Tuesday Tear-Down

I’m not sure how much it matters what happened today as so much is happening after hours.

Iran didn’t fire a missile at an American ship.  This rumor seems to have started on the NYMEX, either before or after oil futures shot up to $68 in after hours trading.  You can tell a market rumor because there is no mention of it anywhere in Google, other than the denial I linked to.  Hopefully this is a sign of the desperate height of manipulation and not the beginning of another round of fear mongering that will take us through hurricane season with $100 oil.

Something that is true, and all over Google, is the FBI investigation of Beazer Homes.  A spokesman for the FBI’s Charlotte field office, said the inquiry involves "fraud in general" and more specifically is related to corporate, mortgage and investment issues.  My older readers will remember BZH as my most hated stock of late 2005 when the darn thing would not go down, prompting me to say on 1/20/06: "BZH is my personal Moby Dick as it refuses to die."  As is often the case, we were just a little ahead of ourselves on that one!

The most interesting thing I read today was George Monbiot’s take on Biofuels.  This administration is pushing biofuels over conservation, looking to replace 24% of our fuel consumption by 2017 when raising the mileage requirements of passenger cars to 25 mpg would accomplish the same thing in just 18 months.  The problem with that plan?  No one makes any money from conservation.  Monbiot points out that "biofuels would set up a competition for food between cars and people. The people would necessarily lose: those who can afford to drive are, by definition, richer than those who are in danger of starvation."

Gosh it’s always something isn’t it?

Something is bothering consumers as confidence levels dropped to 107.2, down from 111.2 in February and slightly below the 108 that was expected and consumer stocks led the markets lower along with transports which, after tonight, may have good reason to lead the markets lower.  As I said just yesterday, the energy markets are now prospering at the expense of the entire economy as they now require a flow of capital that cannot be satisfied outside of crisis spending.  Money that flows into energy is being sucked out of other sectors just as the flow of outside capital is drying up.  This creates a dangerous, unstable and ultimately unsupportable situation.

At this point, in order for you to sustain XOM’s share price, we need to buy 24M shares a day at $75 per share ($1.8Bn).  Should someone not manage to put $40Bn a month into XOM the share price will collapse and we’ve already seen the lengths that people are willing to go to to prevent that from happening.  But now there are other hungry children competing for stock dollars.  TSO needs $6Bn a month (the company’s entire market cap), VLO needs $17Bn a month (just half its cap), MRO takes in $8Bn a month, SUN uses $5Bn a month (60% of its total cap)…  Unless this level of "interest" can be sustained, this global game of musical chairs can end very badly.

Poor DIS, with a $71Bn market cap needs just $8Bn a month to get by but they were the worst performing Dow component today as money flows away from the consumer sector.  AXP turns over just $7Bn of their $67Bn cap each month and I think people use credit cards to buy gas but apparently not enough to keep that company afloat.  The whole Dow, other than XOM and T, had a pretty miserable day and tomorrow is dicey at best as we lost many levels:

So we lost the Dow today and much of our buffer that we had on the other levels.  Tomorrow will be a real test of that 50% line as it will be very hard to recover from an additional slip.

Oil settled the day still under $63 after gaining just .02 on the session but that’s hardly even worth discussing now as the rumor that was dropped at the close allowed them to spike oil up to the highest level since September.  13Mb were shaved off the May contract since Friday, leaving us with 367Mb on order and we’ll see if traders use this opportunity to stock up or sell off tomorrow (oil inventory day).  June is up 19Mb at 171Mb while July gained just 2Mb to finish at 66Mb.  On the whole, the contract has gone from $61.50 to $63 in 3 days as a net of just 8Mb added.

This was to be expected as the dollar flattened just below 83 looking precarious at best. Gold is bopping along that $660 line and we’ll be watching that one closely tomorrow but many mining stocks pulled back today as gold fell off a bit. 

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We closed just 3 positions today as we drifted back to that very uncomfortable zone between our puts and our calls. 

• HAL $30s came off the table at $1.45 (up 45%)
• ICE $125s ran up to $5.35 and that was plenty for now (up 37%)
• LEND $7.50s were bought back for $3 (up 33%) as our first cash win in the new $10K Virtual Portfolio!
  • We sold these again just a little later for $3.95!

Let’s be prepared to throw down some mattress plays tomorrow as it’s all up to Bernanke again to save the markets but how credible is he going to sound at this point if he tries to tell us that all is well in housing?