Let’s put this annoying week to bed!
It’s barbecue time this weekend as we open our pools and fire up the barby, enjoying both for the last time this summer before we are shocked by the gas bills we’re going to get in a few weeks as summer fun has never been more expensive. Americans are already scaling back their holiday plans with 25% of the people surveyed changing travel plans to cut down driving and 20% canceling plans altogether.
Probably most damaged by this will be lower cost hotel chains like IHG, who operate Holiday Inn and other discount hotels, as their customers are the most likely to cancel trips altogether. Another chain that will be affected is CHH (Comfort Inn, Econo Lodge) but both of these stocks have already been beaten down so I’m not playing them but – yuch!
Is George Bush destroying the his core base of support? Well, maybe not Texas but here’s a red and blue state map from the Philly Fed (thanks Barry for pointing this out!) not of Democratic and Republican strongholds but of the Fed’s Coincident Index, which is an index of economic indicators whose movements closely coincide with the overall cycle of economic activity. Along with lagging and leading indicators, this index highlights the speed and size of growth or shrinkage in an economy. Texas is doing just great on the oil boom but many other Republican strongholds are suffering deeply while the "blue states" are mainly blue, indicating growth despite all the economic turmoil:
This does not bode well for the Republicans in the election as not only do you have a dissatisfied voting population but it’s also going to put a damper on campaign contributions, which is very bad for the GOP because, as our President said "You got to keep repeating things over and over and over again for the truth to sink in – to kind of catapult the propaganda." I do wish I just made this stuff up but he really does say these things!
Our decision making process today is simple, either oil pulls back below $130 and stays there to rally the markets or it doesn’t and we go very tightly covered into the weekend, which was kind of our plan from last week anyway so "stay the course" I guess… We’re catching a break on Apple (who were added to GS’s "conviction buy list with a $215 target), Google and ISRG, all of which we need to cover and BIDU is too hot to hold so let’s just plan on exiting that one. It’s going to be cover, cover and when in doubt cover against our long positions, just like last week, we’ll take our lumps by rolling up our callers IF the market takes off but this week, that if never came and those covers saved us.
The Hang Seng dropped another 329 points, closing out a very lousy week down 1,000 points. The Nikkei held flat for the day and off their lows of the week but finished the session with a 150-point drop but they were Asia’s shining star as the Shanghai Composite fell 0.68% and India dropped 1.5% and Pakistan fell 615 points (4.5%) and Taiwan dropped 2%. Even commodity-rich Australia fell 1% as $130 oil is truly the magic number that can bring the global economy to its knees.
Oil bulls are pointing to gas lines in China as a sign of demand but we reported earlier in the week that China was going to scale back gasoline subsides to the pictures you see on CNBC being touted as "evidence" of strong demand is nothing more than drivers seeking to top off their tanks before the prices jump up. This is how the "news" is being manipulated to drive up energy prices on television networks whose parent companies make tens of Billions of dollars both directly, from sales of energy-related products, and indirectly, from ad revenues from energy companies.
Europe is also ending a rotten week on a down note. also unnerved by the oil shock with auto makers leading the decline along with airlines, who seem ready to throw in the towel. Silverjet Airlines (the all first class one) was halted as funding was pulled and the fuel-intensive mining sector hit the 2.5% rule to the downside as cost issues began to outweigh the runaway price of the commodities.
Our futures are down considerably pre-market and we continue to watch our levels for the pass/fail test of the week with Dow 12,600, S&P 1,390, Nasdaq 2,450, NYSE 9,400, Russell 730 and SOX 400. Holding those levels today would be amazing and will cause me to go 1/2 covered on some of my favorite positions (GOOG, AAPL, ISRG, SHLD, C, BA, FDX, IBM, PEP) but, if we are below the line on any 2 of them, then I’ll sleep better over the long weekend fully covered.
Oil is the key to happiness as $130 seems to be the breaking point we’ve been looking for. This doesn’t seem to bother the energy bulls much the same way $1M for a 2Br condo in Miami didn’t bother the real estate bulls in 2005. Those apartments are now back around $500,000 and still no one is buying them, even though they still "aren’t making any more land." We hit peak land somewhere around 5 Billion BC yet the price of that commodity still goes up and down – that’s the fundamental flaw in the "peak oil" logic the bulls are resting their case on. Much like the waves of land speculation that come and go over the years, this too shall pass – we just need to ride this one out.
Have a good weekend!
