Yay, GDP day – I'm so excited!
I know, "get a life", right? Well we haven't had much exciting data in a week so this will be fun and I'm pretty sure we'll beat the low expectations for the quarter as earnings were generally on the plus side but this is only a revision to Q1 so it's not exactly a major market mover but an upside move in GDP and a downside move in crude today would be just what the market doctor ordered to put us back on a positive track.
We also have oil and gas inventories at 10:30 with expectations of flat crude, a 300K draw in gasoline, an 800K build in distillates and an 85Bcf build in natural gas. We noted from yesterday's late action in the oil patch that it looked like the "fix was in" for this morning as many energy names rallied into the close. These inventories are for the week ending 5/23, LAST Friday so the fix may indeed be in with these low expectations of draws in the days leading up to what was supposed to be the big holiday driving weekend.
Ahead of a holiday weekend one would expect refiners to refine a lot of crude, drawing down oil inventories while shipping pretty much everything they have out to the retailers, drawing down gasoline, while drivers fill up their tanks locally ahead of the weekend (because no one is crazy enough to PLAN to buy gas on the highways at these prices), causing a spike in demand. This weekend should be, and historically is, a home run for the oil industry. So what's with these incredibly (as in not at all credible) low expectations?
There are 146M cars on the road in the US and the average gas tank has a 17 gallon capacity. That's 2.5Bn gallons of gasoline that could be driving around at any given moment and, if we assume that people usually keep their tank half full, then that would be about 1.25Bn gallons which, at 42 gallons a barrel, equals roughly 30M barrels of gasoline. If just 1/3 of all drivers top off their tanks ahead of the 3-day weekend (and don't forget oil was racing up and many of us filled up just to avoid the price hike), that would be a 10M barrel draw in gasoline – if the numbers they are projecting are even CLOSE to being in-line, then gasoline demand in this country has been decimated!
Where are these estimates coming from and what are they hoping to accomplish by setting expectations so ridiculously low? I spoke last night about the blatant manipulation of the media and we had a great example as IACI and EXPE were yanked around by the rumor mongers yesterday. At the same time, Scott McClellan, who was formally George Bush's chief propagandist, came out with a book that essentially says "I was George Bush's chief propagandist" (and not in a complimentary way!).
McClellan has presented chapter after chapter of accusations that some of the administration's most senior officials regularly lied to the public, conducted a "permanent campaign" to advance Republican political interests and managed the debate leading up to the 2003 invasion of Iraq in a way that "almost guaranteed that the use of force would become the only feasible option."
McClellan cast Bush as a President engaged in profound "self-deception" who seemed "disconnected from the reality of people's lives" during a time of national crisis. “History appears poised to confirm what most Americans today have decided: that the decision to invade Iraq was a serious strategic blunder. No one, including me, can know with absolute certainty how the war will be viewed decades from now when we can more fully understand its impact. What I do know is that war should only be waged when necessary, and the Iraq war was not necessary.” The White House is currently spinning McClellan as a "disgruntled" former employee – ROFL!
Also funny today was Japan's huge recovery on a very small dollar bounce, a move I predicted yesterday morning when we grabbed TM calls. Also spot on was my prediction that the BS jump in the Shanghai Composite would reverse – it did. This predicting stuff isn't that hard folks, all you have to do is pay attention and, most importantly, realize that the people in the MSM who are telling you what to think are just as clueless as you are, probably more so because they are trapped in their little world and can't see the forest through the trees. The Hang Seng was flattish but nothing over there matters ahead of our GDP.
Quantas became the latest airline to wave the white flag on fuel prices, announcing layoffs, pay freezes and cutting 5% of their flights. Despite a recruitment freeze, its fuel-hedging strategy, fuel surcharges and two increases in ticket prices announced over the past month, Qantas said it isn't able to offset an expected increase of $2 Billion in its fuel bill for the year to June 2009. This is not the kind of demand destruction that reverses quickly!
Europe is trading farily flat ahead of our GDP data (8am) and the big news there is the continued erratic behavior of LIBOR rates, which the BBA will be reporting on tomorrow and the continued decline of UK housing prices, which posted a new monthly record in May with a 2.5% drop in just one month, over double what was expected. "The credit crunch remains severe," Citi economist Michael Saunders said in a note. "Any notion that the worst is over is misplaced. Lots more economic pain lies ahead. The U.K. economy is heading close to recession and recession risks are rising." So this leads to rate cutting which boosts the dollar and makes US equities look less sucky — assuming we all don't fall down a black pit into economic hell together of course…
German inflation is also on the march with consumer prices rising 3% in May, over the 2.8% expected and a big jump over April's 2.4% rate. Euro-zone inflation is looking like 3.3% overall, quite a bit ahead of the official target rate of 2% but rate increases are a tough sell as the economy is cooling down. "We think the ECB is on hold. It can't raise rates because the economy is cooling, but neither can it cut rates with inflation where it is," said Julian Callow, chief European economist at Barclays Capital in London.
You'll notice a pattern developing where crude is trading markedly down in overnight trading (yesterday it was down $2.50 pre-market, today it's down $2) until the crooks at the NYMEX get a hold of it and pump prices up into the close again. This is becoming a nice, tradable pattern with USO and we're going to go long into the open with the USO calls, hopefully we can pick up the $103s for $5 and we'll set a 10% stop loss although inventory day is the most dangerous day to play this one. We will also be shorting some high flying energy plays if we get a nice run into inventories but, at the moment, the whole sector still looks weak.
8:30 Update: Our GDP report was indeed revised up a whopping 50%, but that only brings us to an anemic 0.9% from a pathetic 0.6% so woo-hoo I guess. The "positive" revision on the GDP is being more than offset by lethargic jobs numbers and our pre-markets are trading down ahead of the open.
MA reported yesterday that gasoline demand fell 5.5% in the week leading up to Memorial Day with prices at an average of $3.84 per gallon. I'm not sure if that is a measure of price or quantity and it makes a huge difference as price is up 20% so spending 5.5% less would indicated a better than 20% reduction in fuel consumption but, either way, LOL you greedy bastard oil companies, you killed the the goose that lays your obscene profits!
It's going to be an interesting day and the inventories at 10:30 will be critical so strap in for a wild ride! If oil would have the good sense to get below $125 and stay there, we could have a rally on our hands but good sense and energy trading have not gone together for quite some time so best of luck to the energy bagholders – it's going to be a mother of a hangover!
