Which Way Wednesday – For Oil?

Boy this is fun!

I love it when a plan comes together and all that tedious waiting has finally paid off as our bull trap has sprung and we are enjoying the ride down with all of the "wheee" and none of the nasty gnawing off of legs in order to get our money out.  While Jim Cramer decides to shamefully deflect the issue by CELEBRATING his call of a June housing bottom, his poor sheeple are getting hammered as wave after wave of sellsellsellers hit the wires.

It was, in fact, the BS housing data (sorry Jim but read past the headlines before you make a fool of yourself) that led us to get MORE bearish yesterday morning as it was reported RIGHT ON CNBC, that analyst Ivy Zelman said the following:

50 percent of sales in May were on spec. She says we’re seeing a lot of spec homes now because, “today’s consumer wants to touch and feel the house.” The positives are that cancellations are down, sales are better and there’s less negative pricing, although discounts are still prevalent. “The patient was without a pulse in the fourth quarter,” Zelman notes, “and now the patient’s in ICU.”  So why all the spec now? Because builders are trying to jam all these homes into buyers’ pockets before the expiration of the $8000 first time home buyer tax credit. It turns into a pumpkin November 30th.

So 50% of the sales (which were up 17%) were not sales at all!  That means that sales to ACTUAL people declined 33% in May.  We shorted the Qs right out of the gate and made our target 30% for the day trade and we had the usual fun with our oil shorts but, otherwise, all our bearish bets were working and there was little to do.  I called almost the exact finish for the day in my 2:58 comment to members where I said: "… since we need to sell off 5% and since NOT selling off more than 1.5% today would make it very unlikely we sell off 5% overall, then I think we need to finish lower than our lows so far.   Of course, Mr Stick knows this too so they will likely be fighting like hell to make sure that doesn’t happen while Mr Fund who wants to move to cash may take advantage of that and look to sell into the close so, if we can punch the volume up 100M in the last hour (250M or better) then I would consider the close to be an honest indicator for the day as competing forces really do cancel out."  We did, in fact, finish at our lows and 100M Dow shares were traded in the last hour, with a closing volume at 241M.

This morning we're looking for proper capitulation in the energy markets and follow-through from our indices to the 5% rule at least (we are hoping for 8% total pullback on this leg).  I put those levels out in a morning alert to members already so I won't go back over it here.  I had pointed out in yesterday's morning post (that anyone can have delivered to them daily by clicking HERE) that we expected the Russell to bounce to test 515 and the S&P to test 928 and that failing those points would keep us bearish and expect 1.25% of downside follow-through.  Well the Russell topped out at 516 at 9:55 and then turned down while the S&P topped out at 928 TO THE PENNY, twice!   Isn't it useful to know these things in advance.  Of course our members have been watching these levels for a lot longer than a day – they are our long-standing pullback targets.

Will this sell-off finally be enough to pull some of our cash off the sidelines?  I hope so.  We picked up some VLO (hedged) earlier in the week and we grabbed GENZ on yesterday's dip and we're adding some GE down here for the $100K Virtual Portfolio so it's not like we hate everything, we would just feel more comfortable seeing a test of our -5% zone off the 8,650 center mark we've been tracking for the Dow since last year.  That's still 3.5% away, which puts us just about midway through a proper correction so today's action will be very telling as the 5% rule is midway between where we are now and a full correction.  Yesterday we tee'd up a positive DIA play that didn't trigger and we'll do that again this morning but we didn't get much of a pump all day yesterday, except for the failed one at the end.

Asia was mixed this morning with Japan gaining a point and the Hang Seng losing half a point.  The Shangai gained 1.23% but India fell 3.24% so anything can happen in this wild quadruple-witching week.    The Baltic Dry Index is bouncing back, now at 3,951 with a retest of 4,000 pending and this is lending some support to commodities.  Europe is off about a point (8:50), led down by banks and commodity pushers.  New car registrations in Europe fell 4.9% in the 13th consecutive month of shrinking demand.  In addition to poor Volvo sales, Sweden is getting crushed by a grueling recession as bank writedowns from loans to the Baltic States are costing that nation 5% of their GDP. 

“If Swedish banks suffer from large loan losses in the Baltic states they will be forced to shrink their balance sheets, not just in the Baltic states but in Sweden too,” says Roger Josefsson, chief economist at Danske Bank A/S in Stockholm. “Since Swedbank and SEB account for a large part of the lending in Sweden — Swedbank to households and SEB to companies — it will obviously have an effect on Sweden.”

“Banks will see a major rise in bad loans across the Baltic states as real wages fall and unemployment rises, whether currency devaluation is avoided or not,” said Aidan Manktelow, an analyst at the Economist Intelligence Unit. “The effects would be more concentrated in the event of currency devaluation, but the course of ‘internal devaluation’ ultimately implies a similar level of loan losses. Either way, there will still be a high chance that the Swedish banks will need to inject additional capital into their Baltic subsidiaries.”  Fitch’s estimated cost of 5 percent of GDP to cover bank losses linked to the Baltics is “conservative,” said Eral Yilmaz, associate director at Fitch Ratings Sovereign Group in London. “Loan losses in the Baltic states hurt Swedish banks’ profitability, reducing the income credits on the current account,” Yilmaz said. “It will increase the government’s borrowing requirements at a time of increased competition for international financing.”

Why am I concerned about Sweden?  The same reason I made a big deal about Iceland last Summer when I said it was an early warning of a pending international banking crisis.  What's happening to Sweden is not unique, I have long predicted that loan defaults in Eastern Europe would skyrocket and bring European banking to its knees.  The bailouts by the EU to the Baltics has not been enough to do more than delay the inevitable and we can't keep our heads in the sand on this one forever.  Of course, this is a destabilizing factor for the Euro and can lead to dollar strength which can send commodities lower (along with our markets), which will send people running for the dollar and send commodities lower….  Very possible.

FDX had a poor report and CPI was down 1.3% from last year so it's "Inflation?  What inflation?" today.  Of course last June oil was $120 a barrel and heading up so be careful with the WSJ headline telling you that "Inflation Remains Subdued."  Inflation is actually up from last month and the core CPI showed a 0.145% increase so it is billed as 0.1% rather than 0.2%.  Still the CPI decline is the worst since 1950 indicating consumers still aren't in a buying mood.  Interestingly, energy prices only rose 0.2% in May from April, even though oil went up 20% on the average.   That means that people along the supply chain are taking the hit and they cannot pass these commodity prices along to the consumer – how long do you think that can last?

We need commodities to break so we can get on with a healthy economy but that break is going to hurt as the commoditiy rally has given us more than 1/3 of our market gains since the March 9th bottom.