Let’s see how much of yesterday’s gains we end up giving back…
We have lots of earnings disappointments (see last night’s post) including TXN, who reported soft demand, as well as BP – the first in what I have been predicting will be a series of disappointments from the majors as the service companies’ record profits translate into integrated oil’s record costs.
Had BP not sold a refinery (who needs those?) and a pipeline (did they have one that was operating?) they would have "only" made $5.35Bn, down 12% from last year as the endless string of various (and very coincidental) supply interruptions finally begins to outweigh the benefits they gain from supporting the price of crude by failing to supply it. Isn’t economics fun?!?
Economics have also finally kicked in at our favorite lemonade cartel as OPEC President Mohammed al-Hamli said that a "fair price" for oil is between $60 and $65 a barrel or, as I said last week, they simply can’t sit by and collect 20% less dollars per barrel than they did last year while pumping 10% less oil.
Unfortunately for us, the energy sector has grown like a cancer on the markets and now comprises over 20% of the S&P so a correction there will take down the whole market – especially as we don’t have any real new leaders ready to step up – in large part due to the fact that energy costs have finally reigned in consumer spending, driven up costs and damaged the other 80% of the market. It’s a cancer that has to be removed but the operation will be very painful as we try to correct the damage done to the broader markets.
Brent crude dropped $1.13 in overnight trading but is a LONG way away from normalizing as it still sits over $75 (up 50% for the year) but our WTIC broke that barrier yesterday after last week’s forced march to $76 finally abated. Keep in mind that the charts do not reflect that we are making significantly lower highs in Euros, which is the chart most of the world is looking at. It remains to be seen whether my 7/16 call that this last run was a "blow-off top" was premature or right on the money.
Demand destruction is indeed evident in Asia as even Nissan says they can’t make enough "small, fuel-efficient cars" to keep up with demand. Autos consume 1/2 of the world’s oil and, if consumers take matters into their own hands by choosing more economical cars and raise the global average MPG from 25 to 35 ahead of Bush’s 10-year crawl, we would knock off 20% of the global oil demand – close to 20M barrels a day! No wonder Phil Flynn is having fits over OPEC’s early capitulation, all those barrels he ordered are just going to start piling up at the docks if we don’t burn them up in a hummer every time we need to get some milk!
I tried to warn OPEC this would happen back in October, but they still haven’t called for a consultation and ZMan points out that we are actually accelerating our builds in LNG to double last year’s levels as energy roaches try to stuff as much as they can down our throats before the jig is up. With crack spreads falling off a very large cliff and oil prices peaking, even the sacred refining business may have some issues as we run into Q3:
Asian trading was generally mixed this morning (see chart last night) and the energy sector is leading the European markets lower. Fortunately we loaded up on our index puts in yesterday’s rally as this was pretty much exactly what we expected to happen. Our OIH calls came off the table as did Happy Trading’s fabulous DO calls, which pulled a clean double on the exit. We’ll be watching the Nasdaq for some desperately needed leadership but I think TXN makes that very unlikely and T posted less than expected IPhone numbers for their opening weekend which bodes ill for Apple maniacs (see Option Sage’s excellent article on the subject).
David Fry captured my concerns about yesterday’s S&P action on this intraday chart:
I’m keeping an eye on the IGM, which has given us strong and stready leadership since the February sell-off and it will be critical for the markets to continue upwards but it disturbs me both that the Sept $60 calls are listed at .55 and that I don’t want to buy them at that price!
Gold is very near a breakout at $685 and that’s not a flight to quality we want to see while the dollar continues to reside in "a house of pain." Let’s not expect too much from the markets today and resolve to be happy if we can just hold Friday’s levels, which would be: Dow 13,800, Nasdaq 2,675, S&P 1,530. If we hold that we have a shot and the declining dollar, which was briefly supported by Paulson yesterday, should go back to giving the markets a lift, unfortunately along with commodities.
- LMT says there’s no business like war business as they post a 34% rise in profits and raise forecasts as it’s guns, guns, guns for this economy.
- MCD had disappointing earnings as no one can afford butter, even when it comes with a Happy Meal toy.
- UPS was so-so with International sales saving the company.
- UAUA also benefited as international revenue climbed 16% to offset a 2.1% decline in North American passenger revenue.
- We will watch LUV with great interest to see how a domestic carrier fares.
- DD disappointed as energy costs hurt them and agriculture was weaker than expected.
- PEP looked good (also helped by international) but reaction will be muted by a negative study on soda and health.
Apple will be sharply lower in the morning on T’s numbers as "only" 140,000 IPhones were activated but the Quarter ended on Saturday and the Phones were available at midnight on Friday so that number actually constitutes the number of IPhones that were taken home and activated within 24 hours of the phone’s release so our play of the day is to take the money and run on our puts, buy some $140s as a momentum play and rebuy the puts (as we still want protection into earnings) as the stock recovers (assuming it does!).
