Monday Market Madness

A little pullback this morning (so far).

Nothing we didn't expect as we went into the weekend on the short side.  We'll be watching oil with great interest as it's time for USO to roll their contracts this week, as I wrote over the weekend, that can give us a nice pullback in the NYMEX front-month contacts (July) and, of course, the worry is that a drop in oil prices will spook the energy sector, who have been leading the rally for the past month, accounting for almost all of the index gains. 

I think I spoke enough about oil and the market manipulation that got us here last week so this week I'm going to save space by assuming my readers already know this and I won't be annoyed by GS et manipulating the markets as it did give us some really nice shorting opportunities, so I can't really stay mad at them.  We don't care IF a market is rigged, as long as we can figure out how it's rigged and place our bets accordingly…  Speaking of rigging though, CNBC has the peak oil crew on camera this morning to stop the drop in crude and the WSJ even has a Page One article (right below the fold) that says "US Foresees a Thinner Cushion of Coal."

Wow, I'd love to "follow the money" that led to this article getting front page on the day USO is scheduled to roll their contracts!  Check out the wording of this article: "Every year, federal employee George Warholic calculates America's vast coal reserves the same way his predecessors have for decades…"  Ah, so he's a FEDERAL employee so he MUST be incompetent and he calculates it the same way they have for decades, as if that's bad too (WSJ: How do you measure things that are less than 1 foot?  A:  With a ruler.  WSJ:  YOU FOOL!  That's the same way they've been doing it for decades!).  WSJ cites the "emerging ranks of peak coal theorists" who generally ague that much of our coal reserves are not profitably extractable at current prices, which are 1/3 of last year's prices.  Lies, damn lies and statistics as Mark Twain used to say.  Unlike the WSJ, I would draw the conclusion that conservation and alternate energy are the way to go and this justifies ramping up all such programs! 

Another Front-Page story in the that is blown out of proportion is the main headline: "China Squeezes PC Makers – Beijing is Set to Require Web Filter That Would Censor "Harmful" Intenet Sites".  Oh BOO!  China evil, boo… Right?   Actually, if you are one of the 15% of the people who statistically read further than the headline, you will find that this has been told to PC makers for quite some time and the software does not have to be pre-installed, they just need to include a disk so USERS, who are typically much poorer in China than in the US, will be assured that they have some way of protecting their children from pornography, which they consider a growing problem on the Web. 

The software's Chinese name is "Green Dam-Youth Escort." The word "green" in Chinese is used to describe Web-surfing free from pornography and other illicit content. Green Dam would link PCs with a regularly updated database of banned sites and block access to those addresses, according to an official who tested the product for a government agency. The May 19 Chinese government notice about the requirement says it is aimed at "constructing a green, healthy, and harmonious Internet environment, and preventing harmful information on the Internet from influencing and poisoning young people."  Yes, China being villified for what is pretty much a standard plank of the conservative party is very interesting while the Wall Street Journal turning into a rag paper that splashes sensationalist headlines on page one is very scary!

Speaking of journalists, North Korea put two of ours in jail and, speaking of China, the Hang Seng was only saved by the bell this morning to stop it from hitting the 2.5% mark with a 426-point loss on the day breaking just below (if you were paying attention to our targeting last week) Tuesdays lows!  See, this chart stuff isn't that hard if you pay attention…  The Hang Seng Bank forecast that the Hong Kong economy would contract 5% this year, 60% worse than the 3% decline originally forecast.  "The global economy is not out of the woods, even though the pace of contraction may be easing," Hang Seng Bank analysts said in a note.  Most Asian markets were down around the 2.5% rule except Japan (up 1%) and the Shanghai up 0.5%) who both got a nice boost as the rising dollar rallied the exporters. 

Energy companies led Asia down as oil fell to $66.75 near the close of Asian trading (now pumped back to $67.50 in the US pre-market (8am).  "I don't see the rally that we've had over the last couple of months as being sustainable," said John Vautrain, energy analyst at consultancy Purvin & Gertz in Singapore. "Inventories are still growing and OPEC production cuts haven't been big enough to offset that," he said. "The major economies are still weak and we are still losing demand."  Oil was pumped back up early in the EU session as RDS.A's CEO Jeroen van der Veer preached to the converted at the Asia Oil and Gas Conference in Kuala Lumpur, where he warned that oil prices would rise in the future without continued investment to meet demand once the global economy recovers — and as the world's population grows to a projected 9 billion by 2050.  Of course, this is being taken out of context by the MSM.  "The oil and gas industry cannot supply all this additional demand … this means the next price spike is in the making," he told more than 1,000 delegates at the Conference.

The Baltic Dry Index continued it's steep decline, dropping 7% this morning as actual shipping is not keeping up with all the glowing forecasts we were getting in May.  China did their best to goose the market by reaffirming their commitment to buy $50Bn of IMF bonds, but this was part of a deal that came out of the last G8 meeting, not a new stimulus action. Still it is welcome relief for the many, many third-world nations who are teetering on the verge of default on their debt obligations (so more debt, of course, is the solution!).

I discussed the EU elections in yesterday's post and their markets are holding up better than I expected this morning, up about half a point, as more right-wing parties won seats than left-wingers and business interests are celebrating a rejection of socialism during the financial crisis.  The fact that so many in government were thrown out has been trumped by looking at who got in to replace them.  Even in England, it's Gordon Brown's LABOR party that's suffering and that's actually helping the Pound come off its lows.  Trying to explain the EU Parliament would make the heads of US readers spin in circles as each country has 4+ parties and each of those parties can have a seat on the EU.  Real political choice is something we've heard about in America but we're not ready to try it just yet…

Treasury yields are still on the rise this morning as investors want more than verbal assurances from the Fed that a $10,000 10-year Treasury Bond purchased in 2009 will still be able to buy 10 onces of gold in 2019.  So, whether you think the economy is getting better and the market will rise more than 4% a year or whether you believe the economy is collapsing and the Fed will have to print money 'till the cows come home, either way locking up your cash in a 3.5% long-term bond backed ONLY by the US government seems a little silly these days.  We benefitted from a flight to RELATIVE "quality" as global investors looked for a safe place to stash their cash during the crisis but investor confidence could become the undoing of the low interest rate party.  That would be bad for America, who is looking to borrow over $2Tn this year and will owe over $15Tn by the year's end.  1% of $15Tn is $150Bn a year – that's what it will cost the US in interest on debts for every point over 3.5% that they have to pay for 10-year notes.  That then, becomes money we need to borrow the next year – kind of like a consumer when the credit card companies are putting the screws to them!

There's a very good article in the WSJ (they haven't fired ALL the good writers yet, some have only been castrated!) on what it would take to execute a "good" recovery with a great chart showing the relationships between Unemployment, Inflation, GDP, Dollar, Interest, Home Values, Commodies and Stocks.  I suggest giving that a look when you have the time, the chart they have is excellent and this article is why I keep reading the Journal, even while I complain about it. 

Woops, it's 9am and Europe turned down sharply, now testing Wednesday's lows and down about 1%.  It looks like we're heading down -1.25%, which is what I told members in this morning's 6:25 Alert – we like to stay a bit ahead of the markets!  I also told members to watch our 40% levels, of course: Dow 8,413, Nasdaq 1,717, S&P 946, NYSE 6,232, Russell 514, SOX 329 and Transports 1,868, but there are new levels there as well that we'll be keying our moves off this week.

We can expect a wild couple of days for crude and that $67 line will make or break the energy sector today.  I don't see much chance of a quick rotation so the commodity sectors pains will be shared by the broader markets this week, we also have more Treasury auctions and lots of data ahead starting with Wholesale Inventories tomorrow at 10 am.  We'll discuss more about the data tomorrow. 

Let's be careful out there!