Thrilling Thursday Morning

Another exciting day in the markets!

We have lots of data including the GDP and Jobless Claims at 8:30, the Chicago PMI at 9:45 followed by Construction Spending and oil inventories at 10:30.  I’d say by 11 am we should have a pretty good indication of which way we’re going from here.

Asia didn’t need to wait for our data, the Hang Seng shot up 340 points while the Nikkei rose 287 points but South Korea is the month’s hottest market, breaking the 1,700 mark today, up 10% for the very merry month of May.  Shanghai A shares rose 1.4% after taking a 9% plunge the day before and my regular readers will take note that this is less than a 20% bounce, leaving us unimpressed.  The B shares dropped another half a point but made a strong recovery from an 8.5% drop at the open – possibly a bottom test over there.  From our list of "Duh" stocks (stocks you can just buy based on the name):  China Petroleum & Chemical and Shanghai Pudong Development Bank rose the daily 10% limit.  Industrial & Commercial Bank of China gained 3%, while Aluminum Corp. of China (huge Duh) jumped 7.4%.

The World Bank, in an incredible (as in NOT credible) case of fortunate timing, picked this morning to raise its forecast for China’s growth this year to 10.4%, from 9.6%, down slightly from last year’s 11.1% rate.  Moody’s said it may raise China’s credit rating (now A2), which would be a big stamp of approval for the government.   The World Bank expects China’s exports to rise 20.6% this year.  It also raised its projection for China’s current-account surplus to $340 billion, or 10.8% of GDP.  White House economists have assured the President that running a country with a surplus is a fairy tale, much like evolution, and should not be taken seriously.

The World Bank said the current-account surplus continues to boost China’s foreign-exchange reserves, and it raised its end-2007 foreign-exchange reserves forecast to $1.389 trillion, from $1.066 trillion at the end of last year. In February, its forecast was $1.334 trillion.  The bank said growth in M2, China’s broad gauge of money supply, will likely be 17% this year, compared with its previous forecast of 16%.  While saying that inflationary pressure isn’t an imminent problem, the bank raised its forecast for consumer prices to a 3.2% increase this year from the previous forecast of 2.5%. Consumer prices climbed 1.5% last year.

Over in Europe, the markets are chugging along this morning but what caught my attention was earnings from STO, who had a 27% drop in net profit and are blaming (I kid you not) "lower oil and gas prices."  THIS IS EXACTLY WHAT I’VE BEEN TALKING ABOUT!  These pigs have had their nose in the trough for so long that they’ve let costs spiral out of control to the point where $70 Brent Crude doesn’t pay the bills anymore.  Of course it doesn’t help that Statoil is a willing part of OPEC’s shadow cartel and cut their production 3% from a year earlier…  RDS.A’s earnings were another laugh riot earlier this month as net profits there rose 5.6% as a 6.3% decline in output was more than offset by higher refining margins.  I mention this now because we are going to be taking a short position on them this morning as this is one of the companies that will be most affected by a collapse in RBOB.

Speaking of something that’s going to collapse, the US housing market doesn’t seem to worry the Fed but it scares the heck out of me.  If you have time, Mark Whitehouse wrote an excellent article highlighting the effect that the "sub-prime debacle" is having on a Detroit neighborhood.  I hate to do it but every time we have one of these rallies I end up wondering why I’m still relatively cautious and then I read a little and go "Oh yeah, THAT’S why!"  I will tell you right now that we certainly could have done about 30% better the past few months if I hadn’t bothered hedging (other than 2/27 when it saved our virtual portfolio) but I also place a value on a good night’s sleep and I wouldn’t be having any of those if I went to bed with my neck stretched along with some of these valuations I’m seeing!

Nonetheless we will be ignoring that tripling of delinquent mortgages and pretending we don’t know that during the same time frame (2005-7) the percentage of sub-prime mortgages written went from 10% to 65%, 6.5 times more meaning 19.5 times more people (1,950%) are delinquent on their mortgages this year than in 2005.  As a funny aside, since so many of these mortgages are relatively new and still in "rate lock" we are in a very early stage of the problem (What problem?  Who said problem? Don’t say problem and it will go away!) because only  30% of all loans face rate resets this year but that number will climb steadily to an average of 60% by 2010.

The GDP came in now (8:30) and it’s simply pathetic at .6% (vs. .8% expected) and we’ll see if the markets can hold onto yesterday’s gains.  The CPI was up 3.3% but don’t worry, the "core" CPI was just 2.2% for all you consumers who don’t use food or energy.  In the wild world of stock insanity we can expect this to kill the dollar and BOOST the market initially, based on my old "stocks are just another commodity" theory.

I will be tightening up on my puts today, hopefully with another helping of QQQQ puts, probably the July $48 puts if they come down below $1.20.  We shifted to the DIA July puts yesterday but I’m still not filled on those as there was simply no good looking entry yesterday as the Dow went up and up and then finished the day by going up some more.  It’s not that we’re fighting the tide, it’s more like we’re going with the flow but making sure our life jacket is fully inflated at all times:

Despite the BIG MOVE yesterday, we added NO green boxes in our home markets and the SOX actually moved down so I will urge caution until we see the SOX and the Transports catch up.  The Nasdaq MUST break 2,600 to be taken seriously – Bill Gates and Steve Jobs just  got together last night to tell people "It’s a good time to be in the technology industry" so anything less than 2,600 will be a real sign to pack it in for the week!

Merger mania continues to spill into the weekdays as WB agrees to buy AGE for $6.8Bn (a 17% premium) in a deal that will create the second-largest US brokerage with $1.1T in client assets.  None of that matters to us because we hit the jackpot again with our DNDNs as the company is jumping 31% pre-market on news of confirmation that the FDA may still track them for rapid approval!  Could our week possibly go any better???

We have oil inventories today but I already think that the energy sector got WAY too enthusiastic over what amounted to a very small bounce yesterday but we’ll have to keep an eye on the dollar too:

Have fun today – don’t take the gains too seriously!