David Gaffen of the WSJ countered my morning title by declaring today "Not-So-Manic Monday" but, as any Bangles fan knows, manic is not used in a good way in that sentence!
I do agree with David that we are stuck in "waiting on Bernanke" mode but I was not very alarmed by today’s market moves and, while we weren’t jumping in and buying naked calls – we also weren’t jumping out of our existing positions just yet. Our short-term virtual portfolio is still a safe (perhaps too safe) mix of puts and calls that have kept us neutral for 2 weeks but we have had enough breakouts to give us a good return on positions closed.
There is no reason to shift postures yet as there are still a lot of bullish underlying fundamentals and, if this is a correction, it’s a really pathetic one. Our markets held up pretty well for the day:
- Dow held 12,550.
- Transports held 2,850.
- S&P looked sickly at 1,433.
- NYSE dropped 33 and a third, which was just about .33% – an interesting coincidence for the few album fans that are left in the world!
- Nasdaq held 2,450.
- SOX just had to test the 200 dma at 455 – I predicted they would but I don’t have to like it!
- Russell 805 held – my shining ray of hope!
On the whole, not so terrible on a very bad day for commodities.
Buckle up oil roaches because it’s a long way down to $30!
$30? Have I lowered my $45 target based on today’s action? No, I haven’t, but Sanford Bernstein & Co. has! Zman and I have finally converted a proper research firm to our point of view! According to a research report published today: "Oil could fall to $40 a barrel or even as low as $30 as speculative investors sell their positions and spare production capacity increases."
“We believe such speculative activity created perhaps the biggest artificial distortion of a market since the technology bubble of the late 1990s,” analyst Ben Dell of New York-based Sanford said in a 67-page report entitled: “Energy investing: Beware the Ides of March.” "Timing when the good times will be over is difficult but we fear that the collapse could be dramatic.”
This report is straight out of our usual playbook, pointing out the dog and pony show that is the oil markets:
- Median analysts predict $60-$70 oil for the year.
- Money invested in the commodity index has jumped to $70B from $17B in the past five years.
- "The key factor in the crude market is what’s known as a contango, which means contracts for immediate delivery are currently trading at lower prices than those further into the future. Historically, near-month contracts are more expensive that longer-dated contracts, also called backwardation."
- Investors lose money in this situation because when a contract comes due to sell, they have to buy a more expensive futures contract to maintain their position.
- "Mr. Dell said the situation means investors with money in oil futures are in a difficult, money-losing position, which he argued could eventually lead to a stampede out of the market."
- Spare production capacity among members in the Organization of Petroleum Exporting Countries is rising towards 4 million barrels this year and is expected to exceed that in 2008, returning to levels recorded in the mid-1990s when the price of oil was far lower
- Expensive oil has quelled growth in demand for oil. While demand is still rising in countries such as China, though at a lower rate than recent years, demand in developed countries is actually down
- “Growth in spare capacity should force prices to $40 a barrel — but if passive investors flee, oil could fall to $30.”
So we welcome Ben Dell – to our little oil bear club (membership 3), let’s see if he is as crazy as we are or if there will be other analysts coming into the light now that spring is finally in the air.
We talked about the ides of March last month as we talked about the power of single betrayal to bring down the mighty Caesar (in that case it was Intel knocking out the Nasdaq rally). Now it is time for the analysts to gather and plot the demise of mighty oil. Zman and I can rant and rave all year (and we have) about how ridiculous the market is but when highly paid analysts start questioning the fundamentals in the marketplace then the tide may finally be turning!
It remains to be seen whether other respected voices will rise up to join our cause or if Zman, Mr. Dell and I are exiled to the wilderness, marked as madmen for questioning the will of Goldman Sachs…
Gold lost $5 but held $660 while the dollar retested the falling 200 dma at 85.20. Note the rising 50 dma as we head into a boatload of key economic data and two days of testimony from Bernanke. The dollar is behaving more like Rasputin than Caesar as it has been poisoned, beaten, stabbed, shot and drowned yet is still keeps coming back for more!
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We came back for more too – initiating 8 new oil puts and closed just 2:.
VLO $50 puts from Friday came off the table at .85 (up 70%) and 6 minutes later we decided the Valero rule was against us but, as most of our positions were longer, we weren’t terribly concerned yet.
XOM $75 puts were a momentum trade lasted until they ran into some afternoon chop and the Valero turn convinced us to take them off the table at .95 (up 27%), not too bad for a day’s work!
Nothing else was closed today but it was an active day for intraday alerts so please check there for a full rundown.
