It was one month ago, on a Tuesday, when we became concerned about the Nasdaq making a “death cross” where the 50 dma crossed below the 200 dma. At the time I said “this is a very powerful signal from which few stocks recover.” On the same day we had the Global Banker’s Conference in Basel where I called for an end to the senseless war on inflation but no one listened to me (to be fair, I was over in the kitchen and they were in — Switzerland).
Since then we have been paying the price with one of the worst 30 day periods in many years. Uncle Ben came home last week and finally took my advice and said inflation is under control – this is a lie but he can’t come out and say he no longer cares about inflation, it would make him look like he changed his mind and, as John Kerry learned, that is just not allowed in today’s politics. Instead the Chairman says that inflation is moderating, this is a prelude to a statement that we can expect in the near future that “some inflation is acceptable” which will signal a real change in policy.
Remember, it’s the bankers who hate inflation as they are lending you dollars today and they don’t want to get paid back in crummy deflated dollars tomorrow. What good does it do them if you get a raise and your house doubles in value and you can easily pay them back when it costs them double to hire a clerk? Most people live paycheck to paycheck and it’s generally a good thing when those paychecks get bigger. The whole concept of credit was initiated under the premise that you will earn more in the future. Giving you credit and charging you interest that is above the rate of inflation when your wages are stagnant is one of the great cons of the 21st Century.
Who else hates inflation? Rich people! Not people with a million dollars or even people with a few million dollars… I mean RICH people – George Bush and Dick Cheney level rich people. Rich people don’t play the markets, they have a diversified virtual portfolio of investments that yields 8-14% over a long period of time. Inflation is their mortal enemy! It erodes their returns and, ultimately, their wealth. What’s the point of wiping out inheritance taxes if the money you leave is worth less every year? Speaking of which, since the Republicans can’t get the “death tax” removed, they have decided not to enforce it:
http://www.upi.com/NewsTrack/view.php?StoryID=20060723-015933-5085r
Now, where was I? Oh yes, the markets:
Asia had a nice day but didn’t get too excited as they got burned last week on our one day rally, while Europe seems to be adopting a cautiously optimistic stance. In a blockbuster deal that affects a Billion people that you will never hear about, Disney bought Hungama, the Indian Children’s network and made a 15% investment in the parent company. The whole thing only cost Disney $45M, not bad for a network with 30M viewers but advertising in India is not what it is in the states… yet!
Speaking of yet, it’s been 7 days since I predicted blackouts within a week and so far we only have Queens and California even though we have record power usage around the country – with the weather moderating we may be getting off very easy.
Today we watch only the S&P which is sitting above the 50 dma(having just made a death cross) of 1,259 and just under the 200 at 1,265. We need a breakout well above the 200 to bring the 50 back over otherwise the month long Nasdaq drop may be repeated on the broader index (total disaster):
http://finance.yahoo.com/q/bc?t=6m&s=%5EGSPC&l=on&z=m&q=l&c=&c=%5EIXIC
As my readers know, I do not count an oil and commodity run-up as a rally since these sectors do the broader market no good at all as they suck up investment capital and their success means higher costs for everyone else. What we need (and have needed since October) is a change of leadership that really has to come from the Nasdaq which ultimately draws its strength from the SOX. TXN gave a report that’s as good as it gets yesterday and the SOX picked up 2% but the index has over 25% to go before getting back on a positive track. So unless we begin hearing about a spectacular tech rally led by the semis, I just don’t know where the fuel is going to come from to push the broader market.
http://stockcharts.com/gallery/?%24sox
On the downside, we need to watch the NYSE to hold 8,069 and the Dow to hold 11,053 – both 50 dmas. Any drop on these indexes could put us less than 10 days away from additional death crosses!
Oil jumped right back to $75 on so many negative events that I was almost ready to buy a barrel myself. There is a fundamental disconnect though in the fact that refinery outages cause the price of oil to rise as we are operating refineries at max capacity so any outages mean that less oil will be used that week. This is how you know the market is still in the hands of speculators and still overbought but that kind of logic didn’t stop tulips from trading at $100 per bulb once upon a time so I’m not going to call a top out of principle. Follow the Valero Rule very carefully with oil stocks and you will do well.
Historically, you could get about 15 barrels of oil for an ounce of gold, currently you get 8 so either oil is very expensive or gold is very cheap – there is hedge money to be made by taking a mid point position on both…
Gold was at $850 an ounce in 1980, 9 years after the US went off the gold standard at $35 an ounce. The markets are up about 1,000% since the early 80s so you’d better hope that gold isn’t overpriced because that probably means that stock prices are actually out of control!
I want there to be a follow through day so badly today I am worried it is clouding my judgment so I will only make plays as dictated by the S&P as it goes either positive, negative or neutral.
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BP reported stunning earnings of $7.3Bn for the last 3 months vs. $5.6Bn for the same period last year on just 24% more revenue. That profit was AFTER a $500M charge for claims due to last year’s refinery explosion. The stock has a very weak chart and it will be interesting to see which way this one goes.
MO had a nice beat and raised guidance a touch but I’m not sure it’s enough to get them past $80.
LXK had very surprising earnings and I love their razor and blade model (sell super cheap printers and make money on ink cartridges) which is finally starting to pay off (I an early call on this back in April). I think this can be a sector play so I like HPQ (8/16) $32.50s for .70. People still do not get the business model and LXK is selling off pre market. I like the LXK $55s if they can be had for under .75.
TM (8/4) is still lazing around $100 and the $105s seem like a reasonable play at $1.30.
XLNX has earnings today and I see no reason for them to be at $20 other than this silly stock option thing that is plaguing the industry. While it is possible they will have bad news and make a large adjustment, it is also possible that, like Apple, they find nothing significant and the stock goes crazy. The Sept $20s are a nice gamble at $1.40.
If the market is going to turn up then GE will be the poster boy for it. This company should be at $40 and would be my choice if I had to bet my whole retirement on one stock. The Jan $35s are just .65 and the Aug $32.50s are a giveaway at .60.
OXPS had a nice day yesterday but it could have been much nicer as the stock is still 33% off it’s highs. The Sept $25s for .85 give it plenty of room to grow.
MCD should finally put our $35s in the money even though the earnings were just what they said they would be a couple of week’s ago. The $35s were still .85 as of yesterday.
MMM had pretty good earnigs with in-line guidance – there is just no excuse for the markets to sell off today!
UPS also missed and lowered guidance and is selling like crazy in the pre- market. They are scaring the markets but to their credit they are not blaming the economy. YRCW (7/28) might pull back a little and give us a great opportunity to pick up the $45s for under .60.
Remember when PEIX was at $44? It was only 2 months ago… They took a nice bounce off the 200 dma at $18.81 yesterday and make a nice way to play $80 oil by owning the stock at $18.64 and selling the $20 calls for $1.10 (6% for the month). Buy out your caller and sell if it dips below $18.
SIRI was just being given away yesterday at $3.85, don’t expect it to last… Jan ’08 $5s for .85 will reward the patient but you may as well just buy the stock. The Jan $5s are just .35 but it may not be enough time for earnings to kick in. Last time I called a bottom on Sirius was 11/05 and we got a quick double on it, in the short term I would take $5.50 and run.
BNI had a nice beat (5%) but UPS will mute the results for a little while.
TASR (tomorrow) shot up yesterday at the close and even if it was for no real reason I still like the Jan $10s for .65.
MRVL split today, a move that made more sense when they planned it in the $60s.
X blew the doors off earnings and NUE is up 40% so let’s look at MT (8/2) $32.50s for $1.20 as the slow mover of the bunch.
STN and BYD were both disappointing so we are lovin’ the LVS $60 puts.
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Boone Pickens says oil $100 on CNBC again so it must be time to short some oil stocks. Following the Valero Rule, IF oil breaks below $75 despite the rantings then there may be a sell-off into tomorrow’s inventory. These are a quick in and out trade and not for the feint of heart:
XOM has taken a big hit every time it crossed $65 starting back in Feb ’05. Tomorrow they are expected to report that they made $1Bn a week in Q2 and the Sept $62.50 puts at $1.20 shouldn’t get hurt too badly if we are wrong.
CVX $65 puts are much more attractive at $1.20 than they were yesterday at $2.25!
CLB may not have the earnings to justify the 41 p/e, they recently cancelled a stock split which raised a red flag to me and they are trading at 100% over last year’s average. This is a straight short as they have no options and we can watch how they handle the 50 dma at $57.
Hopefully these will get a strong start on high oil prices and then turn down later in the day so we can get a nice cheap entry.
