Not looking too good is it?
LEH dominated the news and kept the financials on their slide as there is another BSC-style attack on the now (that BSC is gone) smallest investment bank and it's the kind of crisis of confidence that can make the rumors a self-fulfilling prophesy. BSC made a profit the quarter everyone ran for the exits and LEH says their liquidity is up $6Bn this Q vs Q1 but the hyenas don't care about that, they smell blood and they are circling their prey.
At the same time as we have a confidence crisis in the financials, we have the energy sector heading south, led by XOM, of all things, probably the best company to bet on with oil coming down and crack spreads going higher. The energy sector dropped 1.8% today despite a 1.1% increase in Factory Orders, which is a strong indicator we will be skipping that recession everyone is so hot to bet on.
Oil prices hit the 2.5% rule today and finishing at the mark is always a sign that we can expect follow-through the next day so let's watch the critical marks at $122.60 (another 1.25%) and $121 (another 2.5%). Using the 5% rule, we can call this a run off $90 to $135, which is a neat 50% run and we certainly expect a 20% retrace (of the gain), which is $126. If punching through that turns out to be more than a blip, then we can expect another leg down to $117 or, in the very least $122.50. Since $122.50, a 5% mark we could have calculated on Jan 1, almost perfectly intersects with the retracement at $122.60 we're marking on the way down, let's consider that a super-critical test for oil this week. It will be surprising NOT to get a bounce off that and that number should be 20% of the fall from $135 or $2.50, so let's just say that we will be watching the range from $122.50 to $125 for a signal on which way oil goes.
BSC has taught us the futility of trying to call a bottom on LEH (even though they are SOOOOO tempting trading at 22% below book value) so we'll stay away from that trade but I do think we'll roll and press our XLF bets tomorrow. As to XOM, we have an inventory report and we simply need to determine the amount of $85 puts that will balance our our $90 calls and be ready to make money in either direction.
Tomorrow we get the famously inaccurate ADP jobs numbers (or, more probably, they are accurate and the government figures are in fantasy land) along with the Productivity Report and ISM Services, which will hopefully back up our improved ISM numbers. The government's jobless claims numbers come on Thursday morning and Friday is busy with NonFarm Payrolls, Wholesale Inventories and Consumer Credit.
So lots of fun data ahead and a critical test of oil – it's going to be a very exciting close to the week and I just can't believe that we will repeat the foolishness that surrounded BSC in mid-March, when the market dropped 1,000 points in 3 weeks and then recovered fully 3 weeks later. Of course that's my problem sometimes, I think the market is smarter than it is because here we are, down 800 points since May 20th and maybe no Fed this time to bail us out.
LEH has dropped $8Bn in market cap in two weeks but that's nothing compared to XOM, which lost $40Bn in 9 trading sessions. So what's a company really worth? PCX is "worth" $3.23Bn after hitting a new all-time high yesterday and coal must turn into diamonds very quickly in Appalachia because this copany LOST $122M last year selling $1Bn worth of coal and their balance sheet looks like the kind of Biotech companies we try to avoid. If that's not a sign of a bubble I don't know what is….
I don't usually do verticals but we can buy the $125 puts for $10.20 and sell the $120 puts for $8.91 so, at $1.50 or less, I want to take 5 of those for the $10KP and 10 for the $10KP and 20 for the DTP!
