Well this week went by quickly!
As I mentioned in last night's wrap-up, it's been a very low volume week and, on the whole, it's been nothing to get excited about. We need to make some serious break-outs on our Big Chart levels and I don't think that's going to happen with oil getting it's usual boost into the weekend, especially with Rent-A-Rebel now pre-announcing their plans.
The latest oil terrorist to run up the markets is CNBC's own beloved Jim Cramer, who took time out of his busy schedule last night to devote 15 minutes of his show to misinform his viewers about oil. If you have any doubt as to how important this message is to Criminal Narrators Boosting Crude, just log onto www.cnbc.com and look at where this segment is featured.
Cramer interviewed the CEO of JOYG, who supplies mining equipment, and somehow Cramer managed to twist a legitimate, healthy demand for minerals, into proving his point about oil. Cramer's premise, that demand automatically means short supply is flawed on many levels. If I have a mining company and you are paying me $86 a ton, I may run my mine normally (as it's only $20 more than last year) but, if one month later, you offer to pay me $104 per ton, I may order a little more mining equipment to cash in while I can.
Yes there is a lot of demand for minerals and there are spot shortages, but they are due to delivery inefficiencies, not lack of availability. It is called a demand CYCLE for a reason and sometimes the demand outstrips the supply but, in a free market, higher prices put more supply on line until you get to a point of equilibrium. Speculators ruin the curve by creating false demand for product they do not intend to purchase causing miners to overproduce and commit to contracts with equipment makers like JOYG (a big Cramer pick) which eventually leads to a massive oversupply and crashes the market. Don't worry though, Cramer and his pals will be long gone by then – off to put you into the next thing they are looking to get out of.
Cramer says (at the 2:00 minute mark) "The gap in coal could be 60 to 100 million tons this year, that's massive, even the US… can't make up that amount." While this may be partially true, the US does actually produce an average of 1,400M tons of coal per year and has certainly shown the ability to produce over 120M tons a month on a regular basis so it is no stretch to imagine that the US ALONE COULD make an extra 60 (4.2%) and perhaps 100M tons (7.1%) over the course of the year if the demand were truly there. On a global scale of course, 60-100M tons is a rounding error. Con men like to use big numbers to confuse people who don't take the time to do the math and Cramer is a confessed master manipulator but this is a new low, even for him!
There are 998Bn tons of coal in the world and even this extensive IEA report shows there is no danger whatsover of a shortage through 2030. Of course there is more demand, because it's cheaper than oil, but how can this be Cramer's premise for oil going up? Coal is a substitute for oil, every ton of oil shipped is another barrel of oil we don't need – I know this is complicated so I'll type it slowly for Mr. Cramer – They are both used for energy!
Cramer keeps using the term "endless demand," it is probably good to be suspicious of people who say things like that, it's a lot like the guy who calls you on the phone with a "can't miss" investment or the guy who wants you to give him money for the perpetual motion machine or products that grow hair. It's very hard to imagine that Cramer is actually ignorant of the fact that thousands of years of economic history are firmly against him. The only thing that IS different this time is the runaway speculation that has been made possible by a combination of Wall Street pushing all forms of commodity investing along with a relaxing of regulation that allows rampant speculation in everything from cooking oil to copper.
When there was a housing bubble, there were plenty of speculators and CAT was a booming business as were building supply companies, HD etc and Cramer was right there telling his sheep to BUYBUYBUY and all those stocks did rise to incredible highs in a speculative frenzy while Cramer's pals at Goldman Sachs quietly turned around and shorted the market, making $6.5Bn betting against them whole gracefully dumping their long positions on Cramer's legion of bag holders. Now, 2 years later, Cramer is herding the sheep into Bubble 2.0 and it seems that sheep have very short memories but you would think they would at least notice all the for sale signs on the homes they drive past as they drive to their broker to blow some cash into the commodity bubble…
Anyway, I just want to say my piece now so that maybe, when Cramer is herding people into Bubble 3.0, 24 months from now, I will be able to point back to this article as a warning and save people a few bucks. Meanwhile the CTFC is breathing down the necks of Jim's speculating buddies, perhaps causing the urgency of his latest pump as US regulators "disclosed a broad nationwide probe into potential oil-market manipulation and said they are expanding surveillance of energy markets."
According to the WSJ:
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The CFTC's announcement about its oil investigation suggested a single, broad probe that began in December 2007. But people familiar with its enforcement priorities say the agency is pursuing multiple oil investigations, and that many of them relate to one another. CFTC enforcement chief Gregory Mocek said the agency has about 60 manipulation investigations open in various commodity markets.
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The CFTC has expanded an investigation, disclosed previously by The Wall Street Journal, into alleged short-term manipulation of crude-oil prices via a widely used price-reporting system run by Platts, a unit of McGraw-Hill Cos. One suspicion is that energy companies and traders have at times issued a flood of orders during a time window used by Platts to determine its reported prices for physical oil transactions, then used the potentially distorted prices to make profits in other markets.
- Another area of concern for CFTC regulators is whether the owners of crude-oil storage tanks use their knowledge to make bets on oil-futures markets. In theory, the owner of a tank could issue misleading information about the tanks being full or empty, leaving the wrong impression about whether oil is in plentiful supply. Then they could make trades to profit on the misunderstanding.
- Large speculators such as hedge funds often use unregulated over-the-counter platforms, whose prices may affect prices on regulated markets. Mr. Chilton, the CFTC commissioner, said regulators are looking at cases where traders have made simultaneous bets on unregulated and regulated markets, in particular in West Texas Intermediate crude-oil contracts.
These are very serious accusations and, more importantly, serious indications that the government is finally getting serious about reigning in the madness of the commodity markets. If this happens quickly, many commodities, but especially oil, could collapse like a house of cards as investors who thought they would have many months to unwind their positions suddenly find themselves losing 5-10% a week.
Asian markets were good this morning with the Nikkei popping 214 points but, as we noted in the Big Chart, they had a lot of ground to make up and the finish at 14,338 is still well below the 20% mark (off the 2007 highs) at 14,640. The Hang Seng picked up 0.6% but has also lost a lot of ground over the past two weeks so it remains to be seen whether Asia is truly recovering. India's economy posted better than expected growth (8%) but that makes it MORE likely that the Central Bank will tighten monetary policy. Japan's economy went the other way with continuing declines in housing and industrial production. Consumer spending was also off sharply and April jobs numbers weakened.
Europe is up about half a point. UBS is under investigaion for helping wealthy clients dodge taxes, this could widen to other financials as it seems like it was rampant over there. UK's Silverjet airlines ceased operations in another round of long-term demand destruction as those planes will use zero fuel next year. Beware of the moves in Europe and Asia as they were generally based on declining crude prices and we know not to buy into those until we see it stick for more than a few days!
We had great earnings from Dell last night and that should give us an early boost to the Nasdaq in the very least. Solar stocks are rallying as Germany cuts subsidies less than expected, including our pals at FSLR and we couldn't be happier as our last move on them was to take out our callers and roll ourselves down to the $280 calls. At this point, I don't think things could possibly go better on that play and we may have to shut it down! CY will lag the solars and the $28s at .85 will make a nice momentum play if the market stays strong.
Consumer spending and income were up 0.2% but that is barely keeping pace with inflation so I don't think much of the pre-market rally caused by those numbers. Any positive close would be great today, especially on the Transports (2,714 is our goal), The Nasdaq (2,513) and the Russell (745). It is probably too much to hope for the S&P to take back 1,425 but 1,405 would make key long-term support levels so that will be something we need to keep an eye on all day.
We were short on GOOG yesterday, expecting a top at $588 followed by a pullback to $575 and we'll have to watch this carefully. Most likely we'll roll up first and then put tight stops on the position, giving up if it breaks $590 but, otherwise, let's stick with the plan. It is the last day of the month so all sorts of crazy things can happen.
Have a great weekend,
– Phil
