This is one exciting week so far.
We had a great day yesterday and oil has plunged in the overnights down to 126.69 as of 7:30 so it's going to be a very busy day over at PSW! Don't forget we have inventories tomorrow but they will only run through May 23rd and will not cover the holiday weekend, where we may have a shocking build in gasoline stocks due to very poor demand.
Las week there was a draw in crude of 5.4Mb and an 800Kb draw in gasoline as refiners kicked it up to 87.9% utilization and local service stations started stocking up for the weekend, topping off their tanks in the face of rapidly rising crude prices and the anticipated Memorial day demand (and rumors were circulated to gasoline retailers that supply would be short). While this was going on, imports were down to just 9.2Mb per day, 696,000 barrels a day less than the previous week, accounting for 4.9Mb of the 5.4Mb of crude that was "drawn down." Typically, we import around 11.5Mbd but we haven't needed that much oil for almost a year as US demand has fallen off steadily.
Fortunately, we actually read the EIA report last Wednesday and shorted the hell out of oil at the top as these numbers set off all sorts of warning bells for us. Another interesting tidbit from the report is that jet fuel demand for May was tracking 5.6% lower than last year – and that was before AMR announced drastic cut-backs…
Yesterday we took out our callers on VLO and initiated calls on SUN (June $45s at $1.65) as gas prices hit record levels at the same time as the refiners are getting a 10% discount in oil prices. We'll keep an eye on the dollar, which faces another test at 72.5 and looks ready to break up again. So far, the dollar is actually 1% lower than it was last week, so don't blame the greenback for a pullback in commodities, that shoe is yet to drop!
Shoes are still dropping in Asia as the markets there can't get out of their own way as exporters led the pullback of the Nikkei, which lost 183 points as the dollar fell back below 104 yen. TM is an excellent buy down here with the Jan $90s at about $13 this morning, which have just $4 in premium at that price and July $100s can be sold against them for $4 but you may get $4 for the June $100s on a good bounce. The Hang Seng was off just 32 points and the Shanghai Composite jumped 2.5% but only because the launch of index futures spurred demand for financial stocks. Companies with investments in futures trading surged in the afternoon. Citic Securities, China's largest brokerage by market capitalization, ended up 6.2% and real-estate developer Shanghai New Huangpu Real Estate, the parent of Huawen Futures, ended up 10%.
This is good timing for BAC (another one of our LTP holdings), who are exercising $1.9Bn worth of calls to up their stake in CICHF to 10.75% from 8.2% in China's second largest bank. BAC's original $3Bn investment in June 2005 is now worth about $30Bn. The 2010 $35 calls are just $4.70 and make a fantastic long-term investment.
Europe is in a much better mood this morning as the financials take off there as well. This despite the fact that French consumer confidence was even worse than ours, coming in at -41, down from -13 last June with inflation concerns dominating the survey. All of Europe is seen as slowing down markedly with German confidence also taking a nosedive last month.
As I said yesterday, our goal is to just suck less than the other markets and money will find it's way into US equities. We've had pretty good Q1 earnings and if we can put in something that looks like a bottom in housing, knock oil back down under $100 and put the dollar back on track, our markets are going to start to look downright sexy to foreign investors!
Let's not get too excited though, CCE just gave a pretty poor forecast, citing "weakening economic trends" and if people aren't buying Coke, we have some real problems! CCE said weaker economic trends have "continued to limit volume performance in North America, particularly in higher margin 20-ounce packages of sparkling beverages and water, negatively affecting operating income."
Durable goods orders were off 0.5% in April but they were brought down by volatile aircraft orders and, without transportation, we actually had a 2.5% increase, which is our best climb in 12 months. Perhaps the trend is that consumers are cutting back on the junk they don't need and saving up for important things – just like rational people might do! Is it possible that $4 gasoline is really changing people's habits so rapidly? If trends like this continue, we may even see US consumers actually saving some money one day – that would be a shocker!
Today will be very exciting but it's a long, hard climb to get back to 13,000 and we need to get through that at some point. It's all up to oil and we need it to contine back down to $120, staying below $130 at all costs or the bottom can fall out of this little rally very quickly.
