Yawwwn!
Like I said, flat for the day…
I don't care what the Dow did, it's a very silly indicator on the whole, it's the S&P that matters and the S&P never got us excited in today's action, despite all the Dow hoopla as it briefly flirted with 14,000. There is as much value in not getting overly enthusiastic and buying at the top as there is in not panicking and selling at the bottom and we do our best to maintain a level perspective in good times and bad in our little community.
We took the fewest amount of new plays in weeks today and ALL of them were hedged and ALL of them were effectively top calls before lunch – doing what we like to call "selling into the initial excitement" and taking advantage of short-term option premiums to reposition sales against our leaps. Our first sign of a downturn came at 11:28. when I cautioned against jumping into a Google play because I didn't like the way the Dow was approaching 14,000 (tentatively). Kudos to Optrader, who made a canary in a coal mine prediction with AMZN as he called it at 11:14: "AMZN has been the weakest of the horsemen. It will be the first one to drop. Looking to see if we get a double top here."
By 12:04 we were sure the markes were going down as I said: "Retail got much weaker today and I’m not liking the market internals despite the headline indices."
I'm not going to wast time discussing the wiggles, as I said in the morning, today's action was meaningless ahead of a very heavy data and earnings week -just the calm before the storm, a time when those waves Sage mentioned really start to kick up! That is pretty much how we spent our day, rolling our callers, as I set the morning tone with the first part of our Long-Term Virtual Portfolio review.
We got a nice pullback in the oil patch, despite the rise in crude and we were right on top of it with a major "shenanigans" call on the NYMEX as the traders there worked hard all day to pump up the front month contract pricing while dumping longer barrels at an alarming rate, throwing contracts from October forward into backwardation. There are still over 500M barrels on order in the front three months but now there are "just" 131M August barrels closing on Friday for Cushing delivery (a facility that can handle, at most 40Mb). September is jammed with 347M barrels already and October has 95M barrels scheduled for delivery to that 40Mb facility. December is already looming large for energy speculators as 189Mb worth of contracts have already been shoved into that month – this should be great as it unwinds!
I mentioned the exchange rates effect on real crude pricing in the morning post and I think any foreign oil company is going to disappoint in local currency because they are getting paid in dollars that are worth less (worthless?) and oil was over $70 all of Q2 '06 and has averaged barely $65 this Q2 but, in Euros or Yen, you can subtract 8% from that. Hard to wrap your head around but last year the $70 that you got for a barrel of oil bought you 55 Euros and now a $65 barrel buys you just 47.5 Euros.
So we can expect some major disappointments from oil companies who pay wages and expenses in Euros to service companies who are making money “hand over fist” and getting paid in crappy dollars. That’s why Iran just insisted on being paid in Euros or Yen – their revenues are off 13.5% in Euros or Yen last year and you know the average Iranian isn’t planning a NYC shopping spree so they are getting hammered on the exchange rates just like we are when we try to convert our dollars into real currencies.
How long can this continue to not matter? EG asked yesterday why we care what currency oil is purchased in but it must be understood that oil is created and sold. It is a real thing that can be readily marketed while the dollar is a fictional insrument that is backed only by the good word of the US government, supported by the confidence the world has in our leaders (uh oh!). You see, as long as 90M barrels of oil per day are pulled out of the ground at $70 per barrel, there is a demand for $6.3Bn per day to pay for these barrel. That means every day someone (in a figurative sense) who wants oil has to go to a bank and say, "yes, I'd like to withdraw $6.3Bn please" and the bank has to pull all those crisp little bills out of the register and put one of those little bands around 6 stacks that will be labeled $1 Billion and then the teller has to count out another $300Bn in small bills.
Since this goes on around the world 365 days a year, that's a demand for $2.3 Trillion per year that is paid for a commodity that literally goes up in smoke!
Even if 70% of those $2.3T are quickly thrown back into circulation by converting them to harder currencies (and USD holdings among world banks average 60%), that still leaves a demand for $690Bn brand new dollars to buy oil with (at 60% the number is $1.4T). "No problem!" says the US treasury, who run their presses day and night in order to supply those dollars, which are sold at Treasury auctions. As far back as 2005, Peter Schiff identified the cracks that were forming in that system.
The dollar made another new low today and is resting right on the 80.50 mark, a breakdown here will lead to a test of 80 that we really don't want to face. It is already past the point where foreign central bankers should have stepped in to save us but, like I said last week: "I am concerned that China has already been bailing us out to the tune of $130Bn a quarter, so we are putting a lot of pressure on Japan (who kindly left rates at .5%) and the EU to save our assets."
Gold held the magic $666 mark and a breakout of gold here is what we are hedged very heavily against with our various miner plays. I hope I'm wrong and we weather this storm but that's no reason for us to go our without our umbrellas is it?
