Thrill a Minute Thursday

Are we looking at another China Syndrome today?

A meltdown in the Asian markets caused our markets to collapse on Feb 27th and a 477-point drop on the Hang Seng is no way to start a Thursday and 295 Nikkei points is nothing to sneeze at but we are sitting pretty on our DIA mattress play and we are certainly not ready to throw in the towel just yet.

That dip (for you recent history buffs) was brought on by our man Greenspan uttering the word recession at a speaking engagement and this time it's EXPANSION that has Asian traders concerned .  China's GDP jumped 11.1% in Q1, doing better than 85% of the S&P 500 but inflation rears it's ugly head as economists are shocked to discover that Chinese people eat food and consume energy (unlike our government's measure of Americans).

Today the Shanghai composite "only" fell 4.5%, better than the 9% dive it took back on 2/27 and this drop, although ugly, only returned the Hang Seng to last Friday's close.  Feb 27th we ran into limit-down trading curbs in Asia but today we have a commodity led sell-off as China may be poised to prick that bubble before 10% of their population gets upset.  If 10% of your population was 120M people, you'd try to keep them happy too!  The Shanghai is still up 29% for the year AFTER this pullback and 7% a month is pretty good growth for any market so let's not freak out over a less than 20% pullback of the recent move up.

I would be more concerned about commodity inflation if it were based on reality but this is, almost across the board, a cartel issue where supply is being artificially constrained to drive up prices.  While some commodities, like nickel, may be "hard to get" at times, the fact is that there is plenty of everything and we are simply being ripped off and what we have going on in China is a buyer who is about to put their foot down and demand lower prices.  As I often say, if the global citizens were to conserve just 5% of the energy we use every day, that would flood 5M more daily barrels of crude onto the markets.  How can we do it?  Turn off one out of 20 lights, take one out of 20 less trips, turn the heat down 3 degrees, raise the AC 3 degrees – oh torture!  How would society survive?

This is not a crisis, this is a bunch of spoiled consumers acting like children who would rather spend their last cent on conveniences than walk across the street to save some money.  This is an episode of "Cartels Gone Wild" and what we are lacking here is leadership on the consumer side and it is up to China to set an example for the rest of us, a position they are happy to accept.

Europe is, of course, selling off in sympathy but down less than 1% in advance of the US open.  As this is option expiration week it is hard to tell how much of anything is real and how much is an excuse to take out some callers (I know I'll be taking out mine!) ahead of Friday's rollover.  Expect the miners to get hammered today and maybe even (dare we hope?) the oil companies but we need to take at least half our SLB May $75 puts off the table ahead of the weekend as they have more than doubled already, possibly a triple today.

The big question is – how many green boxes can we hold?  We had just 3 red boxes on our US chart yesterday and only the BSE was showing any red in Asia (2 boxes) with one neutral on the FTSE.  We already have some red creep this morning and what we don't want to see is downside leadership forming:

Let's remember that Asia sold back down to Monday's levels and the Dow is 200 points above that.  A 100-point drop would be a sign of strength not weakness and we will analyze the markets on the fly in the members section today as we manage our mattress plays, hopefully as a nice opportunity to pick up a little money and add a few positions as other people panic around us!

Let's keep an eye on the CAC, the Russell and our pals at the SOX as they all can fail multiple levels today – if those guys finish with 6 more red boxes than I doubt we'll recover into the weekend.

Oil should get a nice shove down but there just aren't that many May barrels left to sell after yesterday's trading so it's really just a sentiment thing today.  Diving crude prices are GOOD for refiners as long as gasoline holds up so this will be a nice insight into how stable TSO, SUN and VLO are at these prices.

ZMan discusses UNG, natural gas ETF which I will initiate coverage on by calling it my short of the year!  Pretty much no matter what the price of gas does, you can be fairly certain that this fee machine will chew up that value day in and day out, much like USO did to investors since it's inception:

Gasoline demand is finally dropping off a bit and energy traders are likely praying for a drawdown in nat gas to provide them with an excuse to rally today but any disappointment and I think we may have one of those rare situations where no one wants to go long on oil into the weekend.  After taking British hostages, Iran letting people know they are playing with nukes again just isn't going to cut it on Fear Factor.  Also there is the very real "danger" of nothing bad happening during the Nigerian elections this weekend, that has been one of the main pillars of concern since February but suddenly is not even mentioned (just like the natural gas cartel that Russia was forming).  It's HYPE, nothing but HYPE!

The dollar is still the worst currency on the planet but that won't help gold if they thing the jig is up in China, look for both to trade down today, again emphasizing how utterly ridiculous commodity prices are.

As long as we hold our "break up" levels I will be a happy camper but it certainly looks like we'll be having an interesting day.