Gosh I'd like to not talk about oil but it is driving the markets…
We need a break in the POO (Price of Oil) in order to get the markets back on track and we are dangerously close to crashing the economy. Gasoline has so far avoided the steep gains of oil so the impact to the consumers has been, if you can believe it, minimal so far. Should we close the month of July at the NYMEX on June 24th, none of this nonsense really matters. As with any options, they can go up and down 50% during the month but nothing really matters until expiration day.
It's very easy to knock down oil prices. A real President would have done it by now but the pumper-in-chief had to be forced by Congress to STOP buying oil at $130 a barrel but he still went ahead and bought $85M worth last week, presumably because they didn't say pretty please with sugar on top. We have over 700M barrels of oil in the SPR and all the President has to do is release 5M barrels a week for 10 weeks to knock to price of oil down 20-30%. I won't get into the math of it here but you can see what a 5Mb draw in crude did to us yesterday (+$5 in oil), well a 5Mb build has a similar effect in the opposite direction and knowing there is going to be a 10-week surplus of oil will quickly send speculators looking for greener pastures.
Bush can even enrich his buddies by giving them a heads up to the short side and letting them speculate down for a change, we don't mind if they get rich SAVING us money for a change but the extra $511Bn a year that Americans are paying now for oil over $60 in order for T Boone and company to put another $1Bn in their pockets is really starting to hurt. And not just us, we are the richest country in the world and can almost "afford" a $511Bn payback for George's campaign contributors but the rest of the world consumes 65Mb a day x +$70 a barrel x 365 days = $1.7Tn and that's a lot of money!
That's a global $2.2Tn that, as recently as last year, was money that global consumers were able to spend on food, clothing, IPods etc that is now being spent on something that literally goes up in smoke. There is no better way to transfer wealth from the poor to the rich than by making them pay their hard-earned money for consumables!
So we have to balance out the $2.2Tn (plus ancillary inflation) that has been sucked out of the global economy in the past 12 months against the fact that we have, in fact, survived it and, now that there is a rising awareness and backlash against it, we can look ahead to the possibility of at least some of that $2.2Tn being returned to the people, who will be able to put that money to work with companies which make up the 90% of the S&P that are NOT energy companies.
It's a $50Tn global economy and the energy sector has sucked up 5% of that money in just 12 months but imagine the boon we will recieve when they give it back. If we think of 13,000 as being a fair price for the Dow now, then 14,500 is very reachable if oil goes back to the $70s. While $70 may seem a long way away, I'll remind you that we thought CitiGroup was worth $52.90 just 12 months ago (now $21.06) and we thought Toll Brothers was a $60 stock in mid-'05 (now $22.05) etc… We've had gold bubbles and oil bubbles and tech bubbles and housing bubbles and tulip bubbles in the past – is this time really different or is this just another bubble about to burst.
Unlike other bubbles that burst, a bursting oil bubble will be a huge boon for the economy and it is in the interest of 410 of the Fortune 500 to pop this one so wake up corporate America and let's put a stop to this one! Our "leaders" refuse to do anything about it but this is an election year, so put some strings on those donations or perhaps give the other guy a call if your boy is too deeply involved with the energy lobby. We can change the world, one Congressman at a time!
So we ended the day BULLISH yesterday because I think the markets dropped 500-points this week on a scam and there are plenty of good things going on in the economy. Oil is now up on something besides dollar weakness and while our weak leader may be unwilling to do anything about, you can bet that we will see some real action from the rest of the world as well as our own newly empowered Congress, who are about to kick back a Bush veto (Farm Bill) with record speed, sending a clear message to the President that he has crossed the line from lame duck to dead duck.
The Hang Seng dove 417 points in last night's trading while the Nikkei ended positive by grace of a 300-point recovery after lunch (I'll have what they're having please!) that saved them from posting a 1,000-point drop in 5 days. Nothing good actually happened in Japan, weak results from a Bank of Japan government bond buying operation prompted a sharp selloff in Japanese government bond futures, with the money flowing into stock futures so – Yipee, I guess…
Europe is flat to down ahead of our open and UBS is raising $15.5Bn at a very steep discount (31%) to it's current share price. This is money needed by UBS to make up for over $37Bn in morgage write-downs taken by the bank in addition to the $15Bn they just raised by selling off their Alt-A assets to BlackRock at a 32% discount. UBS is already down over 50% from is't highs last May and this is just a small taste of what will happen to big oil companies who have run up their expenses 100% on a 150% rise in crude if crude falls below $90!
Our markets are looking to open flat this morning and if we don't hold 12,600 it's going to be time for some mattress plays so look alive today! If oil fails at $135 and fails to hold $130, I will get downright bullish as $130 was our target for as far as we thought they would take this scam but, as I said before, you can't really know when a bubble will finally pop. As long as the numbers you see are effecting option and not the actual consumers, they can paint anything they want on that ticker – consumers don't care what it says on CNBC, they care what it says at the pump and that's where were going to get some blowback if gas prices at the pump begin to reflect the fantasy-land that oil is in.
Gas is at $3.65 a gallon as a US average and there are 42 gallons in a barrel (not all gas but for simplicity's sake) so that's $153.30 per barrel. Not much of a refinery/delivery/retail margin at $135 a barrel is there? Something has to give people and it has to give by the time these contracts close in June!
Don't forget it's a holiday weeekend and we want to be well covered regardless but let's give the markets a little chance this morning, they may surprise us!
