Wow, what a day!
That was really exciting and exhausting and I'm stunned at how easily we broke out of my range but we had a solid change of fundamentals as Hillary came out and backed the plan to bail out sub-prime borrowers, indicating there was no stopping it now. The devil will remain in the details but waiting for facts has never been a reason for this market to exercise caution so we had to throw it to the wind ourselves as we broke our levels in the morning trading.
While we didn't give up on our index puts yet (they are Januarys and there's no way I'm going naked long into the holiday anyway so what's the point of selling what we can roll and cover) but we did get a bit more bullish on AAPL as we began to focus our put power on SU, XOM and CVX after what I thought was a lousy inventory report (but none of the oil companies did!). It's funny because, in retrospect, a lot of the move we saw was based on the Semis leading the Nasdaq higher based on the 5% rise in chip demand I talked about on Tuesday that no one seemed to care about then.
I guess we are just too far ahead of the markets so we'll have to allow for a lag as they catch up to our positions. This bodes well for our oil puts, which seemed very obvious to us but we'll give wall street 36 hours to figure it out this time!
Now to some extent lower oil prices are good for refiners and integrated majors but it was the gasoline build that was a shocker at 4Mb, even with refinery utilization still hovering down around 89% and even with the Houston ship channel closed and the pipeline outage from last week and XOM's rebel attack yesterday morning. I guess it's time to spill a tanker boys because there is just way too much oil out there and it's getting hard to hide it all. This planet consumes almost 4Bn gallons of oil per day, making it the second most plentiful liquid on the planet behind water and ahead of Coca Cola by a mile. Unlike Coke, oil comes right out of the ground at a cost of about $12 per barrel in most of the world and the rest is mark-up along the supply chain. With Big Oil booking close to $1Tn in profits last year, that's a heck of a lot of mark-up!
That mark-up, or crack spread, at the refining end is only possible if oil is $60+ per barrel or you might, perhaps object to paying $126 (at $3 per gallon) for fuel that was refined out of $40 barrels. Just like regular crack, Big Oil is addicted to that crack spread and just like any crack addict they are willing to lie, cheat and steal in order to get another fix and it will never satisfy them and they don't really care if everyone else in the world is made miserable as long as they can get just one more high-margin tank out of you.
The high price of oil has taken it's toll on the entire world and inflation is the top concern of voters in pretty much all the countries where they allow voting (sorry China). Buried in some pretty good economic numbers yesterday (Productivity up huge, driving unit labor costs down and offsetting inflation for your boss but not for you allowing them to hire much more people than expected according to the ADP report and increasing durable goods orders by 0.5% which isn't much since they saved so much on labor but it's better than nothing) was a pretty bad ISM survey of non-manufacturing conditions which fell to 54.1% from 55.8% in October, well below the 55% expected. Below 50% is pretty much a recession so we need to keep an eye on that.
It is a global slowdown that OPEC fears the most, an issue I outlined in last year's "Lemonade Cartel" article. The stakes are even higher now than they were then, with oil at a mere $65 a barrel at the time. OPEC already is NOT pumping 3M barrels a day of crude to keep global supplies as tight as possible but it doesn't seem to be enough as prolonged high prices have led to a cycle of demand destruction while, at the same time, fostering competition, notably from aggressive Chinese producers like PTR whose market cap approaches that of XOM because this relative newcomer figured out they could do something our own oil cartel was willing to do – THEY LOOK FOR OIL. Even worse, when they find oil THEY BUILD WELLS AND START PRODUCING IT!
I know, it's like a capitalist business model or something! In 2004 PTR sold $47Bn worth of oil, in 2005 they sold $68Bn worth of oil, in 2006 they sold $8Bn worth of oil and they are on pace to produce well over $100Bn this year. Over that same period XOM's revenues rose from $298Bn to $377Bn (26%), even though the price of oil doubled. That's why Warren Buffett put his money in PTR, not XOM – Exxon is a joke, it's a company that chokes the life out of the US consumer with no purpose other than to bleed cash into the pockets of shareholders and management, whose $1Bn+ in bonuses would have been shocking had they not been buried in $40Bn of profits. $1Bn is a $10 bonus paid to XOM executives by every US household and, again, it's only possible to rip you off like this in the scope of the much larger rip-off you are getting at the pump.
Big oil is the worst kind of crack addict, the kind that are so sick and depraved that they seek to get others addicted and turn them into customers to feed their own habit. In XOM's case, it's all about the bonuses because it sure isn't about building a company anymore. Exxon spent just $21Bn this year on exploration AND production (they won't break it down), that is 5% of operating revenues during a "shortage" yet they spent $28Bn buying back their own stock in order to pad their earnings.
You let it happen America, we take this BS every single day but I do write to my Congresspeople and I encourage you to go to go to this website and send this article to yours. It's not just Exxon but they are a good, typical example of the gang raping of the American public that's been going on for the past 6 years and it's only going to stop if we put it on the agenda as we move forward into the election. You can find your representative's EMail here.
