Friday Flatline

That was just fine!

Nothing bad happened, most of the Dow’s losses were minor with my own picks of MO and MSFT as 2 of the three biggest losers of the day.  BA and AA also dropped a point but no one who’s owned those shares for more than a week is complaining. 

• Dow finished the day at 12,653 – right on target.
  • Transports were flat at 2,875 – more than we hoped for!
• S&P pushed a little bit higher closing at 1,4485.
• NYSE zoomed right over 9,300 to finish at 9,327 with great momentum.
• Nasdaq finally acted like a leader (again with no help from Google or Apple) and gained 7 points to hit our target of 2,475!
  • SOX turned it on today, up another 4 points to 464 – yay! 
• Russell added 2 more and finished the week with a bang at 809.

It’s funny how the transports were able to ignore a $1.72 jump in oil.  Maybe it was because that entire $1.72 was thrown onto the boards in the last 35 minutes of trading in a blatant attempt to headline a rise of oil back to $59 into the weekend.  Nobody thinks this is real anymore, now the oil traders are just fooling themselves – and what a pit of fools they look like, swapping 387M barrels between March and May while only actually paring 7M barrels off the total order.

Our week ending crude contract orders were:

• March Open: 353K (-33K) $59.02 (+$4.98) 
  • 282K contracts traded today.
• April Open: 135K (+22K) $59.73 (+$4.92)
  • 79K contracts traded today. 
• May Open: 59K (+4K) $60.48 (+$4.99)
  • 24K contracts traded today.
• June Open: 97K (+1) $61.11 (+$4.99)
  • 15K  contracts traded today.

You can see the level of farce the have attained when you look down the list of the NYMEX contract closures and see massive discrepancies between the price they forced it to and the price barrels actually trade at.  For example, the last trade on the October contract was $61.26 (8K traded) but they jacked up the "ask" price to $63.02.  This pattern is repeated in most of the longer months where the gains are paper only with no actual trading interest in paying these prices. 

Why is this kind of blatant market manipulation allowed to continue?  This is not innocent speculation, it a deliberate attempt to game the system so the weighted "front month" contracts that are reported to the public and used to price the products you consume as high as you can possibly tolerate.  This is how VLO, TSO, XOM et al turned in record quarters even as their revenues slipped – the margins they are charging you are climbing faster than the price of oil is falling!

It’s OK though, help is on the way.  Thanks to the recent election I have been directed to some interesting Government actions that are now working their way through house after being sandbagged by the last Congress. 

Our own GAO has a Commodity Futures Trading Commission’s (CFTC) that is finally going to get some teeth.  In their last report to Congress they said: "We are also focusing on what fraudulent, manipulative, and abusive practices have been identified by CFTC and others in the trading of energy futures. We will provide information on the enforcement programs of CFTC and NYMEX, including the results of recent enforcement actions taken by CFTC and NYMEX and the settlements reached involving these enforcement actions. We are also addressing the extent to which CFTC uses internal and external sources in developing enforcement cases. This includes discussing NYMEX’s enforcement activities and how NYMEX coordinates these activities with CFTC."

By providing transparency and oversight of off-market trading, this legislation would allow the CFTC to better monitor these deals to prevent market manipulation. The legislation would not eliminate legal OTC trading, it would merely require speculators to report their trades and be held accountable should it be determined they illegally manipulated energy markets. This increased oversight will improve confidence in the market, and will help eliminate the unreasonable inflation of crude oil prices, helping protect American consumers at the pump.  

Congressman Brian Baird (D – WA) is leading the charge with the introduction of the aptly named "Pump Act" which says:  "The PUMP Act would require off-market speculators to play by the same rules as speculators who participate in on-market trading already do.

The PUMP Act would also increase penalties for market manipulation. The legislation would allow the CFTC to double the penalties for market manipulators, allowing civil penalties up to $1 million or triple the monetary gain, and increasing jail time to up to 10 years. "

You can just imagine how happy this make me!

So enjoy your last hurrah pump boys – the Feds are coming!

Right now our friends in the oil pits are betting it all on the hopes the President Bush will not only get Congress to approve a build in the SPR but will be able to circumvent them immediately in order to fill at a higher rate than promised.  It turns out this not only relives the energy traders of the burden of their inventories but it allows big oil companies to ship their surplus to the government and label is "payment in kind" at the full retail price of a barrel of oil, more money than they would make if they went through the usual middlemen.

You would think that a single customer ordering 700M barrels of oil would be entitled to some sort of frequent big-oil lackey discount wouldn’t you? 

Don’t let them tell you filling the SPR isn’t a big deal – it is!  700M barrels is 2M barrels a week for 350 weeks, and you know what happens when we have an unexpected drawdown of just 500,000 barrels in a weekly inventory report.  The only plan anywhere near this level of insanity would be to compress, supercool and liquefy natural gas so that we can store hundreds of times more of that than we could ever use.  What?  They’re doing that too?!?  Oh I just give up….

The SPR, by the way, currently is just about at it’s maximum fill of 727M barrels which you will often hear referred to as a "30 or 40 day supply" which is totally untrue.  The US imports 12M barrels of oil per day and 5M of that is from Canada and Mexico.  While I wouldn’t put it past this administration to declare war on our neighbors, at least we might beat them and take their oil…

Even if you wanted it, the maximum physical drawdown of the SPR is 4M barrels a day so no matter how you slice it, there’s 6 months worth of oil there!

There is another 1Bn barrels of oil in private storage in this country and those inventories are bursting at the seems with near record levels while our military efforts in Iraq and Afghanistan continue to consume an additonal 1M barrels of oil per week (tanks use a lot of gas!).  Combine that with Bush’s previous SPR fill rate of 1.5M barrels a week during the largest bull run of oil in history and you can see how desperate they are to keep things going, things like the war, filling the SPR and encouraging you to use as much oil as possible…

The war (wars, police actions, peacekeeping efforts, nation building, whatever it is we’re doing this week) and filling the SPR account for over 100% of the global growth in crude demand since 2003!

Maybe, just maybe, calling them manipulators is a little harsh, John Perkins says:

"Although unconscious, deceived, and – in many cases – self-deluded, these players were not members of any clandestine conspiracy; rather, they were the product of a system that promotes the most subtle and effective form of imperialism the world has ever witnessed."

Speaking of imperialism, I’m sure you’ve heard how Chavez has seized "extraordinary powers" giving him unprecedented control to push forth his policies.  What is not widely known is he was the second leader that week to take away the autonomy of Government Agencies as our own El Presidente executed Executive Order No. 12,866, which the White House has used to give itself the power to review regulations before they can be officially published in the Federal Register.

How serious is this?  “This order is just the latest in a series of unacceptable power grabs by the Bush administration,” said Joan Claybrook, president of Public Citizen. “President Bush is asserting the right to change the law by executive fiat.”