Testing Tuesday

The world markets have lost their confidence over the weekend with Asia and Europe both off in the .5-1% range over fears of a global economic slowdown driven by rising rates and commodity pricing driving inflation (same as it ever was). Smaller world markets are also facing a lot of pressure as doomsayers are predicting their dependence on foreign capital makes them a crash risk (it does). What they don’t say is that perhaps the fact that the US, Russia, China, India, Europe… all have so much foreign investing in their economies is because we are actually starting to achieve a fluid Global Economy and are moving towards a more open and efficient World Market just like we always wanted to! http://online.wsj.com/article/SB114895250881765923.html?mod=home_whats_news_us I imagine the economists who warn of these risks are the old economists who still think the boarders between European countries mean something more than arbitrary lines to the people who take $99 round trip weekends to 20 different countries the way we would travel from state to state. Today’s Dow tragedy will be people coming to their senses over GM (up 15% last week) and Wal-Mart coming in with sales guidance at the low end of the range. Exxon should also trade down as nothing blew up over the long weekend (although Iran continues to be a problem) so it will be amazing if the Dow can manage a positive day. We need a lot more than a positive day today to confirm a rally, we need about 2% in the next 2 days from all the indices to demonstrate that last week was anything more than a bounce. The Dow is, unfortunately, key as it is sitting just below its 50 dma at 11,280 and has not reversed an upturn through the 50 since September, when it faked a recovery into an even larger drop (but at least set us up for the October rally). Relative international calm is being offset somewhat by a falling dollar on commodities as gold holds steady despite the falling dollar. Oil is being ratcheted up on riots in Afghanistan and Iran taunting the US, saying we couldn’t invade them if we wanted to because we don’t have the troops for it (true) and the upcoming hurricane season which are all being pointed to to justify the 100% increase in oil prices in 24 months. http://www.bloomberg.com/apps/news?pid=10000085&sid=aDPhnm0uO6Wc&refer=Europe One thing nobody talks about is that 1/2 of Iraq’s production is still off-line after 3 full years of US occupation. One of the war’s justifications was that we would restore production to 3M barrels a day by the end of ’03, giving Iraq all the money it needs to get back on it’s own feet. 2 years and 5 months past that deadline, Iraq is pumping barely over 1M barrels a day. That’s a shortfall of $140M per day – a real budget buster! Now, who’s in charge of bringing Iraq oil production on-line? Haliburton! Remember when they got that Mega Billion dollar contract in a no-bid decision which was justified because they were American and the competitors were not? Then do you remember how they blatantly ripped off the military by overcharging for everything and delivering virtually nothing? Remember how, after a prolonged investigation involving over $1Bn in overbillings, they got fined just $11M? Ah, good times… I am waiting to hear the weekend driving statistics but I’m betting it will be less than expected while airline consumption should also be lower (less flights are being flown) and there is also the underreported affect of private pilots and boaters who are keeping it in the respective hangers and docks this year. Today may give us another chance to take up some short oil positions into tomorrow’s inventory report but I will be playing today from the sidelines until I get my 2% from at least one of the major indexes. Just like last week, if we have a commodity driven rally it will be no help at all the the broader issues so we need to be very suspicious of any rally that doesn’t have strong Nasdaq participation. ===================================== I am not playing today. The market is in a very dangerous and very unpredictable spot and I don’t like it one bit! The world economy is strong and we are halfway through the year already, oil is in plentiful supply and China and India do not look like they are growing out of control. The Fed should be near the end of tightening, unemployment is low and inflation is well contained. Housing has already slumped so at least half of that is behind us and the auto makers seem to be turning it around. With all these fundamentals this market should be testing new highs, not moving back to where we were last March! So if the market is dead set on being irrational I will hold on to my cash and avoid buying too many goods from foreign lands as my dollars don’t buy what they used to. There is an avian flu conference in Rome today so expect more of that nonsense. One thing that strikes me is that only 300 scientists are attending vs. thousands at normal conferences (ones which mainstream scientists are concerned about). The virus has killed 127 people since it first moved throughout Asia in 2003. Remember Ebola? Swine Flu? It’s always something and while I am glad there are people preparing for a worst-case scenario, I just don’t see how markets can react to this every time as if it were absolutely going to spread. I’m not going to get ahead of this thing but there is a lot of money to be made in TSN, CAG, PPC, SFD and other stocks that have been devastated by the panic around this issue. On the whole, I seriously believe we can get my 2% rally in the next 2 days and all will be well but I will wait for it to happen as I just don’t have the cash to make it happen all by myself! ===================================== KMI is moving towards a management buyout at a 20% premium which is exciting the whole oil patch but the movement has already happened at the open. Why is KMI doing so well? Storage! They are the country’s largest storage provider and we are just swimming in oil. They also move most of the country’s natural gas which is currently the cheapest form of energy besides coal (and look how well the rail companies are doing with that). HOV has earnings tomorrow and bears watching. CA has earnings at the close and the question for them is how low can they go? This company has been off its game for quite a while and they lowered guidance in April and bottomed out last week at $22. We already know it’s going to be bad so the real question is, how will the market react? Holding $22 will show some faith in a tech rebound while a big sell-off will not bode well for other Nasdaq stocks. FRE will also have important earnings tonight as their revenues are a big indicator of housing health. Unfortunately, some of this will be obscured by accounting for their poor behavior of late. VOD lost $41Bn last year on writedowns of business units it sold off and they are paying $16.7Bn in cash back to shareholders (12%). I like the new plan and the $22.50s might make a nice play at .60. Watch out for the 200 dma at $23.30. We already made our money shorting COST and I won’t reshort down here but it will be interesting to see if I was right about high gas costs backfiring on them in tomorrow’s earnings. TIF has traded down on seasonal issues as well as a documentary that essentially highlights how buying diamonds is worse than wearing fur for the socially conscious (it is) but earnings are earnings and they should have a good quarter tomorrow with the Jul $35s at .60. As reported here first last week, John Snow is being replaced today by GS CEO John Paulson so look for GS stock to go down at least a bit. The $145 puts for $1.35 are the safest way to play it but it may reverse quickly when they announce a replacement. On the other hand, it may be smarter to just wait and take the buying opportunity to the upside but I’m not sure where it will settle yet. If you want to play gold up today on high oil prices then I like AU $50s for $1. Keep an eye on GOLD for market direction. Be careful out there! – Phil