value of the dollar in the medium term is to pursue our dual mandate of maximum employment and price stability, and we will certainly do that.

    Another argument that has been made is that low interest rates have pushed up commodity prices by reducing the cost of holding inventories, thus boosting commodity demand, or by encouraging speculators to push commodity futures prices above their fundamental levels. In either case, if such forces were driving commodity prices materially and persistently higher, we should see corresponding increases in commodity inventories, as higher prices curtailed consumption and boosted production relative to their fundamental levels. In fact, inventories of most commodities have not shown sizable increases over the past year as prices rose; indeed, increases in prices have often been associated with lower rather than higher levels of inventories, likely reflecting strong demand or weak supply that tends to put pressure on available stocks.

    Finally, some have suggested that very low interest rates in the United States and other advanced economies have created risks of economic overheating in emerging market economies and have thus indirectly put upward pressures on commodity prices. In fact, most of the recent rapid economic growth in emerging market economies appears to reflect a bounceback from the previous recession and continuing increases in productive capacity, as their technologies and capital stocks catch up with those in advanced economies, rather than being primarily the result of monetary conditions in those countries. More fundamentally, however, whatever the source of the recent growth in the emerging markets, the authorities in those economies clearly have a range of fiscal, monetary, exchange rate, and other tools that can be used to address any overheating that may occur. As in all countries, the primary objective of monetary policy in the United States should be to promote economic growth and price stability at home, which in turn supports a stable global economic and financial environment.

    Monetary Policy
    Let me conclude with a few words about the current stance of monetary policy. As I have discussed today, the economic recovery in the United States appears to be proceeding at a moderate pace and--notwithstanding unevenness in the rate of progress and some recent signs of reduced momentum--the labor market has been gradually improving. At the same time, the jobs situation remains far from normal, with unemployment remaining elevated. Inflation has risen lately but should moderate, assuming that commodity prices stabilize and that, as I expect, longer-term inflation expectations remain stable.

    Against this backdrop, the Federal Open Market Committee (FOMC) has maintained a highly accommodative monetary policy, keeping its target for the federal funds rate close to zero and further easing monetary conditions through large-scale asset purchases. The FOMC has indicated that it will complete its purchases of $600 billion of Treasury securities by the end of this month while maintaining its existing policy of reinvesting principal payments from its securities holdings. The Committee also continues to anticipate that economic conditions are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

    The U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional headwinds ranging from the effects of the Japanese disaster to global pressures in commodity markets. In this context, monetary policy cannot be a panacea. Still, the Federal Reserve’s actions in recent years have doubtless helped stabilize the financial system, ease credit and financial conditions, guard against deflation, and promote economic recovery. All of this has been accomplished, I should note, at no net cost to the federal budget or to the U.S. taxpayer.

    Although it is moving in the right direction, the economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established. At the same time, the longer-run health of the economy requires that the Federal Reserve be vigilant in preserving its hard-won credibility for maintaining price stability. As I have explained, most FOMC participants currently see the recent increase in inflation as transitory and expect inflation to remain subdued in the medium term. Should that forecast prove wrong, however, and particularly if signs were to emerge that inflation was becoming more broadly based or that longer-term inflation expectations were becoming less well anchored, the Committee would respond as necessary. Under all circumstances, our policy actions will be guided by the objectives of supporting the recovery in output and employment while helping ensure that inflation, over time, is at levels consistent with the Federal Reserve’s mandate.


    1. Through April, personal consumption expenditures (PCE) inflation over the previous six months was 3.6 percent at an annual rate; excluding gasoline, inflation over that period was 2 percent. Over a 12-month span, inflation through April was 2.2 percent; excluding gasoline, it was 1.2 percent. Return to text

    2. In the Thomson Reuters/University of Michigan Surveys of Consumers, the median reading on expected inflation over the next 5 to 10 years was 2.9 percent in May after having averaged 2.8 percent in 2010. In the Survey of Professional Forecasters (SPF) compiled by the Federal Reserve Bank of Philadelphia, the median projection for PCE inflation over the next 10 years was 2.3 percent in May, up from the 2.1 percent average reading last year. The equivalent SPF projection for CPI inflation was 2.4 percent, versus 2.3 percent in 2010. The 5-year forward measure of inflation compensation derived from TIPS stood at about 2-3/4 percent in May, down noticeably from the levels observed toward the end of 2010. Return to text

    3. The GDP data cited here are from the International Monetary Fund’s World Economic Outlook database. The difference between the advanced and emerging market economies is also evident in the statistics on industrial production, which is perhaps more directly relevant to the demand for commodities. According to the CPB Netherlands Bureau for Economic Policy Analysis, from March 2009 to March 2010, industrial production rose 26 percent in the emerging market economies and 11 percent in the advanced economies. Return to text

    4. A portion of commodity use in the emerging market economies serves as inputs to the production of exports, some of which are ultimately consumed in advanced economies. Return to text

    5. As natural gas is difficult to transport overseas, the increased supplies of natural gas in North America have not translated into significantly lower prices abroad. In the first quarter of 2011, natural gas prices in the United States were less than half of those in Germany. Return to text


  144. wow…just sold my DIA Puts on that last spike down for about a 20% gain…still holding USO puts

  145. Wilsons:
    Can you be more specific on what you did or are doing with FTR? Thanks.

  146. Blah, blah, blah – there is no QE3 here and that is not good for the markets!  

    XLF took a big tumble and I doubt the other indexes will hold up well either.  

    If the Dollar starts coming back – look out below.  

    Summary of speech – "Well, we did all we can and that didn’t help, we are out of ideas now."

  147. Go DIA Puts, go.  Down goes Frazier, down goes Frazier!

  148.  Phil, I believe that was a "WHEEEEEEEE!!!!"

  149.  Wow, that was cool!  I was sucking wind with SDS, OIH & DIA all day, and, mirabile dictu!

  150. Oh no, the Yen just broke below 80!  

    They are now officiallly pulling ALL the stops out to squash the Dollar.  Euro topped out at $1.469 and Pound at $1.645 so I doubt they can do any more there but below 80 Yen to the Dollar is uncharted waters.  Nikkei futures dropped a quick 50 on that move.  

    Damn, so close to closing – gotta take money and run on the short DIAs (at least 1/2) but the USO puts can ride.  

  151. Glad I kept all my shorts.

  152. dcclark. On a jet at the moment. Internet choppy. I just do buy/write on FTR. Usually wait for pullback under 8 and then load up. I sell calls as far out as possible. Even my 2013,s were assigned. Hope that’s clear. I pad typing is a slow way to communicate.

  153. Banks are freaking out about NO MO FREE MONEY!

    Aren’t you guys glad I kept pointing out how fake the rally was?    8-)

  154. tchayipov/FTR, can you explain the reasons you sold 5X calls?

  155. tchayipov,  Thanks.

  156. Couldn’t wait until tomorrow huh?  Shuky darns……

  157.  Yes!  And I even kept my USO puts.  Keeping the faith.

  158.  IPad/Willsons – Try using Dragon, very easy to work with once you get used to switching apps from background to foreground.  

    Something very apropos about Bernanke droning on about how everything is fine while the markets collapse in the background – pretty much sums up this decade so far…

  159. Great day Phil! see you all tomorrow…

  160.  did that many people really think that qe3 was coming already??? what bad action…however let’s not be foolish..he’s not telgrahpin shiite right now..wait til we correct a bit…meanwhile new high SODA!!!!!

  161. Phil, 
    Short (10) June 80 PUTS (sold for $2.10). Long (20) July 70 Puts (net $1.15) and short (7) 72.50 (Sold for $6.00) June Calls. 

  162. Held all puts till tomorrow.  With no more free money, I think we crack 12,000 easily tomorrow.

  163. Phil:
    So are you willing to say with any conviction that we should get more Shortish and if yes what index is most vulnerable?

  164. vol breakdown in wynn another china play….zzzzzzzzappp

  165. Wilsons:
    Thank you. I will watch them closely. It looks like I might get a good entry below $8. And then, like tchayipov, will sell at least the 2013 $7.50 puts. Thanks again.

  166. Bernank Fed never going to be ahead of the curve.  They feel they’ve done enough for asset prices to save the banks’ asses, so everyone is own their own.   But, should C, BAC, etc.  continue their downward equity trajectory leading to capital adequacy concerns, then we might see the Fed wake up again, but not before.

  167. Phil
    Looks like a good move today on the FAS 1/2 covers. Sad to say we might have to do it a few more times!

  168. Phil / Ben    How can this academic stand their talking about oil and blaming developing world demand, and not mention speculators (which he is funding for free).  I need a rock to throw!

  169. Phil
    Thanxs for the  DIA puts at made a quick .30 and the Oil trade keeps on giving  

  170.  I dunno, Tusca, what about all those dollar pegs?  China has a Trillion dollar surplus, the U.S. a Trillion-plus deficit,  but the Renminbi stays tied to the dollar.  Everyone acts in their self-interest — no surprise there.

  171. For once, it was not all dollar today… The moves were a bit decoupled – at 12 PM the dollar was at 73.60 and /ES was at 1291. By 4:00 PM, /DX was at 73.58 but /ES was down all the way to 1283. Not much correlation there. The Bernanke spook up the market but didn’t inflate the dollar! 

  172. how many times does phil have to say ‘let’s game the gamestahs…don’t look for rationale behavior or response..if it were his (bernanke’s) money he would be at the wailing wall davening for a stock pick!

  173. Apparently we are easy suckers…
    And so is the rest of the world apparently.
    It’s either scary or great depending on which side of the wall you stand! 

  174. People/Angel – I’ve gotten better in my timing by learning not to overestimate the intelligence of our fellow investors.  Unfortunately, PT Barnum was right when he said: "No one ever went broke underestimating the intelligence of the American public."

    GMCR/Amatta – OK, so it’s a net .10 spread and 10 June $80 puts can roll to 20 July $70 puts for just under even so not much there as the escape would be spending .75 to roll up to the $72.50 puts and then rolling the short puts although it may pay for us to roll the $80 puts to 2x the $75 puts now – remind me tomorrow as I should look at that one for the $25KP anyway.  As for the short calls, we’re happy to just roll them along when we have to.  They are $5 now but that’s 20% premium still to work off and the $80 puts also have $1 of premium to work off so doing nothing on those two positions nets $2 by expiration day unless GMCR is over $80 or under $72.50 – anything in between means the put and call combination is net $7.50 vs $5.50 now – see how that works?  Remind me tomorrow as it may be a good idea to make adjustments depending on what the market does.  

    No free money/Rustle – Well a little mixed signal as Bernanke did say they will keep being accommodative as long as Big Business doesn’t hire any US workers and that he will only count inflation as monthly increases so, if they KEEP oil at $100 – that’s not inflation because it’s the same as last month and he will count that as zero and, of course, wage and benefit DEflation will balance out any inflation anyway as long as nobody hires people.  Very demented logic….

    More shortish/DC – We have to see what hold up.  Patience… 

    Wow, WYNN did get a smack-down.  Maybe today is the day China takes back Macau…

    Ouch, oil just popped back to $99.65!  Way to fight inflation Ben!  I can only hope they are spiking people out ahead of a real drop as it came right after USO stopped trading (ie. thinnest volume chance they got).

    Rocks/Tusca – We need a revolution very badly!  

  175. DIA/Bert – You are welcome, those went very nicely with that 100-point drop.  

    Dollar/StJ – I don’t know if I’d call it decoupled just yet.  We’ll have to see what happens over the next few days.  

    Financial illiteracy/StJ – I bitch about that all the time.  They are purposely dumbing down the population so they don’t understand how much they are being screwed.  How else can the top 1% rob the bottom 99% of half their wealth over 30 years while, at the same time, the bottom 99% votes for more tax cuts for the top 1%?  

    At the close: Dow -0.15% to 12072. S&P -0.09% to 1285. Nasdaq -0.04% to 2702.
    Treasurys: 30-year +0.12%. 10-yr +0.1%. 5-yr +0.18%.
    Commodities: Crude -0.07% to $98.94. Gold -0.05% to $1543.30.
    Currencies: Euro +0.71% vs. dollar. Yen +0.06%. Pound +0.55%.

    April Consumer Credit: +$6.25B (+3.1% annual rate) to $2.43T, vs. consensus of +$6B; March revised to $4.8B from $6B. It’s the seventh straight monthly increase after 20 months of contraction. April’s increase in came despite a drop in credit card debt, which fell $943.5M (1.4% annual) after a $36.7M gain in March.

    Market recap: Stocks gave up all earlier gains after Bernanke said the U.S. economy is slowing and that the Fed would remain accommodative but offered no hint of more stimulus. Financials, which had been rising, reversed course. The dollar added to losses and Treasurys rose to their best prices of the day. Oil edged higher ahead of the OPEC meeting. NYSE gainers led losers seven to six. 

    Chairman Bernanke spends a good part of his talk defending against accusations Fed policies have put a bid under the commodity sector. Hedgeye’s Keith McCullough isn’t buying it, saying, "only a dogmatic academic who doesn’t have to be held accountable … would represent ‘noble lies’ this way."  He acknowledges the economic slowdown and says accommodative policies are still necessary. He’s also worried about sharp fiscal consolidation given the weakened state of the economy. 

    The Fed is risking a second Depression by putting pressure on banks to raise more capital, analyst Dick Bove writes in a scathing note that accuses the central bank of losing "all sense of reality." Banks must be allowed room to lend money and conduct business but are being handcuffed by onerous capital restrictions, Bove believes. 

    In a letter to ECB President Trichet, the IMF and other EU officials, German Finance Minister Schauble says any new bailout agreement for Greece must include burden-sharing between taxpayers and private investors. Schauble warns that without an agreement, there is a "real danger of the 1st disordered state bankruptcy in the eurozone."

    "All you have to do is buy the Bovespa and government bonds," says a hedge fund manager on the ease of profitably running money in Brazil. With Brazilian 2 year sovereigns averaging a 17% return over the past decade and the Bovespa 16%, there are harder ways of making a living. 

    Barton Biggs sees opportunity in equities, particularly big-cap techs. They are "way too cheap, trading almost like value stocks." He’s cautious towards financials, seeing the possibility of additional write-downs as home prices continue to fall. 

    Despite a wave of analyst love regarding yesterday’s iCloud rollout - "increases the stickiness of the AAPL ecosystem;" "prices the cloud offering to drive adoption" – Apple (AAPL -1.3%) is among the day’s worst tech performers. The stock has been stuck at $330-$360 throughout most of 2011, and today’s weakness brings the price near the low end. 

  176. heres a comment from a well know stock technician
    " Everybody is mystified about the job situation, but not me. Everything is manufactured in China and we’re not drilling for oil. "

  177. Gasoline jumped 2% while Ben was speaking (.06) nice $10Bn price tag for that speech at the pumps (so far).  

  178. Today’s Levels.

  179. DIA/Phil—thx for anticipating the false rally--sold 1/2 puts at close and kept the rest for tomorrow
    Very good call==thanks!!!

  180. RUT bouncing right off that 7.5% line and that means they need a 1.5% recovery just to get to a weak bounce.  That goes for all of them really because they began the drop above the 5% line and they’re all creeping up on the 2.5% lines so anything less than a 1.5% recovery is going to be suspect…

  181. Hey Phil,
    When you have a second can you give me your advice on 3 buy/write positions to roll.  JBL is fairly straight forward as we entered on Jan 27 for $20.56 and brought in $1.90 June $21 call and $2.40 June $21 put.  I am guessing you will recommend Sept $20 call and put for roll but always want to be sure.
    LDK isn’t as easy.  Also entered Jan 27 at $12.95 and took in $2.09 June $13 call and $2.11 June $13 put.  Stock closed today at $7.10 and I still like the stock at forward p/e of 3.  Obviously the call is good for knocking basis to $10.86.  My question here is on the roll or accept put.
    LCC, also Jan 27 at $11.05 with $1.31 for June $11 call and $1.29 for June $11 put.  Forward p/e is 4.08 so prefer to remain exposed.  What would you recommend rolling to? 

  182. Of course I have forgotten my trip on US Airways recently so if I go with a qualtitative approach using my 1 trip perhaps been to short the pants off them :) .

  183. market remains very over sold… and despite today’s low quality rally the odds still favor a multi day bounce….i guess jaime dimon asked ben a question that flummoxed him about the economic effect of the new financial regulations currently in the pipeline..the subsequent confused reponse must have freaked traders out..coz there is no way anybody could have believed he was giong to announce QEIII…he needs to let that one fester for a bit..then subject us to more of his "lifesaving"

  184. Phil,
    When you have a minute could you clarify why you don’t like the credit vertical spreads ie bull puts, bear calls? I have seen some comments stating the risk doesn’t justify the reward but was curious any other thoughts…
    also, in general  for strateg;y,  selling premium, buy/writes, bull call spreads and the occasional ratio backspread are what you use mostly?  Thanks

  185. Phil  
    Overnight short with QM at 99.70 or too dangerous with OPEC meeting tomorrow?
    Also thanks for the DIA P’s

  186. BTW Phil, did I see correctly yesterday that you have a 1 TB music library. Better not sync that to the iCloud, you’ll be sucking up my Netflix bandwidth ;-0 (that’s about 400 HD movies!)
    Kidding aside, I wonder if Apple will let you sync unlimited storage for that $24.95. Hardware for 1 TB cost about $50 nowadays retail. Even backup companies have limits or are more expensive. Carbonite offers unlimited backup for $59.95 a year for example. Although I suspect most people have less than 100 GB of music, pictures and videos!

  187. Phil

    Nice call on the DIA puts. I jumped in and made some easy $$$

  188. I didn’t mention it during trading hours, but what H.L. Mencken said was  "No one every lost a dime underestimating the taste of the American public."  
    PT Barnum attributed with saying "There’s a sucker born every minute."  Not that the sentiment expressed in your conflation was misplaced.

  189. And wheeeee on the dollar now at 74 AH. Whatup with that? 

  190.  "ever"

  191. Phil,
    I have been spectating for a while, soaking things in, and have recently started paper trading at ToS.  I should be funding my account and start trading for real in a couple of months.  So, I am practicing, and would like to see if this is a solid trade and if i have my math correct :D .
    Buy 100 shares CSCO @ 15.50 and Sell the Jan 12 17.5 put and calls for 3.30.
    If my math is correct, this should be $12.20/$14.85 for a 30.2% profit if called away in jan or put to us with a buffer of 15% lower than we are buying today.
    I did see your suggested trade on CSCO yesterday;  I am just trying to practice the buy / write strategy to see if i am ready to start planting some trees :)   I am not at all sure about my math or overall premise :)   I also realize that I need to think further ahead, but wanted to take one step at a time.
    thanks for your time and help,

  192. DIA/Clarence – Very nice.  Looking good at the moment too as BS after-hours rally is fading into Asia’s open.  


    • On JBL, they are at $19.89 and you’re in for net $16.26/18.63.  The caller is dead and the June $21 puts are $1.25 so you’re just looking to roll those to the next strike.  As the markets are kind of shaky, conservative is the way to go so how about the Jan $19 puts and calls at $5.50.  That’s + $4.25 so your new net drops to $12.01/15.51.  Hard to lose when you can grind out a 25% discount for yourself on your entries, right?
    • LDK was $8.75/10.88 and now the stock is $7.10.  Keep in mind that forward p/e is projected and they are down here because they blew their previous projections.  You issue is your June $13 putter, now $6 and I’d roll them to 2x the Jan $9 puts, now $3 as an even roll (but more obligation) and I’d sell the $6 calls for $2.05 (just 1x) so you net out to $6.75/7.88 and that would be 2x with another 1x if you get assigned at 9 for 3x at $8.25, which is fine as the 2013 $7.50 puts and calls are $5 so you’ll get it back eventually.  In an up market, I might want to be more aggressive but, if LDK takes off, you can alway add 2013 calls or sell more puts but, if they go lower, you’ll be very glad you took the conservative route.  
    • LCC also not having a good time.  You have net $8.45/9.73 with the stock at $8.56.  Your June $11 putter is $2.50 and you can just spread that out to the Jan $9 puts and calls for $3.15 so .65 credit on the roll lowers your basis to $7.80/8.40 and you are back in the money.  Would have been a good move to flip short after that trip!  

    Oversold/Angel – That’s only a matter of perspective.  Keep in mind how much of the rally was engineered in the first place so, technically, you can’t really trust any of the normal indicators as they were based on low-volume, BS rallies with most of the gains coming on the first day of each month AND the dollar dropped 15% and repriced the equities higher while tons of very dumb money poured in off the sidelines chasing performance based on profit and GDP assumptions that are simply not panning out for 2011.  Time to stop staring at the dials my friend and get back to good old-fashioned fundamental analysis.  I invested with my Grandfather since I was 7 years old and the first time I looked at a chart was in the 90s, when I was almost 30!  

    As to Dimon – lots of interesting stuff going on.  Baby wants his QE bottle back:  

    Jamie Dimon (JPMchallenges Bernanke after today’s speech: "Has anyone bothered to study the cumulative effect of all these [regulations]" – that it could be the reason it’s taking so long for credit and jobs to come back? Bernanke essentially says no: "it’s just too complicated. We don’t have quantitative tools to do that… There is going to be some trade-off here."

    Richard Koo says the WH understood the U.S. balance sheet recession, but preferred Paul Krugman’s easy money cure instead of more spending. Nearly one year on, all QEII has done is shift money out of Treasurys and into stocks, with higher commodities hampering economic activity. Thanks for the inside baseball account, but when has Krugman ever shied from more government spending?

    Kyle Bass says the short bet against the JGB is "more compelling" than subprime in 2008, and looking back will be "the most obvious scenario we’ve ever seen in our lives." The fact is that he’s made this same call before, as have many others – and been wrong. That’s why they call the trade "the widowmaker."

    Mark Thoma, on U.S. government policy of the past decade and how it makes a budget fix so difficult today: "What we did, in essence, was trade tax cuts for the wealthy and spending on wars for increased working class misery – higher unemployment, insufficient social service support, and a slower recovery from the recession." 

    Much of the higher tax burden Europeans pay is "illusory," Bruce Bartlett writes, since they pay health insurance premiums through their taxes rather than through lower wages, as Americans do. The Euro way may or may not be any better, "but the idea that Europeans are enslaved by high taxes, as most American conservatives believe, is just nonsense." 

    A few voices are beginning to defend Sino-Forest (SNOFF.PK), disputing the Muddy Waters contention that it’s akin to the Madoff Ponzi scheme. RBC’s Paul Quinn says the company has provided a "strong response" to concerns of forest ownership in China, and Dundee’s Rich Kelertas believes there’s nothing fraudulent "to the best of our knowledge."

    Verticals/Sun – I don’t like any kind of verticals as they are not very flexible.  We use them for targeted trades or specific purposes, especially when the VIX is low or, the other way – to offset the silly premiums of ultra-etfs.  On credit spreads, I just don’t like anything with a negative risk/reward ratio.  I don’t mind what Peter D and Income Trader do as they are playing BOTH sides with a wide spread but you still need to get 5 right and none wrong to make your money so it’s too tedious for me.  If you want to be short on something – SELL a call or take a backspread (which is just a fancy way to sell calls with protection anyway).  Next time you feel the urge to take a credit spread, ask me and we’ll see if I can come up with a better alternative.  Hopefully, with a few examples you’ll see what I’m talking about.  

    Oil shorts/Dave – Weeeeeeeeellllll, you need to REALLY understand that if you fall asleep with open contracts, you can end up down one or two thousand Dollars PER CONTRACT on a not so big move.  Heck, you can lose that going to the bathroom with oil.  Just today, we went from $98 at 1pm to $99.70 at 3pm and now back to $99.20 where you should have stopped out with the .50 gain.  Tempting though it may be – at this point I value a good night’s sleep over letting it ride!  50 cents is a huge move in the futures.  It’s $500 per contract on /CL and, once you get used to it, you realize you can play oil like this almost any time of day or night including Sunday nights so once you get your move, it’s best to take the money and run ESPECIALLY when big data is coming.  If you are a night owl, you just pocket your gains with a stop at the nearest 0.25 line ($98.25 at the moment) and just keep dropping it if oil falls further and, of course, if you do stop out, you can just get back in on the next cross of a .25 line.  

    Speaking of oil Data:  


    UPDATE 1-US crude inventories tumble as imports fall-API
    Tue Jun 7, 2011 10:05pm GMT
    [-Text [+]
    * Crude stock down 5.5 mln barrels
    * Gasoline shows surprise drop; down 390,000 barrels
    * Distillate inventories show build of 1.8 mln barrels
    * Refinery utilization up 0.7 pct points (Recasts, adds regional details, analyst comment)
    By Antonita Madonna Devotta
    NEW YORK, June 7 (Reuters) – U.S. crude oil stocks declined much more than expected last week, data from the American Petroleum Institute showed, as the shutdown of the Keystone crude pipeline slashed imports.
    Domestic crude stocks slipped 5.5 million barrels in the week ended June 3, according to the report, far exceeding the average analyst forecast of a drop of 300,000 barrels.
    During the week, the 591,000-bpd Keystone pipeline system, which carries Canadian crude to the U.S. Midwest, was shut due to a leak. It was restarted over the weekend.
    The biggest inventory decline came from the Midwest and the Gulf Coast regions, together accounting for about 5 million of the total drop. The drawdown came as imports fell 1.2 million to 8.75 million barrels per day.  

    "The report was bullish, with the large crude oil drawdown dominating the data," John Kilduff, partner at Again Capital LLC said.

    "Imports were clearly affected by issues surrounding Canadian barrels, and the continuing rise in utilization also helped with the drawdown."
    Crude stocks at the key Cushing, Oklahoma storage hub — the delivery point for the New York Mercantile Exchange’s benchmark West Texas Intermediate futures — dropped by 1.5 million barrels to 38.9 million barrels, the report said.
    U.S. crude futures extended gains in post-settlement trade after the data was released, trading up 70 cents to $99.71 a barrel at 4:53 p.m. EDT (2053 GMT).
    Gasoline stockpiles fell by 390,000 barrels for the week, which included part of the Memorial Day weekend, the traditional start to the summer driving season. Analysts, meanwhile, had forecast a buildup of 1 million barrels.
    Midwest and West Coast showed a drawdown of gasoline stockpiles, causing the overall drop, while the other regions showed a modest build.
    Earlier in the day, a report showed U.S. gasoline demand rose last week for the first time in nearly two months as prices eased over the weekend. [ID:nN07148476]
    Distillate stocks were up 1.8 million barrels in the week, compared with analysts projection of stockpiles remaining unchanged in the period.
    Refinery utilization rates rose by 0.7 percentage point to 84.7 percent. 



    Music/StJ – Ah, that’s the beauty of AAPL’s plan.  They have the rights to all those songs so they are not really synching anything but the rights database!  Clever, isn’t it?  So people perceive that AAPL is storing massive amounts of their music and video data but all they are really doing is delivering music and video on demand from what is actually a very limited data-base (relatively speaking).  

    DIA/Exec – Yes, we’re in a real groove at the moment, things are just so blatantly manipulated they are pretty easy to call.  

    Mencken/ZZ – I stand corrected.  Seemed like something Barnum would say…

    74/StJ – 74 is about as low as it should be.  That’s why rallies based on the Dollar getting pressed below 74 are DOOMED!  Now it’s going to be a real mess without QE3 to keep the Dollar down.  I’m sure the Banksters will now crash the markets to punish the Fed and Treasury until they turn on the money taps again.  

    CSCO/SBraze – Not 15% lower.  You will be assigned 2x at net $14.85 IF THEY ARE BELOW $17.50.  $14.85 is then your break-even and that’s just .65 lower than the current price (4.2%), not 15%.  Notice my above rolls with other Scott, it’s like chess, you have to think down the board for the long game which, in this case, takes years to develop.  You have an aggressive play on CSCO with a lot of risk of assignment as CSCO has to rise 15% just to not trigger your short puts at $17.50.  At $15.50, you can just sell the 2013 $15 puts and calls for $4.55 and that puts you in for net $10.95/12.98.  So, at $15, which is .50 LOWER than CSCO is now, you make $4.05 or 37% and your worst case is you are assigned 2x at an average of $12.98, which is 16.25% lower than they are now.  THAT’S how you buy a stock at a discount.   

  193. Meanwhile, it look like oil is going to blow $99 with the Dollar back at 74.05.  

  194. Student Loans/Craigzooka – plant those trees, but be sure to harvest in time, those loans can get pretty scary:  Serfdom via Student Loans.

  195. Phil,
    thanks much for the explanation; that makes a lot of sense.  I reckon I was trying too hard to be assigned the stock, instead of letting it happen if it’s gonna happen.  It’s also the reason i chose the 2012 and not the 2013.  Thanks again for the advice.

  196.  I’ve puzzled about the trajectory of China, since it’s at least one of the elephants in the room.  I could never get a handle on the Chinese real estate boom thing.  Sure, they opened the lending taps and kept the U.S./Euro-based recession from devastating their export-led growth with a massive public building program [50 airports] and an bank-led private real estate development boom, but now what?    
    And there’s been over a year of "China Bubble" chatter, at the least, lacks convincing reference points.  If the U.S. could leverage up with giant deficits for decades, why can China not do the same given its still-large trade surpluses?
    This FT article is worth a few rays of light.  It seems that is exactly what China will do, but with a giant downmarket move towards subsidized housing for the [presumably] disenfranchised — a national palliative for Jasmine Revolution.  For a bunch of Commies, the Chinese Central Committee is rapidly perfecting a form of state capitalism that looks to consign the "free market" version to the dustbin of history.,dwp_uuid=d2d846de-a954-11df-a6f2-00144feabdc0.html#axzz1O
    Of course, that is exactly what was being written about Japan in the mid-1980s. Ozymandias would have approved of Jim Morrison’s lyric "the future’s uncertain and the end is always near." 

  197. Phil
    Rode the /QM down from 99.65 at 7pm and now I’m taking your advice, taking the $$ and going to enjoy a restful night sleep.
    I don’t post often so I want to say thanks for sharing your incredible market acumen with all of us. Your site has a unusually talented group of investors (and some characters) and I enjoy my days trading more because of it.  I liked the idea of the new ignore button but now that you’ve ejected Goober we probably won’t need it!  At least Yipcarl was mostly amusing, at least until he went off his rocker near the end.  That’s what I like about this site, trading ideas and humor too!     

  198. among the many sources i read the consensus was qe3 was huge failure and fed knows it and no more qe unless they get really desparate…now whats desperate to them?  global growth worries.. rising eurozone debt concerns.. emerging markets inflation fears… rising Mideast unrest… rising food/energy prices…technical selling and th epossibility that china and the the us are ramping up their assured mutual destruction game..china cannot replicate its growth without its consumer..billions of dollars belonging to rich chinese are flying out of the country..and does china understand there’s alot of unrest in pakistan and btw where it is on the map?…obama is in candidates are like wooden indians..although i do like this guy hermann seems to me greed is about to turn to fear in a big way…this is one v large shiite burger…uuurrrp

  199. Phil, when I see articles that talk about world demand for oil rising is that just major BS?  I know when they talk about it domestically it is, but are they also fudging the world numbers?  Just think it’s funny how not one paper calls out Goldman for raising their target on oil to suddenly lowering it to raising it back to 130 with no noticeable reason except for price manipulation.

  200. Fundamentals/Phil – "Time to stop staring at the dials my friend and get back to good old-fashioned fundamental analysis." Phil, can you do a weekend or less-crazy-time post about how you approach a fundamental assessment?  Do you have a process for conducting a fundamental review?   And what, for a specific example, prompts you to favor XOM over CVX (i have noted your support for XOM in various posts, as well as an express _not_ CVX post)?  thanks.

  201. Good article about Bob Rodriguez of First Pacific Advisors

  202. Good morning!  

    Dollar back below 74 at 3am and the futures back to about flat.  Oil held good old $98.50, which it should as it’s a key point of resistance and it’s good to get a bit of consolidation on the way down so everyone knows you mean it.  The API report wasn’t taken that bullish because imports were down so much but retail traders are much easier to fool so I expect a nice move up into today’s inventories – giving us an opportunity to short them again (isn’t this fun?).  

    For now (in case anyone’s up, we can play the oil futures up off the $98.50 line with super-tight stops below it as that would be a nasty failure).  

    Student loans/Scott – Yet another scam in America.  The worst is not the lawyers, who should have known better before spending uber-bucks on grad school but the Doctors and Teachers who earn very little out of college and start their lives out with crushing debt as well as the people they herd into career prep schools with "easy financing", especially when they prey on people who are already unemployed and think it’s a path to getting a new job.  Those guys are despicable, and that includes The Donald.  

    German exports down 5.5% last month.  World’s #2 exporter.  

    Trying too hard/Scott – The key to a good buy/write is to set up a situation where you either buy the stock at a 20% discount or you make 20% if the stock is flat or moves higher.  If that is your premise for buying all stocks, then you are pretty much going to outperform down and flat markets by 20%.  

    China/ZZ – The problem with Real Estate in China is there’s really only a few cities that are "cool" to live in but their top 10% is 130M people, which is plenty to fill 10 cities, even if they only buy 1 home each and don’t speculate.  That drives prices in the major cities quickly out of the range of affordability for the bottom 90%.  That’s what happens when you grow an economy 10% a year in an unequal distribution of wealth.   They have no suburbs – people moved straight from farms to cities and some of the cities are factory cities, artificially designed just for the purpose of feeding the factories.  

    Even worse in China is the fact that homes have been considered investments and, generally, when a young couple buys a home, parents and grandparents all put up money as investments so you have, perhaps 4 families digging into their retirement savings to buy one couple a home.  If that home goes upside down – it’s a strain on a lot of people.   

    Chinese banks are profiteering from this phenomenon by offering inter-generational mortgages to the home buyers. This is a frightening echo of a Japanese financial innovation during the heyday of the Japanese housing bubble, when three generations signed a collective mortgage.

    According to the same Green Book, the current price of an apartment in China’s urban centres costs 8.3 times the average income of a household. This figure is significantly higher for China’s farmers: a roof over their heads would require roughly 29 times their annual household income. Researchers at CASS believe that this would make home ownership an implausible dream for 60 per cent of China’s urban residents and this figure could reach a stunning 85 per cent once they factor in the massive number of rural migrants who are moving into Chinese cities every year.

    This is like getting your parents and grandparent and your wife’s parents and grandparents all together and you all drained out your savings accounts to buy McMansions in 2006 "before they got even more expensive" – you KNOW this is going to end badly.  Keep in mind that the families are willing to do this because both of the older generations generally only have the one kid – so they have this huge sense of obligation that overrides good financial sense…

    I love that story Jrom!  

    Oil/Dave – Nice job.  Back at $98.65 so you missed nothing overall.  Very glad you are enjoying yourself because what’s the point if we can’t enjoy what we do every day?  

    My that’s gloomy Angel – I thought you were bullish and expecting a big technical correction?  

    Oil demand/Rustle – Yes, it’s BS, plain and simple.  It’s rising in emerging markets but declining here and in Europe and, since we use twice as much oil as emerging markets, it is more than balanced.  

    Note that demand in 2006 – 2008 were driven by the act of a single madman who hijacked the vast economic wealth of a nation to stockpile 200 Million barrels of oil while initiating two wars that consumed another 1Mbd of oil (and still is!).   Bush is gone now, but the damage was done and, unfortunately, China bought into the stockpiling mania as well and added their own 270Mb reserve at the same time (possibly more as they are not forthcoming).  Also in China, private reserves were built up quickly.  So it’s hard to say how much of that run-up in global demand was caused by US and China policy vs. real demand growth.  Clearly in 2009 we got a look at how fast that demand could be crushed.  Supply is certainly keeping up as that’s up 2mbd from 2008 while demand is still lower than it was then and, as I said earlier, we haven’t had an interruption in supply since the 70s.  IPads are in short supply, not oil….

    Fundamentals/Scott – Oh good, I love homework!  Remind me on a weekend (early Saturday is best) and I’ll see if I can put something together but I don’t really have a "process" as I’ve been following a lot of these stocks for 40 years so it’s like asking "how do you know when your kid is sick?"  

    Europe was in a really rotten mood at the open and knocked us back to futures lows and knocked oil down to $98.25 – a nice entry for the brave.  Hard to believe they won’t go for $99 into inventories at 10:30 once the EU panic subsides.  Opec is meeting in Europe and we already know they will hike supplies so maybe a little panic selling in oil specifically but gold is down to $1,537 too so kind of a general commodity sell-off despite the still-weak Dollar.  

    I like the Dow futures (/YM) for a bullish play over the 12,050 line with tight stops and the RUT futures (/TF) over the 795 mark – they are both just below at the moment.  

    Wednesday’s economic calendar:
    7:00 MBA Mortgage Applications
    10:00 Quarterly Services Report
    10:30 EIA Petroleum Inventories
    1:00 PM Results of $21B, 10-Year Note Auction
    2:00 PM Fed’s Beige Book

  203. Oil back to $98.65 but OPEC announcement either now (8am) or in an hour so I’d take money and run rather than risk the whip!   

  204. Phil,
    In conjunction with your commentary the last few days, do you still favor the TZA Jan 34/42 bcs as a disaster hedge if either the up 2.5% (SP 1333) line isn’t reached convincingly or alternatively the dn 2.5% line (1268/ 1260 support) is breached decisively vs something else? If so, what would you opt to cover with – the recomended  RUT 500 Dec puts vs a stk (or a few ) one would want to own. TIA for all suggestions.