Friday Already?

It’s Friday (the 13th!) already?

Darn, and we were having so much fun!

Isn’t this a great job – we hang out all day and follow the markets, make a few bets, make some money and chat amoungst friends.  I find myself anxious for Monday some weekends so we can get back into it and this is certainly one of those weekends.  We have lots of data, earnings and Uncle Ben testifies to Congress so it’s going to be fun and exciting.

Meanwhile, finishing up this week, GE (my favorite company) pulled off in-line earnings on strong sales despite taking another $200M charge on their sub-prime lending division (they got hit for $500M last Q).  Does this mean the sub-prime picture is improving?  Sorry, no – it means that GE dumped $3.7Bn worth of subprime loans on WMC Mortgage and is selling the rest of the division, exiting the US mortgage business.

On the opposite side of the planet, mega-electronic corp Samsung posted a 5% profit drop, generating just 1.42 Trillion in net income (won, that is!), the smallest profit ($1.54Bn) since the recession of 2000-2001.  Chip margins fell from 30% to 8%, down from 12% last quarter and cell-phone margins fell from 13% in Q1 to 7.7% in Q2.  The only profitable division for Samsung was LCDs, which jumped to 8.6% from 3% in Q1.  Despite the troubles the stock stayed strong on RUMORS that Carl Icahn has an interest in the company.

Asia isn’t worried about this so why should we (because we are rational, that’s why!)?  Hong Kong (up 1.2%), South Korea (up 3%), Singapore (up 1%) and India (up 1%) all finished at all-time highs while Australia pulled back a little from an intraday all-time high.  Exporters led a relief rally as fears of a US consumer slowdown were calmed by the performance of the US markets.

Europe is not so exuberant as Asia but is up across the board and the DAX, which dropped 150 points on Wednesday morning, is now flirting with record highs.  Earnings season is off to a good start in Europe and the markets there are all working their way into record territory as well.  Interest rates are kicking up in Europe and all over the world as this global stock rally is being fueled by $353Bn in margin borrowing in the US alone.

Import prices were up 1% in June, vs. .6% expected while retail sales were down .9% vs. down .1% expected.  The retail sales less autos (which we knew were pathetic) were down .4% vs. .down .2% expected so we have once again exceeded very low expectations but this time to the downside!  I predicted yesterday, in my list of bad news to come, that this number would be a miss and would get much worse in July as the dollar has plunged 2% and oil has gone up 4.2% since June.  Will this finally matter or will the market continue to whistle past the graveyard?

Also as predicted by me, oil prices drove the trade gap to my $60Bn mark despite the fact that our volume demand for oil slowed in May.  Gasoline sales were off 1.1% last month – no wonder T. Boone and Flynn rushed to the studio this morning!  Zman is buying into my "Blow-Off Top" theory in oil and is looking at a possible key reversal but, as expected, Nigerians are back to kidnapping people (it’s been almost 2 days!) driving Brent Crude to an 11-month high of $77.45 but this has pushed Brent into backwardation, a situation that can lead to rapid price declines as the front month prices exceed the prices speculators can expect to get in the future, causing them to rush barrels to the market.  "Markets move to backwardation when demand is strong," said Dennis Gartman, the editor of The Gartman Letter trading note.  "The market is no longer willing to pay for a commodity to be stored and instead is marking prices higher to draw upon available reserves."

We will be focused on our refiner plays and Zman points out that WNR and HOC have really gotten ahead of the group in terms of valuation:

With crack spreads in rapid decline, it will only take one earnings miss (VLO leads the group off on 7/31) to send HOC and WNR into a pretty good correction so we’ll be playing the HOC Aug $75 puts at $2.25 and the WNR Sept $55 puts at $2.12 but scaling in slowly ahead of earnings as oil above $73 will continue to support the group but let’s keep an eye on gasoline, which should abate as summer driving season continues to disappoint.  We hit the jackpot this morning on BHI as my members pick from yesterday was:

BHI Aug $85 puts at $1.62 XXX
BHI July $85 pts for .30 as a fun play XXX

Oh, that reminds me.  We are closing subscriptions this weekend so the last chance to sign up before late August will be Sunday as we’ve got a full house and it’s time for some remodeling in order to meet demand.  We had a record 440 comments in yesterdays member chat and, while things went very smoothly, it’s still a good time for us to take a breather so that we can keep things humming in what should be a very busy second half of the year.  If you are considering membership, check out Happy Trading’s Thursday wrap-up to see some very happy comments from our subscribers.

Our big chart is as green as green can be so let’s enjoy it while we can.  We are hoping for the big breakouts but please maintain at least a mild degree of skepticism in case someone decides to take away the punch bowl one day:

Will the S&P be our first US index to hit our target?  I know a lot of self-proclaimed "Wall Street Clowns" tell you they had a target but I’m the only analyst that I know of who has clearly publishes them for all the major indices every single week!

I’m still enthusiastic, in the "pretend nothing bad matters" sort of way we have to do it to enjoy this rally and we’ll see how we shake off a bit of disappointing news today.  Let’s be careful out there keep our mattress plays tight and try to have some fun!

Have a great weekend,

– Phil