Can we hold on today?
Can oil break $88 ahead of an inventory report that is almost certain to show a "surprising" build in crude? Can gold break $800, can the dollar break below 76, can Cramer find a way to tell us he called this correction?
All these and other conundrums will be answered as we move forward in a wild expiration week. I mentioned Ben's negative comments in last night's post and Asia had an interesting session digesting that, as well as another $1.50 rise in the price of oil in overnight trading. The Nikkei had no doubts as they gapped down 100 points at the open and finished the day off over 200 points but the Hang Seng was very interesting as tht index climbed all the way up to 29,861 at the open before sliding all the way back to 28,954 in a sell-off that was only stopped by the closing bell.
The Chinese, being far more sensible than US traders, used record high oil prices as an excuse to take profits on CEO (down 4.2%), SHI (down 5.6%) and PTR (down 2.1%). PTR held up well because they have an IPO pending on the mainland market but we are salivating over all the inflated valuations of the integrated oil majors in the US and Europe as there is NO WAY that they will not suffer from poorer refining margins and, with oil in Q4 already significantly higher than Q3, I don't think there is any way they are going to be able to paint a rosy picture going forward either.
We'll be picking off some high flyers ahead of tomorrow's inventory report and we will be thrilled to roll up to higher puts if the inventory surprises up with a drawdown but, with just one week left until the November contract closes and there are still 177M barrels on order for November delivery. You would think that, with oil flying higher, traders might actually want those barrels but – no – it's still a total scam and they will cancel about 130M of those barrels in the next 5 days, most likely rolling them to Dec (392Mb), Jan (130MB) and Feb (56Mb) as they continue to con the working American people out of Billions of dollars each day while Congress worries about whether or not we should call the killing of Armenians by Turkey in 1915 a genocide.
Hey Congress: People are DYING while you talk. They are starving to death, they are freezing to death, they are dying without health care, bridges are falling on their heads, prisoners are being tortured… How about coming up with some real priorities and sticking to them? Try it, you might actually accomplish something! There's a lot of work to be done solving problems in this country so maybe a little less time on CNN and a little more time on the floor of the House…
Backwardation at the NYMEX has now hit EXTREME levels as the front-month cost of $86 a barrel is now $7 ahead of next November's contract price of $79.05 and a full $11 higher than barrels from Nov '10 on. Even more interesting is that no one thinks they would need oil at a $10.60 discount to today's price in May of 2010. Just 88M barrels are scheduled for delivery that month and the last barrel sold on that contract went for just $71.56. You would think an airline or FedEx or UPS or someone might want to hedge their future fuel costs – they're pretty smart guys… One would almost have to conclude that the actual commercial consumers of crude are already onto this scam and aren't buying into it. What will happen to the price of crude if the retail buyers wake up?
Europe is off to an awful start with ERIC giving a profit warning that cost them, as well as other phone companies, quite a lot of market cap but I think the issue is going to be mainly confined to ERIC so we may want to look at that group today as well as ERIC themselves for possible bargain hunting. Like MOT last year, investors are concerned about a decline in gross margins. MOT should get a small sell-off and we need to watch those closely as they are uncovered in the LTP but I'd rather not cover them. ERIC themselves should provide a fun momentum play with the current $30s as well as the Nov $32.50s, which were $8.60 at yesterday's close and should open at just over $1 so I think we'll go with those and think about a spread on the Octobers if it runs out of steam.
I'm behind schedule today so let's just watch our levels and take our cues from the market. 14,000 should hold on the Dow and 2,750 should be the bottom for the Nasdaq, as I said on Friday, that's the level we really don't want to cross. Happy is concerned about the health of the SPX and I don't see any way out of this for today as high oil will hurt the bulk of the index (we're past the breaking point at $87) while lower oil will drag down energy and the financial sector that is far too heavily invested in them:
Let's go into today without any directional prejudice, our cash call goes for winning puts just as it went for winning calls last week. The time to take profits is WHILE the trade is going your way, not after it reverses so we have a lot of rolling and adjusting to do today, whatever the market does.
Time have some fun!
– Phil
