Monday Markets

Uh-oh!

Something's wrong today.  Something is missing from the markets this morning and it's about $50Bn worth of merger money – where's our mergers???  Is it just one of those random slow days or is this the beginning of the end?

With $496B worth of deals in May we expect a lot EVERY Monday and we do have AV ($7.5Bn), SLR ($3.6Bn) and a couple of small ($2Bn) European deals (AXA & SGRO) but that's a far cry from the $130Bn WEEKLY pace we've been on.

All is quiet on the far eastern front as Shanghai drops another 8% on both the A&B side, the worst drop for the A shares since the February 27th catastrophe that triggered a 500-point drop in the Dow.  This is the second biggest loss of the DECADE (Feb was #1) and $350BN worth or shareholder value was lost TODAY.  Unlike February, other Asian markets are weathering the storm well on the heels of Friday's strong US market, the Dollar moving up against the Yen and very strong (up 13.6%) Japanese business spending.

All was not quite on the political front as the Dems had a debate yesterday that followed the great Republican philosophy of Abraham Lincoln who said "A house divided against itself cannot stand."  Senator Obama laid down the gauntlet and said he was campaigning for "a different kind of politics that brings Americans together" as he seized on the question put to the candidates when the Democrats were asked for a show of hands for making English the nation's official language (a Republican cause).

With some agitation in his voice, Obama interjected to moderator Wolf Blitzer of CNN, "This is the kind of question that is designed precisely to divide us….The issue is not whether or not future generations of immigrants are going to learn English. The question is: How can we come up with both a legal, sensible immigration policy? And when we get distracted by those kinds of questions, I think we do a disservice to the American people."

Led by Sen. Clinton, the candidates staged a mini-revolt against Mr. Blitzer over the subject of using military troops to quell the bloodshed in Sudan. Mr. Blitzer, picking up on Sen. Biden's advocacy of sending troops, asked for a show of hands on using force there. An hubub broke out among the participants as they sought to qualify their responses. After a few moments, Sen. Clinton snapped, "We're not going to engage in these hypotheticals.'' Several of her rivals applauded.

Democrats presenting a united front this early in the campaign is very bad news for the Republicans and even worse news for the administration, who hoped the election would distract the majority party while they conduct some house cleaning.  While there are literally too many scandals to mention Slate has come up with a very useful interactive guide ordered by category: Sex, Conflicts of Interest, Politicking, Gonzales (rates his own section), Greed, Snooping, Big Business, Abuses of Executive Power, Press Manipulation, Secrecy, Karl Rove (also scores his own section), Favoritism, The Hammer (it's like an all-star team!), Military, Prisons and Lobbyists.

Even if you are a Republican and, like 23% of your fellow Americans, approve of the job the President is doing, you have to appreciate the excellent graphics and this great use of a Web 2.0 environment to summarize such a vast quantity of scandalous behavior.

Europe is not taking the Shanghai drop as lightly as Asia and markets there are off about 1/2 a point with no news to speak of.  At home this week we have a pretty light data schedule ahead of next week's Retail Sales, CPI, PPI, Beige Book, Industrial Production and Cap Utilization reports – all during options expiration week coming into the end of the second quarter – Wow!:

• Factory Orders at 10 am today
  • we need an upside surprise, over 1.5%
• ISM at 10 am tomorrow
  • this is a random number that should be ignored but isn't
• Productivity and Crude Inventory reports on Wednesday
  • wages are way up so we'd better be producing!
• Jobless Claims, Wholesale Inventories and Consumer Credit on Thursday
  • inventories should give us a boost but watch out for Consumer Credit!
• Trade Balance on Friday
  • no points for guessing which way this is going…

We're supposed to (according to me anyway) be consolidating into next week's expirations so we're not going to worry about a little pullback.  We are very well covered to the downside but we won't be treating this pullback as a buying opportunity until we start seeing some real breakouts:

Not  the kind of chart that inspires panic selling is it?  If the NYSE holds 10,000 I can't see being the least concerned and if the SOX can fight the tape today and close positive, I may start loading up in that sector as they clearly have a lot of ground to make up but today is a day to go with the flow and not try to outthink the market.

The roaches will try to keep oil up at $65 despite declining fundamentals.  I couldn't tune into a financial channel this weekend without being forced to endure a lecture from T. Boone on why $70 oil is right around the corner.  ZMan pointed out over the weekend that US righ count is at a new record (only kept since 1987) and MEND (Nigerian Rebels-R-Us) agreed to a one-month ceasefire, so it might be tough for Mr. T to have his way this week, especially with the dollar on the MEND.

Note on the chart that Crude Oil hasn't budged since December 29th yet the refiners are charging you 20% more for the gasoline they make out of it.  That's $277M PER DAY more than they were charging in December for the same gasoline, refined in the same refineries that they've been neglecting for 20 years in order to keep them in such disrepair that it's news when they DON'T have an outage.

WAKE UP CONGRESS!!!

I'll tell you one thing, $277M a day in price gouging sure buys you a lot of airtime for your PR people lobbyists so they can tell you how there's no price gouging going on!

The only line in the sand is the forced perkiness of the 50 dma at $64.33 but let's keep an eye on the declining 200 dma at $61.75 to the downside.  We've lightened up on our oil puts and I'll be off this sector through July if we don't get a nice down move soon.  At this point nothing would thrill me more than seeing TSO go to $70 ahead of earnings where we can see how well they justify a near triple off their September lows (not to mention the 5-fold increase from the '05 open, in a year the company earned just 37% less than they did last year).

Let's see if Gold can hold $670 this week as the dollar makes yet another attempt to conquer 82.50 but our Friday Trade numbers could stick a nail in that coffin.  Long term rates are firmly over 5% and shorter rates are catching up so we'll watch the housing sector today for signs of danger.

One play we are going to be watching this morning will be RHT, which was suggested by Mike this morning.  I like them a lot and NOVL already gave a good report on the Linux segment.  LNUX shot up last week too.   Earnings are on the 27th and expectations are pretty low.   Earnings are after expiration so you can take the Sept $25s for $2.25 and sell the June $25s for .60 and then sell the July $25s, now $1.50, which should hold their value with earnings coming up for a pretty free look at earnings.

Of course, we need to see how the markets hold up in general but I'd feel good about picking this one up on a dip, especially if we can get a good retest of $24.

Let's be careful out there!